Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Make Qualified Contingent Cross Orders Available for FLEX Trading, 51531-51535 [2020-18200]
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Federal Register / Vol. 85, No. 162 / Thursday, August 20, 2020 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89564; File No. SR–CBOE–
2020–075]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Make
Qualified Contingent Cross Orders
Available for FLEX Trading
August 14, 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 August 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
Rule 5.70 and Rule 5.72, as well as Rule
5.33, to make Qualified Contingent
Cross (‘‘QCC’’) Orders available for
FLEX trading. 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.
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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.
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 5.70 and Rule 5.72, as well as Rule
5.33, to make QCC Orders, which
includes Complex QCC Orders and QCC
with Stock Orders, available for
electronic FLEX trading. Currently, QCC
Orders are available only for electronic
non-FLEX trading.
QCC Orders facilitate the execution of
option orders that are part of Qualified
Contingent Trades (‘‘QCTs’’),3 by
permitting Trading Permit Holders
(‘‘TPHs’’) to cross options orders
without exposure while effecting the
trade in the equities leg in another
market at a price necessary to achieve
the net price. Currently, TPHs may
choose to submit the options component
of a QCT as a FLEX Option, yet, are
currently unable to execute a FLEX
Options component of a QCT on the
Exchange in the same efficient,
unexposed manner as they may execute
a non-FLEX Option component of a
QCT on the Exchange. The Exchange
now seeks to provide TPHs and their
customers with the same QCC trading
capabilities for FLEX trading that are
currently available for non-FLEX
trading, thus providing TPHs with the
same capability to execute the options
parts of QCTs that are comprised of
FLEX Options.
Rule 5.6(c) currently provides for the
non-FLEX definition of a QCC Order.
Specifically, a QCC order is comprised
of an originating order to buy or sell at
least 1,000 contracts (or 10,000 minioption contracts) that is identified as
being part of a QCT coupled with a
contra-side order or orders totaling an
equal number of contracts. If a QCC
3 See Rule 5.6(c), definition of ‘‘Qualified
Contingent Cross or QCC’’, paragraph (1), which
defines a ‘‘qualified contingent trade’’ as a
transaction consisting of two or more component
orders, executed as agent or principal, where: (A)
At least one component is an NMS stock, as defined
in Rule 600 of Regulation NMS under the Exchange
Act; (B) all components are effected with a product
or price contingency that either has been agreed to
by all the respective counterparties or arranged for
by a broker-dealer as principal or agent; (C) the
execution of one component is contingent upon the
execution of all other components at or near the
same time; (D) the specific relationship between the
component orders (e.g., the spread between the
prices of the component orders) is determined by
the time the contingent order is placed; (E) the
component orders bear a derivative relationship to
one another, represent different classes of shares of
the same issuer, or involve the securities of
participants in mergers or with intentions to merge
that have been announced or cancelled; and (F) the
transaction is fully hedged (without regard to any
prior existing position) as a result of other
components of the contingent trade.
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Order has more than one option leg (a
‘‘Complex QCC Order’’), each option leg
must have at least 1,000 standard option
contracts (or 10,000 mini-option
contracts). A QCC order represents one
component of a QCT, which must be
paired with a stock order. When a User
enters a QCC Order, the User is
responsible for executing the associated
stock component of the QCT at or near
the same time of the QCC order
execution, just as a User is ultimately
responsible for complying with
execution requirements for any order a
User submits. Indeed, the Exchange
requires TPHs to properly mark all QCC
Orders as such, and has a surveillance
program in place which assesses TPH
compliance with the requirements
applicable to QCC Orders, including the
requirement that the stock leg of the
transaction be executed at or near the
same time as the options leg.4 To
execute the associated stock, a User may
choose to either (1) separately submit an
option order to the Exchange and the
stock order to a stock execution venue
in time to be executed at or near the
same time of each other, or (2) submit
a QCC with Stock Order. A QCC with
Stock Order is a type of QCC Order
(including a Complex QCC Order)
entered with a stock component to be
electronically communicated by the
Exchange to a designated broker-dealer
for execution on behalf of the
submitting User and, as indicated, are
available to Users on a voluntary basis.5
The Exchange proposes to adopt Rule
5.72(e) 6 to govern FLEX QCC Orders.
The proposed rule is simply making
QCC Order available for FLEX, and as
such, the definition of FLEX QCC
Orders is substantively identical as nonFLEX QCC Orders in Rule 5.6(c) and
FLEX QCC Orders will execute in
substantially the same manner with few
differences unique to trading in FLEX
Trading. Proposed Rule 5.72(e) provides
that a ‘‘FLEX QCC’’ order is comprised
of an originating order to buy or sell at
least 1,000 standard FLEX Option
contracts (or 10,000 mini FLEX option
contracts) that is identified as being part
of a QCT (as defined in Rule 5.6(c))
coupled with a contra-side order or
orders totaling an equal number of
contracts. If a FLEX QCC order has more
than one option leg (a ‘‘Complex FLEX
QCC’’ order), each option leg must have
4 See Securities Exchange Act Release No. 15058
(June 17, 2011), 76 FR 35491 (Order Granting
Approval of Proposed Rule Change Establishing
Qualified Contingent Cross Orders) (‘‘QCC
Approval Order’’).
5 See Rule 5.33(a), definition of ‘‘QCC with Stock
Order’’.
6 The Exchange also moves current paragraph (e)
to paragraph (f).
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at least 1,000 standard FLEX option
contracts (or 10,000 mini FLEX option
contracts). This is substantively
identical to the non-FLEX QCC
definition in Rule 5.6(c). The Exchange
notes that Users will enter into the
System all FLEX QCC Orders as they
would any other FLEX Order pursuant
to 5.72(b) (governing the order entry of
FLEX Orders) and the applicable FLEX
auction rules. As such, the Exchange
points out that FLEX QCC Orders may
only be submitted for series consistent
with the FLEX rules.7 Like QCC Orders
submitted for non-FLEX trading,8 FLEX
QCC Orders will execute automatically
upon entry without exposure pursuant
to proposed Rule 5.72(e)(1). The
Exchange notes, as there is no FLEX
Order Book, the corresponding
provisions in Rule 5.6(c) 9 and 5.33(f)(2)
regarding QCC Order execution
requirements in connection with
yielding to prices at which Priority
Customer Orders may be resting in the
Simple Book 10 and Complex Order
Book (‘‘COB’’),11 and in Rule 5.6(c) 12 in
connection with pricing QCC Orders at
or between the NBBO 13 would not be
applicable to QCC Orders submitted to
FLEX.14 Proposed Rule 5.72(e)(1) also
provides that a FLEX QCC Order is
cancelled if it cannot execute, and that
Rule 5.9 (related to exposure of orders
on the Exchange) does not apply to
FLEX QCC orders, both of which are
consistent with the current non-FLEX
QCC Rules.15 Like QCC Orders
submitted in non-FLEX classes,16 QCC
orders submitted in FLEX classes must
be entered in the standard increment for
the class.17 Therefore, the proposed rule
change adds in proposed Rule 5.72(e)(2)
that FLEX QCC may only be entered in
the increments applicable to FLEX
Orders under Rule 5.4(c)(4).
Proposed Rule 5.72(e)(1) also provides
that a FLEX QCC with Stock order
executes pursuant to Rule 5.33(l). The
7 See
Rules 5.72(b), (c), and (d).
Rule 5.6(c), definition of ‘‘Qualified
Contingent Cross or QCC’’, paragraph (2).
9 See id.
10 See Rule 5.6(c), definition of ‘‘Qualified
Contingent Cross or QCC’’, subparagraph (2)(A)(i).
11 See Rule 5.6(c), definition of ‘‘Qualified
Contingent Cross or QCC’’, subparagraph (2)(B)(i)
and (iii).
12 See Rule 5.6(c), definition of ‘‘Qualified
Contingent Cross or QCC’’, subparagraph (2).
13 See Rule 5.6(c), definition of ‘‘Qualified
Contingent Cross or QCC’’, subparagraph (2)(A)(ii)
and (B)(ii).
14 This is true for any FLEX Order.
15 See Rule 5.6(c), definition of ‘‘Qualified
Contingent Cross or QCC’’, subparagraph (2)(C) and
(2)(C), respectively.
16 See 5.6(c), definition of ‘‘Qualified Contingent
Cross or QCC’’, paragraph (3).
17 See Rule 5.4(c)(4) (which sets forth minimum
increments for FLEX options).
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8 See
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proposed rule change amends Rule
5.33(1) to specify that the provisions
governing QCC with Stock include
FLEX QCC with Stock. As such,
pursuant to Rule 5.33(l), for a FLEX
QCC with Stock Order, a User must
include the same requisite information
as they must include when submitting
such orders for non-FLEX trading
pursuant to Rule 5.33(l)(3)(A),18 and the
System will process the option and
stock components of such orders in the
same manner as it does for non-FLEX
QCC orders pursuant to Rule
5.33(l)(3)(B) and (C).19
The Exchange seeks to make QCC
Orders available for FLEX trading due to
the growing customer demand it has
received for QCC functionality for FLEX
trading. The Exchange notes that a
number of TPHs have expressed to the
Exchange that use of QCC for FLEX
options would increase the efficiency of
their executions of the options
component of a QCT if the options
component consists of a FLEX Option.
An investor may seek to use a FLEX
Option as an appropriate hedge for a
stock order but is currently unable to
execute a FLEX Option that is part of a
QCT on the Exchange in the same
unexposed manner as it may execute a
non-FLEX Option on the Exchange.
Currently, if a TPH wants to execute a
FLEX Option that is intended to be part
of a QCT, it would have to enter the
FLEX Option as a FLEX Order separate
from the stock portion or as a stockoption order, which must be exposed for
at least three seconds prior to
execution.20 As noted above, to qualify
as a QCT, the execution of one
component is contingent upon the
execution of all other components at or
18 Rule 5.33(l)(3)(A) requires a User to include a
net price for the stock and option components in
accordance with the minimum increments for
stock-option orders and (ii) identify the designated
broker-dealer as set forth in Rule 5.33 (l)(2).
19 Rule 5.33(l)(3)(B) provides that the System
executes the option component in accordance with
Rule 5.6(c), but does not immediately send the User
a trade execution report, and automatically
communicates the stock component to the
designated broker-dealer for execution at a stock
trading venue. If the option component(s) of a QCC
with Stock Order cannot execute, the System
cancels the QCC with Stock Order, including both
the stock and option components. Rule 5.33(l)(3)(C)
provides that, if the System receives an execution
report for the stock component of a QCC with Stock
Order from the designated broker-dealer, the
Exchange sends the User the trade execution report
for the QCC with Stock order, including execution
information for both the stock and option
components. If the System receives a report from
the designated broker-dealer that the stock
component of a QCC with Stock Order cannot
execute, the Exchange nullifies the option
component trade and notifies the User of the reason
for the nullification.
20 See Rule 5.72(c)(1)(F); Rule 5.73(c)(3); and Rule
5.74(c)(3).
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near the same time. The Exchange
conducts surveillance of TPHs to ensure
that TPHs execute the options
component of a QCT at or near the same
time as the stock component, in
accordance with the QCT exemption.21
Therefore, there is compliance risk for
TPHs if they do not execute the options
component at or near the same time of
execution of the stock component.
Providing TPHs with QCC Order
functionality for FLEX Options will
reduce the compliance burden on TPHs
by providing a more efficient means of
executing the options component of a
QCT if the options component consists
of a FLEX Option, as QCC Orders did for
non-FLEX options.
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.22 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 23 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) 24 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the proposal to make the
QCC Order type available for electronic
FLEX trading will facilitate TPHs’
execution of the options component of
QCTs that are comprised of FLEX
Options in the same manner that TPHs
may currently execute the options
component of QCTs that are comprised
of non-FLEX Options, thereby removing
impediments to and perfecting the
mechanism of a free and open market
and national market system and, in
general, protecting investors. QCC
Orders for FLEX Options will execute in
the same manner as QCC Orders for
21 See
supra note 3; see also infra note 29.
U.S.C. 78f(b).
23 15 U.S.C. 78f(b)(5).
24 Id.
22 15
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non-FLEX Options; the proposed rule
change merely expands the classes in
which the Exchange may make QCC
Orders available and provides a specific
definition of FLEX QCC Orders for
clarity. Moreover, the Exchange notes
that stock-option orders (which, by
definition, must also be a QCT) 25 are
already permitted under the Rules for
FLEX Options, and thus, the FLEX
Options components of QCTs submitted
as stock-option orders may currently
execute at any price in FLEX (i.e., are
not subject to an NBBO or yielding to
Customer orders). The proposed rule
change merely provides an alternative,
more efficient manner of execution for
the option component of larger-sized
QCTs.
The Exchange believes the availability
of QCC Orders for FLEX Options will
allow for a more efficient execution of
the options component of a QCT on the
Exchange. As noted above, to qualify as
a QCT, the execution of one component
is contingent upon the execution of all
other components at or near the same
time. The Exchange conducts
surveillance to ensure a TPH executes
the stock and option components of a
QCT at or near the same time.26 As a
result, if the option component does not
execute when initially submitted to the
Exchange, a TPH may be subject to
compliance risk if it does not execute
the option component at or near the
same time of the execution of the stock
component. Indeed, the Exchange notes
that the compliance risk of not being
able to execute a FLEX Options portion
of a QCT at or near the same time of the
execution of the stock component is
greater in a FLEX auction, where it must
be exposed for at least three seconds
prior to execution, than for non-FLEX
option orders that must be exposed for
at least one second 27 unless submitted
into an auction with a shorter exposure
period. The Exchange believes the
proposed rule change will reduce this
compliance risk for TPHs executing
FLEX Options that are components of
QCTs, which will protect investors and
the public interest. Since the purpose of
a QCT order is for all components to
trade at or near the same time, the
Exchange believes it is appropriate to
provide TPHs with a mechanism to
facilitate immediate execution of FLEX
Options that comprise the options
component of a QCT to reduce the
compliance burden on TPHs when
effecting QCTs with a FLEX Option
component.
25 See
Interpretation and Policy .03 to Rule 5.33.
supra QCC Approval Order.
27 See Rule 5.9.
26 See
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The Exchange believes that proposed
Rule 5.72(e), while substantially the
same in almost all aspects to Rule 5.6(c)
governing non-FLEX QCC, will provide
clarity to TPHs regarding the
submission of their QCC FLEX Options.
The only difference between the FLEX
and non-FLEX QCC orders is that FLEX
QCC orders are not subject to the NBBO
or prices of customers in the book. The
Exchange notes this difference exists for
any order type in non-FLEX trading
versus FLEX trading.28 The Exchange
notes that the proposed rule changes do
not alter any of the current increments
applicable to FLEX Options but merely
provide additional detail within the
specific provision covering QCC Orders
regarding the standard increments
already permissible for FLEX Options
that will also apply to QCC FLEX
Orders.
As the Commission has previously
found,29 the execution of QCTs is
beneficial to the market as a whole as it
contributes to the efficient functioning
of the securities markets and the price
discovery process. Pursuant to the QCT
Release, the options portion of a QCT
may consist of non-FLEX or FLEX
Options [sic]. However, as noted above,
without the availability of QCC Orders
for FLEX Options, TPHs are subject to
higher compliance risk with respect to
QCTs with a FLEX Option component
than TPHs who execute QCTs with a
non-FLEX Option component. The
Exchange submits this proposed rule
change in response to demand from
TPHs and their customers to be able to
execute the options components of
QCTs comprised of a FLEX Option in
the same manner that they are currently
able to execute the options components
of QCTs comprised of non-FLEX
options. Therefore, the proposed rule
change will provide TPHs whose
hedging strategies involve FLEX
Options with the same functionality
currently available to TPHs whose
hedging strategies involve non-FLEX
Options. The Exchange believes this
will provide investors with additional
flexibility regarding execution of their
hedging strategies related to stock
positions, which flexibility ultimately
benefits investors.
Moreover, the Commission has stated
that, while it believes that order
28 The Exchange also notes that the requirement
that a QCC order execute at a price at or better than
the NBBO is not a unique execution requirement—
every option order type approved by the
Commission must execute at a price at or better
than the NBBO in accordance with the linkage plan.
See Rule 5.66.
29 See Securities Exchange Act Release No. 57620
(April 4, 2008), 73 FR 19271 (April 9, 2008) (‘‘QCT
Release’’); and see QCC Approval Order.
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51533
exposure is generally beneficial to
options markets, it recognizes that
contingent trades can be useful trading
tools for investors and other market
participants, particularly those who
trade the securities of issuers involved
in mergers, different classes of shares of
the same issuers, convertible securities,
and equity derivatives such as options
and that those who engage in contingent
trades can benefit the market as a whole
by studying the relationships between
prices of such securities and executing
contingent trades when they believe
such relationships are out of line with
what they believe to be fair value.30
The requirement that a non-FLEX
QCC must execute at a price at or
between the NBBO merely incorporates
an execution requirement applicable to
all option order types, as all options
must execute at price at or better than
the NBBO in accordance with linkage
rules.31 Therefore, this execution
requirement is not a heightened
execution requirement for an unexposed
option order. The additional
requirement that a QCC order not
execute at the same price as a Priority
Customer incorporates the general
principle of customer protection in the
options markets.32 If the market model
for a class does not include customer
priority, this is a heightened execution
requirement for execution of an
unexposed order.33 Even without this
additional protection, the Exchange
believes the proposed FLEX QCC order
will protection investors, as it will
provide users of FLEX options with the
same functionality as user of non-FLEX
options. Additionally, primarily brokerdealers and institutional investors
engage in FLEX trading. Therefore, there
are minimal retail customer orders
30 See
QCC Approval Order.
Rule 5.66. In other words, if the definition
of a QCC order did not include the provision that
it must execute at a price at or better than the
NBBO, QCC orders would still be required to
execute at a price at or better than the NBBO. The
Exchange believes inclusion of this explicit
requirement for QCC orders was intended to
highlight the difference between execution of the
options component and the stock component,
which may execute at any price, but was not a
unique price requirement necessary for execution of
an unexposed order. Every order type on the
Exchange approved for non-FLEX trading and FLEX
trading has this same distinction.
32 If there was not a customer order resting at the
top of the book, then the second pricing
requirement for QCC orders is simply ignored. As
there is no book in the FLEX market, the proposed
FLEX QCC order is equivalent to a non-FLEX QCC
order submitted when there is no customer order
resting at the top of the book.
33 The Exchange has enabled customer priority
for all equity option classes that trade on the
Exchange (and thus for all classes in which TPHs
may submit QCC orders). Therefore, all QCC orders
submitted on the Exchange are subject to the same
execution pricing requirements as non-QCC orders.
31 See
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submitted into the FLEX market that
would require additional protection. As
discussed above, the Exchange believes
the benefits of exposure on an order on
the Exchange are outweighed by the
benefits offered by immediate execution
of these contingent order types. The
Exchange does not believe market
participants that engage in hedging
strategies involving FLEX Options
should not have access to the same
functionality as market participants
with hedging strategies involving nonFLEX options.
The Exchange does not believe the
propose rule change raises price
protection concerns that market
participants may submit FLEX QCC
orders for a FLEX series with slightly
different terms than a non-FLEX series
in order to get better pricing. Such risk,
if any, exists today with respect to all
FLEX trading. The Exchange again
points out that the linkage rules and
customer priority are currently not
applicable to any orders submitted to
FLEX, wherein there is no order book.
The Exchange has observed no trends of
TPHs submitting FLEX orders in order
to avoid trading in the non-FLEX
market. The Exchange believes the risk
(if any) of a market participant trading
a FLEX Option rather than a non-FLEX
Option with slightly different terms to
use the FLEX market as a substitute for
the non-FLEX market and achieve such
a result is minimal. This possibility
exists today with respect to all options
the Exchange lists for FLEX and nonFLEX trading. The Exchange has not
observed market participants attempting
to trade in the FLEX market rather than
the non-FLEX market for this purpose in
classes in which this is possible today.
The Exchange believes attempting to
execute an order in the FLEX market as
a substitute for the non-FLEX market
would minimize execution
opportunities for that order. Such
trading would be inefficient for market
participants and could introduce price
and execution risk to market
participants’ trading strategies given the
reduced liquidity, participation, and
price discovery in the FLEX market
compared to the non-FLEX market.34
Additionally, series with different terms
have different prices and serve different
investment purposes, so trading a
‘‘similar’’ FLEX series may not achieve
the same investment objective as the
non-FLEX series a TPH initially sought
to trade. The Exchange notes if a FLEX
QCC orders execute at a price through
the book of the ‘‘similar’’ non-FLEX
series, while that would be a better price
34 See Sections VII and X of the ODD regarding
risks associated with FLEX Options.
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for one transaction participant, it would
be a worse price for the participant on
the opposite side, and thus it may be
more difficult for the TPH to find
sufficient contra party interest. For
example, suppose the market for Aug
ABC 800 call with a multiplier of 100
is 10.20—11.00. If a market participant
sought interest from counterparties to
execute a FLEX QCC Order to buy an
Aug ABC 795 call with at 10.00, it is
unlikely another market participant
would sell at that price if they were
looking to sell the Aug ABC 800 call,
given that participant could sell the
‘‘similar’’ non-FLEX Option series at
10.20, which would be a better price for
that seller. Given the likely difficulties
(such as reduced liquidity and
potentially longer timeframe to receive
execution) of trading in the FLEX
market as a substitute for trading an
economically equivalent option in the
non-FLEX market (such as to obtain a
better execution price), the Exchange
believes the risk of this occurring is de
minimis. The Exchange believes that
any such risk is even lower for FLEX
QCC orders given the additional
requirements that apply to FLEX QCC
orders, even without the heightened
execution price requirement that a QCC
order cannot execute at the same price
as a Priority Customer. The benefits of
QCC orders apply to FLEX options in
the same manner as they do for nonFLEX options, which benefits the
Exchange believes significantly
outweigh any price protection risk that
may exist in the FLEX market.
Ultimately, as noted above, QCC
Orders in FLEX Options will execute in
a substantially similar manner as QCC
Orders in non-FLEX Options. In
addition to this, the Exchange notes that
QCC functionality is a widely adopted
industry order type wherein multiple
other options exchanges currently have
QCC functionality in place.35
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that the
proposed rule change will impose any
burden on intramarket competition that
is not necessary or appropriate in
furtherance of the purposes of the Act
because QCC functionality is already
35 See e.g. Nasdaq Phlx Rules Options 3, Section
12 (electronic QCC orders), and Options 8, Section
32(e) (open outcry QCC orders); Nasdaq ISE Options
3, Section 12; BOX Options Rule 7110(c)(6); MIAX
Options Rule 516(j); and NYSE Arca Options Rule
6.90–O.
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
available for non-FLEX Options. The
Exchange is simply proposing to make
QCC Orders available for additional
classes (FLEX Option classes). The
Exchange notes that the proposed order
type will be available to all Users on a
voluntary basis, and Users are not
required to use QCC Orders when
executing QCTs. Users may continue to
execute the options component of QCTs
that are comprised of FLEX Options in
the same manner as they do today. The
proposed rule change will provide FLEX
Traders with the same functionality that
is currently available to non-FLEX
Traders with respect to execution of
option components of QCTs. The
Exchange believes all TPHs should have
access to this functionality so they can
all execute option components of QCTs
in the same manner, regardless of
whether they choose to hedge the stock
portions of QCTs with FLEX or nonFLEX options.
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
because the proposed rule change is
merely making functionality currently
available on the Exchange to additional
option classes. As noted above, QCC
Order functionality is currently
available at other options exchanges,
which may determine make QCC
functionality available to additional
option classes as well, including flexible
options. To the extent the proposed rule
change makes the Exchange a more
attractive trading venue for market
participants on other exchanges, those
market participants may elect to become
Exchange market participants.
Overall, the Exchange believes the
proposed rule change is appropriate for
the protection of investors and the
maintenance of fair and orderly markets
to assure, among other things, the
economically efficient execution of
securities transactions.
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
E:\FR\FM\20AUN1.SGM
20AUN1
Federal Register / Vol. 85, No. 162 / Thursday, August 20, 2020 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
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.
Number SR–CBOE–2020–075 and
should be submitted on or before
September 10, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
J. Matthew DeLesDernier,
Assistant Secretary.
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:
[FR Doc. 2020–18200 Filed 8–19–20; 8:45 am]
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–2020–075 on the subject line.
ACTION:
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–2020–075. 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
VerDate Sep<11>2014
18:01 Aug 19, 2020
Jkt 250001
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
Data Collection Available for Public
Comments
60-Day notice and request for
comments.
The Small Business
Administration (SBA) intends to request
approval, from the Office of
Management and Budget (OMB) for the
collection of information described
below. The Paperwork Reduction Act
(PRA) of 1995 requires federal agencies
to publish a notice in the Federal
Register concerning each proposed
collection of information before
submission to OMB, and to allow 60
days for public comment in response to
the notice. This notice complies with
that requirement.
DATES: Submit comments on or before
October 19, 2020.
ADDRESSES: Send all comments to
Jermaine Perry, Management Analyst,
Office Surety Guarantees, Small
Business Administration, 409 3rd Street,
6th Floor, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT:
Jermaine Perry, Management Analyst,
Jermaine.perry@sba.gov 202–401–8275,
or Curtis B. Rich, Management Analyst,
202–205–7030, curtis.rich@sba.gov.
SUPPLEMENTARY INFORMATION: Small
Business Administration Surety Bond
Guarantee Program was created to
encourage surety companies to provide
bonding for small contractors. The
information collected on the form from
surety companies will be used to update
the status of successfully completed
contracts and to provide a final
accounting of contractor and surety fees
due to SBA.
Solicitation of Public Comments:
SBA is requesting comments on (a)
Whether the collection of information is
necessary for the agency to properly
perform its functions; (b) whether the
burden estimates are accurate; (c)
whether there are ways to minimize the
burden, including through the use of
automated techniques or other forms of
SUMMARY:
36 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00133
Fmt 4703
Sfmt 4703
51535
information technology; and (d) whether
there are ways to enhance the quality,
utility, and clarity of the information.
Summary of Information Collection:
Title: Quarterly Contract Completion
Report.
Description of Respondents: Surety
companies.
Form Number: 2,461.
Total Estimated Annual Responses:
92.
Total Estimated Annual Hour Burden:
92.
Curtis Rich,
Management Analyst.
[FR Doc. 2020–18260 Filed 8–19–20; 8:45 am]
BILLING CODE 8026–03–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #16588 and #16589;
FLORIDA Disaster Number FL–00156]
Administrative Declaration of a
Disaster for the State of Florida
Small Business Administration.
Notice.
AGENCY:
ACTION:
This is a notice of an
Administrative declaration of a disaster
for the State of Florida dated 08/13/
2020.
Incident: Flash Flooding.
Incident Period: 05/26/2020 through
05/27/2020.
DATES: Issued on 08/13/2020.
Physical Loan Application Deadline
Date: 10/13/2020.
Economic Injury (EIDL) Loan
Application Deadline Date: 05/13/2021.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
Administrator’s disaster declaration,
applications for disaster loans may be
filed at the address listed above or other
locally announced locations.
The following areas have been
determined to be adversely affected by
the disaster:
Primary Counties: Miami-Dade.
Contiguous Counties:
Florida: Broward, Collier, Monroe.
The Interest Rates are:
SUMMARY:
Percent
For Physical Damage:
E:\FR\FM\20AUN1.SGM
20AUN1
]]>Agencies
[Federal Register Volume 85, Number 162 (Thursday, August 20, 2020)]
[Notices]
[Pages 51531-51535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18200]
[[Page 51531]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89564; File No. SR-CBOE-2020-075]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Make Qualified Contingent Cross
Orders Available for FLEX Trading
August 14, 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 August 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 Rule 5.70 and Rule 5.72, as well as Rule 5.33, to make
Qualified Contingent Cross (``QCC'') Orders available for FLEX trading.
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 5.70 and Rule 5.72, as well as
Rule 5.33, to make QCC Orders, which includes Complex QCC Orders and
QCC with Stock Orders, available for electronic FLEX trading.
Currently, QCC Orders are available only for electronic non-FLEX
trading.
QCC Orders facilitate the execution of option orders that are part
of Qualified Contingent Trades (``QCTs''),\3\ by permitting Trading
Permit Holders (``TPHs'') to cross options orders without exposure
while effecting the trade in the equities leg in another market at a
price necessary to achieve the net price. Currently, TPHs may choose to
submit the options component of a QCT as a FLEX Option, yet, are
currently unable to execute a FLEX Options component of a QCT on the
Exchange in the same efficient, unexposed manner as they may execute a
non-FLEX Option component of a QCT on the Exchange. The Exchange now
seeks to provide TPHs and their customers with the same QCC trading
capabilities for FLEX trading that are currently available for non-FLEX
trading, thus providing TPHs with the same capability to execute the
options parts of QCTs that are comprised of FLEX Options.
---------------------------------------------------------------------------
\3\ See Rule 5.6(c), definition of ``Qualified Contingent Cross
or QCC'', paragraph (1), which defines a ``qualified contingent
trade'' as a transaction consisting of two or more component orders,
executed as agent or principal, where: (A) At least one component is
an NMS stock, as defined in Rule 600 of Regulation NMS under the
Exchange Act; (B) all components are effected with a product or
price contingency that either has been agreed to by all the
respective counterparties or arranged for by a broker-dealer as
principal or agent; (C) the execution of one component is contingent
upon the execution of all other components at or near the same time;
(D) the specific relationship between the component orders (e.g.,
the spread between the prices of the component orders) is determined
by the time the contingent order is placed; (E) the component orders
bear a derivative relationship to one another, represent different
classes of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or cancelled; and (F) the transaction is fully hedged
(without regard to any prior existing position) as a result of other
components of the contingent trade.
---------------------------------------------------------------------------
Rule 5.6(c) currently provides for the non-FLEX definition of a QCC
Order. Specifically, a QCC order is comprised of an originating order
to buy or sell at least 1,000 contracts (or 10,000 mini-option
contracts) that is identified as being part of a QCT coupled with a
contra-side order or orders totaling an equal number of contracts. If a
QCC Order has more than one option leg (a ``Complex QCC Order''), each
option leg must have at least 1,000 standard option contracts (or
10,000 mini-option contracts). A QCC order represents one component of
a QCT, which must be paired with a stock order. When a User enters a
QCC Order, the User is responsible for executing the associated stock
component of the QCT at or near the same time of the QCC order
execution, just as a User is ultimately responsible for complying with
execution requirements for any order a User submits. Indeed, the
Exchange requires TPHs to properly mark all QCC Orders as such, and has
a surveillance program in place which assesses TPH compliance with the
requirements applicable to QCC Orders, including the requirement that
the stock leg of the transaction be executed at or near the same time
as the options leg.\4\ To execute the associated stock, a User may
choose to either (1) separately submit an option order to the Exchange
and the stock order to a stock execution venue in time to be executed
at or near the same time of each other, or (2) submit a QCC with Stock
Order. A QCC with Stock Order is a type of QCC Order (including a
Complex QCC Order) entered with a stock component to be electronically
communicated by the Exchange to a designated broker-dealer for
execution on behalf of the submitting User and, as indicated, are
available to Users on a voluntary basis.\5\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 15058 (June 17,
2011), 76 FR 35491 (Order Granting Approval of Proposed Rule Change
Establishing Qualified Contingent Cross Orders) (``QCC Approval
Order'').
\5\ See Rule 5.33(a), definition of ``QCC with Stock Order''.
---------------------------------------------------------------------------
The Exchange proposes to adopt Rule 5.72(e) \6\ to govern FLEX QCC
Orders. The proposed rule is simply making QCC Order available for
FLEX, and as such, the definition of FLEX QCC Orders is substantively
identical as non-FLEX QCC Orders in Rule 5.6(c) and FLEX QCC Orders
will execute in substantially the same manner with few differences
unique to trading in FLEX Trading. Proposed Rule 5.72(e) provides that
a ``FLEX QCC'' order is comprised of an originating order to buy or
sell at least 1,000 standard FLEX Option contracts (or 10,000 mini FLEX
option contracts) that is identified as being part of a QCT (as defined
in Rule 5.6(c)) coupled with a contra-side order or orders totaling an
equal number of contracts. If a FLEX QCC order has more than one option
leg (a ``Complex FLEX QCC'' order), each option leg must have
[[Page 51532]]
at least 1,000 standard FLEX option contracts (or 10,000 mini FLEX
option contracts). This is substantively identical to the non-FLEX QCC
definition in Rule 5.6(c). The Exchange notes that Users will enter
into the System all FLEX QCC Orders as they would any other FLEX Order
pursuant to 5.72(b) (governing the order entry of FLEX Orders) and the
applicable FLEX auction rules. As such, the Exchange points out that
FLEX QCC Orders may only be submitted for series consistent with the
FLEX rules.\7\ Like QCC Orders submitted for non-FLEX trading,\8\ FLEX
QCC Orders will execute automatically upon entry without exposure
pursuant to proposed Rule 5.72(e)(1). The Exchange notes, as there is
no FLEX Order Book, the corresponding provisions in Rule 5.6(c) \9\ and
5.33(f)(2) regarding QCC Order execution requirements in connection
with yielding to prices at which Priority Customer Orders may be
resting in the Simple Book \10\ and Complex Order Book (``COB''),\11\
and in Rule 5.6(c) \12\ in connection with pricing QCC Orders at or
between the NBBO \13\ would not be applicable to QCC Orders submitted
to FLEX.\14\ Proposed Rule 5.72(e)(1) also provides that a FLEX QCC
Order is cancelled if it cannot execute, and that Rule 5.9 (related to
exposure of orders on the Exchange) does not apply to FLEX QCC orders,
both of which are consistent with the current non-FLEX QCC Rules.\15\
Like QCC Orders submitted in non-FLEX classes,\16\ QCC orders submitted
in FLEX classes must be entered in the standard increment for the
class.\17\ Therefore, the proposed rule change adds in proposed Rule
5.72(e)(2) that FLEX QCC may only be entered in the increments
applicable to FLEX Orders under Rule 5.4(c)(4).
---------------------------------------------------------------------------
\6\ The Exchange also moves current paragraph (e) to paragraph
(f).
\7\ See Rules 5.72(b), (c), and (d).
\8\ See Rule 5.6(c), definition of ``Qualified Contingent Cross
or QCC'', paragraph (2).
\9\ See id.
\10\ See Rule 5.6(c), definition of ``Qualified Contingent Cross
or QCC'', subparagraph (2)(A)(i).
\11\ See Rule 5.6(c), definition of ``Qualified Contingent Cross
or QCC'', subparagraph (2)(B)(i) and (iii).
\12\ See Rule 5.6(c), definition of ``Qualified Contingent Cross
or QCC'', subparagraph (2).
\13\ See Rule 5.6(c), definition of ``Qualified Contingent Cross
or QCC'', subparagraph (2)(A)(ii) and (B)(ii).
\14\ This is true for any FLEX Order.
\15\ See Rule 5.6(c), definition of ``Qualified Contingent Cross
or QCC'', subparagraph (2)(C) and (2)(C), respectively.
\16\ See 5.6(c), definition of ``Qualified Contingent Cross or
QCC'', paragraph (3).
\17\ See Rule 5.4(c)(4) (which sets forth minimum increments for
FLEX options).
---------------------------------------------------------------------------
Proposed Rule 5.72(e)(1) also provides that a FLEX QCC with Stock
order executes pursuant to Rule 5.33(l). The proposed rule change
amends Rule 5.33(1) to specify that the provisions governing QCC with
Stock include FLEX QCC with Stock. As such, pursuant to Rule 5.33(l),
for a FLEX QCC with Stock Order, a User must include the same requisite
information as they must include when submitting such orders for non-
FLEX trading pursuant to Rule 5.33(l)(3)(A),\18\ and the System will
process the option and stock components of such orders in the same
manner as it does for non-FLEX QCC orders pursuant to Rule
5.33(l)(3)(B) and (C).\19\
---------------------------------------------------------------------------
\18\ Rule 5.33(l)(3)(A) requires a User to include a net price
for the stock and option components in accordance with the minimum
increments for stock-option orders and (ii) identify the designated
broker-dealer as set forth in Rule 5.33 (l)(2).
\19\ Rule 5.33(l)(3)(B) provides that the System executes the
option component in accordance with Rule 5.6(c), but does not
immediately send the User a trade execution report, and
automatically communicates the stock component to the designated
broker-dealer for execution at a stock trading venue. If the option
component(s) of a QCC with Stock Order cannot execute, the System
cancels the QCC with Stock Order, including both the stock and
option components. Rule 5.33(l)(3)(C) provides that, if the System
receives an execution report for the stock component of a QCC with
Stock Order from the designated broker-dealer, the Exchange sends
the User the trade execution report for the QCC with Stock order,
including execution information for both the stock and option
components. If the System receives a report from the designated
broker-dealer that the stock component of a QCC with Stock Order
cannot execute, the Exchange nullifies the option component trade
and notifies the User of the reason for the nullification.
---------------------------------------------------------------------------
The Exchange seeks to make QCC Orders available for FLEX trading
due to the growing customer demand it has received for QCC
functionality for FLEX trading. The Exchange notes that a number of
TPHs have expressed to the Exchange that use of QCC for FLEX options
would increase the efficiency of their executions of the options
component of a QCT if the options component consists of a FLEX Option.
An investor may seek to use a FLEX Option as an appropriate hedge for a
stock order but is currently unable to execute a FLEX Option that is
part of a QCT on the Exchange in the same unexposed manner as it may
execute a non-FLEX Option on the Exchange. Currently, if a TPH wants to
execute a FLEX Option that is intended to be part of a QCT, it would
have to enter the FLEX Option as a FLEX Order separate from the stock
portion or as a stock-option order, which must be exposed for at least
three seconds prior to execution.\20\ As noted above, to qualify as a
QCT, the execution of one component is contingent upon the execution of
all other components at or near the same time. The Exchange conducts
surveillance of TPHs to ensure that TPHs execute the options component
of a QCT at or near the same time as the stock component, in accordance
with the QCT exemption.\21\ Therefore, there is compliance risk for
TPHs if they do not execute the options component at or near the same
time of execution of the stock component. Providing TPHs with QCC Order
functionality for FLEX Options will reduce the compliance burden on
TPHs by providing a more efficient means of executing the options
component of a QCT if the options component consists of a FLEX Option,
as QCC Orders did for non-FLEX options.
---------------------------------------------------------------------------
\20\ See Rule 5.72(c)(1)(F); Rule 5.73(c)(3); and Rule
5.74(c)(3).
\21\ See supra note 3; see also infra note 29.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\22\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \23\ 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) \24\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
\24\ Id.
---------------------------------------------------------------------------
In particular, the proposal to make the QCC Order type available
for electronic FLEX trading will facilitate TPHs' execution of the
options component of QCTs that are comprised of FLEX Options in the
same manner that TPHs may currently execute the options component of
QCTs that are comprised of non-FLEX Options, thereby removing
impediments to and perfecting the mechanism of a free and open market
and national market system and, in general, protecting investors. QCC
Orders for FLEX Options will execute in the same manner as QCC Orders
for
[[Page 51533]]
non-FLEX Options; the proposed rule change merely expands the classes
in which the Exchange may make QCC Orders available and provides a
specific definition of FLEX QCC Orders for clarity. Moreover, the
Exchange notes that stock-option orders (which, by definition, must
also be a QCT) \25\ are already permitted under the Rules for FLEX
Options, and thus, the FLEX Options components of QCTs submitted as
stock-option orders may currently execute at any price in FLEX (i.e.,
are not subject to an NBBO or yielding to Customer orders). The
proposed rule change merely provides an alternative, more efficient
manner of execution for the option component of larger-sized QCTs.
---------------------------------------------------------------------------
\25\ See Interpretation and Policy .03 to Rule 5.33.
---------------------------------------------------------------------------
The Exchange believes the availability of QCC Orders for FLEX
Options will allow for a more efficient execution of the options
component of a QCT on the Exchange. As noted above, to qualify as a
QCT, the execution of one component is contingent upon the execution of
all other components at or near the same time. The Exchange conducts
surveillance to ensure a TPH executes the stock and option components
of a QCT at or near the same time.\26\ As a result, if the option
component does not execute when initially submitted to the Exchange, a
TPH may be subject to compliance risk if it does not execute the option
component at or near the same time of the execution of the stock
component. Indeed, the Exchange notes that the compliance risk of not
being able to execute a FLEX Options portion of a QCT at or near the
same time of the execution of the stock component is greater in a FLEX
auction, where it must be exposed for at least three seconds prior to
execution, than for non-FLEX option orders that must be exposed for at
least one second \27\ unless submitted into an auction with a shorter
exposure period. The Exchange believes the proposed rule change will
reduce this compliance risk for TPHs executing FLEX Options that are
components of QCTs, which will protect investors and the public
interest. Since the purpose of a QCT order is for all components to
trade at or near the same time, the Exchange believes it is appropriate
to provide TPHs with a mechanism to facilitate immediate execution of
FLEX Options that comprise the options component of a QCT to reduce the
compliance burden on TPHs when effecting QCTs with a FLEX Option
component.
---------------------------------------------------------------------------
\26\ See supra QCC Approval Order.
\27\ See Rule 5.9.
---------------------------------------------------------------------------
The Exchange believes that proposed Rule 5.72(e), while
substantially the same in almost all aspects to Rule 5.6(c) governing
non-FLEX QCC, will provide clarity to TPHs regarding the submission of
their QCC FLEX Options. The only difference between the FLEX and non-
FLEX QCC orders is that FLEX QCC orders are not subject to the NBBO or
prices of customers in the book. The Exchange notes this difference
exists for any order type in non-FLEX trading versus FLEX trading.\28\
The Exchange notes that the proposed rule changes do not alter any of
the current increments applicable to FLEX Options but merely provide
additional detail within the specific provision covering QCC Orders
regarding the standard increments already permissible for FLEX Options
that will also apply to QCC FLEX Orders.
---------------------------------------------------------------------------
\28\ The Exchange also notes that the requirement that a QCC
order execute at a price at or better than the NBBO is not a unique
execution requirement--every option order type approved by the
Commission must execute at a price at or better than the NBBO in
accordance with the linkage plan. See Rule 5.66.
---------------------------------------------------------------------------
As the Commission has previously found,\29\ the execution of QCTs
is beneficial to the market as a whole as it contributes to the
efficient functioning of the securities markets and the price discovery
process. Pursuant to the QCT Release, the options portion of a QCT may
consist of non-FLEX or FLEX Options [sic]. However, as noted above,
without the availability of QCC Orders for FLEX Options, TPHs are
subject to higher compliance risk with respect to QCTs with a FLEX
Option component than TPHs who execute QCTs with a non-FLEX Option
component. The Exchange submits this proposed rule change in response
to demand from TPHs and their customers to be able to execute the
options components of QCTs comprised of a FLEX Option in the same
manner that they are currently able to execute the options components
of QCTs comprised of non-FLEX options. Therefore, the proposed rule
change will provide TPHs whose hedging strategies involve FLEX Options
with the same functionality currently available to TPHs whose hedging
strategies involve non-FLEX Options. The Exchange believes this will
provide investors with additional flexibility regarding execution of
their hedging strategies related to stock positions, which flexibility
ultimately benefits investors.
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\29\ See Securities Exchange Act Release No. 57620 (April 4,
2008), 73 FR 19271 (April 9, 2008) (``QCT Release''); and see QCC
Approval Order.
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Moreover, the Commission has stated that, while it believes that
order exposure is generally beneficial to options markets, it
recognizes that contingent trades can be useful trading tools for
investors and other market participants, particularly those who trade
the securities of issuers involved in mergers, different classes of
shares of the same issuers, convertible securities, and equity
derivatives such as options and that those who engage in contingent
trades can benefit the market as a whole by studying the relationships
between prices of such securities and executing contingent trades when
they believe such relationships are out of line with what they believe
to be fair value.\30\
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\30\ See QCC Approval Order.
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The requirement that a non-FLEX QCC must execute at a price at or
between the NBBO merely incorporates an execution requirement
applicable to all option order types, as all options must execute at
price at or better than the NBBO in accordance with linkage rules.\31\
Therefore, this execution requirement is not a heightened execution
requirement for an unexposed option order. The additional requirement
that a QCC order not execute at the same price as a Priority Customer
incorporates the general principle of customer protection in the
options markets.\32\ If the market model for a class does not include
customer priority, this is a heightened execution requirement for
execution of an unexposed order.\33\ Even without this additional
protection, the Exchange believes the proposed FLEX QCC order will
protection investors, as it will provide users of FLEX options with the
same functionality as user of non-FLEX options. Additionally, primarily
broker-dealers and institutional investors engage in FLEX trading.
Therefore, there are minimal retail customer orders
[[Page 51534]]
submitted into the FLEX market that would require additional
protection. As discussed above, the Exchange believes the benefits of
exposure on an order on the Exchange are outweighed by the benefits
offered by immediate execution of these contingent order types. The
Exchange does not believe market participants that engage in hedging
strategies involving FLEX Options should not have access to the same
functionality as market participants with hedging strategies involving
non-FLEX options.
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\31\ See Rule 5.66. In other words, if the definition of a QCC
order did not include the provision that it must execute at a price
at or better than the NBBO, QCC orders would still be required to
execute at a price at or better than the NBBO. The Exchange believes
inclusion of this explicit requirement for QCC orders was intended
to highlight the difference between execution of the options
component and the stock component, which may execute at any price,
but was not a unique price requirement necessary for execution of an
unexposed order. Every order type on the Exchange approved for non-
FLEX trading and FLEX trading has this same distinction.
\32\ If there was not a customer order resting at the top of the
book, then the second pricing requirement for QCC orders is simply
ignored. As there is no book in the FLEX market, the proposed FLEX
QCC order is equivalent to a non-FLEX QCC order submitted when there
is no customer order resting at the top of the book.
\33\ The Exchange has enabled customer priority for all equity
option classes that trade on the Exchange (and thus for all classes
in which TPHs may submit QCC orders). Therefore, all QCC orders
submitted on the Exchange are subject to the same execution pricing
requirements as non-QCC orders.
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The Exchange does not believe the propose rule change raises price
protection concerns that market participants may submit FLEX QCC orders
for a FLEX series with slightly different terms than a non-FLEX series
in order to get better pricing. Such risk, if any, exists today with
respect to all FLEX trading. The Exchange again points out that the
linkage rules and customer priority are currently not applicable to any
orders submitted to FLEX, wherein there is no order book. The Exchange
has observed no trends of TPHs submitting FLEX orders in order to avoid
trading in the non-FLEX market. The Exchange believes the risk (if any)
of a market participant trading a FLEX Option rather than a non-FLEX
Option with slightly different terms to use the FLEX market as a
substitute for the non-FLEX market and achieve such a result is
minimal. This possibility exists today with respect to all options the
Exchange lists for FLEX and non-FLEX trading. The Exchange has not
observed market participants attempting to trade in the FLEX market
rather than the non-FLEX market for this purpose in classes in which
this is possible today.
The Exchange believes attempting to execute an order in the FLEX
market as a substitute for the non-FLEX market would minimize execution
opportunities for that order. Such trading would be inefficient for
market participants and could introduce price and execution risk to
market participants' trading strategies given the reduced liquidity,
participation, and price discovery in the FLEX market compared to the
non-FLEX market.\34\ Additionally, series with different terms have
different prices and serve different investment purposes, so trading a
``similar'' FLEX series may not achieve the same investment objective
as the non-FLEX series a TPH initially sought to trade. The Exchange
notes if a FLEX QCC orders execute at a price through the book of the
``similar'' non-FLEX series, while that would be a better price for one
transaction participant, it would be a worse price for the participant
on the opposite side, and thus it may be more difficult for the TPH to
find sufficient contra party interest. For example, suppose the market
for Aug ABC 800 call with a multiplier of 100 is 10.20--11.00. If a
market participant sought interest from counterparties to execute a
FLEX QCC Order to buy an Aug ABC 795 call with at 10.00, it is unlikely
another market participant would sell at that price if they were
looking to sell the Aug ABC 800 call, given that participant could sell
the ``similar'' non-FLEX Option series at 10.20, which would be a
better price for that seller. Given the likely difficulties (such as
reduced liquidity and potentially longer timeframe to receive
execution) of trading in the FLEX market as a substitute for trading an
economically equivalent option in the non-FLEX market (such as to
obtain a better execution price), the Exchange believes the risk of
this occurring is de minimis. The Exchange believes that any such risk
is even lower for FLEX QCC orders given the additional requirements
that apply to FLEX QCC orders, even without the heightened execution
price requirement that a QCC order cannot execute at the same price as
a Priority Customer. The benefits of QCC orders apply to FLEX options
in the same manner as they do for non-FLEX options, which benefits the
Exchange believes significantly outweigh any price protection risk that
may exist in the FLEX market.
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\34\ See Sections VII and X of the ODD regarding risks
associated with FLEX Options.
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Ultimately, as noted above, QCC Orders in FLEX Options will execute
in a substantially similar manner as QCC Orders in non-FLEX Options. In
addition to this, the Exchange notes that QCC functionality is a widely
adopted industry order type wherein multiple other options exchanges
currently have QCC functionality in place.\35\
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\35\ See e.g. Nasdaq Phlx Rules Options 3, Section 12
(electronic QCC orders), and Options 8, Section 32(e) (open outcry
QCC orders); Nasdaq ISE Options 3, Section 12; BOX Options Rule
7110(c)(6); MIAX Options Rule 516(j); and NYSE Arca Options Rule
6.90-O.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because QCC functionality is
already available for non-FLEX Options. The Exchange is simply
proposing to make QCC Orders available for additional classes (FLEX
Option classes). The Exchange notes that the proposed order type will
be available to all Users on a voluntary basis, and Users are not
required to use QCC Orders when executing QCTs. Users may continue to
execute the options component of QCTs that are comprised of FLEX
Options in the same manner as they do today. The proposed rule change
will provide FLEX Traders with the same functionality that is currently
available to non-FLEX Traders with respect to execution of option
components of QCTs. The Exchange believes all TPHs should have access
to this functionality so they can all execute option components of QCTs
in the same manner, regardless of whether they choose to hedge the
stock portions of QCTs with FLEX or non-FLEX options.
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 because the
proposed rule change is merely making functionality currently available
on the Exchange to additional option classes. As noted above, QCC Order
functionality is currently available at other options exchanges, which
may determine make QCC functionality available to additional option
classes as well, including flexible options. To the extent the proposed
rule change makes the Exchange a more attractive trading venue for
market participants on other exchanges, those market participants may
elect to become Exchange market participants.
Overall, the Exchange believes the proposed rule change is
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure, among other things, the economically
efficient execution of securities transactions.
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
[[Page 51535]]
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-2020-075 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-2020-075. 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-2020-075 and should be submitted on
or before September 10, 2020.
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\36\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18200 Filed 8-19-20; 8:45 am]
BILLING CODE 8011-01-P
