Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend the Exchange's Opening Process To Allow for an Opening Auction, Similar to that Available on Cboe Exchange, Inc. (“Cboe Options”) and Cboe EDGX Exchange, Inc. (“EDGX Options”), and Make Other Conforming Changes to Rules 16.1 and 21.17, 6246-6252 [2020-02049]
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Federal Register / Vol. 85, No. 23 / Tuesday, February 4, 2020 / Notices
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.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88076; File No. SR–
CboeBZX–2020–012]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Relating To
Amend the Exchange’s Opening
Process To Allow for an Opening
Auction, Similar to that Available on
Cboe Exchange, Inc. (‘‘Cboe Options’’)
and Cboe EDGX Exchange, Inc.
(‘‘EDGX Options’’), and Make Other
Conforming Changes to Rules 16.1 and
21.17
January 29, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
22, 2020, Cboe BZX Exchange, Inc.
(‘‘BZX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) proposes to
amend the Exchange’s opening process
to allow for an opening auction, similar
to that available on Cboe Exchange, Inc.
(‘‘Cboe Options’’) and Cboe EDGX
Exchange, Inc. (‘‘EDGX Options’’), and
make other conforming changes to Rules
16.1 and 21.17. The text of the proposed
rule changes are provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), 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
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Exchange Rule 21.7 sets forth the
opening process the Exchange uses to
open series on the Exchange at the
market open each trading day (and after
trading halts). Pursuant to the current
opening process, the System determines
an opening price for a series based on
the National Best Bid and Offer
(‘‘NBBO’’) 3 and crosses any interest on
the book that is marketable at that price.
The proposed rule change adopts an
opening auction process, substantially
similar to the Cboe Options and EDGX
Options opening auction process.4 The
Exchange believes an opening auction
process will enhance the openings of
series on the Exchange by providing an
opportunity for price discovery based
on then-current market conditions.
Pursuant to the proposed opening
auction process, the Exchange will have
a Queuing Period, during which the
System will accept orders and quotes
and disseminate expected opening
information; will initiate an opening
rotation upon the occurrence of certain
triggers; will conduct an opening
rotation during which the System
matches and executes orders and quotes
against each other in order to establish
an opening Exchange best bid and offer
and trade price, if any, for each series,
subject to certain price protections; and
will open series for trading.5
Proposed Rule 21.7(a) sets forth the
definitions of the following terms for
purposes of the opening auction process
in proposed Rule 21.7: 6
• Composite Market: The term
‘‘Composite Market’’ means the market
for a series comprised of (1) the higher
of the then-current best appointed
3 The opening price (if not outside the NBBO and
no more than a specified minimum amount away
from the NBBO) is either the midpoint of the NBBO,
the last disseminated transaction price after 9:30
a.m., or the last transaction price from the previous
trading day. See current Rule 21.7(b).
4 See Cboe Options Rule 5.31 and EDGX Options
Rule 21.7.
5 The order of events that comprise this proposed
opening auction process corresponds to the opening
auction process on Cboe Options and EDGX
Options. See Cboe Options Rule 5.31 and EDGX
Options Rule 21.7.
6 A term defined elsewhere in the Rules has the
same meaning with respect to Rule 21.7, unless
otherwise defined in Rule 21.7. See Cboe Options
Rule 5.31(a) and EDGX Options Rule 21.7(a).
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Market-Maker bulk message bid on the
Queuing Book and the away best bid
(‘‘ABB’’) 7 (if there is an ABB) and (2)
the lower of the then-current best
appointed Market-Maker bulk message
offer on the Queuing Book and the away
best offer (‘‘ABO’’) 8 (if there is an ABO).
The term ‘‘Composite Bid (Offer)’’
means the bid (offer) used to determine
the Composite Market.9
• Composite Width: The term
‘‘Composite Width’’ means the width of
the Composite Market (i.e., the width
between the Composite Bid and the
Composite Offer) of a series.
• Maximum Composite Width: The
term ‘‘Maximum Composite Width’’
means the amount that the Composite
Width of a series may generally not be
greater than for the series to open
(subject to certain exceptions, as
described below). The Exchange
determines this amount on a class and
Composite Bid basis, which amount the
Exchange may modify during the
opening auction process (which
modifications the Exchange
disseminates to all subscribers to the
Exchange’s data feeds that deliver
opening auction updates).
• Opening Auction Updates: The
term ‘‘opening auction updates’’ means
Exchange-disseminated messages that
contain information regarding the
expected opening of a series based on
orders and quotes in the Queuing Book,
including the expected opening price,
the then-current cumulative size on
each side at or more aggressive than the
expected opening price, and whether
the series would open (and any reason
why a series would not open).
• Opening Collar: The term ‘‘Opening
Collar’’ means the price range that
establishes limits at or inside of which
the System determines the Opening
Trade Price for a series. The Exchange
determines the width of this price range
on a class and Composite Bid basis,
which range the Exchange may modify
during the opening auction process
(which modifications the Exchange
disseminates to all subscribers to the
Exchange’s data feeds that deliver
opening auction updates).
• Opening Trade Price: The term
‘‘Opening Trade Price’’ means the price
at which the System executes opening
trades in a series during the opening
rotation.10
7 See the definition of ‘‘ABBO’’ included in
proposed Rule 16.1.
8 Id.
9 Cboe Options and EDGX Options similarly
consider the Exchange’s best quote bid and best
quote offer when determining whether the
Exchange’s market is too wide.
10 See current Rule 21.7(d).
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• Queuing Book: The term ‘‘Queuing
Book’’ means the book into which Users
may submit orders and quotes during
the Queuing Period for participation in
the application opening rotation. Orders
and quotes on the Queuing Book may
not execute until the opening rotation.
• Queuing Period: The term
‘‘Queueing Period’’ means the time
period prior to the initiation of an
opening rotation during which the
System accepts orders and quotes for
participation in the opening rotation for
the applicable trading session.11
Proposed paragraph (b) describes the
Queuing Period. The Queuing Period
begins at 7:30 a.m. for all classes.12 This
is the same time at which the System
begins accepting orders and quotes
today. Therefore, Users will have the
same amount of time to submit orders
and quotes prior to the opening.
Proposed subparagraph (b)(2) clarifies
that orders and quotes on the Queuing
Book are not eligible for execution until
the opening rotation pursuant to
proposed paragraph (e), as described
below. This is consistent with current
order entry period, pursuant to which
orders and quotes entered for inclusion
in the opening process do not execute
until the opening trade pursuant to
current paragraph (d). The System
accepts all orders and quotes that are
available for a class and trading session
pursuant to Rule 21.1 during the
Queuing Period, which are eligible for
execution during the opening rotation,
except as follows:
• The System rejects Immediate-orCancel (‘‘IOC’’) and Fill-or-Kill (‘‘FOK’’)
orders during the Queuing Period; 13
• the System accepts orders and
quotes with Match Trade Prevention
(‘‘MTP’’) Modifiers during the Queuing
Period, but does not enforce them
during the opening rotation; 14
• the System accepts Stop and Stop
Limit Orders 15 during the Queuing
11 See current Rule 21.7(a)(1) (the current rule
does not use the term ‘‘Queuing Period’’; however,
it does provide for an order entry period prior to
the opening of a series during which the System
accepts orders and quotes). The proposed rule
change moves the rule provisions regarding the
opening process following a halt to proposed
paragraph (g), with no substantive changes.
12 See proposed Rule 21.7(b)(1).
13 See current paragraph (a) and proposed
subparagraph (b)(2)(A); see also Cboe Options Rule
5.31(b)(2)(A) and EDGX Options Rule 21.7(b)(2)(A).
14 See proposed subparagraph (b)(2)(B). This is
consistent with current functionality, and the detail
is being added to the Rules. See also Cboe Options
Rule 5.31(b)(2)(B) and EDGX Options Rule
21.7(b)(2)(B).
15 Pursuant to Exchange Rule 21.1(d)(11) and (12),
Stop and Stop Limit Orders are triggered based on
the consolidated last sale price. Not participating in
the opening process is consistent with this
requirement, as the Exchange needs to be open (and
thus have an opening trade occur) in order for there
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Period, but they do not participate
during the opening rotation. The System
enters any of these orders it receives
during the Queuing Period into the
Book following completion of the
opening rotation (in time priority); 16
and
• the System converts all Intermarket
Sweep Orders (‘‘ISOs’’) received prior to
the completion of the opening rotation
into non-ISOs.17
Proposed paragraph (c) describes the
opening auction updates the Exchange
will disseminate as part of the opening
auction process. As noted above,
opening auction updates contain
information regarding the expected
opening of a series. These messages
provide market participants with
information that may contribute to
enhanced liquidity and price discovery
during the opening auction process.
Beginning at a time (determined by the
Exchange) no earlier than one hour prior
to the expected initiation of the opening
rotation and until the conclusion of the
opening rotation for a series, the
Exchange disseminates opening auction
updates for the series. The Exchange
disseminates opening auction updates at
regular intervals of time (the length of
which the Exchange determines for each
trading session), or less frequently if
there are no updates to the opening
information since the previously
disseminated update, to all subscribers
to the Exchange’s data feeds that deliver
these messages until a series opens. If
there have been no changes since the
previous update, the Exchange does not
believe it is necessary to disseminate
duplicate updates to market participants
at the next interval of time.18
Proposed paragraph (d) describes the
events that will trigger the opening
rotation for a class. Pursuant to current
paragraph (b), the System will
automatically open a related equity
option series after the first transaction
on the primary listing market after 9:30
a.m. Eastern Time in the securities
underlying the options as reported on
the first print disseminated pursuant to
an effective national market system plan
(with respect to equity options).
Pursuant to current paragraph (c), the
System automatically opens a related
to be a consolidated last sale price that can trigger
these orders. See also Cboe Options Rule
5.31(b)(2)(C) and EDGX Options Rule 21.7(b)(2)(C).
16 This is consistent with current functionality,
and the proposed rule change is adding this detail
to the Rules.
17 See current paragraph (a) and proposed
subparagraph (b)(2)(D); see also Cboe Options Rule
5.31(b)(2)(D) and EDGX Options Rule 21.7(b)(2)(D)
(which does not permit ISOs to be entered during
the Cboe Options pre-opening period).
18 See Cboe Options Rule 5.31(c) and EDGX
Options Rule 21.7(c).
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6247
index option series after an away
options exchange(s) disseminates a
quote in an index option series (with
respect to index options).
The Exchange proposes to adopt
opening rotation triggers applicable to
both equity options and index options.
As it pertains to equity options, the
Exchange proposes to include the
System’s observation of the first
disseminated quote 19 and transaction
on the primary market in the security
underlying the equity options as an
opening trigger for equity options.20
Specifically, as proposed, the System
will initiate the opening rotation after
an Exchange-determined time period
(which the Exchange determines for all
classes) upon the earlier of (A) the
passage of two minutes (or such shorter
time as determined by the Exchange)
after the System’s observation after 9:30
a.m. Eastern Time of either the first
disseminated transaction or the first
disseminated quote on the primary
listing market in the security underlying
an equity option; or (B) the System’s
observation after 9:30 a.m. Eastern Time
of both the first disseminated
transaction and the first disseminated
quote on the primary listing market in
the security underlying an equity
option. The Exchange notes that the
proposed triggers are intended to tie the
Exchange’s opening process to quoting
and/or trading in the underlying
security. The Exchange believes that
quoting activity in the underlying
market is a trigger that generally
indicates the presence of post-open
price discovery and liquidity in the
primary market for the underlying, and,
therefore, that the market for the
underlying is adequately situated for the
commencement of options trading the
underlying.
The proposed timing steps in
connection with the equity option
opening triggers are intended to ensure
that the market for the underlying
security has had sufficient time to open
prior to the initiation of the opening
rotation where there is not both a twosided quote and an execution in the
underlying security. By waiting a
requisite amount of time after the
System observes one of the opening
triggers, the proposed process pursuant
to proposed Rule 21.7(d)(1)(A) is
intended to permit post-opening price
discovery to occur in the underlying
security prior to the opening of options
on the security. Similarly, by initiating
the opening rotation upon the System’s
observation of both opening triggers
19 The
quote must be a two-sided quote.
Cboe Options Rule 5.31(d)(1)(A)(i)–(ii) and
EDGX Options Rule 21.7(d)(1)(A)(i)–(ii).
20 See
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prior to the passage of two minutes,
proposed Rule 21.7(d)(1)(B) ties the
Exchange’s opening process to specific
market conditions in the underlying
security that generally indicate that
sufficient post-opening price discovery
has occurred prior to the opening of
options on the security. To illustrate, if
the System were to observe a
disseminated quote (or transaction) in
the primary market for the underlying
security, it would begin the two-minute
(or shorter) timer pursuant to proposed
Rule 21.7(d)(1)(A). If two minutes then
passed without the System’s observation
of a disseminated transaction (or quote)
on the primary market for the
underlying security (which would cause
the scenario in Rule 21.7(d)(1)(B) to
occur) then it would initiate the opening
rotation after a time period determined
by the Exchange. Conversely, if the
System were to observe a disseminated
quote (or transaction) in the primary
listing market and begin the two minute
(or shorter) timer, but then observe a
disseminated transaction (or quote) in
the primary listing market before the
passage of two minutes (or shorter), it
would then, at the time it observed the
disseminated transaction (or quote)
prior to the passage of two minutes (or
shorter), initiate the opening rotation
after a period of time determined by the
Exchange.
As it pertains to index options, the
Exchange proposes to initiate the
opening rotation after a time period
(which the Exchange determines for all
classes) following the System’s
observation after 9:30 a.m. Eastern Time
of the first disseminated index value for
the index underlying an index option.21
The Exchange notes that the proposed
trigger is intended to tie the Exchange’s
opening process to the disseminated
index value of the underlying index.
Proposed paragraph (e) describes the
opening rotation process, during which
the System will determine whether the
Composite Market for a series is not
wider than a maximum width, will
determine the opening price, and open
the series.22 The Maximum Composite
Width Check and Opening Collar are
intended to ensure that series open in a
fair and orderly manner and at prices
consistent with the current market
21 See Cboe Options Rule 5.31(d)(2) and EDGX
Options Rule 21.7(d)(2).
22 See Cboe Options Rule 5.31(e), EDGX Options
Rule 21.7(e), and Cboe C2 Exchange Inc. (‘‘C2
Options’’) Rule 5.31(e) (pursuant to which Cboe
Options/EDGX Options will generally not open a
series if the width is wider than an acceptable price
range or if the opening trade price is outside of an
acceptable price range). The Exchange will
similarly have a maximum quote width and
acceptable opening price range, however, they may
be calculated differently.
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conditions for the series and not at
extreme prices, while taking into
consideration prices disseminated from
other options exchanges that may be
better than the Exchange’s at the open.
Proposed subparagraph (e)(1)
describes the Maximum Composite
Width Check.
• If the Composite Market of a series
is not crossed, and the Composite Width
of the series is less than or equal to the
Maximum Composite Width, the series
is eligible to open (and the System
determines the Opening Price as
described below).
• If the Composite Market of a series
is not crossed, and the Composite Width
of the series is greater than the
Maximum Composite Width, but there
are no non-M Capacity 23 market orders
or buy (sell) limit orders with prices
higher (lower) than the Composite
Market midpoint and there are no
locked or crossed orders or quotes, the
series is eligible to open (and the
System determines the Opening Price as
described below).24
• If neither of the conditions above
are satisfied for a series, or if the
Composite Market of a series is crossed,
the series is ineligible to open. The
Queuing Period for the series will
continue (including the dissemination
of opening auction updates) until one of
the above conditions for the series is
satisfied, or the Exchange opens the
series pursuant to paragraph (h).25
The Exchange will use the Maximum
Composite Width Check as a price
protection measure to prevent orders
23 Capacity M is used for orders for the account
of a Market-Maker (with an appointment in the
class). See U.S. Options Binary Order Entry
Specifications, at 28 (definition of Capacity),
available at https://cdn.cboe.com/resources/
membership/US_Options_BOE_Specification.pdf.
24 The Exchange notes that Cboe Options and
EDGX Options recently amended subparagraph
(e)(1)(B) to identically state that if the Composite
Market of a series is not crossed, and the Composite
Width of the series is greater than the Maximum
Composite Width, but there are no non-M Capacity
market orders or buy (sell) limit orders with prices
higher (lower) than the Composite Market midpoint
and there are orders or quotes marketable against
each other, the series is eligible to open. See
Securities Exchange Act Release Nos. 87707 (filed
December 4, 2019) (SR-CboeEDGX–2019–072) and
87706 (filed December 4, 2019) (SR–CBOE–2019–
115).
25 See Cboe Options Rule 5.31(e)(1)(C) and EDGX
Options Rule 21.7(e)(1)(C). The proposed rule
change moves the provision regarding the
Exchange’s ability to deviate from the standard
manner of the opening process from current
paragraph (f) to proposed paragraph (h). Pursuant
to the proposed rule change, the Exchange will
make and maintain records to document all
determinations to deviate from the standard manner
of the opening auction process, and periodically
review these determinations for consistency with
the interests of a fair and orderly market (which,
while not specified in the current Rules, the
Exchange does today). See proposed Rule 21.7(h).
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from executing at extreme prices at the
open. If the width of the Composite
Market (which represents the best
market, as it is comprised of the better
of Market-Maker bulk messages on the
Exchange or any away market quotes) is
no greater than the Maximum
Composite Width, the Exchange
believes it is appropriate to open a
series under these circumstances and
provide marketable orders with an
opportunity to execute at a reasonable
opening price (as discussed below),
because there is minimal risk of
execution at an extreme price.
Similarly, if the Composite Width is
greater than the Maximum Composite
Width but there are no non-M Capacity
bids (offers) 26 that are higher (lower)
than the Composite Market midpoint
(and thus not marketable at a price at
which the Exchange would open, as
described below), there is similarly
limited risk of an order executing at an
extreme price on the open. While it is
possible for Market-Makers to submit
orders to the Exchange at an extreme
price, the Exchange believes there is less
risk of a Market-Maker inputting an
order at an extreme price given that
Market-Makers are generally responsible
for pricing the market. Given this, the
Exchange believes it is appropriate to
open a series under certain
circumstances if M capacity bids and
offers set the Composite Market when
the Composite Width is wider than the
Maximum Composite Market.
Nonetheless, the Exchange also
recognizes there may be circumstances
under which a non-M capacity order
may improve the Composite Market
when the Composite Width is greater
than the Maximum Composite Width.
As such, the Exchange proposes to open
a series if the Composite Width is
greater than the Maximum Composite
Width and there are non-M Capacity
limit orders at a price better than the
Composite Bid (Offer) in certain
circumstances. Specifically, the
proposed amendment will allow the
Exchange to open a series if the
Composite Width of a series is greater
than the Maximum Composite Width,
but there are no non-M Capacity market
orders or buy (sell) limit orders with
prices higher (lower) than the
Composite Market midpoint and there
26 Market-Maker bulk messages are considered
when determining the Composite Market. The
Exchange believes it is appropriate to consider
Market-Maker bulk messages when determining an
opening quote to ensure there will be liquidity in
a series when it opens. Additionally, while MarketMakers may submit M capacity orders, the
Exchange believes there is less risk of a MarketMaker inputting an order at an extreme price given
that Market-Makers are generally responsible for
pricing the market.
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are no locked or crossed orders or
quotes. The Exchange believes the
proposed provision under proposed
subparagraph (e)(1)(B) strikes a
reasonable balance between protecting
non-M capacity orders from executing at
extreme prices and encouraging the
submission of non-M capacity orders at
prices that improve the Composite
Market, as illustrated in examples two
and three below.
The following examples show the
application of the Maximum Composite
Width Check:
Example #1
Suppose the Maximum Composite
Width for a class is 1.00, and the
Composite Market is 7.00 x 5.00,
comprised of an appointed MarketMaker bulk message bid of 7.00 and an
appointed Market-Maker bulk message
offer of 5.00. There is no other interest
in the Queuing Book. The fact that the
Composite Market is greater than the
Maximum Composite Width does not
cause ineligibility to open as there are
no non-M capacity market orders or buy
(sell) limit orders with prices higher
(lower) than the Composite Market
midpoint. The series is not eligible to
open because there are crossed orders or
quotes in the series. The Queuing Period
for the series will continue until the
series satisfies the Maximum Composite
Width Check.
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Example #2
Suppose the Maximum Composite
Width for a class is 1.00, and the
Composite Market is 5.00 × 7.00,
comprised of an appointed MarketMaker bulk message bid of 5.00 and an
appointed Market-Maker bulk message
offer of 7.00. There is a non-M capacity
limit order to buy for 5.75 in the
Queuing Book. Prior to the open, the
Exchange does not know the market
value of the option series; however,
assume that the intrinsic value of the
option series is 5.75. In this case, the
series would be eligible to open because
the width of the Composite Market is
greater than the Maximum Composite
Width and the non-M Capacity order is
at a price less than the Composite
Market midpoint. The System will then
determine the Opening Trade Price.
Example #3
Suppose the Maximum Composite
Width for a class is 1.00, and the
Composite Market is 5.00 × 20.00,
comprised of an appointed MarketMaker bulk message bid of 5.00 and an
appointed Market-Maker bulk message
offer of 20.00. There is a non-M
Capacity limit order to buy for 18.00 in
the Queuing Book. Prior to the open, the
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Exchange does not know the market
value of the option series; however,
assume that the intrinsic value of the
option series is 6.00 In this case, the
series is not eligible to open because the
width of the Composite Market is
greater than the Maximum Composite
Width, and there is a non-M Capacity
bid at a price higher than the Composite
Market midpoint of 12.50. The Queuing
Period for the series will continue until
the series satisfies the Maximum
Composite Width Check.
As proposed, subparagraph (e)(1)(B)
will allow the Exchange to open a series
if the Composite Market of a series is
greater than the Maximum Composite
Width, but there are no non-M Capacity
market orders or buy (sell) limit orders
with prices higher (lower) than the
Composite Market midpoint and there
are no locked or crossed orders or
quotes. Thus, under proposed
subparagraph (e)(1)(B), the Exchange
would allow the option series to open
in Example #2 above as the non-M
capacity limit bid was entered at a price
lower than the Composite Market
midpoint. However, the proposed
amendment would limit the risk of a
non-M capacity order executing at an
extreme price such as that in Example
#3 as the non-M capacity limit bid was
entered at a price higher than the
Composite Market midpoint.
Proposed subparagraph (e)(2)
describes how the System determines
the Opening Trade Price for a series
after it satisfies the Maximum
Composite Width Check described
above.
• The Opening Trade Price is the
price that is not outside the Opening
Collar and is the volume-maximizing,
imbalance minimizing price (‘‘VMIM
price’’):
Æ the price at which the largest
number of contracts can execute (i.e.,
the volume-maximizing price);
Æ if there are multiple volumemaximizing prices, the price at which
the fewest number of contracts remain
unexecuted (i.e., the imbalanceminimizing price); or
Æ if there are multiple volumemaximizing, imbalance-minimizing
prices, (1) the highest (lowest) price, if
there is a buy (sell) imbalance, or (2) the
price at or nearest to the midpoint of the
Opening Collar, if there is no imbalance.
• There is no Opening Trade Price if
there are no locked or crossed orders or
quotes at a price not outside the
Opening Collar.27
The Exchange believes the proposed
volume-maximizing, imbalanceminimizing procedure is reasonable, as
27 See
PO 00000
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Frm 00109
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6249
it will provide for the largest number of
contracts in the Queuing Book that can
execute, leaving as few as possible bids
and offers in the Book that cannot
execute. The Exchange will use the
Opening Collar as a price protection
measure to prevent orders from
executing at extreme prices at the open.
If the Opening Trade Price is not outside
the Opening Collar (which will be based
on the best then-current market), the
Exchange believes it is appropriate to
open a series at that price, because there
is minimal risk of execution at an
extreme price. However, if the Opening
Trade Price would be outside of the
Opening Collar, the Exchange believes
there may be risk that orders would
execute at an extreme price if the series
opens, and therefore the Exchange will
not open a series.
Pursuant to proposed subparagraph
(e)(3), if the System establishes an
Opening Trade Price, the System will
execute orders and quotes in the
Queuing Book at the Opening Trade
Price. The System will prioritize orders
and quotes in the following order:
market orders, limit orders and quotes
with prices better than the Opening
Trade Price, and orders and quotes at
the Opening Trade Price.28 If there is no
Opening Trade Price, the System opens
a series without a trade. As set forth in
Exchange Rule 21.8, the Exchange’s
execution algorithm executes trading
interest in price/time priority. However,
for purposes of the Opening Auction
Process, the Exchange’s execution
algorithm will execute trading interest
in a pro-rata fashion, similar to that
provided on EDGX Options and Cboe
Options.29 With pro-rata allocation, if
there are two or more orders or quotes
at the best price then the contracts are
allocated proportionally according to
size. The executable quantity is
allocated to the nearest whole number,
with fractions 1⁄2 or greater rounded up
and fractions less than 1⁄2 rounded
down. The primary reason for pro-rata
allocation in the Opening Auction
28 See current Rule 21.7(d) (which states the
System matches (in accordance with Rule 21.8)
orders and quotes in the System priced equal to or
more aggressively than the Opening Price). See also
Cboe Options Rule 5.31(e)(3)(A)(i) and EDGX
Options Rule 21.7(e)(3)(A)(i). The Exchange
believes it is appropriate to prioritize orders with
the most aggressive prices, as it provides market
participants with incentive to submit their bestpriced orders.
29 EDGX Options and Cboe Options allocate
orders and quotes at the same price pursuant to the
allocation algorithm that applies to a class intraday
(in accordance with EDGX Options Rule 21.8/Cboe
Options Rule 5.32), unless the relevant exchange
determines to apply a different allocation algorithm
to a class during the opening rotation. Currently,
both EDGX Options and Cboe Options use pro-rata
allocation for the Opening Auction Process.
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Process is that all orders will execute at
the same price, thus priority would only
be given on the time at which the orders
were entered. Given that these orders
would be entered during the during a
[sic] Queuing Period and waiting for
execution at the same time, there is no
reason to provide a benefit for the speed
of entry. Pursuant to proposed
subparagraph (f), as is the case today,
following the conclusion of the opening
rotation, the System enters any
unexecuted orders and quotes (or
remaining portions) from the Queuing
Book into the BZX Options Book in time
sequence (subject to a User’s
instructions—for example, a User may
cancel an order), where they may be
processed in accordance with Rule
21.8.30 Consistent with the OPG 31
contingency (and current functionality),
the System cancels any unexecuted OPG
orders (or remaining portions) following
the conclusion of the opening rotation.
The proposed rule change adds
paragraph (i), which provides if the
underlying security for a class is in a
limit up-limit down state when the
opening rotation begins for that class,
then the System cancels or rejects all
market orders. In addition, if the
opening rotation has already begun for
a class when a limit up-limit down state
initiates for the underlying security of
that class, market and limit orders will
continue through the end of the opening
rotation.32
Currently, if an order enters the Book
following the Opening Process (which
would include any Good Til Cancelled
(‘‘GTC’’) or Good Til Date (‘‘GTD’’)
orders that reenter the Book from the
prior trading day) and become subject to
the drill-through protection pursuant to
Rule 21.17(d), the NBO (NBB) that
existed at the time it enters (or reenters)
the Book would be used when
determining the drill-through price.
Proposed Rule 21.17(d)(1) provides that
if an order that enters the BZX Options
Book following the Opening Auction
Process and becomes subject to the drillthrough protection, the bid (offer) limit
of the Opening Collar plus (minus) the
buffer amount will be the drill-through
price. As discussed above, the Opening
Collar is a price protection, and the
Exchange would execute orders at the
open at prices at or within the Opening
Collar (as it would execute orders at or
within the NBBO). Therefore, the
Exchange believes the Opening Collar
limit price points are reasonable to use
30 The proposed rule change corrects an error in
the current Rule, which references Rule 21.9 rather
than Rule 21.8.
31 See Exchange Rule 21.1(f)(6).
32 This is consistent with the definition of market
orders in Rule 21.1(d)(5).
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when determining the drill-through
price for orders that are unable to
execute during the opening rotation.
The Exchange notes that certain
provisions of Cboe Options Rule 5.31
and EDGX Options Rule 21.7 are not
proposed for inclusion in Exchange
Rule 21.7. Specifically, subparagraph
(b)(2)(C) of Cboe Options and EDGX
Options provides that all-or-none orders
are not eligible for execution during the
opening rotation. However, because the
Exchange does not support all-or-none
orders, such a provision is not included
in the proposed Rule. Similarly,
subparagraph (b)(2)(E) of Cboe Options
Rule 5.31 and EDGX Options Rule 21.7
provides that complex orders do not
participate in the opening auction
process, which is also not applicable to
BZX Options as the Exchange does not
support a complex options book.
Paragraph (d) of Cboe Options Rule 5.31
and EDGX Options Rule 21.7 provides
for opening rotation triggers during both
Regular Trading Hours and Global
Trading Hours; however, as the
Exchange does not support Global
Trading Hours no such applicable
provision is proposed. Lastly, paragraph
(j) of Cboe Options Rule 5.31 provides
a modified opening process for volatility
settlements which is not applicable to
BZX Options as such products are not
traded on the Exchange.
The proposed amendments to Rule
16.1 include the clarification and
addition of definitions to conform with
existing Cboe Options and EDGX
Options rules. Such proposed
amendments involve no substantive
changes.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.33 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 34 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 35 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes the proposed
rule change to adopt an opening auction
will protect investors, because it will
enhance the openings of series on the
Exchange by providing an opportunity
for price discovery based on thencurrent market conditions. The
proposed Queuing Period is
substantively the same as the current
Order Entry Period on the Exchange.
The proposed detail regarding the
Queuing Period provides additional
transparency regarding the handling of
orders and quotes submitted during that
time, and will thus benefit investors.
The proposed rule change, including
orders that are not permitted during the
Queuing Period or orders that are not
eligible to trade during the opening
rotation, is also similar to the preopening period on Cboe Options and
EDGX Options.36
The proposed rule change will protect
investors by ensuring they have access
to information regarding the opening of
a series, which will provide them with
transparency that will permit them to
participate in the opening auction
process and contribute to, and benefit
from, the price discovery the auction
may provide. The proposed opening
auction updates are not be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers,
as all market participants may subscribe
to the Exchange’s data feeds that deliver
these message, and thus all market
participants may have access to this
information.
The proposed opening rotation
triggers are substantially similar to the
current events that will trigger series
openings on the Cboe Options and
EDGX Options. The proposed trigger
events will remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, as they ensure that the
underlying securities will have begun
trading, or the underlying index values
will have begun being disseminated,
before the System opens a series for
trading.
The proposed Maximum Composite
Width Check and Opening Collar will
protect investors by providing price
protection measures to prevent orders
from executing at extreme prices at the
35 Id.
33 15
U.S.C. 78f(b).
34 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00110
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36 See Cboe Options Rule 5.31(a) and EDGX
Options Rule 21.7(a).
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open. The Exchange believes it is
appropriate to open a series under the
proposed circumstances and provide
marketable orders with an opportunity
to execute at a reasonable opening price
(as discussed below), because there is
minimal risk of execution at an extreme
price. Furthermore, the Exchange
believes proposed Rule 21.7(e)(1)(B)
will benefit market participants as it
may encourage the submission of orders
at prices that improve the Composite
Market in the Opening Auction Process
on the Exchange, and allow the
Exchange to open series earlier, which
may also allow for more trading
opportunities on the Exchange
throughout the trading day. The
proposed price protections incorporate
all available pricing information,
including Market-Maker bulk messages
(which are generally used to price
markets for series) and any quotes
disseminated from away markets, and
thus may lead to a more accurate
Opening Trade Price based on thencurrent market conditions. As noted
above, Cboe Options and EDGX Options
apply similar price protections during
its opening rotation. Cboe Options and
EDGX Options similarly consider
Market-Maker quotes (the equivalent of
Market-Maker bulk message on EDGX
Options and the Exchange), and in
certain classes, quotes of away
exchanges, and whether there are
crossing orders or quotes when
determining whether the opening width
and trade price are reasonable.
The proposed priority with respect to
trades during the opening rotation are
consistent with current priority
principles that protect investors, which
are to provide priority to more
aggressively priced orders and quotes.
Orders and quotes will be subject to the
same allocation algorithms that the
Exchange may apply during the trading
day. The proposed priority and
allocation of orders and quotes at the
opening trade is substantially similar to
the priority and allocation of orders and
quotes at the opening of Cboe Options
and EDGX Options.37
The Exchange believes the proposed
opening auction process is designed to
ensure sufficient liquidity in a series
when it opens and ensure series open at
prices consistent with then-current
market conditions, and thus will ensure
a fair and orderly opening process.
Additionally, as noted above, the
proposed opening auction process is
substantially similar to the opening
auction process of Cboe Options and
EDGX Options.38 The differences
between proposed Rule 21.7 and Cboe
Options Rule 5.31 and EDGX Options
Rule 21.7 primarily relate to differences
between the exchanges, including
functionality Cboe Options and EDGX
Options offer that the Exchange does not
and products Cboe Options and EDGX
Options list for trading that the
Exchange does not.
The proposed rule change is generally
intended to align system functionality
currently offered by the Exchange with
Cboe Options and EDGX Options
functionality in order to provide a
consistent technology offering for the
Cboe Affiliated Exchanges. A consistent
technology offering, in turn, will
simplify the technology changes and
maintenance by Users of the Exchange
that are also participants on Cboe
Affiliated Exchanges. The Exchange
believes this consistency will promote a
fair and orderly national options market
system. Users of the Exchange and other
Cboe Affiliated Exchanges have access
to similar functionality on all Cboe
Affiliated Exchanges. As such, the
proposed rule change would foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities and would
remove impediments to and perfect the
mechanism of a free and open market
and a national market system.
37 See Cboe Options Rule 5.31(e)(3)(A) and EDGX
Options Rule 21.7(e)(3)(A).
38 See Cboe Options Rule 5.31 and EDGX Options
Rule 21.7.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that the
proposed rule change to adopt an
opening auction process will impose
any burden on intramarket competition
that is not necessary or appropriate in
furtherance of the purposes of the Act,
because it will apply to orders and
quotes of all market participants in the
same manner. The same order types that
are not currently accepted prior to the
opening, and that do not participate in
the opening process, will similarly not
be accepted during the Queuing Period
or be eligible for trading during the
opening rotation.
The Exchange does not believe that
the proposed rule change to adopt an
opening auction process will impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the purposes of the Act,
because it is designed to open series on
the Exchange in a fair and orderly
PO 00000
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6251
manner. The Exchange believes an
opening auction process will enhance
the openings of series on the Exchange
by providing an opportunity for price
discovery based on then-current market
conditions. The proposed auction
process will provide an opportunity for
price discovery when a series opens,
ensure there sufficient liquidity in a
series when it opens, and ensure series
open at prices consistent with thencurrent market conditions (at the
Exchange and other exchanges) rather
than extreme prices that could result in
unfavorable executions to market
participants. Additionally, as discussed
above, the proposed opening auction
process is substantially similar to the
Cboe Options and EDGX Options
opening auction process.39
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 40 and Rule
19b–4(f)(6) thereunder.41 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
for 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 42 and Rule 19b–4(f)(6)
thereunder.43
A proposed rule change filed under
Rule 19b–4(f)(6) 44 normally does not
become operative for 30 days after the
date of the filing. However, pursuant to
39 See Cboe Options Rule 5.31 and EDGX Options
Rule 21.7.
40 15 U.S.C. 78s(b)(3)(A)(iii).
41 17 CFR 240.19b–4(f)(6).
42 15 U.S.C. 78s(b)(3)(A).
43 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s intent
to file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
44 17 CFR 240.19b–4(f)(6).
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Federal Register / Vol. 85, No. 23 / Tuesday, February 4, 2020 / Notices
Rule 19b–4(f)(6)(iii),45 the Commission
may 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
operative immediately. The Exchange
represents that the functionality of the
proposed auction process is scheduled
to become available on January 30,
2020. Furthermore, the Exchange states
that the proposed auction process is
virtually identical to the one used on
the Cboe Affiliated Exchanges, and that
waiver of the operative delay would
enable the Exchange to continue its
efforts to provide a technology offering
consistent with those of the Cboe
Affiliated Exchanges as promptly as
possible. The Exchange believes that
such consistency will simplify the
technology changes and maintenance by
Options Members of the Exchange that
are also participants on Cboe Affiliated
Exchanges. For these reasons, the
Commission believes that waiver of the
30-day operative delay is consistent
with the protection of investors and the
public interest. Accordingly, the
Commission hereby waives the 30-day
operative delay and designates the
proposal operative upon filing.46
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
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.
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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 rule-comments@
sec.gov. Please include File Number SR–
CboeBZX–2020–012 on the subject line.
CFR 240.19b–4(f)(6)(iii).
purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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–CboeBZX–2020–012. 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–CboeBZX–2020–012, and
should be submitted on or before
February 25, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.47
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–02049 Filed 2–3–20; 8:45 am]
BILLING CODE 8011–01–P
45 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88077; File No. SR–FINRA–
2020–003]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Extend the Effective
Date for Eliminating Computer-toComputer Interface as a Technological
Option for TRACE Reporting
January 29, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
28, 2020, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by FINRA. FINRA has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to provide
members with additional time to
migrate their trade reporting processes
to connect to TRACE through a
permissible means other than
Computer-to-Computer Interface
(‘‘CTCI’’).
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA 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,
FINRA 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. FINRA has prepared
summaries, set forth in sections A, B,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
2 17
47 17
PO 00000
CFR 200.30–3(a)(12), (59).
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]]>Agencies
[Federal Register Volume 85, Number 23 (Tuesday, February 4, 2020)]
[Notices]
[Pages 6246-6252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02049]
[[Page 6246]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88076; File No. SR-CboeBZX-2020-012]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend the Exchange's Opening Process To Allow for an Opening
Auction, Similar to that Available on Cboe Exchange, Inc. (``Cboe
Options'') and Cboe EDGX Exchange, Inc. (``EDGX Options''), and Make
Other Conforming Changes to Rules 16.1 and 21.17
January 29, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 22, 2020, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to
amend the Exchange's opening process to allow for an opening auction,
similar to that available on Cboe Exchange, Inc. (``Cboe Options'') and
Cboe EDGX Exchange, Inc. (``EDGX Options''), and make other conforming
changes to Rules 16.1 and 21.17. The text of the proposed rule changes
are provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), 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
Exchange Rule 21.7 sets forth the opening process the Exchange uses
to open series on the Exchange at the market open each trading day (and
after trading halts). Pursuant to the current opening process, the
System determines an opening price for a series based on the National
Best Bid and Offer (``NBBO'') \3\ and crosses any interest on the book
that is marketable at that price. The proposed rule change adopts an
opening auction process, substantially similar to the Cboe Options and
EDGX Options opening auction process.\4\ The Exchange believes an
opening auction process will enhance the openings of series on the
Exchange by providing an opportunity for price discovery based on then-
current market conditions. Pursuant to the proposed opening auction
process, the Exchange will have a Queuing Period, during which the
System will accept orders and quotes and disseminate expected opening
information; will initiate an opening rotation upon the occurrence of
certain triggers; will conduct an opening rotation during which the
System matches and executes orders and quotes against each other in
order to establish an opening Exchange best bid and offer and trade
price, if any, for each series, subject to certain price protections;
and will open series for trading.\5\
---------------------------------------------------------------------------
\3\ The opening price (if not outside the NBBO and no more than
a specified minimum amount away from the NBBO) is either the
midpoint of the NBBO, the last disseminated transaction price after
9:30 a.m., or the last transaction price from the previous trading
day. See current Rule 21.7(b).
\4\ See Cboe Options Rule 5.31 and EDGX Options Rule 21.7.
\5\ The order of events that comprise this proposed opening
auction process corresponds to the opening auction process on Cboe
Options and EDGX Options. See Cboe Options Rule 5.31 and EDGX
Options Rule 21.7.
---------------------------------------------------------------------------
Proposed Rule 21.7(a) sets forth the definitions of the following
terms for purposes of the opening auction process in proposed Rule
21.7: \6\
---------------------------------------------------------------------------
\6\ A term defined elsewhere in the Rules has the same meaning
with respect to Rule 21.7, unless otherwise defined in Rule 21.7.
See Cboe Options Rule 5.31(a) and EDGX Options Rule 21.7(a).
---------------------------------------------------------------------------
Composite Market: The term ``Composite Market'' means the
market for a series comprised of (1) the higher of the then-current
best appointed Market-Maker bulk message bid on the Queuing Book and
the away best bid (``ABB'') \7\ (if there is an ABB) and (2) the lower
of the then-current best appointed Market-Maker bulk message offer on
the Queuing Book and the away best offer (``ABO'') \8\ (if there is an
ABO). The term ``Composite Bid (Offer)'' means the bid (offer) used to
determine the Composite Market.\9\
---------------------------------------------------------------------------
\7\ See the definition of ``ABBO'' included in proposed Rule
16.1.
\8\ Id.
\9\ Cboe Options and EDGX Options similarly consider the
Exchange's best quote bid and best quote offer when determining
whether the Exchange's market is too wide.
---------------------------------------------------------------------------
Composite Width: The term ``Composite Width'' means the
width of the Composite Market (i.e., the width between the Composite
Bid and the Composite Offer) of a series.
Maximum Composite Width: The term ``Maximum Composite
Width'' means the amount that the Composite Width of a series may
generally not be greater than for the series to open (subject to
certain exceptions, as described below). The Exchange determines this
amount on a class and Composite Bid basis, which amount the Exchange
may modify during the opening auction process (which modifications the
Exchange disseminates to all subscribers to the Exchange's data feeds
that deliver opening auction updates).
Opening Auction Updates: The term ``opening auction
updates'' means Exchange-disseminated messages that contain information
regarding the expected opening of a series based on orders and quotes
in the Queuing Book, including the expected opening price, the then-
current cumulative size on each side at or more aggressive than the
expected opening price, and whether the series would open (and any
reason why a series would not open).
Opening Collar: The term ``Opening Collar'' means the
price range that establishes limits at or inside of which the System
determines the Opening Trade Price for a series. The Exchange
determines the width of this price range on a class and Composite Bid
basis, which range the Exchange may modify during the opening auction
process (which modifications the Exchange disseminates to all
subscribers to the Exchange's data feeds that deliver opening auction
updates).
Opening Trade Price: The term ``Opening Trade Price''
means the price at which the System executes opening trades in a series
during the opening rotation.\10\
---------------------------------------------------------------------------
\10\ See current Rule 21.7(d).
---------------------------------------------------------------------------
[[Page 6247]]
Queuing Book: The term ``Queuing Book'' means the book
into which Users may submit orders and quotes during the Queuing Period
for participation in the application opening rotation. Orders and
quotes on the Queuing Book may not execute until the opening rotation.
Queuing Period: The term ``Queueing Period'' means the
time period prior to the initiation of an opening rotation during which
the System accepts orders and quotes for participation in the opening
rotation for the applicable trading session.\11\
---------------------------------------------------------------------------
\11\ See current Rule 21.7(a)(1) (the current rule does not use
the term ``Queuing Period''; however, it does provide for an order
entry period prior to the opening of a series during which the
System accepts orders and quotes). The proposed rule change moves
the rule provisions regarding the opening process following a halt
to proposed paragraph (g), with no substantive changes.
---------------------------------------------------------------------------
Proposed paragraph (b) describes the Queuing Period. The Queuing
Period begins at 7:30 a.m. for all classes.\12\ This is the same time
at which the System begins accepting orders and quotes today.
Therefore, Users will have the same amount of time to submit orders and
quotes prior to the opening. Proposed subparagraph (b)(2) clarifies
that orders and quotes on the Queuing Book are not eligible for
execution until the opening rotation pursuant to proposed paragraph
(e), as described below. This is consistent with current order entry
period, pursuant to which orders and quotes entered for inclusion in
the opening process do not execute until the opening trade pursuant to
current paragraph (d). The System accepts all orders and quotes that
are available for a class and trading session pursuant to Rule 21.1
during the Queuing Period, which are eligible for execution during the
opening rotation, except as follows:
---------------------------------------------------------------------------
\12\ See proposed Rule 21.7(b)(1).
---------------------------------------------------------------------------
The System rejects Immediate-or-Cancel (``IOC'') and Fill-
or-Kill (``FOK'') orders during the Queuing Period; \13\
---------------------------------------------------------------------------
\13\ See current paragraph (a) and proposed subparagraph
(b)(2)(A); see also Cboe Options Rule 5.31(b)(2)(A) and EDGX Options
Rule 21.7(b)(2)(A).
---------------------------------------------------------------------------
the System accepts orders and quotes with Match Trade
Prevention (``MTP'') Modifiers during the Queuing Period, but does not
enforce them during the opening rotation; \14\
---------------------------------------------------------------------------
\14\ See proposed subparagraph (b)(2)(B). This is consistent
with current functionality, and the detail is being added to the
Rules. See also Cboe Options Rule 5.31(b)(2)(B) and EDGX Options
Rule 21.7(b)(2)(B).
---------------------------------------------------------------------------
the System accepts Stop and Stop Limit Orders \15\ during
the Queuing Period, but they do not participate during the opening
rotation. The System enters any of these orders it receives during the
Queuing Period into the Book following completion of the opening
rotation (in time priority); \16\ and
---------------------------------------------------------------------------
\15\ Pursuant to Exchange Rule 21.1(d)(11) and (12), Stop and
Stop Limit Orders are triggered based on the consolidated last sale
price. Not participating in the opening process is consistent with
this requirement, as the Exchange needs to be open (and thus have an
opening trade occur) in order for there to be a consolidated last
sale price that can trigger these orders. See also Cboe Options Rule
5.31(b)(2)(C) and EDGX Options Rule 21.7(b)(2)(C).
\16\ This is consistent with current functionality, and the
proposed rule change is adding this detail to the Rules.
---------------------------------------------------------------------------
the System converts all Intermarket Sweep Orders
(``ISOs'') received prior to the completion of the opening rotation
into non-ISOs.\17\
---------------------------------------------------------------------------
\17\ See current paragraph (a) and proposed subparagraph
(b)(2)(D); see also Cboe Options Rule 5.31(b)(2)(D) and EDGX Options
Rule 21.7(b)(2)(D) (which does not permit ISOs to be entered during
the Cboe Options pre-opening period).
---------------------------------------------------------------------------
Proposed paragraph (c) describes the opening auction updates the
Exchange will disseminate as part of the opening auction process. As
noted above, opening auction updates contain information regarding the
expected opening of a series. These messages provide market
participants with information that may contribute to enhanced liquidity
and price discovery during the opening auction process. Beginning at a
time (determined by the Exchange) no earlier than one hour prior to the
expected initiation of the opening rotation and until the conclusion of
the opening rotation for a series, the Exchange disseminates opening
auction updates for the series. The Exchange disseminates opening
auction updates at regular intervals of time (the length of which the
Exchange determines for each trading session), or less frequently if
there are no updates to the opening information since the previously
disseminated update, to all subscribers to the Exchange's data feeds
that deliver these messages until a series opens. If there have been no
changes since the previous update, the Exchange does not believe it is
necessary to disseminate duplicate updates to market participants at
the next interval of time.\18\
---------------------------------------------------------------------------
\18\ See Cboe Options Rule 5.31(c) and EDGX Options Rule
21.7(c).
---------------------------------------------------------------------------
Proposed paragraph (d) describes the events that will trigger the
opening rotation for a class. Pursuant to current paragraph (b), the
System will automatically open a related equity option series after the
first transaction on the primary listing market after 9:30 a.m. Eastern
Time in the securities underlying the options as reported on the first
print disseminated pursuant to an effective national market system plan
(with respect to equity options). Pursuant to current paragraph (c),
the System automatically opens a related index option series after an
away options exchange(s) disseminates a quote in an index option series
(with respect to index options).
The Exchange proposes to adopt opening rotation triggers applicable
to both equity options and index options. As it pertains to equity
options, the Exchange proposes to include the System's observation of
the first disseminated quote \19\ and transaction on the primary market
in the security underlying the equity options as an opening trigger for
equity options.\20\ Specifically, as proposed, the System will initiate
the opening rotation after an Exchange-determined time period (which
the Exchange determines for all classes) upon the earlier of (A) the
passage of two minutes (or such shorter time as determined by the
Exchange) after the System's observation after 9:30 a.m. Eastern Time
of either the first disseminated transaction or the first disseminated
quote on the primary listing market in the security underlying an
equity option; or (B) the System's observation after 9:30 a.m. Eastern
Time of both the first disseminated transaction and the first
disseminated quote on the primary listing market in the security
underlying an equity option. The Exchange notes that the proposed
triggers are intended to tie the Exchange's opening process to quoting
and/or trading in the underlying security. The Exchange believes that
quoting activity in the underlying market is a trigger that generally
indicates the presence of post-open price discovery and liquidity in
the primary market for the underlying, and, therefore, that the market
for the underlying is adequately situated for the commencement of
options trading the underlying.
---------------------------------------------------------------------------
\19\ The quote must be a two-sided quote.
\20\ See Cboe Options Rule 5.31(d)(1)(A)(i)-(ii) and EDGX
Options Rule 21.7(d)(1)(A)(i)-(ii).
---------------------------------------------------------------------------
The proposed timing steps in connection with the equity option
opening triggers are intended to ensure that the market for the
underlying security has had sufficient time to open prior to the
initiation of the opening rotation where there is not both a two-sided
quote and an execution in the underlying security. By waiting a
requisite amount of time after the System observes one of the opening
triggers, the proposed process pursuant to proposed Rule 21.7(d)(1)(A)
is intended to permit post-opening price discovery to occur in the
underlying security prior to the opening of options on the security.
Similarly, by initiating the opening rotation upon the System's
observation of both opening triggers
[[Page 6248]]
prior to the passage of two minutes, proposed Rule 21.7(d)(1)(B) ties
the Exchange's opening process to specific market conditions in the
underlying security that generally indicate that sufficient post-
opening price discovery has occurred prior to the opening of options on
the security. To illustrate, if the System were to observe a
disseminated quote (or transaction) in the primary market for the
underlying security, it would begin the two-minute (or shorter) timer
pursuant to proposed Rule 21.7(d)(1)(A). If two minutes then passed
without the System's observation of a disseminated transaction (or
quote) on the primary market for the underlying security (which would
cause the scenario in Rule 21.7(d)(1)(B) to occur) then it would
initiate the opening rotation after a time period determined by the
Exchange. Conversely, if the System were to observe a disseminated
quote (or transaction) in the primary listing market and begin the two
minute (or shorter) timer, but then observe a disseminated transaction
(or quote) in the primary listing market before the passage of two
minutes (or shorter), it would then, at the time it observed the
disseminated transaction (or quote) prior to the passage of two minutes
(or shorter), initiate the opening rotation after a period of time
determined by the Exchange.
As it pertains to index options, the Exchange proposes to initiate
the opening rotation after a time period (which the Exchange determines
for all classes) following the System's observation after 9:30 a.m.
Eastern Time of the first disseminated index value for the index
underlying an index option.\21\ The Exchange notes that the proposed
trigger is intended to tie the Exchange's opening process to the
disseminated index value of the underlying index.
---------------------------------------------------------------------------
\21\ See Cboe Options Rule 5.31(d)(2) and EDGX Options Rule
21.7(d)(2).
---------------------------------------------------------------------------
Proposed paragraph (e) describes the opening rotation process,
during which the System will determine whether the Composite Market for
a series is not wider than a maximum width, will determine the opening
price, and open the series.\22\ The Maximum Composite Width Check and
Opening Collar are intended to ensure that series open in a fair and
orderly manner and at prices consistent with the current market
conditions for the series and not at extreme prices, while taking into
consideration prices disseminated from other options exchanges that may
be better than the Exchange's at the open.
---------------------------------------------------------------------------
\22\ See Cboe Options Rule 5.31(e), EDGX Options Rule 21.7(e),
and Cboe C2 Exchange Inc. (``C2 Options'') Rule 5.31(e) (pursuant to
which Cboe Options/EDGX Options will generally not open a series if
the width is wider than an acceptable price range or if the opening
trade price is outside of an acceptable price range). The Exchange
will similarly have a maximum quote width and acceptable opening
price range, however, they may be calculated differently.
---------------------------------------------------------------------------
Proposed subparagraph (e)(1) describes the Maximum Composite Width
Check.
If the Composite Market of a series is not crossed, and
the Composite Width of the series is less than or equal to the Maximum
Composite Width, the series is eligible to open (and the System
determines the Opening Price as described below).
If the Composite Market of a series is not crossed, and
the Composite Width of the series is greater than the Maximum Composite
Width, but there are no non-M Capacity \23\ market orders or buy (sell)
limit orders with prices higher (lower) than the Composite Market
midpoint and there are no locked or crossed orders or quotes, the
series is eligible to open (and the System determines the Opening Price
as described below).\24\
---------------------------------------------------------------------------
\23\ Capacity M is used for orders for the account of a Market-
Maker (with an appointment in the class). See U.S. Options Binary
Order Entry Specifications, at 28 (definition of Capacity),
available at https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf.
\24\ The Exchange notes that Cboe Options and EDGX Options
recently amended subparagraph (e)(1)(B) to identically state that if
the Composite Market of a series is not crossed, and the Composite
Width of the series is greater than the Maximum Composite Width, but
there are no non-M Capacity market orders or buy (sell) limit orders
with prices higher (lower) than the Composite Market midpoint and
there are orders or quotes marketable against each other, the series
is eligible to open. See Securities Exchange Act Release Nos. 87707
(filed December 4, 2019) (SR-CboeEDGX-2019-072) and 87706 (filed
December 4, 2019) (SR-CBOE-2019-115).
---------------------------------------------------------------------------
If neither of the conditions above are satisfied for a
series, or if the Composite Market of a series is crossed, the series
is ineligible to open. The Queuing Period for the series will continue
(including the dissemination of opening auction updates) until one of
the above conditions for the series is satisfied, or the Exchange opens
the series pursuant to paragraph (h).\25\
---------------------------------------------------------------------------
\25\ See Cboe Options Rule 5.31(e)(1)(C) and EDGX Options Rule
21.7(e)(1)(C). The proposed rule change moves the provision
regarding the Exchange's ability to deviate from the standard manner
of the opening process from current paragraph (f) to proposed
paragraph (h). Pursuant to the proposed rule change, the Exchange
will make and maintain records to document all determinations to
deviate from the standard manner of the opening auction process, and
periodically review these determinations for consistency with the
interests of a fair and orderly market (which, while not specified
in the current Rules, the Exchange does today). See proposed Rule
21.7(h).
---------------------------------------------------------------------------
The Exchange will use the Maximum Composite Width Check as a price
protection measure to prevent orders from executing at extreme prices
at the open. If the width of the Composite Market (which represents the
best market, as it is comprised of the better of Market-Maker bulk
messages on the Exchange or any away market quotes) is no greater than
the Maximum Composite Width, the Exchange believes it is appropriate to
open a series under these circumstances and provide marketable orders
with an opportunity to execute at a reasonable opening price (as
discussed below), because there is minimal risk of execution at an
extreme price.
Similarly, if the Composite Width is greater than the Maximum
Composite Width but there are no non-M Capacity bids (offers) \26\ that
are higher (lower) than the Composite Market midpoint (and thus not
marketable at a price at which the Exchange would open, as described
below), there is similarly limited risk of an order executing at an
extreme price on the open. While it is possible for Market-Makers to
submit orders to the Exchange at an extreme price, the Exchange
believes there is less risk of a Market-Maker inputting an order at an
extreme price given that Market-Makers are generally responsible for
pricing the market. Given this, the Exchange believes it is appropriate
to open a series under certain circumstances if M capacity bids and
offers set the Composite Market when the Composite Width is wider than
the Maximum Composite Market. Nonetheless, the Exchange also recognizes
there may be circumstances under which a non-M capacity order may
improve the Composite Market when the Composite Width is greater than
the Maximum Composite Width. As such, the Exchange proposes to open a
series if the Composite Width is greater than the Maximum Composite
Width and there are non-M Capacity limit orders at a price better than
the Composite Bid (Offer) in certain circumstances. Specifically, the
proposed amendment will allow the Exchange to open a series if the
Composite Width of a series is greater than the Maximum Composite
Width, but there are no non-M Capacity market orders or buy (sell)
limit orders with prices higher (lower) than the Composite Market
midpoint and there
[[Page 6249]]
are no locked or crossed orders or quotes. The Exchange believes the
proposed provision under proposed subparagraph (e)(1)(B) strikes a
reasonable balance between protecting non-M capacity orders from
executing at extreme prices and encouraging the submission of non-M
capacity orders at prices that improve the Composite Market, as
illustrated in examples two and three below.
---------------------------------------------------------------------------
\26\ Market-Maker bulk messages are considered when determining
the Composite Market. The Exchange believes it is appropriate to
consider Market-Maker bulk messages when determining an opening
quote to ensure there will be liquidity in a series when it opens.
Additionally, while Market-Makers may submit M capacity orders, the
Exchange believes there is less risk of a Market-Maker inputting an
order at an extreme price given that Market-Makers are generally
responsible for pricing the market.
---------------------------------------------------------------------------
The following examples show the application of the Maximum
Composite Width Check:
Example #1
Suppose the Maximum Composite Width for a class is 1.00, and the
Composite Market is 7.00 x 5.00, comprised of an appointed Market-Maker
bulk message bid of 7.00 and an appointed Market-Maker bulk message
offer of 5.00. There is no other interest in the Queuing Book. The fact
that the Composite Market is greater than the Maximum Composite Width
does not cause ineligibility to open as there are no non-M capacity
market orders or buy (sell) limit orders with prices higher (lower)
than the Composite Market midpoint. The series is not eligible to open
because there are crossed orders or quotes in the series. The Queuing
Period for the series will continue until the series satisfies the
Maximum Composite Width Check.
Example #2
Suppose the Maximum Composite Width for a class is 1.00, and the
Composite Market is 5.00 x 7.00, comprised of an appointed Market-Maker
bulk message bid of 5.00 and an appointed Market-Maker bulk message
offer of 7.00. There is a non-M capacity limit order to buy for 5.75 in
the Queuing Book. Prior to the open, the Exchange does not know the
market value of the option series; however, assume that the intrinsic
value of the option series is 5.75. In this case, the series would be
eligible to open because the width of the Composite Market is greater
than the Maximum Composite Width and the non-M Capacity order is at a
price less than the Composite Market midpoint. The System will then
determine the Opening Trade Price.
Example #3
Suppose the Maximum Composite Width for a class is 1.00, and the
Composite Market is 5.00 x 20.00, comprised of an appointed Market-
Maker bulk message bid of 5.00 and an appointed Market-Maker bulk
message offer of 20.00. There is a non-M Capacity limit order to buy
for 18.00 in the Queuing Book. Prior to the open, the Exchange does not
know the market value of the option series; however, assume that the
intrinsic value of the option series is 6.00 In this case, the series
is not eligible to open because the width of the Composite Market is
greater than the Maximum Composite Width, and there is a non-M Capacity
bid at a price higher than the Composite Market midpoint of 12.50. The
Queuing Period for the series will continue until the series satisfies
the Maximum Composite Width Check.
As proposed, subparagraph (e)(1)(B) will allow the Exchange to open
a series if the Composite Market of a series is greater than the
Maximum Composite Width, but there are no non-M Capacity market orders
or buy (sell) limit orders with prices higher (lower) than the
Composite Market midpoint and there are no locked or crossed orders or
quotes. Thus, under proposed subparagraph (e)(1)(B), the Exchange would
allow the option series to open in Example #2 above as the non-M
capacity limit bid was entered at a price lower than the Composite
Market midpoint. However, the proposed amendment would limit the risk
of a non-M capacity order executing at an extreme price such as that in
Example #3 as the non-M capacity limit bid was entered at a price
higher than the Composite Market midpoint.
Proposed subparagraph (e)(2) describes how the System determines
the Opening Trade Price for a series after it satisfies the Maximum
Composite Width Check described above.
The Opening Trade Price is the price that is not outside
the Opening Collar and is the volume-maximizing, imbalance minimizing
price (``VMIM price''):
[cir] the price at which the largest number of contracts can
execute (i.e., the volume-maximizing price);
[cir] if there are multiple volume-maximizing prices, the price at
which the fewest number of contracts remain unexecuted (i.e., the
imbalance-minimizing price); or
[cir] if there are multiple volume-maximizing, imbalance-minimizing
prices, (1) the highest (lowest) price, if there is a buy (sell)
imbalance, or (2) the price at or nearest to the midpoint of the
Opening Collar, if there is no imbalance.
There is no Opening Trade Price if there are no locked or
crossed orders or quotes at a price not outside the Opening Collar.\27\
---------------------------------------------------------------------------
\27\ See current Rule 21.7(e).
---------------------------------------------------------------------------
The Exchange believes the proposed volume-maximizing, imbalance-
minimizing procedure is reasonable, as it will provide for the largest
number of contracts in the Queuing Book that can execute, leaving as
few as possible bids and offers in the Book that cannot execute. The
Exchange will use the Opening Collar as a price protection measure to
prevent orders from executing at extreme prices at the open. If the
Opening Trade Price is not outside the Opening Collar (which will be
based on the best then-current market), the Exchange believes it is
appropriate to open a series at that price, because there is minimal
risk of execution at an extreme price. However, if the Opening Trade
Price would be outside of the Opening Collar, the Exchange believes
there may be risk that orders would execute at an extreme price if the
series opens, and therefore the Exchange will not open a series.
Pursuant to proposed subparagraph (e)(3), if the System establishes
an Opening Trade Price, the System will execute orders and quotes in
the Queuing Book at the Opening Trade Price. The System will prioritize
orders and quotes in the following order: market orders, limit orders
and quotes with prices better than the Opening Trade Price, and orders
and quotes at the Opening Trade Price.\28\ If there is no Opening Trade
Price, the System opens a series without a trade. As set forth in
Exchange Rule 21.8, the Exchange's execution algorithm executes trading
interest in price/time priority. However, for purposes of the Opening
Auction Process, the Exchange's execution algorithm will execute
trading interest in a pro-rata fashion, similar to that provided on
EDGX Options and Cboe Options.\29\ With pro-rata allocation, if there
are two or more orders or quotes at the best price then the contracts
are allocated proportionally according to size. The executable quantity
is allocated to the nearest whole number, with fractions \1/2\ or
greater rounded up and fractions less than \1/2\ rounded down. The
primary reason for pro-rata allocation in the Opening Auction
[[Page 6250]]
Process is that all orders will execute at the same price, thus
priority would only be given on the time at which the orders were
entered. Given that these orders would be entered during the during a
[sic] Queuing Period and waiting for execution at the same time, there
is no reason to provide a benefit for the speed of entry. Pursuant to
proposed subparagraph (f), as is the case today, following the
conclusion of the opening rotation, the System enters any unexecuted
orders and quotes (or remaining portions) from the Queuing Book into
the BZX Options Book in time sequence (subject to a User's
instructions--for example, a User may cancel an order), where they may
be processed in accordance with Rule 21.8.\30\ Consistent with the OPG
\31\ contingency (and current functionality), the System cancels any
unexecuted OPG orders (or remaining portions) following the conclusion
of the opening rotation.
---------------------------------------------------------------------------
\28\ See current Rule 21.7(d) (which states the System matches
(in accordance with Rule 21.8) orders and quotes in the System
priced equal to or more aggressively than the Opening Price). See
also Cboe Options Rule 5.31(e)(3)(A)(i) and EDGX Options Rule
21.7(e)(3)(A)(i). The Exchange believes it is appropriate to
prioritize orders with the most aggressive prices, as it provides
market participants with incentive to submit their best-priced
orders.
\29\ EDGX Options and Cboe Options allocate orders and quotes at
the same price pursuant to the allocation algorithm that applies to
a class intraday (in accordance with EDGX Options Rule 21.8/Cboe
Options Rule 5.32), unless the relevant exchange determines to apply
a different allocation algorithm to a class during the opening
rotation. Currently, both EDGX Options and Cboe Options use pro-rata
allocation for the Opening Auction Process.
\30\ The proposed rule change corrects an error in the current
Rule, which references Rule 21.9 rather than Rule 21.8.
\31\ See Exchange Rule 21.1(f)(6).
---------------------------------------------------------------------------
The proposed rule change adds paragraph (i), which provides if the
underlying security for a class is in a limit up-limit down state when
the opening rotation begins for that class, then the System cancels or
rejects all market orders. In addition, if the opening rotation has
already begun for a class when a limit up-limit down state initiates
for the underlying security of that class, market and limit orders will
continue through the end of the opening rotation.\32\
---------------------------------------------------------------------------
\32\ This is consistent with the definition of market orders in
Rule 21.1(d)(5).
---------------------------------------------------------------------------
Currently, if an order enters the Book following the Opening
Process (which would include any Good Til Cancelled (``GTC'') or Good
Til Date (``GTD'') orders that reenter the Book from the prior trading
day) and become subject to the drill-through protection pursuant to
Rule 21.17(d), the NBO (NBB) that existed at the time it enters (or
reenters) the Book would be used when determining the drill-through
price. Proposed Rule 21.17(d)(1) provides that if an order that enters
the BZX Options Book following the Opening Auction Process and becomes
subject to the drill-through protection, the bid (offer) limit of the
Opening Collar plus (minus) the buffer amount will be the drill-through
price. As discussed above, the Opening Collar is a price protection,
and the Exchange would execute orders at the open at prices at or
within the Opening Collar (as it would execute orders at or within the
NBBO). Therefore, the Exchange believes the Opening Collar limit price
points are reasonable to use when determining the drill-through price
for orders that are unable to execute during the opening rotation.
The Exchange notes that certain provisions of Cboe Options Rule
5.31 and EDGX Options Rule 21.7 are not proposed for inclusion in
Exchange Rule 21.7. Specifically, subparagraph (b)(2)(C) of Cboe
Options and EDGX Options provides that all-or-none orders are not
eligible for execution during the opening rotation. However, because
the Exchange does not support all-or-none orders, such a provision is
not included in the proposed Rule. Similarly, subparagraph (b)(2)(E) of
Cboe Options Rule 5.31 and EDGX Options Rule 21.7 provides that complex
orders do not participate in the opening auction process, which is also
not applicable to BZX Options as the Exchange does not support a
complex options book. Paragraph (d) of Cboe Options Rule 5.31 and EDGX
Options Rule 21.7 provides for opening rotation triggers during both
Regular Trading Hours and Global Trading Hours; however, as the
Exchange does not support Global Trading Hours no such applicable
provision is proposed. Lastly, paragraph (j) of Cboe Options Rule 5.31
provides a modified opening process for volatility settlements which is
not applicable to BZX Options as such products are not traded on the
Exchange.
The proposed amendments to Rule 16.1 include the clarification and
addition of definitions to conform with existing Cboe Options and EDGX
Options rules. Such proposed amendments involve no substantive changes.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\33\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \34\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \35\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\33\ 15 U.S.C. 78f(b).
\34\ 15 U.S.C. 78f(b)(5).
\35\ Id.
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The Exchange believes the proposed rule change to adopt an opening
auction will protect investors, because it will enhance the openings of
series on the Exchange by providing an opportunity for price discovery
based on then-current market conditions. The proposed Queuing Period is
substantively the same as the current Order Entry Period on the
Exchange. The proposed detail regarding the Queuing Period provides
additional transparency regarding the handling of orders and quotes
submitted during that time, and will thus benefit investors. The
proposed rule change, including orders that are not permitted during
the Queuing Period or orders that are not eligible to trade during the
opening rotation, is also similar to the pre-opening period on Cboe
Options and EDGX Options.\36\
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\36\ See Cboe Options Rule 5.31(a) and EDGX Options Rule
21.7(a).
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The proposed rule change will protect investors by ensuring they
have access to information regarding the opening of a series, which
will provide them with transparency that will permit them to
participate in the opening auction process and contribute to, and
benefit from, the price discovery the auction may provide. The proposed
opening auction updates are not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers, as all
market participants may subscribe to the Exchange's data feeds that
deliver these message, and thus all market participants may have access
to this information.
The proposed opening rotation triggers are substantially similar to
the current events that will trigger series openings on the Cboe
Options and EDGX Options. The proposed trigger events will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, as they ensure that the underlying securities
will have begun trading, or the underlying index values will have begun
being disseminated, before the System opens a series for trading.
The proposed Maximum Composite Width Check and Opening Collar will
protect investors by providing price protection measures to prevent
orders from executing at extreme prices at the
[[Page 6251]]
open. The Exchange believes it is appropriate to open a series under
the proposed circumstances and provide marketable orders with an
opportunity to execute at a reasonable opening price (as discussed
below), because there is minimal risk of execution at an extreme price.
Furthermore, the Exchange believes proposed Rule 21.7(e)(1)(B) will
benefit market participants as it may encourage the submission of
orders at prices that improve the Composite Market in the Opening
Auction Process on the Exchange, and allow the Exchange to open series
earlier, which may also allow for more trading opportunities on the
Exchange throughout the trading day. The proposed price protections
incorporate all available pricing information, including Market-Maker
bulk messages (which are generally used to price markets for series)
and any quotes disseminated from away markets, and thus may lead to a
more accurate Opening Trade Price based on then-current market
conditions. As noted above, Cboe Options and EDGX Options apply similar
price protections during its opening rotation. Cboe Options and EDGX
Options similarly consider Market-Maker quotes (the equivalent of
Market-Maker bulk message on EDGX Options and the Exchange), and in
certain classes, quotes of away exchanges, and whether there are
crossing orders or quotes when determining whether the opening width
and trade price are reasonable.
The proposed priority with respect to trades during the opening
rotation are consistent with current priority principles that protect
investors, which are to provide priority to more aggressively priced
orders and quotes. Orders and quotes will be subject to the same
allocation algorithms that the Exchange may apply during the trading
day. The proposed priority and allocation of orders and quotes at the
opening trade is substantially similar to the priority and allocation
of orders and quotes at the opening of Cboe Options and EDGX
Options.\37\
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\37\ See Cboe Options Rule 5.31(e)(3)(A) and EDGX Options Rule
21.7(e)(3)(A).
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The Exchange believes the proposed opening auction process is
designed to ensure sufficient liquidity in a series when it opens and
ensure series open at prices consistent with then-current market
conditions, and thus will ensure a fair and orderly opening process.
Additionally, as noted above, the proposed opening auction process is
substantially similar to the opening auction process of Cboe Options
and EDGX Options.\38\ The differences between proposed Rule 21.7 and
Cboe Options Rule 5.31 and EDGX Options Rule 21.7 primarily relate to
differences between the exchanges, including functionality Cboe Options
and EDGX Options offer that the Exchange does not and products Cboe
Options and EDGX Options list for trading that the Exchange does not.
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\38\ See Cboe Options Rule 5.31 and EDGX Options Rule 21.7.
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The proposed rule change is generally intended to align system
functionality currently offered by the Exchange with Cboe Options and
EDGX Options functionality in order to provide a consistent technology
offering for the Cboe Affiliated Exchanges. A consistent technology
offering, in turn, will simplify the technology changes and maintenance
by Users of the Exchange that are also participants on Cboe Affiliated
Exchanges. The Exchange believes this consistency will promote a fair
and orderly national options market system. Users of the Exchange and
other Cboe Affiliated Exchanges have access to similar functionality on
all Cboe Affiliated Exchanges. As such, the proposed rule change would
foster cooperation and coordination with persons engaged in
facilitating transactions in securities and would remove impediments to
and perfect the mechanism of a free and open market and a national
market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change to adopt an opening auction
process will impose any burden on intramarket competition that is not
necessary or appropriate in furtherance of the purposes of the Act,
because it will apply to orders and quotes of all market participants
in the same manner. The same order types that are not currently
accepted prior to the opening, and that do not participate in the
opening process, will similarly not be accepted during the Queuing
Period or be eligible for trading during the opening rotation.
The Exchange does not believe that the proposed rule change to
adopt an opening auction process will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, because it is designed to open series on the
Exchange in a fair and orderly manner. The Exchange believes an opening
auction process will enhance the openings of series on the Exchange by
providing an opportunity for price discovery based on then-current
market conditions. The proposed auction process will provide an
opportunity for price discovery when a series opens, ensure there
sufficient liquidity in a series when it opens, and ensure series open
at prices consistent with then-current market conditions (at the
Exchange and other exchanges) rather than extreme prices that could
result in unfavorable executions to market participants. Additionally,
as discussed above, the proposed opening auction process is
substantially similar to the Cboe Options and EDGX Options opening
auction process.\39\
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\39\ See Cboe Options Rule 5.31 and EDGX Options Rule 21.7.
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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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \40\ and Rule 19b-4(f)(6) thereunder.\41\
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 for 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 \42\ and Rule 19b-
4(f)(6) thereunder.\43\
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\40\ 15 U.S.C. 78s(b)(3)(A)(iii).
\41\ 17 CFR 240.19b-4(f)(6).
\42\ 15 U.S.C. 78s(b)(3)(A).
\43\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \44\ normally
does not become operative for 30 days after the date of the filing.
However, pursuant to
[[Page 6252]]
Rule 19b-4(f)(6)(iii),\45\ the Commission may 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
operative immediately. The Exchange represents that the functionality
of the proposed auction process is scheduled to become available on
January 30, 2020. Furthermore, the Exchange states that the proposed
auction process is virtually identical to the one used on the Cboe
Affiliated Exchanges, and that waiver of the operative delay would
enable the Exchange to continue its efforts to provide a technology
offering consistent with those of the Cboe Affiliated Exchanges as
promptly as possible. The Exchange believes that such consistency will
simplify the technology changes and maintenance by Options Members of
the Exchange that are also participants on Cboe Affiliated Exchanges.
For these reasons, the Commission believes that waiver of the 30-day
operative delay is consistent with the protection of investors and the
public interest. Accordingly, the Commission hereby waives the 30-day
operative delay and designates the proposal operative upon filing.\46\
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\44\ 17 CFR 240.19b-4(f)(6).
\45\ 17 CFR 240.19b-4(f)(6)(iii).
\46\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission 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-CboeBZX-2020-012 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-CboeBZX-2020-012. 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-CboeBZX-2020-012, and should be
submitted on or before February 25, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-02049 Filed 2-3-20; 8:45 am]
BILLING CODE 8011-01-P
