Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating To Amend Rules 5.37, 5.38 and Rule 5.73, 36923-36928 [2020-13123]

Download as PDF Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Notices By the Commission. Eduardo A. Aleman, Deputy Secretary. 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 [FR Doc. 2020–13127 Filed 6–17–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89063; File No. SR–CBOE– 2020–052] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating To Amend Rules 5.37, 5.38 and Rule 5.73 June 12, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 3, 2020, Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) proposes to amend Rules 5.37, 5.38 and Rule 5.73. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://www.cboe.com/ AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Sep<11>2014 17:40 Jun 17, 2020 Jkt 250001 1. Purpose The Exchange proposes to amend Rule 5.38 and Rule 5.73 regarding the minimum increment for Complex Automated Improvement Mechanism (‘‘C–AIM’’) and FLEX AIM Auction responses, respectively, in connection with SPX Combo Orders, as well as Rule 5.37, Rule 5.38, and Rule 5.73 in connection with dissemination of the stop price in auction notification messages for auctions in SPX. By way of background, the Exchange recently activated the Automated Improvement Mechanism (‘‘AIM’’) and C–AIM Auctions in S&P 500 Index (‘‘SPX’’) options.3 When submitting an Agency Order into a C–AIM Auction, the Initiating Member must also submit a contra-side second order for the same size as the Agency Order. This second order guarantees that the Agency Order will receive an execution (i.e., it acts as a stop). Upon commencement of a C– AIM Auction, market participants submit responses to trade against the Agency Order. At the end of an auction, depending on the contra-side interest available, the contra order may be allocated a certain percentage of the Agency Order.4 When the Exchange is operating in its normal trading environment, the Exchange has not activated C–AIM (or AIM) in SPX,5 thus all non-FLEX crossing transactions in SPX were previously only able to occur on the trading floor. Therefore, Trading Permit Holders may cross orders only in open outcry on the trading floor. Pursuant to Rule 5.87(f), a floor broker holding an order for the eligible order size is entitled to cross a certain percentage 6 of 3 The Exchange notes FLEX AIM in SPX had been activated prior to March 16, 2020. 4 See generally Rule 5.38(e). The Exchange notes, too, that the same process applies to the FLEX AIM Auction pursuant to the FLEX Rules. See generally Rule 5.73(e). 5 The Exchange had activated C–AIM and AIM in SPX for the first time as a result of the March 16, 2020 trading floor suspension to help prevent the spread of COVID–19 and operated in an allelectronic configuration beginning March 16, 2020. Currently, the trading floor is scheduled to reopen June 15, 2020. The Exchange intends to activate AIM and C–AIM in SPX as electronic crossing mechanisms available for Users while the trading floor is open, subject to approval of this proposed rule change and separate proposed rule changes regarding AIM and C–AIM. 6 Currently, the Exchange has set the percentage as 40% (the same crossing entitlement percentage as on AIM, C–AIM, and FLEX AIM). See CBOE PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 36923 the order with facilitated (and solicited orders, if designated by the Exchange for a class) after satisfying public customer orders 7 if the order trades at or between the best bid or offer given by the crowd in response to the floor broker’s initial request for a market. Specifically, a floor broker representing an order of the eligible order size or greater that he wishes to cross (and the percentage of which he is entitled to cross) must request bids and offers for such option series and make all persons in the trading crowd, including the PAR Official, aware of his request. In this way, the crossing mechanism on the trading floor allows for the trading crowd to control the price of a crossing order and indicates to responding TPHs and the crossing floor broker a reasonable range at which the market is willing to buy (sell) at that point in time. This provision is subject to the crossing rules in Rule 5.86 (subject to certain exceptions), which require disclosure of all terms and conditions to the crowd (including the price) prior to executing a cross.8 Moreover, orders in SPX generally take on greater risk than in other option classes. SPX options tend to have a higher notional value than options in other classes (e.g., they are ten times the notional size of SPY options), trade much larger size than in other options classes (indeed, even smaller sized orders in SPX would be considered fairly large size in other classes), and effect increasingly more complex strategies than executed in other classes (e.g., SPX Combo orders) or executed electronically (e.g., in open outcry complex orders trade with larger ratios that may be negotiated by the trading crowd). Given these factors, SPX Market-Makers on the floor generally have more confidence in the pricing of their responses as the crosses start with a request for market and the trading crowd then provides a ‘‘ballpark’’ of the prices at which they are willing to trade and a Market-Maker may thus more confidently base response on the market of other members of the trading crowd. Pursuant to Rules 5.4(b) and 5.33(f)(1)(A), the minimum increment for bids and offers on complex orders in options on SPX 9 is $0.05 or greater, or in any increment determined by the Exchange. When seeking to cross SPX Regulatory Circular RG16–179, Participation Entitlement Applicable to Crossing Orders in Open Outcry (November 18, 2016) available at https:// www.cboe.com/publish/RegCir/RG16-179.pdf. 7 Similarly, the AIM and C–AIM percentage applies after public customer orders are satisfied. See Rules 5.37(e) and 5.38(e). 8 See Rule 5.87, Interpretation and Policy .05. 9 Except for box/roll spreads. E:\FR\FM\18JNN1.SGM 18JNN1 36924 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Notices complex orders on the trading floor, a floor broker generally identifies the legs of the complex order and their relative sizes to each other with a net package price. The Exchange understands the trading crowd then generally provides a market based on the strategy’s theoretical value in an increment of $0.05 rather than the value of the net package (which equals the strategy times the ratio), which is particularly true when the complex order represented is a delta neutral order that includes a combo. The Exchange has observed that SPX Combos comprise a significant portion of crosses in SPX.10 For example, assume a floor broker represents a $4.00 option tied to a combo, with a ratio of 8-to-1 combo (i.e. 12.5 delta), and further assume the combo portion is priced as a package at even,11 which strategy has a theoretical value of $4.00, which is applied to each of the 8 options in the order. Members of the trading crowd then generally respond with markets based on a $0.05 increment above or below the theoretical value of $4.00 rather than the net package price of $32.00 (8 × $4.00). If the execution price occurred at $4.50, the net cash price would be $36.00, providing for $4.00 price improvement (i.e., $0.50 × 8 options) over the theoretical value of the strategy. However, if this order is submitted via C–AIM, responses are generally based on a $0.05 increment above or below $32.00. If the execution price was $32.50, the price improvement above the theoretical price for the strategy would be approximately $0.06 ($0.50/8). Since the Exchange activated C–AIM for SPX options, a significant amount of SPX volume has executed through C– AIM. As noted above, the Exchange has also observed that a majority of the complex strategies submitted for execution in SPX options are ‘‘delta neutral,’’ often hedged with a ‘‘combo’’ of other SPX options, as is the case with complex orders crossed on the trading floor. An SPX Combo Order is a complex order that includes one or more SPX legs, hedged by an SPX combo, or synthetic future, defined by the delta. Specifically, an ‘‘SPX combination’’ is a purchase (sale) of an SPX call and a sale (purchase) of an SPX put with the same expiration date and strike price, and ‘‘delta’’ is the positive (negative) number of SPX combinations that must be sold (bought) to establish 10 In April 2020, SPX Combos comprised 60.5% of crossed volume executed in SPX via AIM while the trading floor was inoperable. 11 The Exchange also notes that it intends to implement Index Combo Orders when it reopens its trading floor. See Rule 5.33(b). VerDate Sep<11>2014 17:40 Jun 17, 2020 Jkt 250001 a market neutral hedge with one or more SPX option series.12 Currently, Rule 5.38(c)(5)(A) and Rule 5.38(a)(4) provide that the minimum price increment for C–AIM responses and Agency and Initiating Orders, respectively, must be in an increment the Exchange determines on a class basis—which, as described above, is $0.05 in SPX options.13 The Exchange notes that the corresponding FLEX AIM Rules 5.73(c)(5)(A) and 5.73(a)(4) provide the same for FLEX AIM Auctions. However, unlike on the trading floor, market participant responses using this increment have generally improved the net package price (based on then-current leg markets) by the minimum increment of $0.05. While members of the trading crowd on the trading floor are permitted to improve the net package price (based on then-current leg markets) by the minimum increment of $0.05 under the Rules, that is not the common practice, as noted above. The Exchange believes this is because the parties to an electronic complex order trade may compete only with respect to the net price and are not able to negotiate the leg prices. For example, consider an SPX complex strategy to buy 8 of the June 2600/2550 SPX put spreads tied to one June 2660 Combo, using a delta of 5. Consider that the desired starting price of the put spread is $15.50 by 8 with the combo trading at even (i.e., zero). If the strategy was executed on the trading floor, the broker would first ask for a market for the June 2600/2550 put spread tied to the 2660 combo, and the trading crowd might, for example, price the 2600 leg at 16–17, the 2550 leg at 1– 3, and the combo at 20–22 and 20–22 (or, even). Based off the market provided, an in-crowd Market-Maker could then respond to the package at 13–16, which equates to buying the 2660 leg at 16 and selling the 2550 leg at 3 and then selling the 2600 leg at 17 and buying the 2550 leg at a dollar. The trading crowd’s responses would not include the combo, instead, the combo at even is ‘‘tied up’’ to, or in addition to, the package price. The broker would then be able to indicate their size and direction for the put spread (i.e., their contra) based off the market given by the trading crowd; in this example, that they would pay 15.50 for 8. Open outcry auction responses would then be priced in $0.05 increments below $15.50, per spread. However, the same strategy 12 See Rule 5.6(b). System rejects a C–AIM response or Agency or Initiating Order that is not in the applicable minimum increment. 13 The PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 submitted into a C–AIM Auction must currently be entered as one package, inclusive of the combo, for a net price of $124.00 ($15.50 × 8). In this example, the broker would submit the Agency Order and contra-side order(s) simultaneously to commence the Auction. C–AIM Auction responses would then join the $124.00 package price or occur in $0.05 below the $124.00 package price, thus price improved by $123.95, an improvement of only a quarter penny per spread (i.e., $0.05/8). In addition to this, current Rules 5.37(c)(2), 5.38(c)(2), and 5.73(c)(2) provide that the System initiates the AIM, C–AIM, and FLEX AIM Auction processes, respectively, by sending an auction notification message detailing the side, size, Auction ID, options series (additionally, in the case of C–AIM Auctions, complex strategy, and in the case of FLEX AIM Auctions, length of the auction period and complex strategy, as applicable) of the Agency Order to all Users that elect to receive AIM, C–AIM, or FLEX AIM Auction notification messages. AIM, C–AIM, and FLEX AIM Auction notification messages are not included in the disseminated BBO (in connection with AIM Auctions) or OPRA. As such, the stop price of an Agency Order is not currently included in auction notification messages. The Exchange believes that lack of an indication of where an auction is set to begin, like the ballpark figure provided by the trading crowd when crossing on the trading floor, may cause apprehension in pricing competitive responses during the electronic auctions in SPX, which may reduce liquidity and price improvement during such auctions. The Exchange is considering activating AIM and C–AIM in SPX when it reopens the trading floor. To better align the C–AIM process for SPX complex strategies with the open outcry crossing process for those strategies, the Exchange proposes to amend Rule 5.38(c)(5)(A) to provide that the minimum price increment for a C–AIM response in which the Agency Order complex strategy is comprised of an SPX Combo Order (as defined in Rule 1.1) will be the ratio of the non-combo portion of the strategy to the number of combos, multiplied by the minimum price increment the Exchange determines for options on SPX Agency Orders pursuant to Rule 5.38(a)(4). Also, to better align the AIM and C–AIM pricing process generally for responses with the open outcry process, the Exchange proposes to amend Rules 5.37(c)(2) and 5.38(c)(2) to provide that the Exchange may also determine to E:\FR\FM\18JNN1.SGM 18JNN1 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Notices include the stope price in AIM and C– AIM Auction notification messages, respectively, in SPX. Like all other information disseminated in an AIM and C–AIM Auction notification message, the stop price will be available to all Users that elect to receive auction notification messages. The Exchange notes that the FLEX AIM Rules in connection with the auction process for FLEX complex orders are substantially similar to the AIM and C–AIM Rules. Therefore, to maintain consistency within the Rules between the FLEX and non-FLEX auctions, the Exchange also proposes to amend the FLEX AIM process for SPX complex strategies (i.e., for FLEX C–AIM) and for FLEX AIM Auction notification messages in the same manner.14 The Exchange believes that the proposed rule changes will create similar price competition for these orders in electronic and open outcry trading. Particularly, the Exchange believes that the current manner in which de minimis price improvement may occur via C–AIM, as well as FLEX C–AIM, Auctions in connection with SPX Combo Orders (i.e., potentially only improved in sub-penny increments) may discourage market participants from providing contra-side interest at the best prices and liquidity providers from joining or improving at meaningful increments. As such, the proposed rule change is intended to provide for substantially the same price improvement opportunities at meaningful increments on SPX complex strategies submitted to C–AIM and FLEX C–AIM that occur for the same strategies on the trading floor. To illustrate by using the same complex strategy example above, if a User buys 8 of the June 2600/2550 SPX Put spreads tied to one June 2660 Combo, using a delta of 5, pursuant to the proposed rules, the System would calculate the minimum increment by the ratio of the non-combo leg (8) to the number of combos (1) by the minimum increment of $0.05. Therefore, (8/1) × 0.05 = $0.40 as the starting point for price improvement during the C–AIM or FLEX C–AIM Auction. In this way, by tying the minimum increment to the legs of the order, as opposed to the package price inclusive of the combos, the Exchange believes the proposed rule would require market participants to respond to the C–AIM or FLEX C–AIM Auctions for SPX complex strategies at prices more aligned with the prices at which responses generally occur in open outcry, i.e., prices in response to a broker’s corresponding bids (offers) 14 See proposed Rules 5.73(c)(2) and 5.73(c)(5)(A). VerDate Sep<11>2014 17:40 Jun 17, 2020 Jkt 250001 based off of the market per leg at which the trading crowd indicates it is willing to buy (sell). If market participants may participate in C–AIM or FLEX C–AIM executions in connection with SPX complex strategies by providing de minimis price improvement compared to price improvement that may occur on the floor, the Exchange believes there may be less interest by market participants to take on the risk of participating as a contra and may negatively impact liquidity available on the trading floor. As a result, the Exchange believes this potentially reduces price improvement opportunities for customers. Particularly, if the Exchange determines to activate C–AIM in SPX when the trading floor re-opens, the Exchange believes the proposed rule change may provide customers with additional opportunities for more meaningful price improvement and may encourage market participants to provide more liquidity for C–AIM transactions in SPX while also mitigating any potential disincentive to provide liquidity on the trading floor in SPX by better aligning electronic and open outcry crossing of SPX complex orders that include a combo. The Exchange notes that the proposed rule change does not alter the minimum increment as determined by the Exchange for SPX complex strategies and is consistent with the ability of the Exchange to determine the minimum increment for SPX (the proposed minimum increment will be in multiples of $0.05) but instead provides that price improvement opportunities for such orders submitted into C–AIM, as well FLEX AIM, occur at the same meaningful increments that market participants reasonably would expect to occur on such orders pursuant to the current Rules and practice on the trading floor. The Exchange believes this may encourage a potential increase in participation in the C–AIM and FLEX AIM Auctions in SPX without a corresponding negative impact on participation or liquidity in open outcry auctions once the trading floor reopens. In the same way, the Exchange believes that the proposed rule change to allow the System to disseminate the initial price of an SPX AIM and C–AIM Auction, as well as FLEX AIM Auction, would more generally align the trading of SPX options submitted for execution into the electronic auctions with those crossed on the trading floor. The Exchange believes that the proposed rule change would allow the Exchange to address any uncertainties market participants may have when pricing SPX responses, given the more PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 36925 complicated market models, greater risk, higher notional value, larger sizes, and increasingly more complex strategies in SPX, by including the Agency Order stop price in the auction notification messages. This, in turn, may facilitate market participants’ confidence in pricing meaningful, competitive responses during electronic auctions in SPX in a manner substantially similar to which the trading crowd’s market allows for market participants to more confidently price their responses accordingly. As a result, this proposed rule change is intended to incentivize continued, competitive responses to SPX electronic auctions in substantially the same manner in which responses may be priced on the trading floor, thus, providing for potentially improved liquidity and price improvement opportunities for orders being executed through those auctions. The Exchange also notes that its affiliated options exchange, Cboe EDGX Exchange, Inc. (‘‘EDGX Options’’) corresponding rules 15 governing the AIM and C–AIM auction notification messages on EDGX Options provide that its system initiates the AIM or C–AIM auction processes by sending an auction notification message detailing the price, along with the same fields currently detailed pursuant to Cboe Options Rules 5.37(c)(2) and 5.38(c)(2) as well as 5.73(c)(2). Also, pursuant to Exchange Rule 5.33(d)(1), C2 Rule 6.13(d)(1), and EDGX Options Rule 21.20(d)(1), the Exchange and its affiliated options exchanges may currently determine to include in similar notification messages the limit price of an order that initiates a Complex Order Auction (‘‘COA’’), much like that of the stop price of an AIM, C– AIM, or FLEX AIM Agency order that initiates these auctions. The Exchange further notes that similar electronic auctions on other options exchanges disseminate the price in their initial auction messages.16 The Exchange believes that providing similar response and execution opportunities across these trading facilities will serve to maintain meaningful levels of liquidity, price competition, and price improvement opportunities in SPX during both electronic and open outcry auctions 15 See EDGX Options Rules 21.19(c)(2) and 21.22(c)(2). 16 See MIAX Options Rule 5.18(d)(2), which governs the commencement of a Complex Auction on MIAX Options, and Rules 515A(a)(2)(i)(B) and 515A.12, which govern the request for response message disseminated during MIAX Options’ electronic crossing auctions, PRIME and complex PRIME; substantially similar to AIM and C–AIM; see also NYSE American Options Rule 903G(a)(2), which governs the information required in FLEX Request for quotes. E:\FR\FM\18JNN1.SGM 18JNN1 36926 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Notices upon the reopening of the trading floor if the Exchange determines to activate AIM and C–AIM for SPX at that time. As a result, the proposed rule change is designed to ensure that C–AIM for complex SPX strategies remains a viable additional means of execution for SPX complex orders, and that market participants maintain the same confidence in pricing their responses to AIM and C–AIM Auctions in SPX as they have during open outcry auctions, and thus, will continue to provide more execution and price improvement opportunities for customers. Likewise, the proposed rule change would align the FLEX AIM and C–AIM Auction process with the non-FLEX AIM and C– AIM Auction process, potentially providing the similar opportunities for execution and price improvement in connection with the same complex strategies and similar meaningfully price responses submitted into FLEX AIM and providing investors with continued consistency in the Exchange’s auction rules, thus, mitigating any confusion for those participating in both non-FLEX and FLEX SPX trading. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Securities Exchange Act of 1934 (the ‘‘Act’’) and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.17 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 18 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 19 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Exchange believes the proposed rule change, overall, will promote just and equitable principles of trade and remove impediments to and perfect the mechanism of a free and open market 17 15 18 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 19 Id. VerDate Sep<11>2014 17:40 Jun 17, 2020 Jkt 250001 and a national market system by further aligning the AIM, C–AIM and FLEX AIM Auction processes with the open outcry crossing process. The Exchange believes the proposed rule change will permit market participants that respond to C–AIM and FLEX AIM Auctions for orders tied to SPX Combos in a similar manner as members of a trading crowd respond to request for markets for those orders. Additionally, for those that respond to AIM, C–AIM, and FLEX AIM auctions generally in SPX, the Exchange believes the proposed rule change will facilitate more confidence of market participants in pricing responses during auctions in a manner similar to pricing process that takes place on the trading floor. In particular, the Exchange believes the proposed rule change regarding minimum increments for responses to SPX Combo Orders will remove impediments to and perfect the mechanism of a free and open market and national market system and will protect investors by encouraging market participants to continue to provide liquidity by acting as contra in C–AIM Auctions for SPX orders, as well as possibly providing more price improvement opportunities and more meaningful price improvement if the Exchange determines to activate C–AIM in SPX when the trading floor is reopened. The Exchange believes that providing similar execution opportunities for SPX complex strategies between C–AIM and open outcry will help to maintain meaningful levels of liquidity and price improvement opportunities in SPX across both facilities. Thus, the proposed rule change seeks to have C– AIM for complex SPX strategies be an additional means of execution for SPX complex orders, together with executions opportunities via open outcry, in turn, providing additional execution and price improvement opportunities overall for customers without a potential negative impact on liquidity on the trading floor. The proposed rule change does not alter the minimum increment as determined by the Exchange for SPX complex strategies but rather increases the overall minimum increment for responses (in other words, executions will continue to trade in an increment of $0.05 per leg and per order), which will still be in a multiple of $0.05. The Exchange believes this may result in responses to customer orders submitted for execution in C–AIM and FLEX AIM at prices market participants reasonably would expect to receive for such orders on the trading floor. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 Additionally, the Exchange believes that proposal to permit the Exchange to include the auction price in the auction notification message, which, unlike open outcry, will be a net package price rather than a per strategy price, may pose potential risk of market participants submitting responses by de minimis amounts ($0.05 above or below the auction price), which as described above, may discourage market participants from taking on the risk to participate as contras, which could reduce liquidity available in the electronic and open outcry SPX market. The Exchange is concerned that potential interruptions to the provision of liquidity in SPX and general participation in the complex electronic auctions in SPX, as well as on the trading floor, could result from the de minimis price increases market participants may provide in responses to electronic auctions due to the disparity between pricing in electronic auctions and pricing in open outcry trading. As a result, the Exchange believes the proposed rule change may encourage continued submission of SPX complex strategies to the electronic auctions by modifying C–AIM and FLEX AIM Auctions for SPX to more closely replicate the open outcry crossing auction process for SPX (which constitutes the majority of SPX trading when the Exchange trading floor is available and C–AIM is not activated). The Exchange believes the proposed rule change would generally enhance price improvement and execution opportunities in SPX C–AIM Auctions, as well as FLEX AIM, thereby removing impediments to and perfecting the mechanism of a free and open market and a national market system, and, overall, benefitting the entire market and all investors. Similarly, the Exchange believes that the proposed change to allow the System to disseminate the price of an Agency Order in SPX options submitted to AIM and C–AIM auctions will further enable all market participants to respond to the auctions with competitive prices thereby removing impediments to and perfecting the mechanism of a free and open market and national market system. As described above, participants in SPX are accustomed to receiving an approximate starting price range during open outcry auctions, which provides them with confidence in pricing their responses; this confidence is particularly important for orders in SPX, which, as noted above, generally take on greater risk and effect increasingly more complex strategies than in other option classes. E:\FR\FM\18JNN1.SGM 18JNN1 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Notices Thus, the proposed rule change is intended to better align the dissemination of auction prices in SPX with the manner in which the trading floor may give a ‘‘ball park’’ price in response to a request for a market on the trading floor, thereby providing participants with the same level of confidence in pricing their responses when responding to both the electronic and open outcry auctions, and thus encouraging market participants to continue to submit responses and participate in the electronic auctions when the trading floor is again operable. This proposed change, too, may increase price improvement and execution opportunities in SPX during the AIM and C–AIM, as well as the FLEX AIM, Auctions, thereby also facilitating the provision of an additional viable avenue(s) of execution for SPX orders if AIM and C–AIM remain activated in SPX once the trading floor reopens. In addition to this, the proposed rule change is not new or unique, as the Exchange may already determine to include the price for notification messages in connection with the commencement of its COA pursuant to Rule 5.33(d)(1), the rules of EDGX Options currently provide that the price of an Agency Order in its AIM and C– AIM auctions be disseminated via its auction notification messages,20 and other options exchange rules also permit for dissemination of the price of an electronic auction-commencing order in auction messages.21 The Exchange notes that each of the aforementioned rules has previously been filed with the Commission. The Exchange believes that, together, both proposed changes would provide benefits to investors participating in SPX. As discussed above, the Exchange believes providing market participants with the auction price for SPX AIM Auctions may increase participation in the AIM Auctions, and thus increase execution and price improvement opportunities for customer orders submitted into those auctions. The Exchange believes this will benefit all market participants that trade in the SPX market. In connection with this change, the Exchange believes the proposed change to impose a larger minimum increment for responses is necessary and appropriate offsets the potential risk that the display of the auction price may lead to further de minimis price improvement for those orders. Moreover, the Exchange believes the proposed rule changes will likewise 20 See 21 See supra note 15. supra note 16. VerDate Sep<11>2014 17:40 Jun 17, 2020 Jkt 250001 extend these additional execution and price improvement opportunities to such orders submitted into FLEX AIM while also maintaining consistent auction rules in connection with SPX auction notification messages and SPX complex strategies in both non-FLEX and FLEX. As a result, the Exchange believes this will benefit investors by mitigating any potential confusion regarding the manner of SPX auction message dissemination or SPX execution for complex strategies in SPX into either auction. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange does not believe the proposed rule change in connection with minimum increments for SPX complex strategies 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 all C–AIM and FLEX AIM executions in connection with SPX Combo Orders for all market participants. The Exchange believes it is reasonable to limit the proposed rule change to SPX Combo Orders as the majority of index strategies are structured as SPX combos. The Exchange also does not believe that the proposed rule change in connection with the dissemination of price in the SPX auction notification messages 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 all Agency Orders submitted into the AIM, C–AIM, and FLEX AIM Auctions, as the Exchange determines, by all market participants. Additionally, the dissemination of the price via the auction notification message, when applicable, will continue to be made available to all market participants that elect to receive auction notification messages, as it currently is today. The Exchange further notes that, as compared to other options classes, SPX exhibits generally more complex trading characteristics and market models, different investor basis, and a significant portion of larger orders and more complex strategies that typically occur on the trading floor, and thus, it is reasonable to limit the proposed rule change to SPX as it is designed to facilitate confidence when pricing responses in light of these factors. The Exchange does not believe the proposed rule change will impose any PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 36927 burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act, as the proposed rule change relates to an Exchange-specific auction mechanism in a class of options only listed for trading on the Exchange. Other exchanges with similar price improvement auctions may amend their rules to propose different minimum increments for auction responses as they deem appropriate. The Exchange notes the proposed rule change has no impact on the allocation or priority of orders and responses at the conclusion of the C–AIM and FLEX AIM Auctions. Also, as noted above, pursuant to rules previously filed with the Commission, the Exchange and its affiliated options exchanges may currently determine to include price in its similar notification messages disseminated in connection with the COA, EDGX Options currently disseminates the price of agency orders in its auction notification messages for AIM and C–AIM auctions,22 and the rules of other options exchanges governing substantially similar electronic auctions disseminate the initiating prices for such auctions.23 The Exchange believes the proposed rule change may promote competition on the Exchange, as it will more closely align the electronic crossing process with the open outcry crossing process, and thus provide similar execution and price improvement opportunities to customers whether their orders are submitted for electronic or open outcry execution. In particular, the Exchange may activate AIM and C–AIM for SPX when the trading floor is reopened, and the proposed rule change would enable it to do so in a manner the Exchange believes will encourage liquidity in both electronic and open outcry trading, and, as a result, will provide an additional viable avenue of execution for SPX orders, and thus more execution and price improvement opportunities overall in SPX for customers. 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 Within 45 days of the date of publication of this notice in the Federal Register or within such longer period 22 See 23 See E:\FR\FM\18JNN1.SGM supra note 15. supra note 16. 18JNN1 36928 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Notices up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. By order approve or disapprove such proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be 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 rule-comments@ sec.gov. Please include File Number SR– CBOE–2020–052 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2020–052. 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 VerDate Sep<11>2014 17:40 Jun 17, 2020 Jkt 250001 submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2020–052 and should be submitted on or before July 9, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.24 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–13123 Filed 6–17–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89055; File No. SR–FINRA– 2020–017] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Extend the Effective Date of the Temporary Amendments Set Forth in SR–FINRA–2020–015 June 12, 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 June 10, 2020, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. 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 extend the effective date of the temporary amendments set forth in SR–FINRA– 2020–015 3 from June 15, 2020 to July 31, 2020. In response to the impacts on FINRA’s operations caused by the outbreak of the coronavirus disease (COVID–19), FINRA’s May 8 Filing temporarily modified some timing, method of service and other procedural requirements in FINRA rules through June 15, 2020.4 24 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 88917 (May 20, 2020), 85 FR 31832 (Notice of Filing and Immediate Effectiveness) (SR–FINRA–2020–015) (filed with the Commission on May 8, 2020 for immediate effectiveness) (the ‘‘May 8 Filing’’). 4 See id. 1 15 PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 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, 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 On May 8, 2020, FINRA filed with the Commission a proposed rule change for immediate effectiveness to temporarily amend some timing, method of service and other procedural requirements in FINRA rules during the period in which FINRA’s operations are impacted by the outbreak of COVID–19. Those temporary amendments set forth in FINRA’s May 8 Filing are in effect through June 15, 2020.5 The Commission published its notice of filing and immediate effectiveness for the May 8 Filing on May 20, 2020.6 FINRA proposed the temporary amendments set forth in its May 8 Filing to address the substantial impacts of the COVID–19 outbreak on FINRA’s operations. Among other things, the need for FINRA staff, with limited exceptions, to work remotely and restrict in-person activities—consistent with the recommendations of public health officials—makes it challenging to meet certain procedural requirements and perform certain functions required under FINRA rules. The proposed rule change addressed these concerns by easing logistical and other issues and providing FINRA with needed flexibility for its operations during the COVID–19 outbreak. The COVID–19 conditions necessitating the temporary amendments in FINRA’s May 8 Filing 5 As noted in FINRA’s May 8 Filing, the temporarily amended FINRA rules will revert back to their original state at the conclusion of the temporary relief period, now July 31, 2020, and any extension thereof. 6 See supra note 3. E:\FR\FM\18JNN1.SGM 18JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 118 (Thursday, June 18, 2020)]
[Notices]
[Pages 36923-36928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13123]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89063; File No. SR-CBOE-2020-052]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating To Amend Rules 5.37, 5.38 and 
Rule 5.73

June 12, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 3, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \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 Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rules 5.37, 5.38 and Rule 5.73. The text of the proposed rule 
change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 5.38 and Rule 5.73 regarding 
the minimum increment for Complex Automated Improvement Mechanism (``C-
AIM'') and FLEX AIM Auction responses, respectively, in connection with 
SPX Combo Orders, as well as Rule 5.37, Rule 5.38, and Rule 5.73 in 
connection with dissemination of the stop price in auction notification 
messages for auctions in SPX.
    By way of background, the Exchange recently activated the Automated 
Improvement Mechanism (``AIM'') and C-AIM Auctions in S&P 500 Index 
(``SPX'') options.\3\ When submitting an Agency Order into a C-AIM 
Auction, the Initiating Member must also submit a contra-side second 
order for the same size as the Agency Order. This second order 
guarantees that the Agency Order will receive an execution (i.e., it 
acts as a stop). Upon commencement of a C-AIM Auction, market 
participants submit responses to trade against the Agency Order. At the 
end of an auction, depending on the contra-side interest available, the 
contra order may be allocated a certain percentage of the Agency 
Order.\4\
---------------------------------------------------------------------------

    \3\ The Exchange notes FLEX AIM in SPX had been activated prior 
to March 16, 2020.
    \4\ See generally Rule 5.38(e). The Exchange notes, too, that 
the same process applies to the FLEX AIM Auction pursuant to the 
FLEX Rules. See generally Rule 5.73(e).
---------------------------------------------------------------------------

    When the Exchange is operating in its normal trading environment, 
the Exchange has not activated C-AIM (or AIM) in SPX,\5\ thus all non-
FLEX crossing transactions in SPX were previously only able to occur on 
the trading floor. Therefore, Trading Permit Holders may cross orders 
only in open outcry on the trading floor. Pursuant to Rule 5.87(f), a 
floor broker holding an order for the eligible order size is entitled 
to cross a certain percentage \6\ of the order with facilitated (and 
solicited orders, if designated by the Exchange for a class) after 
satisfying public customer orders \7\ if the order trades at or between 
the best bid or offer given by the crowd in response to the floor 
broker's initial request for a market. Specifically, a floor broker 
representing an order of the eligible order size or greater that he 
wishes to cross (and the percentage of which he is entitled to cross) 
must request bids and offers for such option series and make all 
persons in the trading crowd, including the PAR Official, aware of his 
request. In this way, the crossing mechanism on the trading floor 
allows for the trading crowd to control the price of a crossing order 
and indicates to responding TPHs and the crossing floor broker a 
reasonable range at which the market is willing to buy (sell) at that 
point in time. This provision is subject to the crossing rules in Rule 
5.86 (subject to certain exceptions), which require disclosure of all 
terms and conditions to the crowd (including the price) prior to 
executing a cross.\8\
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    \5\ The Exchange had activated C-AIM and AIM in SPX for the 
first time as a result of the March 16, 2020 trading floor 
suspension to help prevent the spread of COVID-19 and operated in an 
all-electronic configuration beginning March 16, 2020. Currently, 
the trading floor is scheduled to reopen June 15, 2020. The Exchange 
intends to activate AIM and C-AIM in SPX as electronic crossing 
mechanisms available for Users while the trading floor is open, 
subject to approval of this proposed rule change and separate 
proposed rule changes regarding AIM and C-AIM.
    \6\ Currently, the Exchange has set the percentage as 40% (the 
same crossing entitlement percentage as on AIM, C-AIM, and FLEX 
AIM). See CBOE Regulatory Circular RG16-179, Participation 
Entitlement Applicable to Crossing Orders in Open Outcry (November 
18, 2016) available at https://www.cboe.com/publish/RegCir/RG16-179.pdf.
    \7\ Similarly, the AIM and C-AIM percentage applies after public 
customer orders are satisfied. See Rules 5.37(e) and 5.38(e).
    \8\ See Rule 5.87, Interpretation and Policy .05.
---------------------------------------------------------------------------

    Moreover, orders in SPX generally take on greater risk than in 
other option classes. SPX options tend to have a higher notional value 
than options in other classes (e.g., they are ten times the notional 
size of SPY options), trade much larger size than in other options 
classes (indeed, even smaller sized orders in SPX would be considered 
fairly large size in other classes), and effect increasingly more 
complex strategies than executed in other classes (e.g., SPX Combo 
orders) or executed electronically (e.g., in open outcry complex orders 
trade with larger ratios that may be negotiated by the trading crowd). 
Given these factors, SPX Market-Makers on the floor generally have more 
confidence in the pricing of their responses as the crosses start with 
a request for market and the trading crowd then provides a ``ballpark'' 
of the prices at which they are willing to trade and a Market-Maker may 
thus more confidently base response on the market of other members of 
the trading crowd.
    Pursuant to Rules 5.4(b) and 5.33(f)(1)(A), the minimum increment 
for bids and offers on complex orders in options on SPX \9\ is $0.05 or 
greater, or in any increment determined by the Exchange. When seeking 
to cross SPX

[[Page 36924]]

complex orders on the trading floor, a floor broker generally 
identifies the legs of the complex order and their relative sizes to 
each other with a net package price. The Exchange understands the 
trading crowd then generally provides a market based on the strategy's 
theoretical value in an increment of $0.05 rather than the value of the 
net package (which equals the strategy times the ratio), which is 
particularly true when the complex order represented is a delta neutral 
order that includes a combo. The Exchange has observed that SPX Combos 
comprise a significant portion of crosses in SPX.\10\ For example, 
assume a floor broker represents a $4.00 option tied to a combo, with a 
ratio of 8-to-1 combo (i.e. 12.5 delta), and further assume the combo 
portion is priced as a package at even,\11\ which strategy has a 
theoretical value of $4.00, which is applied to each of the 8 options 
in the order. Members of the trading crowd then generally respond with 
markets based on a $0.05 increment above or below the theoretical value 
of $4.00 rather than the net package price of $32.00 (8 x $4.00). If 
the execution price occurred at $4.50, the net cash price would be 
$36.00, providing for $4.00 price improvement (i.e., $0.50 x 8 options) 
over the theoretical value of the strategy. However, if this order is 
submitted via C-AIM, responses are generally based on a $0.05 increment 
above or below $32.00. If the execution price was $32.50, the price 
improvement above the theoretical price for the strategy would be 
approximately $0.06 ($0.50/8).
---------------------------------------------------------------------------

    \9\ Except for box/roll spreads.
    \10\ In April 2020, SPX Combos comprised 60.5% of crossed volume 
executed in SPX via AIM while the trading floor was inoperable.
    \11\ The Exchange also notes that it intends to implement Index 
Combo Orders when it reopens its trading floor. See Rule 5.33(b).
---------------------------------------------------------------------------

    Since the Exchange activated C-AIM for SPX options, a significant 
amount of SPX volume has executed through C-AIM. As noted above, the 
Exchange has also observed that a majority of the complex strategies 
submitted for execution in SPX options are ``delta neutral,'' often 
hedged with a ``combo'' of other SPX options, as is the case with 
complex orders crossed on the trading floor. An SPX Combo Order is a 
complex order that includes one or more SPX legs, hedged by an SPX 
combo, or synthetic future, defined by the delta. Specifically, an 
``SPX combination'' is a purchase (sale) of an SPX call and a sale 
(purchase) of an SPX put with the same expiration date and strike 
price, and ``delta'' is the positive (negative) number of SPX 
combinations that must be sold (bought) to establish a market neutral 
hedge with one or more SPX option series.\12\
---------------------------------------------------------------------------

    \12\ See Rule 5.6(b).
---------------------------------------------------------------------------

    Currently, Rule 5.38(c)(5)(A) and Rule 5.38(a)(4) provide that the 
minimum price increment for C-AIM responses and Agency and Initiating 
Orders, respectively, must be in an increment the Exchange determines 
on a class basis--which, as described above, is $0.05 in SPX 
options.\13\ The Exchange notes that the corresponding FLEX AIM Rules 
5.73(c)(5)(A) and 5.73(a)(4) provide the same for FLEX AIM Auctions. 
However, unlike on the trading floor, market participant responses 
using this increment have generally improved the net package price 
(based on then-current leg markets) by the minimum increment of $0.05. 
While members of the trading crowd on the trading floor are permitted 
to improve the net package price (based on then-current leg markets) by 
the minimum increment of $0.05 under the Rules, that is not the common 
practice, as noted above. The Exchange believes this is because the 
parties to an electronic complex order trade may compete only with 
respect to the net price and are not able to negotiate the leg prices.
---------------------------------------------------------------------------

    \13\ The System rejects a C-AIM response or Agency or Initiating 
Order that is not in the applicable minimum increment.
---------------------------------------------------------------------------

    For example, consider an SPX complex strategy to buy 8 of the June 
2600/2550 SPX put spreads tied to one June 2660 Combo, using a delta of 
5. Consider that the desired starting price of the put spread is $15.50 
by 8 with the combo trading at even (i.e., zero). If the strategy was 
executed on the trading floor, the broker would first ask for a market 
for the June 2600/2550 put spread tied to the 2660 combo, and the 
trading crowd might, for example, price the 2600 leg at 16-17, the 2550 
leg at 1-3, and the combo at 20-22 and 20-22 (or, even). Based off the 
market provided, an in-crowd Market-Maker could then respond to the 
package at 13-16, which equates to buying the 2660 leg at 16 and 
selling the 2550 leg at 3 and then selling the 2600 leg at 17 and 
buying the 2550 leg at a dollar. The trading crowd's responses would 
not include the combo, instead, the combo at even is ``tied up'' to, or 
in addition to, the package price. The broker would then be able to 
indicate their size and direction for the put spread (i.e., their 
contra) based off the market given by the trading crowd; in this 
example, that they would pay 15.50 for 8. Open outcry auction responses 
would then be priced in $0.05 increments below $15.50, per spread. 
However, the same strategy submitted into a C-AIM Auction must 
currently be entered as one package, inclusive of the combo, for a net 
price of $124.00 ($15.50 x 8). In this example, the broker would submit 
the Agency Order and contra-side order(s) simultaneously to commence 
the Auction. C-AIM Auction responses would then join the $124.00 
package price or occur in $0.05 below the $124.00 package price, thus 
price improved by $123.95, an improvement of only a quarter penny per 
spread (i.e., $0.05/8).
    In addition to this, current Rules 5.37(c)(2), 5.38(c)(2), and 
5.73(c)(2) provide that the System initiates the AIM, C-AIM, and FLEX 
AIM Auction processes, respectively, by sending an auction notification 
message detailing the side, size, Auction ID, options series 
(additionally, in the case of C-AIM Auctions, complex strategy, and in 
the case of FLEX AIM Auctions, length of the auction period and complex 
strategy, as applicable) of the Agency Order to all Users that elect to 
receive AIM, C-AIM, or FLEX AIM Auction notification messages. AIM, C-
AIM, and FLEX AIM Auction notification messages are not included in the 
disseminated BBO (in connection with AIM Auctions) or OPRA. As such, 
the stop price of an Agency Order is not currently included in auction 
notification messages. The Exchange believes that lack of an indication 
of where an auction is set to begin, like the ballpark figure provided 
by the trading crowd when crossing on the trading floor, may cause 
apprehension in pricing competitive responses during the electronic 
auctions in SPX, which may reduce liquidity and price improvement 
during such auctions.
    The Exchange is considering activating AIM and C-AIM in SPX when it 
reopens the trading floor. To better align the C-AIM process for SPX 
complex strategies with the open outcry crossing process for those 
strategies, the Exchange proposes to amend Rule 5.38(c)(5)(A) to 
provide that the minimum price increment for a C-AIM response in which 
the Agency Order complex strategy is comprised of an SPX Combo Order 
(as defined in Rule 1.1) will be the ratio of the non-combo portion of 
the strategy to the number of combos, multiplied by the minimum price 
increment the Exchange determines for options on SPX Agency Orders 
pursuant to Rule 5.38(a)(4). Also, to better align the AIM and C-AIM 
pricing process generally for responses with the open outcry process, 
the Exchange proposes to amend Rules 5.37(c)(2) and 5.38(c)(2) to 
provide that the Exchange may also determine to

[[Page 36925]]

include the stope price in AIM and C-AIM Auction notification messages, 
respectively, in SPX. Like all other information disseminated in an AIM 
and C-AIM Auction notification message, the stop price will be 
available to all Users that elect to receive auction notification 
messages. The Exchange notes that the FLEX AIM Rules in connection with 
the auction process for FLEX complex orders are substantially similar 
to the AIM and C-AIM Rules. Therefore, to maintain consistency within 
the Rules between the FLEX and non-FLEX auctions, the Exchange also 
proposes to amend the FLEX AIM process for SPX complex strategies 
(i.e., for FLEX C-AIM) and for FLEX AIM Auction notification messages 
in the same manner.\14\
---------------------------------------------------------------------------

    \14\ See proposed Rules 5.73(c)(2) and 5.73(c)(5)(A).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule changes will create 
similar price competition for these orders in electronic and open 
outcry trading. Particularly, the Exchange believes that the current 
manner in which de minimis price improvement may occur via C-AIM, as 
well as FLEX C-AIM, Auctions in connection with SPX Combo Orders (i.e., 
potentially only improved in sub-penny increments) may discourage 
market participants from providing contra-side interest at the best 
prices and liquidity providers from joining or improving at meaningful 
increments. As such, the proposed rule change is intended to provide 
for substantially the same price improvement opportunities at 
meaningful increments on SPX complex strategies submitted to C-AIM and 
FLEX C-AIM that occur for the same strategies on the trading floor. To 
illustrate by using the same complex strategy example above, if a User 
buys 8 of the June 2600/2550 SPX Put spreads tied to one June 2660 
Combo, using a delta of 5, pursuant to the proposed rules, the System 
would calculate the minimum increment by the ratio of the non-combo leg 
(8) to the number of combos (1) by the minimum increment of $0.05. 
Therefore, (8/1) x 0.05 = $0.40 as the starting point for price 
improvement during the C-AIM or FLEX C-AIM Auction. In this way, by 
tying the minimum increment to the legs of the order, as opposed to the 
package price inclusive of the combos, the Exchange believes the 
proposed rule would require market participants to respond to the C-AIM 
or FLEX C-AIM Auctions for SPX complex strategies at prices more 
aligned with the prices at which responses generally occur in open 
outcry, i.e., prices in response to a broker's corresponding bids 
(offers) based off of the market per leg at which the trading crowd 
indicates it is willing to buy (sell). If market participants may 
participate in C-AIM or FLEX C-AIM executions in connection with SPX 
complex strategies by providing de minimis price improvement compared 
to price improvement that may occur on the floor, the Exchange believes 
there may be less interest by market participants to take on the risk 
of participating as a contra and may negatively impact liquidity 
available on the trading floor. As a result, the Exchange believes this 
potentially reduces price improvement opportunities for customers. 
Particularly, if the Exchange determines to activate C-AIM in SPX when 
the trading floor re-opens, the Exchange believes the proposed rule 
change may provide customers with additional opportunities for more 
meaningful price improvement and may encourage market participants to 
provide more liquidity for C-AIM transactions in SPX while also 
mitigating any potential disincentive to provide liquidity on the 
trading floor in SPX by better aligning electronic and open outcry 
crossing of SPX complex orders that include a combo.
    The Exchange notes that the proposed rule change does not alter the 
minimum increment as determined by the Exchange for SPX complex 
strategies and is consistent with the ability of the Exchange to 
determine the minimum increment for SPX (the proposed minimum increment 
will be in multiples of $0.05) but instead provides that price 
improvement opportunities for such orders submitted into C-AIM, as well 
FLEX AIM, occur at the same meaningful increments that market 
participants reasonably would expect to occur on such orders pursuant 
to the current Rules and practice on the trading floor. The Exchange 
believes this may encourage a potential increase in participation in 
the C-AIM and FLEX AIM Auctions in SPX without a corresponding negative 
impact on participation or liquidity in open outcry auctions once the 
trading floor reopens.
    In the same way, the Exchange believes that the proposed rule 
change to allow the System to disseminate the initial price of an SPX 
AIM and C-AIM Auction, as well as FLEX AIM Auction, would more 
generally align the trading of SPX options submitted for execution into 
the electronic auctions with those crossed on the trading floor. The 
Exchange believes that the proposed rule change would allow the 
Exchange to address any uncertainties market participants may have when 
pricing SPX responses, given the more complicated market models, 
greater risk, higher notional value, larger sizes, and increasingly 
more complex strategies in SPX, by including the Agency Order stop 
price in the auction notification messages. This, in turn, may 
facilitate market participants' confidence in pricing meaningful, 
competitive responses during electronic auctions in SPX in a manner 
substantially similar to which the trading crowd's market allows for 
market participants to more confidently price their responses 
accordingly. As a result, this proposed rule change is intended to 
incentivize continued, competitive responses to SPX electronic auctions 
in substantially the same manner in which responses may be priced on 
the trading floor, thus, providing for potentially improved liquidity 
and price improvement opportunities for orders being executed through 
those auctions. The Exchange also notes that its affiliated options 
exchange, Cboe EDGX Exchange, Inc. (``EDGX Options'') corresponding 
rules \15\ governing the AIM and C-AIM auction notification messages on 
EDGX Options provide that its system initiates the AIM or C-AIM auction 
processes by sending an auction notification message detailing the 
price, along with the same fields currently detailed pursuant to Cboe 
Options Rules 5.37(c)(2) and 5.38(c)(2) as well as 5.73(c)(2). Also, 
pursuant to Exchange Rule 5.33(d)(1), C2 Rule 6.13(d)(1), and EDGX 
Options Rule 21.20(d)(1), the Exchange and its affiliated options 
exchanges may currently determine to include in similar notification 
messages the limit price of an order that initiates a Complex Order 
Auction (``COA''), much like that of the stop price of an AIM, C-AIM, 
or FLEX AIM Agency order that initiates these auctions. The Exchange 
further notes that similar electronic auctions on other options 
exchanges disseminate the price in their initial auction messages.\16\
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    \15\ See EDGX Options Rules 21.19(c)(2) and 21.22(c)(2).
    \16\ See MIAX Options Rule 5.18(d)(2), which governs the 
commencement of a Complex Auction on MIAX Options, and Rules 
515A(a)(2)(i)(B) and 515A.12, which govern the request for response 
message disseminated during MIAX Options' electronic crossing 
auctions, PRIME and complex PRIME; substantially similar to AIM and 
C-AIM; see also NYSE American Options Rule 903G(a)(2), which governs 
the information required in FLEX Request for quotes.
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    The Exchange believes that providing similar response and execution 
opportunities across these trading facilities will serve to maintain 
meaningful levels of liquidity, price competition, and price 
improvement opportunities in SPX during both electronic and open outcry 
auctions

[[Page 36926]]

upon the reopening of the trading floor if the Exchange determines to 
activate AIM and C-AIM for SPX at that time. As a result, the proposed 
rule change is designed to ensure that C-AIM for complex SPX strategies 
remains a viable additional means of execution for SPX complex orders, 
and that market participants maintain the same confidence in pricing 
their responses to AIM and C-AIM Auctions in SPX as they have during 
open outcry auctions, and thus, will continue to provide more execution 
and price improvement opportunities for customers. Likewise, the 
proposed rule change would align the FLEX AIM and C-AIM Auction process 
with the non-FLEX AIM and C-AIM Auction process, potentially providing 
the similar opportunities for execution and price improvement in 
connection with the same complex strategies and similar meaningfully 
price responses submitted into FLEX AIM and providing investors with 
continued consistency in the Exchange's auction rules, thus, mitigating 
any confusion for those participating in both non-FLEX and FLEX SPX 
trading.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \19\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change, overall, will 
promote just and equitable principles of trade and remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system by further aligning the AIM, C-AIM and FLEX AIM Auction 
processes with the open outcry crossing process. The Exchange believes 
the proposed rule change will permit market participants that respond 
to C-AIM and FLEX AIM Auctions for orders tied to SPX Combos in a 
similar manner as members of a trading crowd respond to request for 
markets for those orders. Additionally, for those that respond to AIM, 
C-AIM, and FLEX AIM auctions generally in SPX, the Exchange believes 
the proposed rule change will facilitate more confidence of market 
participants in pricing responses during auctions in a manner similar 
to pricing process that takes place on the trading floor.
    In particular, the Exchange believes the proposed rule change 
regarding minimum increments for responses to SPX Combo Orders will 
remove impediments to and perfect the mechanism of a free and open 
market and national market system and will protect investors by 
encouraging market participants to continue to provide liquidity by 
acting as contra in C-AIM Auctions for SPX orders, as well as possibly 
providing more price improvement opportunities and more meaningful 
price improvement if the Exchange determines to activate C-AIM in SPX 
when the trading floor is reopened. The Exchange believes that 
providing similar execution opportunities for SPX complex strategies 
between C-AIM and open outcry will help to maintain meaningful levels 
of liquidity and price improvement opportunities in SPX across both 
facilities. Thus, the proposed rule change seeks to have C-AIM for 
complex SPX strategies be an additional means of execution for SPX 
complex orders, together with executions opportunities via open outcry, 
in turn, providing additional execution and price improvement 
opportunities overall for customers without a potential negative impact 
on liquidity on the trading floor. The proposed rule change does not 
alter the minimum increment as determined by the Exchange for SPX 
complex strategies but rather increases the overall minimum increment 
for responses (in other words, executions will continue to trade in an 
increment of $0.05 per leg and per order), which will still be in a 
multiple of $0.05. The Exchange believes this may result in responses 
to customer orders submitted for execution in C-AIM and FLEX AIM at 
prices market participants reasonably would expect to receive for such 
orders on the trading floor.
    Additionally, the Exchange believes that proposal to permit the 
Exchange to include the auction price in the auction notification 
message, which, unlike open outcry, will be a net package price rather 
than a per strategy price, may pose potential risk of market 
participants submitting responses by de minimis amounts ($0.05 above or 
below the auction price), which as described above, may discourage 
market participants from taking on the risk to participate as contras, 
which could reduce liquidity available in the electronic and open 
outcry SPX market. The Exchange is concerned that potential 
interruptions to the provision of liquidity in SPX and general 
participation in the complex electronic auctions in SPX, as well as on 
the trading floor, could result from the de minimis price increases 
market participants may provide in responses to electronic auctions due 
to the disparity between pricing in electronic auctions and pricing in 
open outcry trading. As a result, the Exchange believes the proposed 
rule change may encourage continued submission of SPX complex 
strategies to the electronic auctions by modifying C-AIM and FLEX AIM 
Auctions for SPX to more closely replicate the open outcry crossing 
auction process for SPX (which constitutes the majority of SPX trading 
when the Exchange trading floor is available and C-AIM is not 
activated). The Exchange believes the proposed rule change would 
generally enhance price improvement and execution opportunities in SPX 
C-AIM Auctions, as well as FLEX AIM, thereby removing impediments to 
and perfecting the mechanism of a free and open market and a national 
market system, and, overall, benefitting the entire market and all 
investors.
    Similarly, the Exchange believes that the proposed change to allow 
the System to disseminate the price of an Agency Order in SPX options 
submitted to AIM and C-AIM auctions will further enable all market 
participants to respond to the auctions with competitive prices thereby 
removing impediments to and perfecting the mechanism of a free and open 
market and national market system. As described above, participants in 
SPX are accustomed to receiving an approximate starting price range 
during open outcry auctions, which provides them with confidence in 
pricing their responses; this confidence is particularly important for 
orders in SPX, which, as noted above, generally take on greater risk 
and effect increasingly more complex strategies than in other option 
classes.

[[Page 36927]]

Thus, the proposed rule change is intended to better align the 
dissemination of auction prices in SPX with the manner in which the 
trading floor may give a ``ball park'' price in response to a request 
for a market on the trading floor, thereby providing participants with 
the same level of confidence in pricing their responses when responding 
to both the electronic and open outcry auctions, and thus encouraging 
market participants to continue to submit responses and participate in 
the electronic auctions when the trading floor is again operable. This 
proposed change, too, may increase price improvement and execution 
opportunities in SPX during the AIM and C-AIM, as well as the FLEX AIM, 
Auctions, thereby also facilitating the provision of an additional 
viable avenue(s) of execution for SPX orders if AIM and C-AIM remain 
activated in SPX once the trading floor reopens. In addition to this, 
the proposed rule change is not new or unique, as the Exchange may 
already determine to include the price for notification messages in 
connection with the commencement of its COA pursuant to Rule 
5.33(d)(1), the rules of EDGX Options currently provide that the price 
of an Agency Order in its AIM and C-AIM auctions be disseminated via 
its auction notification messages,\20\ and other options exchange rules 
also permit for dissemination of the price of an electronic auction-
commencing order in auction messages.\21\ The Exchange notes that each 
of the aforementioned rules has previously been filed with the 
Commission.
---------------------------------------------------------------------------

    \20\ See supra note 15.
    \21\ See supra note 16.
---------------------------------------------------------------------------

    The Exchange believes that, together, both proposed changes would 
provide benefits to investors participating in SPX. As discussed above, 
the Exchange believes providing market participants with the auction 
price for SPX AIM Auctions may increase participation in the AIM 
Auctions, and thus increase execution and price improvement 
opportunities for customer orders submitted into those auctions. The 
Exchange believes this will benefit all market participants that trade 
in the SPX market. In connection with this change, the Exchange 
believes the proposed change to impose a larger minimum increment for 
responses is necessary and appropriate offsets the potential risk that 
the display of the auction price may lead to further de minimis price 
improvement for those orders.
    Moreover, the Exchange believes the proposed rule changes will 
likewise extend these additional execution and price improvement 
opportunities to such orders submitted into FLEX AIM while also 
maintaining consistent auction rules in connection with SPX auction 
notification messages and SPX complex strategies in both non-FLEX and 
FLEX. As a result, the Exchange believes this will benefit investors by 
mitigating any potential confusion regarding the manner of SPX auction 
message dissemination or SPX execution for complex strategies in SPX 
into either auction.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change in connection with minimum increments 
for SPX complex strategies 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 all C-AIM and FLEX AIM 
executions in connection with SPX Combo Orders for all market 
participants. The Exchange believes it is reasonable to limit the 
proposed rule change to SPX Combo Orders as the majority of index 
strategies are structured as SPX combos. The Exchange also does not 
believe that the proposed rule change in connection with the 
dissemination of price in the SPX auction notification messages 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 all Agency Orders submitted into the AIM, C-AIM, and FLEX AIM 
Auctions, as the Exchange determines, by all market participants. 
Additionally, the dissemination of the price via the auction 
notification message, when applicable, will continue to be made 
available to all market participants that elect to receive auction 
notification messages, as it currently is today. The Exchange further 
notes that, as compared to other options classes, SPX exhibits 
generally more complex trading characteristics and market models, 
different investor basis, and a significant portion of larger orders 
and more complex strategies that typically occur on the trading floor, 
and thus, it is reasonable to limit the proposed rule change to SPX as 
it is designed to facilitate confidence when pricing responses in light 
of these factors.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as the proposed 
rule change relates to an Exchange-specific auction mechanism in a 
class of options only listed for trading on the Exchange. Other 
exchanges with similar price improvement auctions may amend their rules 
to propose different minimum increments for auction responses as they 
deem appropriate. The Exchange notes the proposed rule change has no 
impact on the allocation or priority of orders and responses at the 
conclusion of the C-AIM and FLEX AIM Auctions. Also, as noted above, 
pursuant to rules previously filed with the Commission, the Exchange 
and its affiliated options exchanges may currently determine to include 
price in its similar notification messages disseminated in connection 
with the COA, EDGX Options currently disseminates the price of agency 
orders in its auction notification messages for AIM and C-AIM 
auctions,\22\ and the rules of other options exchanges governing 
substantially similar electronic auctions disseminate the initiating 
prices for such auctions.\23\
---------------------------------------------------------------------------

    \22\ See supra note 15.
    \23\ See supra note 16.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change may promote 
competition on the Exchange, as it will more closely align the 
electronic crossing process with the open outcry crossing process, and 
thus provide similar execution and price improvement opportunities to 
customers whether their orders are submitted for electronic or open 
outcry execution. In particular, the Exchange may activate AIM and C-
AIM for SPX when the trading floor is reopened, and the proposed rule 
change would enable it to do so in a manner the Exchange believes will 
encourage liquidity in both electronic and open outcry trading, and, as 
a result, will provide an additional viable avenue of execution for SPX 
orders, and thus more execution and price improvement opportunities 
overall in SPX for customers.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period

[[Page 36928]]

up to 90 days (i) as the Commission may designate if it finds such 
longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2020-052 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2020-052. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2020-052 and should be submitted on 
or before July 9, 2020.
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    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13123 Filed 6-17-20; 8:45 am]
BILLING CODE 8011-01-P

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