Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Its Rules Relating to the Processing of Auction Responses, 50855-50858 [2020-17962]
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Federal Register / Vol. 85, No. 160 / Tuesday, August 18, 2020 / Notices
processor is to serve, and indicating the
solicitation efforts, if any, for alternative
plan processors, the alternatives
considered, and the reasons for the
selection of the plan processor. The
Commission estimates that the
preparation and materials related to the
selection of a plan processor would
result in an average aggregate burden of
approximately 283 hours per year (25
SROs × 11.33 hours = 283.33 rounded
down to 233). In addition, the
Commission estimates that the
preparation and submission of materials
related to the selection of a plan
processor would result in an average
aggregate cost of approximately $8,333
per year (25 SROs × $333.33 = $8,333.33
rounded down to $8,333).
The above estimates result in a total
annual industry burden of
approximately 12,432 hours (850 + 125
+ 11,050 + 124 + 283) and a total annual
industry cost of approximately $483,333
($150,000 + $325,000 + $8,333).
Compliance with Rule 608 is
mandatory. The text of the NMS Plans
and any amendments will not be
confidential, but published on a
designated website or a plan website. To
the extent that Rule 608 requires the
SROs to submit confidential information
to the Commission, that information
will be kept confidential subject to the
provisions of applicable law.1 The SROs
are required by law to retain the records
and information that are collected
pursuant to Rule 608 for a period of not
less than 5 years, the first 2 years in an
easily accessible place.2 Rule 608 does
not affect this existing requirement.
Written comments are invited on: (a)
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Commission, including whether the
information shall have practical utility;
(b) the accuracy of the Commission’s
estimates of the burden of the proposed
collection of information; (c) ways to
enhance the quality, utility, and clarity
of the information collected; and (d)
ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
Consideration will be given to
comments and suggestions submitted in
writing within 60 days of this
publication.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
1 See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x
(governing the public availability of information
obtained by the Commission).
2 See 17 CFR 240.17a–1(b).
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under the PRA unless it displays a
currently valid OMB control number.
Please direct your written comments
to: David Bottom, Director/Chief
Information Officer, Securities and
Exchange Commission, c/o Cynthia
Roscoe, 100 F Street NE, Washington,
DC 20549, or send an email to: PRA_
Mailbox@sec.gov.
Dated: August 13, 2020.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–17993 Filed 8–17–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89528; File No. SR–CBOE–
2020–072]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Amend Its
Rules Relating to the Processing of
Auction Responses
August 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 July 30,
2020, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (‘‘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
its rules relating to the processing of
auction responses. 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.
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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50855
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 seeks to amend its rules
related to its auction mechanisms to
provide a dedicated path for auction
response messages originating from
logical ports that will allow the System
to process such messages more
efficiently. Specifically, the Exchange
proposes to amend Rule 5.25 (Message
Traffic Mitigation) to adopt two separate
message queues which would allow for
auction response messages to be
processed by the System in priority
sequence relative to other non-auction
response message traffic on a rotating
basis.
Background
The Exchange currently offers a
variety of auction mechanisms which
provide price improvement
opportunities for eligible orders.
Particularly, the Exchange offers the
following auction mechanisms:
Complex Order Auction (‘‘COA’’),3 Step
Up Mechanism (‘‘SUM’’),4 Automated
Improvement Mechanism (‘‘AIM’’),5
Complex AIM (‘‘C–AIM’’),6 Solicitation
Auction Mechanism (‘‘SAM’’),7
Complex SAM (‘‘C–SAM’’),8 FLEX
Auction Process,9 FLEX AIM 10 and
FLEX SAM.11 The Exchange notes that
eligible orders are electronically
exposed for an Exchange determined
period (collectively referred to herein as
‘‘auction response period’’) in
accordance with the applicable
Exchange Rule, during which time
3 See
Rule 5.33(d).
Rule 5.35.
5 See Rule 5.37.
6 See Rule 5.38.
7 See Rule 5.39.
8 See Rule 5.40.
9 See Rule 5.72(c).
10 See Rule 5.73.
11 See Rule 5.74.
4 See
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Users may submit responses
(collectively referred to herein as
‘‘auction responses’’) to an auction
message. Trading Permit Holders
(‘‘TPHs’’) may submit auction responses
via logical port connectivity. By way of
background, a User connects to the
Exchange using a logical port available
through an API, such as the industrystandard FIX or BOE protocol. Logical
ports represent a technical port
established by the Exchange within the
Exchange’s trading system for the
delivery and/or receipt of trading
messages, including orders, cancels, and
auction responses. Currently, the
System processes all messages through
a single ‘‘queue’’ and prioritizes the
processing of all message traffic from
the logical ports in the order in which
the System received them (i.e., in time
priority).
Proposal
The Exchange proposes to modify the
operation of its System to allow for the
System to handle auction responses
received via such logical ports in a way
that the Exchange believes may reduce
latency associated with auction
responses. Currently, auction response
messages wait in the same System
queue as all other order and quote
message traffic. In certain
circumstances, the auction response
period may end before queued response
messages are processed, resulting in the
initiating eligible order missing out on
potential price improvement from
respective queued auction response(s).
For example, if an auction response
submitted during an auction response
period is received at a time where there
is a deep queue of other message traffic,
the auction response may not be
‘‘processed’’ by the System in sufficient
time (i.e., prior to the end of the auction
response period so that it is able to
participate in the applicable auction
mechanism) because the System is
‘‘busy’’ processing the deep queue of
pending message traffic that was
received prior to the auction response.
An auction response may only execute
in the applicable auction and is
cancelled if it does not execute during
an auction. If an auction response is
unable to be processed by the System
during the auction response period, that
auction response is unable to receive
any execution opportunity or provide
liquidity (and possible price
improvement) on the Exchange.
The Exchange therefore proposes to
modify the way the System processes
auction responses in order to allow the
System to handle auction responses in
a more timely manner, including during
periods of high message traffic. As noted
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above, the System currently processes
all message traffic in time priority. In
other words, all messages are placed in
a single ‘‘queue’’ based on the time the
message is received by the System and
handled by the System in that order.
The Exchange proposes to adopt a
separate ‘‘priority queue’’, which queue
would consist solely of auction response
messages. Specifically, the System
would be able to identify auction
response messages and divert such
messages from the general message
queue (‘‘general queue’’) to the priority
queue. The System would then alternate
processing a certain number of messages
as determined by the Exchange from
each queue (i.e., on a rotating basis).
Although the System would alternate
between the two queues, the priority
queue would offer reduced latency as
the priority queue would consist only of
auction responses, as compared to the
general queue which would consist of
all other message traffic, (i.e., new
orders/quote messages, cancel messages
(including mass cancel messages) and
modify messages).
The Exchange believes the proposed
modification to provide for a separate
queue for the processing of auction
responses increases the possibility that
such responses are processed by the
Exchange during the auction response
period and have an opportunity for
execution in the applicable auction
mechanism. The Exchange believes this
will, as a result, increase execution
opportunities for liquidity providers
that submit auction responses and
enhance the potential for price
improvement for orders submitted to
each mechanism to the benefit of
investors and public interest. The
Exchange also believes the benefits that
result from the adoption of a priority
queue for auction responses would
outweigh any potential negative impact
to other message traffic. Moreover, the
Exchange believes the impact to other
message traffic to be de minimis.
Particularly, the Exchange reviewed
all submitted message traffic from
March 9–March 13, 2020 and notes that
during this time period, auction
responses across all its auction
mechanisms accounted only for
approximately 0.02% of the message
traffic, whereas new order/quote
messages accounted for approximately
40.3%, modify messages accounted for
approximately 47.9%, and cancel
messages accounted for approximately
11.7%. Accordingly, the number of
messages that would be processed via
the priority queue as compared to
general queue is extremely small.
Indeed, as noted above, only 0.02% of
all messages would be processed via the
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priority queue and therefore the number
of rotations between the two queues
throughout the trading day would likely
be very limited as there are only so
many auction responses that would
need to be processed compared to other
message traffic. Moreover, only a mere
0.007% of non-auction response
messages were related to a customer
order. Therefore, the chances of a
customer order being disadvantaged by
allowing an auction response to be
processed via a priority queue are nearly
zero. Additionally, executions at the
conclusion of an auction mechanism
will occur in the same manner as they
do today. For example, priority
customer orders in the Book will
continue to have first priority at each
price level at the conclusion of a paired
auction, regardless of whether an
auction response is processed via a
priority queue and processed ahead of a
priority customer order.
Furthermore, the Exchange’s review
of auction responses during the period
of March 30–April 3, 2020 indicated
that approximately 17% of auction
responses had no opportunity to execute
in their respective auctions,
notwithstanding being submitted within
the auction response period. In certain
classes, such as SPXW, this percentage
was even higher. Particularly, 47% of
SPXW auction responses had no
opportunity to execute in the applicable
auction, notwithstanding being
submitted within the auction response
period.
The Exchange also notes that it takes
the system approximately 10
microseconds to process a single order/
quote or auction response message and,
on average, approximately 190
microseconds to process a mass cancel
message. As such, under the current
system, an auction response that is
entered after a mass cancel message is
more likely to be detrimentally
impacted as compared to a mass cancel
message that is entered after an auction
response (i.e., a 190 microsecond ‘‘wait
time’’ versus a 10 microsecond ‘‘wait
time’’).
Accordingly, the Exchange believes
that adopting a priority queue for all
auction response messages will
continue to allow the Exchange to set
each auction response period to an
amount of time that provides TPHs with
sufficient time to respond to, compete
for, and provide price improvement for
orders but provides auctioned orders
with quick executions that may reduce
market and execution risk, while also
providing timely submitted auction
responses with more execution
opportunities in the applicable auction
prior to the end of the auction response
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period, even during periods of high
message traffic, thereby potentially
providing customers with additional
opportunities for price improvements.
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.12 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 13 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) 14 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
modifying its System to allow it to
handle auction responses in a timelier
manner may provide further
opportunities for auction eligible orders
to receive price improvement that they
may not otherwise receive if the System
is unable to process auction response
messages prior to the conclusion of an
auction response period, if submitted
during a time when there is a deep
queue of message traffic. In particular,
the proposed rule change will continue
to provide investors with timely
processing of their options quote and
order messages, while providing
investors who submit auction eligible
orders with additional auction liquidity.
Indeed, the proposed rule change may
allow more investors additional
opportunities to receive price
improvement through an auction
mechanism. While the Exchange may
increase the length of auction response
periods to accommodate more auction
responses, the Exchange believes the
proposed rule change allows the
Exchange to continue to mitigate the
market risk for TPHs using any such
mechanism by setting the length of an
12 15
U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(5).
14 Id.
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auction response period to a time frame
that allows an adequate amount of time
for TPHs to respond to an auction
message and fast executions.
Additionally, a priority queue may
provide liquidity providers that submit
auction responses with additional
execution opportunities in auctions,
which may encourage the submission of
more auction responses which may
contribute to a deeper, more liquid
auction process and, thus, provide
investors with additional price
improvement opportunities.
The Exchange believes that the
information outlined above
demonstrates why adopting a priority
queue for auction responses would
better provide customers with
additional opportunities for price
improvements with little impact to nonauction response message traffic. As
discussed, auction responses account
for an incredibly small fraction of
message traffic submitted to the
Exchange. Indeed, based on the
Exchange’s analysis, auction response
messages accounted for a mere 0.02% of
all message traffic submitted to the
Exchange. The Exchange believe the
processing of such a small amount of
message traffic via a priority queue
(which as proposed would rotate with
the general queue) would therefore have
a minimal impact on the processing of
non-auction response messages in the
general queue. Conversely, as
demonstrated by the data discussed
above, the current system configuration
(i.e., a single queue for all message
traffic) can negatively impact the
timeliness of the processing of auction
responses to the detriment of investors
who may miss out on opportunities to
receive price improvement through one
of the Exchange’s auction mechanisms
due to the time necessary for the System
to process auction responses behind a
queue of other message traffic. The
Exchange therefore believes its proposal
will make it more likely that the System
processes timely submitted auction
responses prior to the end of an auction
response period and thus have more
opportunities to execute against
auctioned orders, even during periods of
high message traffic. The Exchange also
believes having the flexibility to
determine the number of messages that
it processes in each queue before
alternating allows the Exchange to
configure the number as needed to
ensure the benefits of alternating
between a priority queue and general
queue continue to outweigh any
potential negative impact to non-auction
response message traffic. The Exchange
further believes the proposal will
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50857
continue to allow the Exchange to set an
auction response period to an amount of
time that provides TPHs with sufficient
time to respond to, compete for, and
provide price improvement for orders
but provides auctioned orders with
quick executions that may reduce
market and execution risk. Accordingly,
the Exchange believes the adoption of a
priority queue for auction responses
would provide customers with
additional opportunities for price
improvement and enhance the quality of
the auctions, thereby removing
impediments to and perfecting the
mechanism of a free and open market
and a national market system, and, in
general protecting investors and the
public interest.
The Exchange also believes the
proposed rule change is not designed to
permit unfair discrimination between
market participants as all market
participants are allowed to submit
auction responses. Additionally, the
Exchange believes it’s reasonable to
adopt a priority queue for auction
responses as compared to other
messages because auction responses are
submitted only for the purpose of
executing (and possibly providing price
improvement) in auctions with short
durations, whereas other messages are
generally submitted to rest in or execute
against the book (and generally not used
to submit liquidity into auctions). As
discussed above, the Exchange also
believes the benefits that result from the
adoption of a priority queue for auction
responses would outweigh any potential
negative impact to other message traffic,
including customer orders, which have
an incredibly low chance of being
affected by the proposed change and
which continue to receive priority
allocation in any event.
The Exchange lastly does not believe
that the purpose of the proposed rule
change to adopt a priority queue for
certain message traffic is new or unique.
As the Commission is aware, other
exchanges offer similar functionality.
For example, Miami International
Securities Exchange LLC (‘‘MIAX’’)
makes clear in its current technical
specifications that it offers priority mass
cancel ports, which similarly provide
expedited processing for certain
message types by alternating between
processing messages from a priority
queue (but for mass cancel requests
instead of auction responses) and
messages from a general queue (for all
other message traffic).15
15 See e.g., MIAX Express Orders Binary Orders
for Trading Options MEO Interface Specification,
Appendix E, Priority Mass Cancel Ports, at: https://
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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 changes will impose any
burden on intra-market competition that
is not necessary or appropriate in
furtherance of the purposes of the Act,
as the proposed rule change would
apply equally to all TPHs that submit
auction responses. As noted above, all
market participants are able to submit
auction responses. Additionally, the
Exchange believes the adoption of a
priority queue for auction responses
would have little impact to non-auction
response message traffic. As discussed,
auction response messages account for
an incredibly small fraction of message
traffic submitted to the Exchange. The
Exchange therefore believes the
processing of such a small amount of
message traffic via a priority queue
would have a minimal impact on the
processing of non-auction response
messages in the general queue.
Moreover, the Exchange believes it’s
reasonable to adopt a priority queue for
auction responses as compared to other
messages because auction responses are
submitted only for the purpose of
executing (and possibly providing price
improvement) in auctions with short
durations, whereas other messages are
generally submitted to rest in or execute
against the book (and generally not used
to submit liquidity into auctions).
Lastly, the Exchange does not believe
the proposed rule change will impose
any burden on inter-market competition
that is not necessary or appropriate in
furtherance of the purposes of the Act,
as the proposed change affects how the
System processes auction responses that
may only participate in auctions that
occur on the Exchange.
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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
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
www.miaxoptions.com/sites/default/files/pagefiles/MIAX_Express_Interface_MEI_v2.8.pdf.
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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–2020–072 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–2020–072. 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
PO 00000
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to make available publicly. All
submissions should refer to File
Number SR–CBOE–2020–072, and
should be submitted on or before
September 8, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–17962 Filed 8–17–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89534; File No. SR–OCC–
2020–009]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change To Revise
the Options Clearing Corporation’s
Schedule of Fees
August 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 July 31,
2020, the Options Clearing Corporation
(‘‘OCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by OCC. OCC filed
the proposed rule change pursuant to
Section 19(b)(3)(A)(ii) 3 of the Act and
Rule 19b–4(f)(2) 4 thereunder so that the
proposal was effective upon filing with
the Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change by OCC
would revise OCC’s Schedule of Fees
effective September 1, 2020, to
implement a decrease in clearing fees.
OCC’s Schedule of Fees is included in
Exhibit 5 to File No. SR–OCC–2020–
009. Material proposed to be added to
OCC’s Schedule of Fees as currently in
effect is underlined and material
proposed to be deleted is marked in
strikethrough text. All capitalized terms
not defined herein have the same
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
1 15
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]]>Agencies
[Federal Register Volume 85, Number 160 (Tuesday, August 18, 2020)]
[Notices]
[Pages 50855-50858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17962]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89528; File No. SR-CBOE-2020-072]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Its Rules Relating to the
Processing of Auction Responses
August 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 July 30, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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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 its rules relating to the processing of auction responses. 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 seeks to amend its rules related to its auction
mechanisms to provide a dedicated path for auction response messages
originating from logical ports that will allow the System to process
such messages more efficiently. Specifically, the Exchange proposes to
amend Rule 5.25 (Message Traffic Mitigation) to adopt two separate
message queues which would allow for auction response messages to be
processed by the System in priority sequence relative to other non-
auction response message traffic on a rotating basis.
Background
The Exchange currently offers a variety of auction mechanisms which
provide price improvement opportunities for eligible orders.
Particularly, the Exchange offers the following auction mechanisms:
Complex Order Auction (``COA''),\3\ Step Up Mechanism (``SUM''),\4\
Automated Improvement Mechanism (``AIM''),\5\ Complex AIM (``C-
AIM''),\6\ Solicitation Auction Mechanism (``SAM''),\7\ Complex SAM
(``C-SAM''),\8\ FLEX Auction Process,\9\ FLEX AIM \10\ and FLEX
SAM.\11\ The Exchange notes that eligible orders are electronically
exposed for an Exchange determined period (collectively referred to
herein as ``auction response period'') in accordance with the
applicable Exchange Rule, during which time
[[Page 50856]]
Users may submit responses (collectively referred to herein as
``auction responses'') to an auction message. Trading Permit Holders
(``TPHs'') may submit auction responses via logical port connectivity.
By way of background, a User connects to the Exchange using a logical
port available through an API, such as the industry-standard FIX or BOE
protocol. Logical ports represent a technical port established by the
Exchange within the Exchange's trading system for the delivery and/or
receipt of trading messages, including orders, cancels, and auction
responses. Currently, the System processes all messages through a
single ``queue'' and prioritizes the processing of all message traffic
from the logical ports in the order in which the System received them
(i.e., in time priority).
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\3\ See Rule 5.33(d).
\4\ See Rule 5.35.
\5\ See Rule 5.37.
\6\ See Rule 5.38.
\7\ See Rule 5.39.
\8\ See Rule 5.40.
\9\ See Rule 5.72(c).
\10\ See Rule 5.73.
\11\ See Rule 5.74.
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Proposal
The Exchange proposes to modify the operation of its System to
allow for the System to handle auction responses received via such
logical ports in a way that the Exchange believes may reduce latency
associated with auction responses. Currently, auction response messages
wait in the same System queue as all other order and quote message
traffic. In certain circumstances, the auction response period may end
before queued response messages are processed, resulting in the
initiating eligible order missing out on potential price improvement
from respective queued auction response(s). For example, if an auction
response submitted during an auction response period is received at a
time where there is a deep queue of other message traffic, the auction
response may not be ``processed'' by the System in sufficient time
(i.e., prior to the end of the auction response period so that it is
able to participate in the applicable auction mechanism) because the
System is ``busy'' processing the deep queue of pending message traffic
that was received prior to the auction response. An auction response
may only execute in the applicable auction and is cancelled if it does
not execute during an auction. If an auction response is unable to be
processed by the System during the auction response period, that
auction response is unable to receive any execution opportunity or
provide liquidity (and possible price improvement) on the Exchange.
The Exchange therefore proposes to modify the way the System
processes auction responses in order to allow the System to handle
auction responses in a more timely manner, including during periods of
high message traffic. As noted above, the System currently processes
all message traffic in time priority. In other words, all messages are
placed in a single ``queue'' based on the time the message is received
by the System and handled by the System in that order. The Exchange
proposes to adopt a separate ``priority queue'', which queue would
consist solely of auction response messages. Specifically, the System
would be able to identify auction response messages and divert such
messages from the general message queue (``general queue'') to the
priority queue. The System would then alternate processing a certain
number of messages as determined by the Exchange from each queue (i.e.,
on a rotating basis). Although the System would alternate between the
two queues, the priority queue would offer reduced latency as the
priority queue would consist only of auction responses, as compared to
the general queue which would consist of all other message traffic,
(i.e., new orders/quote messages, cancel messages (including mass
cancel messages) and modify messages).
The Exchange believes the proposed modification to provide for a
separate queue for the processing of auction responses increases the
possibility that such responses are processed by the Exchange during
the auction response period and have an opportunity for execution in
the applicable auction mechanism. The Exchange believes this will, as a
result, increase execution opportunities for liquidity providers that
submit auction responses and enhance the potential for price
improvement for orders submitted to each mechanism to the benefit of
investors and public interest. The Exchange also believes the benefits
that result from the adoption of a priority queue for auction responses
would outweigh any potential negative impact to other message traffic.
Moreover, the Exchange believes the impact to other message traffic to
be de minimis.
Particularly, the Exchange reviewed all submitted message traffic
from March 9-March 13, 2020 and notes that during this time period,
auction responses across all its auction mechanisms accounted only for
approximately 0.02% of the message traffic, whereas new order/quote
messages accounted for approximately 40.3%, modify messages accounted
for approximately 47.9%, and cancel messages accounted for
approximately 11.7%. Accordingly, the number of messages that would be
processed via the priority queue as compared to general queue is
extremely small. Indeed, as noted above, only 0.02% of all messages
would be processed via the priority queue and therefore the number of
rotations between the two queues throughout the trading day would
likely be very limited as there are only so many auction responses that
would need to be processed compared to other message traffic. Moreover,
only a mere 0.007% of non-auction response messages were related to a
customer order. Therefore, the chances of a customer order being
disadvantaged by allowing an auction response to be processed via a
priority queue are nearly zero. Additionally, executions at the
conclusion of an auction mechanism will occur in the same manner as
they do today. For example, priority customer orders in the Book will
continue to have first priority at each price level at the conclusion
of a paired auction, regardless of whether an auction response is
processed via a priority queue and processed ahead of a priority
customer order.
Furthermore, the Exchange's review of auction responses during the
period of March 30-April 3, 2020 indicated that approximately 17% of
auction responses had no opportunity to execute in their respective
auctions, notwithstanding being submitted within the auction response
period. In certain classes, such as SPXW, this percentage was even
higher. Particularly, 47% of SPXW auction responses had no opportunity
to execute in the applicable auction, notwithstanding being submitted
within the auction response period.
The Exchange also notes that it takes the system approximately 10
microseconds to process a single order/quote or auction response
message and, on average, approximately 190 microseconds to process a
mass cancel message. As such, under the current system, an auction
response that is entered after a mass cancel message is more likely to
be detrimentally impacted as compared to a mass cancel message that is
entered after an auction response (i.e., a 190 microsecond ``wait
time'' versus a 10 microsecond ``wait time'').
Accordingly, the Exchange believes that adopting a priority queue
for all auction response messages will continue to allow the Exchange
to set each auction response period to an amount of time that provides
TPHs with sufficient time to respond to, compete for, and provide price
improvement for orders but provides auctioned orders with quick
executions that may reduce market and execution risk, while also
providing timely submitted auction responses with more execution
opportunities in the applicable auction prior to the end of the auction
response
[[Page 50857]]
period, even during periods of high message traffic, thereby
potentially providing customers with additional opportunities for price
improvements.
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.\12\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ Id.
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In particular, the Exchange believes modifying its System to allow
it to handle auction responses in a timelier manner may provide further
opportunities for auction eligible orders to receive price improvement
that they may not otherwise receive if the System is unable to process
auction response messages prior to the conclusion of an auction
response period, if submitted during a time when there is a deep queue
of message traffic. In particular, the proposed rule change will
continue to provide investors with timely processing of their options
quote and order messages, while providing investors who submit auction
eligible orders with additional auction liquidity. Indeed, the proposed
rule change may allow more investors additional opportunities to
receive price improvement through an auction mechanism. While the
Exchange may increase the length of auction response periods to
accommodate more auction responses, the Exchange believes the proposed
rule change allows the Exchange to continue to mitigate the market risk
for TPHs using any such mechanism by setting the length of an auction
response period to a time frame that allows an adequate amount of time
for TPHs to respond to an auction message and fast executions.
Additionally, a priority queue may provide liquidity providers that
submit auction responses with additional execution opportunities in
auctions, which may encourage the submission of more auction responses
which may contribute to a deeper, more liquid auction process and,
thus, provide investors with additional price improvement
opportunities.
The Exchange believes that the information outlined above
demonstrates why adopting a priority queue for auction responses would
better provide customers with additional opportunities for price
improvements with little impact to non-auction response message
traffic. As discussed, auction responses account for an incredibly
small fraction of message traffic submitted to the Exchange. Indeed,
based on the Exchange's analysis, auction response messages accounted
for a mere 0.02% of all message traffic submitted to the Exchange. The
Exchange believe the processing of such a small amount of message
traffic via a priority queue (which as proposed would rotate with the
general queue) would therefore have a minimal impact on the processing
of non-auction response messages in the general queue. Conversely, as
demonstrated by the data discussed above, the current system
configuration (i.e., a single queue for all message traffic) can
negatively impact the timeliness of the processing of auction responses
to the detriment of investors who may miss out on opportunities to
receive price improvement through one of the Exchange's auction
mechanisms due to the time necessary for the System to process auction
responses behind a queue of other message traffic. The Exchange
therefore believes its proposal will make it more likely that the
System processes timely submitted auction responses prior to the end of
an auction response period and thus have more opportunities to execute
against auctioned orders, even during periods of high message traffic.
The Exchange also believes having the flexibility to determine the
number of messages that it processes in each queue before alternating
allows the Exchange to configure the number as needed to ensure the
benefits of alternating between a priority queue and general queue
continue to outweigh any potential negative impact to non-auction
response message traffic. The Exchange further believes the proposal
will continue to allow the Exchange to set an auction response period
to an amount of time that provides TPHs with sufficient time to respond
to, compete for, and provide price improvement for orders but provides
auctioned orders with quick executions that may reduce market and
execution risk. Accordingly, the Exchange believes the adoption of a
priority queue for auction responses would provide customers with
additional opportunities for price improvement and enhance the quality
of the auctions, thereby removing impediments to and perfecting the
mechanism of a free and open market and a national market system, and,
in general protecting investors and the public interest.
The Exchange also believes the proposed rule change is not designed
to permit unfair discrimination between market participants as all
market participants are allowed to submit auction responses.
Additionally, the Exchange believes it's reasonable to adopt a priority
queue for auction responses as compared to other messages because
auction responses are submitted only for the purpose of executing (and
possibly providing price improvement) in auctions with short durations,
whereas other messages are generally submitted to rest in or execute
against the book (and generally not used to submit liquidity into
auctions). As discussed above, the Exchange also believes the benefits
that result from the adoption of a priority queue for auction responses
would outweigh any potential negative impact to other message traffic,
including customer orders, which have an incredibly low chance of being
affected by the proposed change and which continue to receive priority
allocation in any event.
The Exchange lastly does not believe that the purpose of the
proposed rule change to adopt a priority queue for certain message
traffic is new or unique. As the Commission is aware, other exchanges
offer similar functionality. For example, Miami International
Securities Exchange LLC (``MIAX'') makes clear in its current technical
specifications that it offers priority mass cancel ports, which
similarly provide expedited processing for certain message types by
alternating between processing messages from a priority queue (but for
mass cancel requests instead of auction responses) and messages from a
general queue (for all other message traffic).\15\
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\15\ See e.g., MIAX Express Orders Binary Orders for Trading
Options MEO Interface Specification, Appendix E, Priority Mass
Cancel Ports, at: https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Express_Interface_MEI_v2.8.pdf.
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[[Page 50858]]
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 changes will impose any burden on intra-
market competition that is not necessary or appropriate in furtherance
of the purposes of the Act, as the proposed rule change would apply
equally to all TPHs that submit auction responses. As noted above, all
market participants are able to submit auction responses. Additionally,
the Exchange believes the adoption of a priority queue for auction
responses would have little impact to non-auction response message
traffic. As discussed, auction response messages account for an
incredibly small fraction of message traffic submitted to the Exchange.
The Exchange therefore believes the processing of such a small amount
of message traffic via a priority queue would have a minimal impact on
the processing of non-auction response messages in the general queue.
Moreover, the Exchange believes it's reasonable to adopt a priority
queue for auction responses as compared to other messages because
auction responses are submitted only for the purpose of executing (and
possibly providing price improvement) in auctions with short durations,
whereas other messages are generally submitted to rest in or execute
against the book (and generally not used to submit liquidity into
auctions). Lastly, the Exchange does not believe the proposed rule
change will impose any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act, as
the proposed change affects how the System processes auction responses
that may only participate in auctions that occur on the Exchange.
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 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-2020-072 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-2020-072. 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-2020-072, and should be submitted
on or before September 8, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17962 Filed 8-17-20; 8:45 am]
BILLING CODE 8011-01-P
