Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, To Amend Its Automated Price Improvement Auction Rules in Connection With Agency Order Size Requirements, 53029-53034 [2020-18828]
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Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / Notices
53029
TURKEY POINT NUCLEAR GENERATING UNIT NOS. 3 AND 4—DOCKET NOS. 50–250 AND 50–251—Continued
Document title
ADAMS accession No.
Turkey Point Nuclear Plant, Units 3 and 4—Approval of Exemption from Certain Requirements of 10 CFR [p]art
26, ‘‘Fitness For Duty Programs’’ (EPID L–2020–LLE–0068 [COVID–19]), dated July 30, 2020.
Dated: August 21, 2020.
For the Nuclear Regulatory Commission.
James G. Danna,
Chief, Plant Licensing Branch I, Division of
Operating Reactor Licensing, Office of
Nuclear Reactor Regulation.
[FR Doc. 2020–18815 Filed 8–26–20; 8:45 am]
BILLING CODE 7590–01–P
POSTAL REGULATORY COMMISSION
[Docket Nos. MC2020–224 and CP2020–254]
New Postal Products
Postal Regulatory Commission.
Notice.
AGENCY:
ACTION:
The Commission is noticing a
recent Postal Service filing for the
Commission’s consideration concerning
a negotiated service agreement. This
notice informs the public of the filing,
invites public comment, and takes other
administrative steps.
DATES: Comments are due: August 31,
2020.
SUMMARY:
Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Those who cannot submit
comments electronically should contact
the person identified in the FOR FURTHER
INFORMATION CONTACT section by
telephone for advice on filing
alternatives.
ADDRESSES:
FOR FURTHER INFORMATION CONTACT:
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Docketed Proceeding(s)
I. Introduction
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The Commission gives notice that the
Postal Service filed request(s) for the
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Commission to consider matters related
to negotiated service agreement(s). The
request(s) may propose the addition or
removal of a negotiated service
agreement from the market dominant or
the competitive product list, or the
modification of an existing product
currently appearing on the market
dominant or the competitive product
list.
Section II identifies the docket
number(s) associated with each Postal
Service request, the title of each Postal
Service request, the request’s acceptance
date, and the authority cited by the
Postal Service for each request. For each
request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
establishes comment deadline(s)
pertaining to each request.
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s website (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3011.301.1
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
requirements include 39 U.S.C. 3622, 39
U.S.C. 3642, 39 CFR part 3030, and 39
CFR part 3040, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
1 See Docket No. RM2018–3, Order Adopting
Final Rules Relating to Non-Public Information,
June 27, 2018, Attachment A at 19–22 (Order No.
4679).
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ML20204A765.
39 U.S.C. 3642, 39 CFR part 3035, and
39 CFR part 3040, subpart B. Comment
deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: MC2020–224 and
CP2020–254; Filing Title: USPS Request
to Add Priority Mail & First-Class
Package Service Contract 160 to
Competitive Product List and Notice of
Filing Materials Under Seal; Filing
Acceptance Date: August 21, 2020;
Filing Authority: 39 U.S.C. 3642, 39 CFR
3040.130 through 3040.135, and 39 CFR
3035.105; Public Representative:
Christopher C. Mohr; Comments Due:
August 31, 2020.
This Notice will be published in the
Federal Register.
Erica A. Barker,
Secretary.
[FR Doc. 2020–18870 Filed 8–26–20; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89636; File No. SR–CBOE–
2020–051]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of
Amendment No. 1 and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change, as Modified by
Amendment No. 1, To Amend Its
Automated Price Improvement Auction
Rules in Connection With Agency
Order Size Requirements
August 21, 2020.
I. Introduction
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Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / Notices
On June 11, 2020, Cboe Exchange, Inc.
(‘‘Exchange’’ or ‘‘Cboe’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change
permitting the Exchange to impose a
maximum size requirement for an
agency order submitted into the
Automated Price Improvement
Mechanism (‘‘AIM’’ or ‘‘AIM Auction’’)
and the Complex Automated Price
Improvement Mechanism (‘‘C–AIM’’ or
‘‘C–AIM Auction’’) in S&P 500® Index
Options (‘‘SPX’’). The proposed rule
change was published for comment in
the Federal Register on June 18, 2020.3
On July 23, 2020, the Exchange
submitted Amendment No. 1 to the
proposed rule change, which replaced
and superseded the proposed rule
change in its entirety.4 On July 27, 2020,
pursuant to Section 19(b)(2) of the Act,5
the Commission designated a longer
period within which to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.6
The Commission is publishing this
notice and order to solicit comment on
the proposed rule change, as modified
by Amendment No. 1, from interested
persons and to institute proceedings
pursuant to Section 19(b)(2)(B) of the
Act 7 to determine whether to approve
or disapprove the proposed rule change,
as modified by Amendment No. 1.
II. Exchange’s Description of the
Proposed Rule Change, as Modified by
Amendment No. 1
The Exchange proposes to amend
Rule 5.37(a)(3) and Rule 5.38(a)(8) to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 89058
(June 12, 2020), 85 FR 36918. Comments received
on the proposed rule change are available on the
Commission’s website at: https://www.sec.gov/
comments/sr-cboe-2020-051/srcboe2020051.htm.
4 In Amendment No. 1, the Exchange: (1)
Amended its proposal to modify the proposed
maximum size requirement for AIM and C–AIM
agency orders in SPX to ten contracts rather than
a size determined by the Exchange of up to 100
contracts, specify that this size requirement would
apply to all agency orders in SPX, and make related
conforming changes to its proposed rule text; and
(2) provided additional data, justification, and
support for its modified proposal. The full text of
Amendment No. 1 is available on the Commission’s
website at: https://www.sec.gov/comments/sr-cboe2020-051/srcboe2020051-7470738-221292.pdf.
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 89399,
85 FR 46202 (July 31, 2020). The Commission
designated September 16, 2020 as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
7 15 U.S.C. 78s(b)(2)(B).
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adopt a maximum size of 10 contracts
for Agency Orders in SPX submitted
through the Automated Price
Improvement Mechanism (‘‘AIM’’ or
‘‘AIM Auction’’) and the Complex
Automated Price Improvement
Mechanism (‘‘C–AIM’’ or ‘‘C–AIM
Auction’’).8
Currently, Rules 5.37(a)(3) and
5.38(a)(3), which govern the size
requirements for AIM and C–AIM
Agency and Initiating Orders, provide
that there is no minimum size for orders
submitted into AIM and C–AIM
Auctions, respectively, and that the
Initiating Order must be for the same
size as the Agency Order. As such, an
Agency Order of any size may currently
be submitted in an AIM or C–AIM
Auction.
The Exchange now proposes to amend
Rule 5.37(a)(3) to provide the maximum
size for all Agency Orders in SPX is 10
contracts, and by amending Rule
5.38(a)(3) to provide that the maximum
size for the smallest leg of all Agency
Orders in SPX is 10 contracts.9 The
proposed maximum size limit for SPX
Agency Orders submitted in an AIM or
C–AIM Auction is designed to address
the specific trading characteristics,
market model, and investor basis of
SPX. The Exchange notes that the
maximum size requirement for Agency
Orders in SPX would apply to all
Agency Orders in the entire SPX class
(including SPX Weeklys (‘‘SPXW’’)).
In particular, SPX has a different and
more complicated market model,
involves taking on greater risk, has a
significantly higher notional value (e.g.,
they are ten times the notional size of
SPY options), tends to trade in much
larger size, tends to have a larger
percentage of volume executed in open
outcry than other classes, and tends to
execute increasingly more complex
strategies (e.g., SPX Combo orders) than
in other options classes. The Exchange
understands these factors may limit
retail customer participation in SPX to
simpler strategies and smaller-sized
orders. While AIM and C–AIM have
historically been activated for all other
options classes, the unique and more
complex characteristics of SPX have
contributed to the Exchange’s historical
determination to not activate AIM and
C–AIM in SPX when the floor is open
8 Amendment No. 1 adopts a fixed maximum size
requirement of 10 contracts for SPX Agency Orders
submitted to AIM and C–AIM and amends the
Initial Rule Filing to reflect this fixed maximum.
9 Application of the maximum size to the smallest
leg of complex orders is consistent with the
application of a size requirement for the Exchange’s
Complex Solicitation Auction Mechanism, which is
a similar price improvement auction mechanism on
the Exchange. See Rule 5.40(a)(3).
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so to encourage liquidity on the trading
floor as well as in the electronic book to
accommodate these large and complex
trades.10 Therefore, the Exchange
believes the application of an Agency
Order size ceiling may provide more
price improvement opportunities in
SPX geared towards retail customers
when AIM and C–AIM are activated in
SPX.11 The Exchange believes this may
incentivize increased retail customer
auction participation in SPX and
provide retail customers with execution
and price improvement opportunities in
SPX while incentivizing continued
liquidity in the electronic book and on
the trading floor for larger and more
complex orders.
The Exchange has observed that
smaller size order flow tends to attract
liquidity provider responses, as such
orders are generally easier to hedge than
larger orders, which may encourage
market participants to compete to
provide price improvement in an
electronic competitive auction process.
This, in turn, may contribute to a
deeper, more liquid auction process
with additional price improvement
opportunities for market participants
that submit smaller size orders,
particularly retail customers.
The Exchange notes that smaller
orders in SPX are not commonly
executed on the floor, and, without an
opportunity to execute in AIM and C–
AIM, smaller orders are primarily
submitted into to the Book and trade at
the market, whereas, with AIM and C–
AIM, smaller orders may receive price
improvement.12 For example, the
Exchange observed that during April
and May 2020, while the trading floor
was inoperable and AIM and C–AIM
were activated for SPX, the average
daily statistics for Agency Orders
10 The Exchange notes that, due to the Covid-19
pandemic, the trading floor was inoperable from
March 16, 2020 through June 12, 2020 and, as a
result, AIM and C–AIM were activated for SPX for
the duration of the floor closure.
11 Amendment No. 1 adds additional clarification
regarding the differences between SPX and other
classes and the role of such differences in the
Exchange’s historical determination not to activate
AIM and C–AIM for SPX.
12 Amendment No. 1 provides additional detail
regarding the typical order flow of smaller, retailsized orders when the Exchange is operating in its
historically normal environment (i.e., when the
trading floor is operable and AIM/C–AIM is not
activated in SPX). The Exchange notes, too, that
Rule 5.37(b)(1)(A) guarantees price improvement for
smaller order submitted to AIM. It provides that if
a buy (sell) Agency Order is for less than 50
standard option contracts (or 500 mini-option
contracts), the stop price of the Initiating Order
must be at least one minimum increment better
than the then-current NBO (NBB) or the Agency
Order’s limit price (if the order is a limit order),
whichever is better.
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Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / Notices
containing various quantities was as
follows:
AIM
Order size category
Number of
Agency orders
1 to 10 ..............................................................................................................
11 to 50 ............................................................................................................
51 to 100 ..........................................................................................................
101 to 250 ........................................................................................................
251 to 500 13 ....................................................................................................
The Exchange then observed that
since the re-opening of the trading floor
on June 15, 2020,14 the average daily
C–AIM
Number of
contracts
1,668
103
19
5
3
4,229
2,759
1,654
977
1,335
2,123
189
30
21
12
Number of
contracts
17,231
17,226
12,696
16,373
19,144
statistics for customer orders for various
quantities has been as follows:
Simple orders on floor
Order size category
Number of
customer
orders
1 to 10 ..............................................................................................................
11 to 50 ............................................................................................................
51 to 100 ..........................................................................................................
101 to 250 ........................................................................................................
251 to 500 15 ....................................................................................................
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Number of
Agency orders
Complex orders on floor
Number of
contracts
11
11
8
9
6
50
376
688
1,487
2,240
Number of
customer
orders
12
41
44
30
19
Number of
contracts
1,481
11,894
16,305
20,635
22,489
The Exchange has observed that
brokers generally cross customer orders
on the trading floor, which is currently
the only way to cross orders on the
Exchange. Overall, as demonstrated in
the tables above, the Exchange has
observed that, when AIM and C–AIM
were activated for SPX, there was a
significant number of SPX orders (and
resulting number of contracts)
containing quantities of one to ten
contracts submitted through the
electronic auctions over any other order
size category. However, once the trading
floor was again operable in June 2020,
and AIM and C–AIM consequently
switched off for SPX, the volume of
customer orders in SPX for one to ten
contracts submitted to the trading floor
decreased significantly (approximately a
99% decrease in number of simple
orders, total number of simple order
contracts and number of complex
orders, and approximately a 91%
decrease in total number of complex
order contracts) from the volume that
had previously been submitted to the
electronic auctions, whereas, larger
order sizes experienced a notable
increase in volume once the trading
floor was again operable. Thus, the data
demonstrates that when AIM is not
available, brokers do not take advantage
of the ability to cross smaller-sized
orders on the trading floor, but when
AIM is available, brokers use the
electronic auction to cross these
smaller-sized orders.
In addition to this, the Exchange
observed that, in a sample of SPX orders
submitted into simple AIM during a
week of trading in April 2020,16 orders
containing quantities from one to ten
contracts submitted through AIM
received an average price improvement
of approximately $0.34 over their limit
prices, whereas orders containing
quantities from 11 to 50 contracts
received an average price improvement
of approximately $0.22, and orders for
51 to 250 contracts received an average
price improvement of $0.08 and orders
containing quantities of between 251
and 500 received an average of $0.15.
That is approximately a 55% larger
average price improvement that orders
for one to ten contracts received than
orders for 11 to 50 contracts, a 325%
larger average price improvement than
orders for 51 to 250 contracts and
approximately 127% larger average
price improvement than orders for 251
to 500 contracts. While the Exchange
did not observe such a significant
increase in price improvement for
complex orders from one to ten
contracts in the sample of SPX orders
submitted to C–AIM, it notes that
greater price improvement generally did
occur for smaller sized complex orders
as compared to larger sized orders. The
Exchange notes, however, that it is
simultaneously submitting a rule filing
to amend the manner in which price
improvement occurs for certain complex
SPX orders submitted to C–AIM so that
price improvement received through the
C–AIM Auction is better aligned with
pricing that typically occurs on the
trading floor. The Exchange believes
that this, paired with the proposed
maximum quantity, will greatly
incentivize more retail-sized order flow
through C–AIM. Overall, as this data
demonstrates, price improvement on
smaller orders (particularly for one to
ten contracts) in SPX, a class which
generally exhibits more complicated
trading characteristics and complex
market factors, is generally more
beneficial than price improvement on
larger orders submitted through AIM
and C–AIM, and customers are more
inclined to submit smaller orders (1–10
contracts) in SPX into the electronic
auctions when activated for SPX, rather
13 The Exchange also notes that orders for over
500 contracts did not exceed a daily average of 2
orders (for up to an average daily total of 3,425
contracts) in AIM nor over a daily average of 4
orders (for up to an average daily total of 50,971
contracts) in C–AIM.
14 Through July 16, 2020, when this data was
compiled.
15 The Exchange also notes that orders for over
500 contracts have had up to a daily average of 4
orders (for up to an average daily total of 9,120
contracts) in AIM and up to 10 orders (for up to an
average daily total of 60,091 contracts) in C–AIM.
16 Amendment No. 1 amends the data sample
presented by expanding the time frame in which
the sample was taken for average price
improvement over the limit price of Agency Orders
submitted into AIM and C–AIM from through.
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than to the trading floor, when operable.
As a result, if the Exchange is able to
implement a maximum size requirement
of up to 10 contracts for SPX as
proposed,17 it may determine to activate
AIM and C–AIM when the trading floor
is open. The Exchange believes this
could provide incentive for the
submission of smaller size SPX orders to
the Exchange and into the electronic
auction. As a result, the Exchange
believes the proposed rule change will
provide retail customers with additional
price improvement opportunities
overall when the trading floor is open
while preserving liquidity available in
the market, particularly on the trading
floor, for larger and more complicated
orders.
The Exchange notes that the trading
floor is generally better suited for the
larger complex orders typical in SPX.
Therefore, while permitting retail-sized
orders in SPX to execute in AIM and C–
AIM will provide additional price
improvement opportunities for smaller
orders, it is also designed to maintain
SPX liquidity, and incentive MarketMaker activity in SPX, on the trading
floor and in the electronic book when
AIM and C–AIM is activated for SPX,
creating a liquid hybrid environment for
orders in this class. Indeed, the
Exchange has observed that open outcry
trading is the generally preferred
execution mechanism for orders in such
a complex and nuanced class as SPX,
which has been indicated, among other
observations, by a significant decrease
in SPX executions while the Exchange
operated in an all-electronic
environment. Data from February 3,
2020 through March 13, 2020 (the last
trading day prior to the temporary close
of the trading floor) shows that a total
of 2,717,383 contracts for simple orders
in SPX and 27,242,625 contracts for
complex orders in SPX were executed in
open outcry auctions, whereas data for
approximately the same timeframe, from
March 16, 2020 through April 21, 2020,
shows that 534,790 contracts were
executed in AIM in SPX and 13,059,041
contracts were executed in C–AIM in
SPX. The Exchange notes, too, that the
Exchange’s trading floor may be better
suited for crosses in SPX with more
complex orders, complicated strategies
and larger size. Such orders are more
commonly executed on the trading floor
as Trading Permit Holders (‘‘TPHs’’) are
17 The proposed rule change to designate a
maximum size of 10 contracts is based on this data,
which demonstrates that orders with size up to 10
contracts generally experience the most volume
when AIM and C–AIM are activated for SPX and
generally receive the most beneficial price
improvement (and are considered to be ‘‘retail’’
sized orders).
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able to negotiate and fine-tune the terms
of a trade on the trading floor and are
permitted to submit complex orders
with a ratio less than one-to-three (.333)
or greater than three-to-one (3.00) for
execution on the trading floor.18 TPHs
are not currently permitted to submit
complex orders with such ratios for
electronic processing. In addition to
this, the trading crowd in open outcry
is able to provide markets that are more
tailored to the complexity and size of
orders typically submitted in SPX.
Greater execution and price
improvement opportunities for SPX
orders may result from the markets
given by the trading crowd that better
define the nuanced complexity and size
of such orders than if the same orders
were submitted via AIM or C–AIM
–which, instead, may provide greater
price improvement opportunities for
simpler and smaller orders (as
demonstrated in the data sample
explained above).19
Finally, pursuant to current Rule
5.37.02 and Rule 5.38.02, it is deemed
conduct inconsistent with just and
equitable principles of trade and a
violation of Exchange Rule 8.1 to engage
in a pattern of conduct where the
Initiating Member breaks up an Agency
Order into separate orders for the
purpose of gaining a higher allocation
percentage than the Initiating TPH
would have otherwise received in
accordance with the allocation
procedures contained in the AIM and
C–AIM Rules, respectively. In light of
the proposed rule change, the Exchange
also proposes to amend Rules 5.37.02
and 5.38.02 to make it clear that
Initiating TPHs also may not break up
an Agency Order into separate orders for
the purpose of circumventing the
maximum quantity requirement
pursuant to subparagraph(s) (a)(3). The
Exchange notes that its surveillance
program will monitor for such
violations in the same manner in which
it currently monitors for allocationrelated break up violations.
III. Summary of Comment Letters
Received
To date the Commission has received
six comment letters on the proposal.20
18 See
Rule 5.83(b).
No. 1 adds additional detail and
bolsters the explanation regarding the reasons why
the trading floor is better suited for the execution
of the generally larger, more complicated orders in
SPX, including providing additional data regarding
SPX order flow to the floor when operable and to
AIM/C–AIM when the floor was not operable.
20 See letters to Vanessa Countryman, Secretary,
Commission, from Michael Golding, Head of
Trading, Optiver US LLC, and Rutger Brinkhuis,
Head of Trading, AMS Derivatives B.V., dated July
8, 2020 (‘‘Optiver Letter’’); Richard J. McDonald,
19 Amendment
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The Exchange also submitted a letter
responding to the comments.21 Two
commenters supported imposing a
maximum size limitation on SPX agency
orders in AIM and C–AIM auctions,
agreeing with Cboe’s assertions that it
would incentivize increased retail
customer participation in SPX auctions
and provide increased execution and
price improvement opportunities for
retail customers in SPX.22 One of these
commenters further agreed with Cboe’s
assertions that allowing Cboe to
determine a maximum size for SPX
orders in AIM and C–AIM auctions
would enhance execution quality for
smaller orders while maintaining
liquidity on the trading floor for larger
complex orders.23 The other commenter
claimed its clients recognized
significant price improvement
opportunities in AIM auctions of SPX
orders from 1–100 contracts, but saw
mixed results on orders greater than 100
contracts.24
Three commenters opposed Cboe’s
proposal.25 One of these commenters
opposed activating AIM and C–AIM
auctions for orders in SPX generally,
regardless of size,26 while the other two
commenters opposed Cboe’s proposal to
impose any degree of maximum size
limitation on these orders, arguing
instead that the auctions should be
made available in SPX for agency orders
of all sizes.27 One of these commenters
argued that if retail order flow in SPX
is in fact limited to smaller-sized orders,
there is no need to impose a size
Susquehanna International Group, LLP, dated July
8, 2020 (‘‘SIG Letter’’); Ellen Greene, Managing
Director, Equities & Options Market Structure, The
Securities Industry and Financial Markets
Association, dated July 9, 2020 (‘‘SIFMA Letter’’);
John S. Markle, Interim General Counsel, TD
Ameritrade, Inc., dated July 9, 2020 (‘‘TD
Ameritrade Letter’’); Stephen John Berger,
Managing Director and Global Head of Government
& Regulatory Policy, Citadel Securities, dated July
9, 2020 (‘‘Citadel Letter I’’); and Stephen John
Berger, Managing Director and Global Head of
Government & Regulatory Policy, Citadel Securities,
dated August 12, 2020 (‘‘Citadel Letter II’’).
21 See letter to Vanessa Countryman, Secretary,
Commission, from Rebecca Tenuta, Counsel, Cboe
Global Markets, dated July 31, 2020 (‘‘Cboe
Response Letter’’).
22 See SIFMA Letter, supra note 20, at 2; TD
Ameritrade Letter, supra note 20, at 1. The SIFMA
Letter and TD Ameritrade Letter commented on
Cboe’s original proposal, which would have given
Cboe the ability to determine a maximum size of
up to 100 contracts, prior to Amendment No. 1,
which proposed a set maximum size of ten
contracts.
23 See SIFMA Letter, supra note 20, at 2.
24 See TD Ameritrade Letter, supra note 20, at 1.
25 See Optiver Letter, supra note 20, at 1–2; SIG
Letter, supra note 20, at 3–4; Citadel Letter I, supra
note 20, at 1; Citadel Letter II, supra note 20, at 1.
26 See Optiver Letter, supra note 20, at 1–2.
27 See SIG Letter, supra note 20, at 3–4; Citadel
Letter I, supra note 20, at 1; Citadel Letter II, supra
note 20, at 1.
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limitation in order to provide increased
price improvement opportunities in the
AIM and C–AIM mechanisms for these
orders.28 This commenter further argued
that, if larger-sized orders are better
suited for the trading floor, as Cboe
suggests, such orders would naturally
gravitate towards the floor and obviate
the need for any size limitations in the
electronic mechanisms.29 Two
commenters argued that market
participants should have the choice of
whether to direct their orders to the
trading floor or an electronic auction,
with one suggesting that brokers would
have best execution obligations to
monitor price improvement and route
their orders in the most favorable
manner.30 Three commenters suggested
that Cboe’s data analysis may be
insufficient to support its proposal.31
Two of these commenters noted that the
data does not measure a time period
during which both electronic auctions
and floor-based liquidity are available.32
One of these commenters and a separate
commenter noted that Cboe’s own data
demonstrated that price improvement
opportunities were observed for orders
of all sizes in the electronic auction
mechanisms during the trading floor
closure.33 One commenter argued that
allowing SPX market makers to provide
electronic price improvement for SPX
orders of all sizes would not discourage
market makers from also providing price
improvement for open outcry orders in
SPX.34
In its response to comments, Cboe
noted that its current rules already
allow it to use AIM and C–AIM for all
options classes, and therefore it may
activate AIM and C–AIM in SPX
without a proposed rule change.35 Cboe
further stated that the proposed
maximum size for SPX orders in AIM
and C–AIM is necessary in order to
provide limited electronic auction
functionality that some customers found
beneficial when available, while
28 See
SIG Letter, supra note 20, at 3.
id.
30 See id. at 3; Citadel Letter I, supra note 20, at
29 See
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1.
31 See SIG Letter, supra note 20, at 3; Optiver
Letter, supra note 20, at 2; Citadel Letter I, supra
note 20, at 1.
32 See SIG Letter, supra note 20, at 3; Optiver
Letter, supra note 20, at 2. One of these commenters
further questioned the validity of the data given the
extreme volatility observed during the time period
of the data. See Optiver Letter, supra note 20, at 2.
33 See SIG Letter, supra note 20, at 3 & n.9;
Citadel Letter I, supra note 20, at 1. As noted above,
however, a separate commenter suggested price
improvement opportunities were mixed for SPX
orders greater than 100 contracts. See TD
Ameritrade Letter, supra note 20, at 1.
34 See SIG Letter, supra note 20, at 4.
35 See Cboe Response Letter, supra note 21, at 2
n.9.
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mitigating any negative impact on the
larger SPX market that Cboe claimed
may result from the auctions, including
decreased quoting liquidity on the book,
wider quotes, and reduced participation
by options market makers.36 In addition,
Cboe reiterated its argument that the
unique characteristics of SPX options
warrant imposing a maximum size to
SPX orders submitted through the AIM
and C–AIM auctions.37 Cboe also argued
that the proposal would not unfairly
discriminate against any market
participants, as it imposes no
restrictions on any market participant’s
ability to utilize the AIM and C–AIM
auctions for SPX options (i.e., any
market participant would retain the
ability to submit an SPX agency order of
ten contracts or fewer in an AIM or C–
AIM auction, respond to an AIM or C–
AIM auction, and, to the extent
permitted by Exchange Rules, be
solicited for the initiating order).38
Finally, Cboe stated that it has provided
sufficient additional data in the
amended proposal to support the
proposed maximum size of ten
contracts, and argued that its data
measuring price improvement for AIM
and C–AIM SPX orders of various sizes
is sufficiently representative because all
order sizes reflected in the data sample
were subject to the same market
conditions.39 Cboe also stated that it is
unable to provide comparable price
improvement statistics for orders
executed on the trading floor due to the
nature of their execution as compared to
electronically executed orders.40
Three commenters recommended
that, to the extent any maximum size is
established for SPX orders in AIM and
C–AIM auctions, the level of the
maximum size should be clearly stated
in the proposed rule, with any future
modifications subject to a separate
proposed rule change.41 Two of these
36 See
id. at 2–3. Cboe also argued in its response
to comments that the trading floor may be better for
crosses in SPX, based on Cboe’s observation that the
number of larger and more complicated orders that
are crossed on the Exchange was significantly lower
when the trading floor was closed than when it was
open. See id. at 3 & n.13 (finding that, from January
2, 2020 through March 13, 2020, complex orders for
SPX options with more than six legs represented
approximately 5.3% of the total SPX complex order
average daily volume, whereas from March 16, 2020
through April 30, 2020 while the floor was closed
and C–AIM was activated in SPX, complex orders
for SPX options with more than six legs represented
only approximately 2.2% of the total SPX complex
order average daily volume).
37 See id. at 3–4.
38 See id. at 5.
39 See id. at 6.
40 See id.
41 See TD Ameritrade Letter, supra note 20, at 2;
Citadel Letter I, supra note 20, at 2; Optiver Letter,
supra note 20, at 2. The TD Ameritrade Letter and
Citadel Letter I, commenting on Cboe’s initial
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
53033
commenters suggested that, when
proposing any modification to the
maximum size threshold, Cboe should
provide sufficient supporting
information, including, for example,
data showing price improvement and
internalization statistics, and any
information necessary to clearly
demonstrate how the threshold amount
accurately captures retail investor
activity in SPX and does not exclude a
significant amount of retail activity.42 In
response to these comments, as
described above, Cboe amended its
initial proposal to establish a set
maximum size of ten contracts for AIM
and C–AIM agency orders in SPX and
provided additional data and analysis to
support this proposed threshold.43 In
response to the amended proposal, one
commenter argued that the proposed ten
contract maximum size is without a
rational basis and will result in unfair
discrimination that would deny
significant price improvement to many
retail investors.44 This commenter
claimed that retail investors commonly
submit orders of more than ten contracts
and provided data showing that more
than fifty percent of the AIM-eligible
retail simple marketable SPX orders that
it routed to Cboe from mid-March 2020
to mid-May 2020 were larger than ten
contracts.45 This commenter also argues
that its data demonstrates that retail
orders of up to 100 contracts received
significant price improvement in the
AIM auction and requests that Cboe
either eliminate the proposed maximum
size threshold or, at a minimum, set the
threshold at 100 contracts.46
IV. Proceedings To Determine Whether
To Approve or Disapprove SR–CBOE–
2020–051, as Modified by Amendment
No. 1, and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 47 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues raised by the
proposed rule change. Institution of
proceedings does not indicate that the
proposal, both suggested that Cboe commit to
allowing orders of up to 100 contracts to participate
in the electronic auctions. See TD Ameritrade
Letter, supra note 20, at 2; Citadel Letter I, supra
note 20, at 2.
42 See Citadel Letter I, supra note 20, at 2; Optiver
Letter, supra note 20, at 2.
43 See Cboe Response Letter, supra note 21, at 2.
44 See Citadel Letter II, supra note 20, at 1.
45 See id. at 1–2.
46 See id. at 2.
47 15 U.S.C. 78s(b)(2)(B).
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Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as stated below,
the Commission seeks and encourages
interested persons to provide additional
comment on the proposed rule change,
as modified by Amendment No. 1, to
inform the Commission’s analysis of
whether to approve or disapprove the
proposed rule change.
Pursuant to Section 19(b)(2)(B) of the
Act,48 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
change’s consistency with Section
6(b)(5) of the Act, which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulate 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 to
protect investors and the public interest,
and not be designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers; 49 and
Section 6(b)(8) of the Act, which
requires that the rules of the Exchange
do not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.50
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the [Act] and the rules
and regulations issued thereunder . . .
is on the self-regulatory organization
that proposed the rule change.’’ 51 The
description of a proposed rule change,
its purpose and operation, its effect, and
a legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to
support an affirmative Commission
finding,52 and any failure of a selfregulatory organization to provide this
information may result in the
Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
48 15
U.S.C. 78s(b)(2)(B).
U.S.C. 78f(b)(5).
50 15 U.S.C. 89f(b)(8).
51 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
52 See id.
49 15
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with the Act and the applicable rules
and regulations.53
The Commission is instituting
proceedings to allow for additional
consideration and comment on the
issues raised herein, including as to
whether the proposal is consistent with
the Act.
V. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with Sections
6(b)(5) and 6(b)(8), or any other
provision of the Act, or the rules and
regulations thereunder. Although there
do not appear to be any issues relevant
to approval or disapproval that would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4 under the Act,54 any request
for an opportunity to make an oral
presentation.55
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by September 17, 2020.
Any person who wishes to file a rebuttal
to any other person’s submission must
file that rebuttal by October 1, 2020.
Commission 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–2020–051 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.
53 See
id.
CFR 240.19b–4.
55 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
94–29 (June 4, 1975), grants the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
54 17
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Sfmt 4703
All submissions should refer to File
Number SR–CBOE–2020–051. 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–2020–051, and
should be submitted on or before
September 17, 2020. Rebuttal comments
should be submitted by October 1, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.56
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–18828 Filed 8–26–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–803, OMB Control No.
3235–0754]
Submission for OMB Review;
Comment Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Extension:
56 17
E:\FR\FM\27AUN1.SGM
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27AUN1
]]>Agencies
[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Notices]
[Pages 53029-53034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18828]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89636; File No. SR-CBOE-2020-051]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove a Proposed Rule Change, as
Modified by Amendment No. 1, To Amend Its Automated Price Improvement
Auction Rules in Connection With Agency Order Size Requirements
August 21, 2020.
I. Introduction
[[Page 53030]]
On June 11, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change
permitting the Exchange to impose a maximum size requirement for an
agency order submitted into the Automated Price Improvement Mechanism
(``AIM'' or ``AIM Auction'') and the Complex Automated Price
Improvement Mechanism (``C-AIM'' or ``C-AIM Auction'') in S&P
500[supreg] Index Options (``SPX''). The proposed rule change was
published for comment in the Federal Register on June 18, 2020.\3\ On
July 23, 2020, the Exchange submitted Amendment No. 1 to the proposed
rule change, which replaced and superseded the proposed rule change in
its entirety.\4\ On July 27, 2020, pursuant to Section 19(b)(2) of the
Act,\5\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\6\ The Commission is publishing this notice and
order to solicit comment on the proposed rule change, as modified by
Amendment No. 1, from interested persons and to institute proceedings
pursuant to Section 19(b)(2)(B) of the Act \7\ to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 89058 (June 12,
2020), 85 FR 36918. Comments received on the proposed rule change
are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-051/srcboe2020051.htm.
\4\ In Amendment No. 1, the Exchange: (1) Amended its proposal
to modify the proposed maximum size requirement for AIM and C-AIM
agency orders in SPX to ten contracts rather than a size determined
by the Exchange of up to 100 contracts, specify that this size
requirement would apply to all agency orders in SPX, and make
related conforming changes to its proposed rule text; and (2)
provided additional data, justification, and support for its
modified proposal. The full text of Amendment No. 1 is available on
the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-051/srcboe2020051-7470738-221292.pdf.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 89399, 85 FR 46202
(July 31, 2020). The Commission designated September 16, 2020 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Exchange's Description of the Proposed Rule Change, as Modified by
Amendment No. 1
The Exchange proposes to amend Rule 5.37(a)(3) and Rule 5.38(a)(8)
to adopt a maximum size of 10 contracts for Agency Orders in SPX
submitted through the Automated Price Improvement Mechanism (``AIM'' or
``AIM Auction'') and the Complex Automated Price Improvement Mechanism
(``C-AIM'' or ``C-AIM Auction'').\8\
---------------------------------------------------------------------------
\8\ Amendment No. 1 adopts a fixed maximum size requirement of
10 contracts for SPX Agency Orders submitted to AIM and C-AIM and
amends the Initial Rule Filing to reflect this fixed maximum.
---------------------------------------------------------------------------
Currently, Rules 5.37(a)(3) and 5.38(a)(3), which govern the size
requirements for AIM and C-AIM Agency and Initiating Orders, provide
that there is no minimum size for orders submitted into AIM and C-AIM
Auctions, respectively, and that the Initiating Order must be for the
same size as the Agency Order. As such, an Agency Order of any size may
currently be submitted in an AIM or C-AIM Auction.
The Exchange now proposes to amend Rule 5.37(a)(3) to provide the
maximum size for all Agency Orders in SPX is 10 contracts, and by
amending Rule 5.38(a)(3) to provide that the maximum size for the
smallest leg of all Agency Orders in SPX is 10 contracts.\9\ The
proposed maximum size limit for SPX Agency Orders submitted in an AIM
or C-AIM Auction is designed to address the specific trading
characteristics, market model, and investor basis of SPX. The Exchange
notes that the maximum size requirement for Agency Orders in SPX would
apply to all Agency Orders in the entire SPX class (including SPX
Weeklys (``SPXW'')).
---------------------------------------------------------------------------
\9\ Application of the maximum size to the smallest leg of
complex orders is consistent with the application of a size
requirement for the Exchange's Complex Solicitation Auction
Mechanism, which is a similar price improvement auction mechanism on
the Exchange. See Rule 5.40(a)(3).
---------------------------------------------------------------------------
In particular, SPX has a different and more complicated market
model, involves taking on greater risk, has a significantly higher
notional value (e.g., they are ten times the notional size of SPY
options), tends to trade in much larger size, tends to have a larger
percentage of volume executed in open outcry than other classes, and
tends to execute increasingly more complex strategies (e.g., SPX Combo
orders) than in other options classes. The Exchange understands these
factors may limit retail customer participation in SPX to simpler
strategies and smaller-sized orders. While AIM and C-AIM have
historically been activated for all other options classes, the unique
and more complex characteristics of SPX have contributed to the
Exchange's historical determination to not activate AIM and C-AIM in
SPX when the floor is open so to encourage liquidity on the trading
floor as well as in the electronic book to accommodate these large and
complex trades.\10\ Therefore, the Exchange believes the application of
an Agency Order size ceiling may provide more price improvement
opportunities in SPX geared towards retail customers when AIM and C-AIM
are activated in SPX.\11\ The Exchange believes this may incentivize
increased retail customer auction participation in SPX and provide
retail customers with execution and price improvement opportunities in
SPX while incentivizing continued liquidity in the electronic book and
on the trading floor for larger and more complex orders.
---------------------------------------------------------------------------
\10\ The Exchange notes that, due to the Covid-19 pandemic, the
trading floor was inoperable from March 16, 2020 through June 12,
2020 and, as a result, AIM and C-AIM were activated for SPX for the
duration of the floor closure.
\11\ Amendment No. 1 adds additional clarification regarding the
differences between SPX and other classes and the role of such
differences in the Exchange's historical determination not to
activate AIM and C-AIM for SPX.
---------------------------------------------------------------------------
The Exchange has observed that smaller size order flow tends to
attract liquidity provider responses, as such orders are generally
easier to hedge than larger orders, which may encourage market
participants to compete to provide price improvement in an electronic
competitive auction process. This, in turn, may contribute to a deeper,
more liquid auction process with additional price improvement
opportunities for market participants that submit smaller size orders,
particularly retail customers.
The Exchange notes that smaller orders in SPX are not commonly
executed on the floor, and, without an opportunity to execute in AIM
and C-AIM, smaller orders are primarily submitted into to the Book and
trade at the market, whereas, with AIM and C-AIM, smaller orders may
receive price improvement.\12\ For example, the Exchange observed that
during April and May 2020, while the trading floor was inoperable and
AIM and C-AIM were activated for SPX, the average daily statistics for
Agency Orders
[[Page 53031]]
containing various quantities was as follows:
---------------------------------------------------------------------------
\12\ Amendment No. 1 provides additional detail regarding the
typical order flow of smaller, retail-sized orders when the Exchange
is operating in its historically normal environment (i.e., when the
trading floor is operable and AIM/C-AIM is not activated in SPX).
The Exchange notes, too, that Rule 5.37(b)(1)(A) guarantees price
improvement for smaller order submitted to AIM. It provides that if
a buy (sell) Agency Order is for less than 50 standard option
contracts (or 500 mini-option contracts), the stop price of the
Initiating Order must be at least one minimum increment better than
the then-current NBO (NBB) or the Agency Order's limit price (if the
order is a limit order), whichever is better.
----------------------------------------------------------------------------------------------------------------
AIM C-AIM
---------------------------------------------------------------
Order size category Number of Number of Number of Number of
Agency orders contracts Agency orders contracts
----------------------------------------------------------------------------------------------------------------
1 to 10......................................... 1,668 4,229 2,123 17,231
11 to 50........................................ 103 2,759 189 17,226
51 to 100....................................... 19 1,654 30 12,696
101 to 250...................................... 5 977 21 16,373
251 to 500 \13\................................. 3 1,335 12 19,144
----------------------------------------------------------------------------------------------------------------
The Exchange then observed that since the re-opening of the trading
floor on June 15, 2020,\14\ the average daily statistics for customer
orders for various quantities has been as follows:
---------------------------------------------------------------------------
\13\ The Exchange also notes that orders for over 500 contracts
did not exceed a daily average of 2 orders (for up to an average
daily total of 3,425 contracts) in AIM nor over a daily average of 4
orders (for up to an average daily total of 50,971 contracts) in C-
AIM.
\14\ Through July 16, 2020, when this data was compiled.
----------------------------------------------------------------------------------------------------------------
Simple orders on floor Complex orders on floor
---------------------------------------------------------------
Order size category Number of Number of
customer Number of customer Number of
orders contracts orders contracts
----------------------------------------------------------------------------------------------------------------
1 to 10......................................... 11 50 12 1,481
11 to 50........................................ 11 376 41 11,894
51 to 100....................................... 8 688 44 16,305
101 to 250...................................... 9 1,487 30 20,635
251 to 500 \15\................................. 6 2,240 19 22,489
----------------------------------------------------------------------------------------------------------------
The Exchange has observed that brokers generally cross customer
orders on the trading floor, which is currently the only way to cross
orders on the Exchange. Overall, as demonstrated in the tables above,
the Exchange has observed that, when AIM and C-AIM were activated for
SPX, there was a significant number of SPX orders (and resulting number
of contracts) containing quantities of one to ten contracts submitted
through the electronic auctions over any other order size category.
However, once the trading floor was again operable in June 2020, and
AIM and C-AIM consequently switched off for SPX, the volume of customer
orders in SPX for one to ten contracts submitted to the trading floor
decreased significantly (approximately a 99% decrease in number of
simple orders, total number of simple order contracts and number of
complex orders, and approximately a 91% decrease in total number of
complex order contracts) from the volume that had previously been
submitted to the electronic auctions, whereas, larger order sizes
experienced a notable increase in volume once the trading floor was
again operable. Thus, the data demonstrates that when AIM is not
available, brokers do not take advantage of the ability to cross
smaller-sized orders on the trading floor, but when AIM is available,
brokers use the electronic auction to cross these smaller-sized orders.
---------------------------------------------------------------------------
\15\ The Exchange also notes that orders for over 500 contracts
have had up to a daily average of 4 orders (for up to an average
daily total of 9,120 contracts) in AIM and up to 10 orders (for up
to an average daily total of 60,091 contracts) in C-AIM.
---------------------------------------------------------------------------
In addition to this, the Exchange observed that, in a sample of SPX
orders submitted into simple AIM during a week of trading in April
2020,\16\ orders containing quantities from one to ten contracts
submitted through AIM received an average price improvement of
approximately $0.34 over their limit prices, whereas orders containing
quantities from 11 to 50 contracts received an average price
improvement of approximately $0.22, and orders for 51 to 250 contracts
received an average price improvement of $0.08 and orders containing
quantities of between 251 and 500 received an average of $0.15. That is
approximately a 55% larger average price improvement that orders for
one to ten contracts received than orders for 11 to 50 contracts, a
325% larger average price improvement than orders for 51 to 250
contracts and approximately 127% larger average price improvement than
orders for 251 to 500 contracts. While the Exchange did not observe
such a significant increase in price improvement for complex orders
from one to ten contracts in the sample of SPX orders submitted to C-
AIM, it notes that greater price improvement generally did occur for
smaller sized complex orders as compared to larger sized orders. The
Exchange notes, however, that it is simultaneously submitting a rule
filing to amend the manner in which price improvement occurs for
certain complex SPX orders submitted to C-AIM so that price improvement
received through the C-AIM Auction is better aligned with pricing that
typically occurs on the trading floor. The Exchange believes that this,
paired with the proposed maximum quantity, will greatly incentivize
more retail-sized order flow through C-AIM. Overall, as this data
demonstrates, price improvement on smaller orders (particularly for one
to ten contracts) in SPX, a class which generally exhibits more
complicated trading characteristics and complex market factors, is
generally more beneficial than price improvement on larger orders
submitted through AIM and C-AIM, and customers are more inclined to
submit smaller orders (1-10 contracts) in SPX into the electronic
auctions when activated for SPX, rather
[[Page 53032]]
than to the trading floor, when operable. As a result, if the Exchange
is able to implement a maximum size requirement of up to 10 contracts
for SPX as proposed,\17\ it may determine to activate AIM and C-AIM
when the trading floor is open. The Exchange believes this could
provide incentive for the submission of smaller size SPX orders to the
Exchange and into the electronic auction. As a result, the Exchange
believes the proposed rule change will provide retail customers with
additional price improvement opportunities overall when the trading
floor is open while preserving liquidity available in the market,
particularly on the trading floor, for larger and more complicated
orders.
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\16\ Amendment No. 1 amends the data sample presented by
expanding the time frame in which the sample was taken for average
price improvement over the limit price of Agency Orders submitted
into AIM and C-AIM from through.
\17\ The proposed rule change to designate a maximum size of 10
contracts is based on this data, which demonstrates that orders with
size up to 10 contracts generally experience the most volume when
AIM and C-AIM are activated for SPX and generally receive the most
beneficial price improvement (and are considered to be ``retail''
sized orders).
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The Exchange notes that the trading floor is generally better
suited for the larger complex orders typical in SPX. Therefore, while
permitting retail-sized orders in SPX to execute in AIM and C-AIM will
provide additional price improvement opportunities for smaller orders,
it is also designed to maintain SPX liquidity, and incentive Market-
Maker activity in SPX, on the trading floor and in the electronic book
when AIM and C-AIM is activated for SPX, creating a liquid hybrid
environment for orders in this class. Indeed, the Exchange has observed
that open outcry trading is the generally preferred execution mechanism
for orders in such a complex and nuanced class as SPX, which has been
indicated, among other observations, by a significant decrease in SPX
executions while the Exchange operated in an all-electronic
environment. Data from February 3, 2020 through March 13, 2020 (the
last trading day prior to the temporary close of the trading floor)
shows that a total of 2,717,383 contracts for simple orders in SPX and
27,242,625 contracts for complex orders in SPX were executed in open
outcry auctions, whereas data for approximately the same timeframe,
from March 16, 2020 through April 21, 2020, shows that 534,790
contracts were executed in AIM in SPX and 13,059,041 contracts were
executed in C-AIM in SPX. The Exchange notes, too, that the Exchange's
trading floor may be better suited for crosses in SPX with more complex
orders, complicated strategies and larger size. Such orders are more
commonly executed on the trading floor as Trading Permit Holders
(``TPHs'') are able to negotiate and fine-tune the terms of a trade on
the trading floor and are permitted to submit complex orders with a
ratio less than one-to-three (.333) or greater than three-to-one (3.00)
for execution on the trading floor.\18\ TPHs are not currently
permitted to submit complex orders with such ratios for electronic
processing. In addition to this, the trading crowd in open outcry is
able to provide markets that are more tailored to the complexity and
size of orders typically submitted in SPX. Greater execution and price
improvement opportunities for SPX orders may result from the markets
given by the trading crowd that better define the nuanced complexity
and size of such orders than if the same orders were submitted via AIM
or C-AIM -which, instead, may provide greater price improvement
opportunities for simpler and smaller orders (as demonstrated in the
data sample explained above).\19\
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\18\ See Rule 5.83(b).
\19\ Amendment No. 1 adds additional detail and bolsters the
explanation regarding the reasons why the trading floor is better
suited for the execution of the generally larger, more complicated
orders in SPX, including providing additional data regarding SPX
order flow to the floor when operable and to AIM/C-AIM when the
floor was not operable.
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Finally, pursuant to current Rule 5.37.02 and Rule 5.38.02, it is
deemed conduct inconsistent with just and equitable principles of trade
and a violation of Exchange Rule 8.1 to engage in a pattern of conduct
where the Initiating Member breaks up an Agency Order into separate
orders for the purpose of gaining a higher allocation percentage than
the Initiating TPH would have otherwise received in accordance with the
allocation procedures contained in the AIM and C-AIM Rules,
respectively. In light of the proposed rule change, the Exchange also
proposes to amend Rules 5.37.02 and 5.38.02 to make it clear that
Initiating TPHs also may not break up an Agency Order into separate
orders for the purpose of circumventing the maximum quantity
requirement pursuant to subparagraph(s) (a)(3). The Exchange notes that
its surveillance program will monitor for such violations in the same
manner in which it currently monitors for allocation-related break up
violations.
III. Summary of Comment Letters Received
To date the Commission has received six comment letters on the
proposal.\20\ The Exchange also submitted a letter responding to the
comments.\21\ Two commenters supported imposing a maximum size
limitation on SPX agency orders in AIM and C-AIM auctions, agreeing
with Cboe's assertions that it would incentivize increased retail
customer participation in SPX auctions and provide increased execution
and price improvement opportunities for retail customers in SPX.\22\
One of these commenters further agreed with Cboe's assertions that
allowing Cboe to determine a maximum size for SPX orders in AIM and C-
AIM auctions would enhance execution quality for smaller orders while
maintaining liquidity on the trading floor for larger complex
orders.\23\ The other commenter claimed its clients recognized
significant price improvement opportunities in AIM auctions of SPX
orders from 1-100 contracts, but saw mixed results on orders greater
than 100 contracts.\24\
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\20\ See letters to Vanessa Countryman, Secretary, Commission,
from Michael Golding, Head of Trading, Optiver US LLC, and Rutger
Brinkhuis, Head of Trading, AMS Derivatives B.V., dated July 8, 2020
(``Optiver Letter''); Richard J. McDonald, Susquehanna International
Group, LLP, dated July 8, 2020 (``SIG Letter''); Ellen Greene,
Managing Director, Equities & Options Market Structure, The
Securities Industry and Financial Markets Association, dated July 9,
2020 (``SIFMA Letter''); John S. Markle, Interim General Counsel, TD
Ameritrade, Inc., dated July 9, 2020 (``TD Ameritrade Letter'');
Stephen John Berger, Managing Director and Global Head of Government
& Regulatory Policy, Citadel Securities, dated July 9, 2020
(``Citadel Letter I''); and Stephen John Berger, Managing Director
and Global Head of Government & Regulatory Policy, Citadel
Securities, dated August 12, 2020 (``Citadel Letter II'').
\21\ See letter to Vanessa Countryman, Secretary, Commission,
from Rebecca Tenuta, Counsel, Cboe Global Markets, dated July 31,
2020 (``Cboe Response Letter'').
\22\ See SIFMA Letter, supra note 20, at 2; TD Ameritrade
Letter, supra note 20, at 1. The SIFMA Letter and TD Ameritrade
Letter commented on Cboe's original proposal, which would have given
Cboe the ability to determine a maximum size of up to 100 contracts,
prior to Amendment No. 1, which proposed a set maximum size of ten
contracts.
\23\ See SIFMA Letter, supra note 20, at 2.
\24\ See TD Ameritrade Letter, supra note 20, at 1.
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Three commenters opposed Cboe's proposal.\25\ One of these
commenters opposed activating AIM and C-AIM auctions for orders in SPX
generally, regardless of size,\26\ while the other two commenters
opposed Cboe's proposal to impose any degree of maximum size limitation
on these orders, arguing instead that the auctions should be made
available in SPX for agency orders of all sizes.\27\ One of these
commenters argued that if retail order flow in SPX is in fact limited
to smaller-sized orders, there is no need to impose a size
[[Page 53033]]
limitation in order to provide increased price improvement
opportunities in the AIM and C-AIM mechanisms for these orders.\28\
This commenter further argued that, if larger-sized orders are better
suited for the trading floor, as Cboe suggests, such orders would
naturally gravitate towards the floor and obviate the need for any size
limitations in the electronic mechanisms.\29\ Two commenters argued
that market participants should have the choice of whether to direct
their orders to the trading floor or an electronic auction, with one
suggesting that brokers would have best execution obligations to
monitor price improvement and route their orders in the most favorable
manner.\30\ Three commenters suggested that Cboe's data analysis may be
insufficient to support its proposal.\31\ Two of these commenters noted
that the data does not measure a time period during which both
electronic auctions and floor-based liquidity are available.\32\ One of
these commenters and a separate commenter noted that Cboe's own data
demonstrated that price improvement opportunities were observed for
orders of all sizes in the electronic auction mechanisms during the
trading floor closure.\33\ One commenter argued that allowing SPX
market makers to provide electronic price improvement for SPX orders of
all sizes would not discourage market makers from also providing price
improvement for open outcry orders in SPX.\34\
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\25\ See Optiver Letter, supra note 20, at 1-2; SIG Letter,
supra note 20, at 3-4; Citadel Letter I, supra note 20, at 1;
Citadel Letter II, supra note 20, at 1.
\26\ See Optiver Letter, supra note 20, at 1-2.
\27\ See SIG Letter, supra note 20, at 3-4; Citadel Letter I,
supra note 20, at 1; Citadel Letter II, supra note 20, at 1.
\28\ See SIG Letter, supra note 20, at 3.
\29\ See id.
\30\ See id. at 3; Citadel Letter I, supra note 20, at 1.
\31\ See SIG Letter, supra note 20, at 3; Optiver Letter, supra
note 20, at 2; Citadel Letter I, supra note 20, at 1.
\32\ See SIG Letter, supra note 20, at 3; Optiver Letter, supra
note 20, at 2. One of these commenters further questioned the
validity of the data given the extreme volatility observed during
the time period of the data. See Optiver Letter, supra note 20, at
2.
\33\ See SIG Letter, supra note 20, at 3 & n.9; Citadel Letter
I, supra note 20, at 1. As noted above, however, a separate
commenter suggested price improvement opportunities were mixed for
SPX orders greater than 100 contracts. See TD Ameritrade Letter,
supra note 20, at 1.
\34\ See SIG Letter, supra note 20, at 4.
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In its response to comments, Cboe noted that its current rules
already allow it to use AIM and C-AIM for all options classes, and
therefore it may activate AIM and C-AIM in SPX without a proposed rule
change.\35\ Cboe further stated that the proposed maximum size for SPX
orders in AIM and C-AIM is necessary in order to provide limited
electronic auction functionality that some customers found beneficial
when available, while mitigating any negative impact on the larger SPX
market that Cboe claimed may result from the auctions, including
decreased quoting liquidity on the book, wider quotes, and reduced
participation by options market makers.\36\ In addition, Cboe
reiterated its argument that the unique characteristics of SPX options
warrant imposing a maximum size to SPX orders submitted through the AIM
and C-AIM auctions.\37\ Cboe also argued that the proposal would not
unfairly discriminate against any market participants, as it imposes no
restrictions on any market participant's ability to utilize the AIM and
C-AIM auctions for SPX options (i.e., any market participant would
retain the ability to submit an SPX agency order of ten contracts or
fewer in an AIM or C-AIM auction, respond to an AIM or C-AIM auction,
and, to the extent permitted by Exchange Rules, be solicited for the
initiating order).\38\ Finally, Cboe stated that it has provided
sufficient additional data in the amended proposal to support the
proposed maximum size of ten contracts, and argued that its data
measuring price improvement for AIM and C-AIM SPX orders of various
sizes is sufficiently representative because all order sizes reflected
in the data sample were subject to the same market conditions.\39\ Cboe
also stated that it is unable to provide comparable price improvement
statistics for orders executed on the trading floor due to the nature
of their execution as compared to electronically executed orders.\40\
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\35\ See Cboe Response Letter, supra note 21, at 2 n.9.
\36\ See id. at 2-3. Cboe also argued in its response to
comments that the trading floor may be better for crosses in SPX,
based on Cboe's observation that the number of larger and more
complicated orders that are crossed on the Exchange was
significantly lower when the trading floor was closed than when it
was open. See id. at 3 & n.13 (finding that, from January 2, 2020
through March 13, 2020, complex orders for SPX options with more
than six legs represented approximately 5.3% of the total SPX
complex order average daily volume, whereas from March 16, 2020
through April 30, 2020 while the floor was closed and C-AIM was
activated in SPX, complex orders for SPX options with more than six
legs represented only approximately 2.2% of the total SPX complex
order average daily volume).
\37\ See id. at 3-4.
\38\ See id. at 5.
\39\ See id. at 6.
\40\ See id.
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Three commenters recommended that, to the extent any maximum size
is established for SPX orders in AIM and C-AIM auctions, the level of
the maximum size should be clearly stated in the proposed rule, with
any future modifications subject to a separate proposed rule
change.\41\ Two of these commenters suggested that, when proposing any
modification to the maximum size threshold, Cboe should provide
sufficient supporting information, including, for example, data showing
price improvement and internalization statistics, and any information
necessary to clearly demonstrate how the threshold amount accurately
captures retail investor activity in SPX and does not exclude a
significant amount of retail activity.\42\ In response to these
comments, as described above, Cboe amended its initial proposal to
establish a set maximum size of ten contracts for AIM and C-AIM agency
orders in SPX and provided additional data and analysis to support this
proposed threshold.\43\ In response to the amended proposal, one
commenter argued that the proposed ten contract maximum size is without
a rational basis and will result in unfair discrimination that would
deny significant price improvement to many retail investors.\44\ This
commenter claimed that retail investors commonly submit orders of more
than ten contracts and provided data showing that more than fifty
percent of the AIM-eligible retail simple marketable SPX orders that it
routed to Cboe from mid-March 2020 to mid-May 2020 were larger than ten
contracts.\45\ This commenter also argues that its data demonstrates
that retail orders of up to 100 contracts received significant price
improvement in the AIM auction and requests that Cboe either eliminate
the proposed maximum size threshold or, at a minimum, set the threshold
at 100 contracts.\46\
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\41\ See TD Ameritrade Letter, supra note 20, at 2; Citadel
Letter I, supra note 20, at 2; Optiver Letter, supra note 20, at 2.
The TD Ameritrade Letter and Citadel Letter I, commenting on Cboe's
initial proposal, both suggested that Cboe commit to allowing orders
of up to 100 contracts to participate in the electronic auctions.
See TD Ameritrade Letter, supra note 20, at 2; Citadel Letter I,
supra note 20, at 2.
\42\ See Citadel Letter I, supra note 20, at 2; Optiver Letter,
supra note 20, at 2.
\43\ See Cboe Response Letter, supra note 21, at 2.
\44\ See Citadel Letter II, supra note 20, at 1.
\45\ See id. at 1-2.
\46\ See id. at 2.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2020-051, as Modified by Amendment No. 1, and Grounds for Disapproval
Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \47\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the
[[Page 53034]]
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as stated below, the Commission seeks and
encourages interested persons to provide additional comment on the
proposed rule change, as modified by Amendment No. 1, to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.
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\47\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\48\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulate 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 to protect investors and the public interest, and
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers; \49\ and Section 6(b)(8) of the Act,
which requires that the rules of the Exchange do not impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.\50\
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\48\ 15 U.S.C. 78s(b)(2)(B).
\49\ 15 U.S.C. 78f(b)(5).
\50\ 15 U.S.C. 89f(b)(8).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \51\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding,\52\ and any failure of a self-
regulatory organization to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Act and the
applicable rules and regulations.\53\
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\51\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\52\ See id.
\53\ See id.
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The Commission is instituting proceedings to allow for additional
consideration and comment on the issues raised herein, including as to
whether the proposal is consistent with the Act.
V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of
the Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4 under the Act,\54\
any request for an opportunity to make an oral presentation.\55\
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\54\ 17 CFR 240.19b-4.
\55\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by September 17, 2020. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
October 1, 2020. Commission 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-2020-051 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-2020-051. 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-2020-051, and should be submitted
on or before September 17, 2020. Rebuttal comments should be submitted
by October 1, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
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\56\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18828 Filed 8-26-20; 8:45 am]
BILLING CODE 8011-01-P
