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 Rules 5.37, 5.38, and 5.73 Related to Auction Notification Messages and Index Combo Orders in SPX in the Automated Improvement Mechanism, Complex Automated Improvement Mechanism, and FLEX Automated Improvement Mechanism, 53045-53051 [2020-18830]
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Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / Notices
competitive market in which market
participants can readily choose to send
their orders to other exchanges and offexchange venues if they deem fee levels
at those other venues to be more
favorable. As noted above, the
Exchange’s market share of intraday
trading in Tapes A, B and C securities
is less than 2%. In such an
environment, the Exchange must
continually adjust its fees and rebates to
remain competitive with other
exchanges and off-exchange venues.
Because competitors are free to modify
their own fees and credits in response,
and because market participants may
readily adjust their order routing
practices, the Exchange does not believe
its proposed fee change can impose any
burden on intermarket competition.
The Exchange believes that the
proposed change could promote
competition between the Exchange and
other execution venues, including those
that currently offer similar order types
and comparable transaction pricing, by
encouraging additional orders to be sent
to the Exchange for execution.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
khammond on DSKJM1Z7X2PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 15 of the Act and
subparagraph (f)(2) of Rule 19b–4 16
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 17 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
15 U.S.C. 78s(b)(3)(A).
17 CFR 240.19b–4(f)(2).
17 15 U.S.C. 78s(b)(2)(B).
15
16
VerDate Sep<11>2014
17:09 Aug 26, 2020
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSENAT–2020–27 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–NYSENAT–2020–27. 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–NYSENAT–2020–27 and
should be submitted on or before
September 17, 2020.
53045
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–18831 Filed 8–26–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89638; File No. SR–CBOE–
2020–052]
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 Rules
5.37, 5.38, and 5.73 Related to Auction
Notification Messages and Index
Combo Orders in SPX in the
Automated Improvement Mechanism,
Complex Automated Improvement
Mechanism, and FLEX Automated
Improvement Mechanism
August 21, 2020.
I. Introduction
On June 3, 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 to
amend Rules 5.37, 5.38, and 5.73 to (1)
allow the Exchange to determine to
disseminate the stop price in auction
notification messages for Automated
Improvement Mechanism (‘‘AIM’’),
Complex Automated Improvement
Mechanism (‘‘C–AIM’’), and FLEX AIM
auctions in S&P 500® Index options
(‘‘SPX’’); and (2) modify the minimum
increment for C–AIM and FLEX AIM
auction responses for Index Combo
Orders in SPX. The proposed rule
change was published for comment in
the Federal Register on June 18, 2020.3
On July 22, 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,
17 CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 89063
(June 12, 2020), 85 FR 36923. Comments received
on the proposed rule change are available on the
Commission’s website at: https://www.sec.gov/
comments/sr-cboe-2020-052/srcboe2020052.htm.
4 In Amendment No. 1, the Exchange amended
the proposal to: (1) To add that, when the proposed
stop price dissemination in auction notification
18
1 15
Continued
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53046
Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / Notices
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.
khammond on DSKJM1Z7X2PROD with NOTICES
II. Exchange’s Description of the
Proposed Rule Change, as Modified by
Amendment No. 1
The Exchange proposes to amend
Rule 5.38 and Rule 5.73 regarding the
minimum increment for Complex
Automated Improvement Mechanism
(‘‘C–AIM’’) and FLEX AIM Auction
responses, respectively, in connection
with Index Combo Orders in SPX,8 as
well as Rule 5.37, Rule 5.38, and Rule
5.73 in connection with dissemination
of the stop price in auction notification
messages for auctions in SPX.
By way of background, the Exchange
recently activated the Automated
Improvement Mechanism (‘‘AIM’’) and
C–AIM Auctions in S&P 500 Index
(‘‘SPX’’) options.9 When submitting an
Agency Order into a C–AIM Auction,
the Initiating Member must also submit
a contra-side second order for the same
size as the Agency Order. This second
order guarantees that the Agency Order
will receive an execution (i.e., it acts as
a stop). Upon commencement of a C–
AIM Auction, market participants
submit responses to trade against the
messages is enabled for AIM, C–AIM, or FLEX AIM
auctions in SPX, it would apply to all such AIM,
C–AIM, or FLEX AIM auctions; (2) specify that the
proposed minimum increment modification would
apply to Index Combo Orders in SPX, and to correct
an internal cross-reference in the proposed rules; (3)
provide additional detail to the description and
examples of the proposed modification to the
minimum increment for Index Combo Orders in
SPX; and (4) provide additional justification and
support for the proposed rule change. The full text
of Amendment No. 1 is available on the
Commission’s website at: https://www.sec.gov/
comments/sr-cboe-2020-052/srcboe20200527464403-221166.pdf.
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 89400,
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).
8 Amendment No. 1 clarifies throughout the Form
19b–4 and in the Exhibit 5 that the proposed rule
change is applicable to Index Combo Orders in SPX.
9 The Exchange notes FLEX AIM in SPX had been
activated prior to March 16, 2020.
VerDate Sep<11>2014
17:09 Aug 26, 2020
Jkt 250001
Agency Order. At the end of an auction,
depending on the contra-side interest
available, the contra order may be
allocated a certain percentage of the
Agency Order.10
When the Exchange is operating in its
normal trading environment, the
Exchange has not activated C–AIM (or
AIM) in SPX,11 thus all non-FLEX
crossing transactions in SPX were
previously only able to occur on the
trading floor. Therefore, Trading Permit
Holders may cross orders only in open
outcry on the trading floor. Pursuant to
Rule 5.87(f), a floor broker holding an
order for the eligible order size is
entitled to cross a certain percentage 12
of the order with facilitated (and
solicited orders, if designated by the
Exchange for a class) after satisfying
public customer orders 13 if the order
trades at or between the best bid or offer
given by the crowd in response to the
floor broker’s initial request for a
market. Specifically, a floor broker
representing an order of the eligible
order size or greater that he wishes to
cross (and the percentage of which he is
entitled to cross) must request bids and
offers for such option series and make
all persons in the trading crowd,
including the PAR Official, aware of his
request. In this way, the crossing
mechanism on the trading floor allows
for the trading crowd to control the
price of a crossing order and indicates
to responding TPHs and the crossing
floor broker a reasonable range at which
the market is willing to buy (sell) at that
point in time. This provision is subject
to the crossing rules in Rule 5.86
(subject to certain exceptions), which
require disclosure of all terms and
conditions to the crowd (including the
price) prior to executing a cross.14
10 See generally Rule 5.38(e). The Exchange notes,
too, that the same process applies to the FLEX AIM
Auction pursuant to the FLEX Rules. See generally
Rule 5.73(e).
11 The Exchange had activated C–AIM and AIM
in SPX for the first time as a result of the March
16, 2020 trading floor suspension to help prevent
the spread of COVID–19 and operated in an allelectronic configuration beginning March 16, 2020
through June 15, 2020, when the trading floor
reopened. The Exchange intends to activate AIM
and C–AIM in SPX as electronic crossing
mechanisms available for Users while the trading
floor is open, subject to approval of this proposed
rule change and separate proposed rule changes
regarding AIM and C–AIM.
12 Currently, the Exchange has set the percentage
as 40% (the same crossing entitlement percentage
as on AIM, C–AIM, and FLEX AIM). See CBOE
Regulatory Circular RG16–179, Participation
Entitlement Applicable to Crossing Orders in Open
Outcry (November 18, 2016) available at https://
www.cboe.com/publish/RegCir/RG16-179.pdf.
13 Similarly, the AIM and C–AIM percentage
applies after public customer orders are satisfied.
See Rules 5.37(e) and 5.38(e).
14 See Rule 5.87, Interpretation and Policy .05.
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Moreover, orders in SPX generally
take on greater risk than in other option
classes. SPX options tend to have a
higher notional value than options in
other classes (e.g., they are ten times the
notional size of SPY options), trade
much larger size than in other options
classes (indeed, even smaller sized
orders in SPX would be considered
fairly large size in other classes), and
effect increasingly more complex
strategies than executed in other classes
(e.g., Index Combo orders are more
frequently submitted) or executed
electronically (e.g., in open outcry
complex orders trade with larger ratios
that may be negotiated by the trading
crowd). Given these factors, SPX
Market-Makers on the floor generally
have more confidence in the pricing of
their responses as the crosses start with
a request for market and the trading
crowd then provides a ‘‘ballpark’’ of the
prices at which they are willing to trade
and a Market-Maker may thus more
confidently base response on the market
of other members of the trading crowd.
The Exchange notes, too, that these
unique factors 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,
whereas the auctions have historically
been activated in all other options
classes.15
Pursuant to Rules 5.4(b) and
5.33(f)(1)(A), the minimum increment
for bids and offers on complex orders in
options on SPX 16 is $0.05 or greater, or
in any increment determined by the
Exchange. When seeking to cross SPX
complex orders on the trading floor, a
floor broker generally identifies the legs
of the complex order and their relative
sizes to each other with a net package
price. The Exchange understands the
trading crowd then generally provides a
market based on the strategy’s
theoretical value in an increment of
$0.05 rather than the value of the net
package (which equals the strategy
times the ratio), which is particularly
true when the complex order
represented is a delta neutral order that
includes a combo. The Exchange has
observed that Index Combos in SPX
comprise a significant portion of crosses
in SPX,17 and when the Exchange
15 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, whereas AIM and C–AIM
have historically been activated in all other classes.
16 Except for box/roll spreads.
17 In April 2020, Index Combos in SPX comprised
60.5% of crossed volume executed in SPX via AIM
while the trading floor was inoperable.
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Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / Notices
activated C–AIM for SPX options, a
significant amount of SPX volume
executed through C–AIM. An Index
Combo Order in SPX is a complex order
that includes one or more SPX legs,
hedged by an SPX combo, or synthetic
future, defined by the delta.
Specifically, an ‘‘Index Combination’’ is
a purchase (sale) of an index option call
and a sale (purchase) of an index option
put with the same expiration date and
strike price, and ‘‘delta’’ is the positive
(negative) number of Index
Combinations that must be sold (bought)
to establish a market neutral hedge with
one or more series of the same index
option.18 A combo often used in SPX is
an at-the-money series in the quarterly
expiration that coincides with the CME
E-mini S&P 500 futures contract
expiration. In order to hedge fully, the
number of combos required is equal to
the number of units of the non-combo
portion times the delta divided by 100.
For example, 800 units of a 12.5-delta
option would require 100 combos to be
fully hedged (800 *12.5)/100 = 100
combos.
In open outcry, the trading crowd
generally prices the combo hedge
portion separately. The price of the
combo and the rest of the order are
ultimately packaged and sent out as a
net package price for the entire order on
the customer fill report. If the crowd
Option
Premium
NOV 3650 Call .................................
SEP 3210 Call .................................
SEP 3210 Put ..................................
Net package .....................................
Option
khammond on DSKJM1Z7X2PROD with NOTICES
Rule 5.33(b).
No. 1 adds clarity around the use
of Index Combo Orders in SPX as well as the price
improvement process on such orders when
submitted for open outcry trading.
20 The System rejects a C–AIM response or
Agency or Initiating Order that is not in the
applicable minimum increment.
19 Amendment
Jkt 250001
$1,680,000.00 debit ($21*800*100).
1,200,000.00 credit (120*100*100).
1,280,000.00 debit (128*100*100).
1,760,000.00 debit (176*100*100).
Ratio
$20.90
120.00
128.00
N/A
As stated, if submitted for execution
in an electronic auction, the minimum
improvement increment is $0.05 for
complex orders in SPX. If the electronic
18 See
$168.00
120.00
128.00
176.00
$167.20
120.00
128.00
175.20
improve the net package price (based on
then-current leg markets) by the
minimum increment of $0.05 under the
Rules, that is not the common practice,
as noted above. The Exchange believes
this is because the parties to an
electronic complex order trade may
compete only with respect to the net
price and are not able to negotiate the
leg prices.
Using the example above, consider,
specifically, an Index Combo in SPX to
buy 800 SPX NOV 3650 calls, ‘‘tied’’
(meaning hedged by combos), with a
12.5 delta. Systematized, the order has
an 8:1:1 ratio, 100 times, and is as
follows:
• Leg 1 = Buy 800 SPX NOV 3650
Calls.
• Leg 2 = Sell 100 SPX SEP 3210
Calls.
• Leg 3 = Buy 100 SPX SEP 3210
Puts.
Consider, too, that the current quotes
are as follows:
• SPX NOV 3650 Call = $20.40 ¥
$21.00
• SPX SEP 3210 Call
$120.00¥$120.70.
• SPX SEP 3210 Put
$127.30¥$128.00.
If the entire order were to trade at the
implied/BBO prices, the premium and
total cash outlay would be as follows:
Total cash
above, if the crowd improves the noncombo portion (Leg 1) by the minimum
Premium
NOV 3650 Call .................................
SEP 3210 Call .................................
SEP 3210 Put ..................................
Net package .....................................
17:09 Aug 26, 2020
Ratio
$21.00
120.00
128.00
N/A
As described above, the trading crowd
would generally price the non-combo
portion separately and, per the example
VerDate Sep<11>2014
improves the price on the non-combo
leg by a minimum increment, or greater,
that price is given on each contract. For
example, if the trading crowd improves
$0.10 on 800 contracts, the $0.10
improvement is on each of the 800
contracts.19
Currently, Rule 5.38(c)(5)(A) and Rule
5.38(a)(4) provide that the minimum
price increment for C–AIM responses
and Agency and Initiating Orders,
respectively, must be in an increment
the Exchange determines on a class
basis—which, as described above, is
$0.05 in SPX options.20 The Exchange
notes that the corresponding FLEX AIM
Rules 5.73(c)(5)(A) and 5.73(a)(4)
provide the same for FLEX AIM
Auctions. However, unlike on the
trading floor, market participant
responses using this increment have
generally improved the net package
price (based on then-current leg
markets) by the minimum increment of
$0.05. More specifically, in an
electronic auction the improvement
increment is given on each strategy unit.
That is, if the order (per the example
above) is for 800:100:100 total quantity,
the system treats this as 100 units of an
8:1:1 ratio strategy. If $0.05 of
improvement is given, the $0.05 applies
to each of the 100 strategy units.21
While members of the trading crowd on
the trading floor are permitted to
53047
increment of $0.10, prices would be as
follows:
Total cash
$1,672,000.00 debit ($20.90*800*100).
1,200,000.00 credit (120*100*100).
1,280,000.00 debit (128*100*100).
1,752,000.00 debit (175.20*100*100).
auction results in the minimum
improvement increment of $0.05, $0.05
of improvement would be given to each
strategy unit (i.e., each of the 100 units
would receive $0.05 of improvement).
The prices would be as follows: 22
21 Amendment No. 1 adds clarity regarding the
price improvement process for Index Combo Orders
in SPX when submitted for execution in an
electronic auction.
22 The Exchange notes that the System uses an
algorithm to determine how price improvement is
distributed on a multi-leg strategy. This example
shows one possibility. The $0.05 improvement
cannot not be applied to Leg 1 because the ratio on
that leg is ‘8’, therefore, there are not enough
pennies to distribute given there are only five
pennies ($0.05) worth of improvement. This, then,
leaves the other two legs, both of which have a ratio
of ‘1’, in which the System may distribute the five
pennies of improvement per strategy unit. In sum,
the price improvement given is always distributed
in a manner that improves the leg market.
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27AUN1
53048
Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / Notices
Option
Premium
khammond on DSKJM1Z7X2PROD with NOTICES
NOV 3650 Call .................................
SEP 3210 Call .................................
SEP 3210 Put ..................................
Net package .....................................
$21.00
120.03
127.98
N/A
Therefore, as demonstrated in the
example, the difference between pricing
the combo and non-combo portions of
the order separately when trading in
open outcry (where the example order
would have received a total price
improvement of $0.80) and as a net
package when trading in an electronic
auction (where the example order
would have received a total price
improvement of only $0.05), may result
in a significant difference between the
price improvement received.23
In addition to this, current Rules
5.37(c)(2), 5.38(c)(2), and 5.73(c)(2)
provide that the System initiates the
AIM, C–AIM, and FLEX AIM Auction
processes, respectively, by sending an
auction notification message detailing
the side, size, Auction ID, options series
(additionally, in the case of C–AIM
Auctions, complex strategy, and in the
case of FLEX AIM Auctions, length of
the auction period and complex
strategy, as applicable) of the Agency
Order to all Users that elect to receive
AIM, C–AIM, or FLEX AIM Auction
notification messages. AIM, C–AIM, and
FLEX AIM Auction notification
messages are not included in the
disseminated BBO (in connection with
AIM Auctions) or OPRA. As such, the
stop price of an Agency Order is not
currently included in auction
notification messages. The Exchange
believes that lack of an indication of
where an auction is set to begin, like the
ballpark figure provided by the trading
crowd when crossing on the trading
floor, may cause apprehension in
pricing competitive responses during
the electronic auctions in SPX, which
may reduce liquidity and price
improvement during such auctions.
The Exchange is considering
activating AIM and C–AIM in SPX when
it reopens the trading floor. To better
align the C–AIM process for SPX
complex strategies with the open outcry
crossing process for those strategies, the
Exchange proposes to amend Rule
5.38(c)(5)(A) to provide that the
minimum price increment for a C–AIM
response in which the Agency Order
complex strategy is comprised of an
23 Amendment No. 1 replaces the example and
explanation of the differences between the price
improvement process in open outcry trading and in
the electronic auctions, simplifying and clarifying
the example explanation as well as providing for
additional detail.
VerDate Sep<11>2014
17:09 Aug 26, 2020
Jkt 250001
Ratio
$168.00
120.03
127.98
175.95
Total cash
$1,680,000.00 debit ($21*800*100).
1,200,300.00 credit (120.03*100*100).
1,279,800.00 debit (127.98*100*100).
1,759,500.00 debit (175.95*100*100).
Index Combo Order in SPX (as defined
in Rule 5.33(b)) 24 will be the ratio of the
non-combo portion of the strategy to the
number of combos, multiplied by the
minimum price increment the Exchange
determines for options on SPX Agency
Orders pursuant to Rule 5.38(a)(4). Also,
to better align the AIM and C–AIM
pricing process generally for responses
with the open outcry process, the
Exchange proposes to amend Rules
5.37(c)(2) and 5.38(c)(2) to provide that
the Exchange may also determine to
include the stop price in AIM and C–
AIM Auction notification messages,
respectively, in SPX.25 If the stop price
is enabled for SPX in AIM or C–AIM,
respectively, it will apply to all AIM
auctions in SPX.26 Like all other
information disseminated in an AIM
and C–AIM Auction notification
message, the stop price will be available
to all Users that elect to receive auction
notification messages. The Exchange
notes that the FLEX AIM Rules in
connection with the auction process for
FLEX complex orders are substantially
similar to the AIM and C–AIM Rules.
Therefore, to maintain consistency
within the Rules between the FLEX and
non-FLEX auctions, the Exchange also
proposes to amend the FLEX AIM
process for SPX complex strategies (i.e.
for FLEX C–AIM) and for FLEX AIM
Auction notification messages in the
same manner.27
The Exchange believes that the
proposed rule changes will create
similar price competition for these
orders in electronic and open outcry
trading. Particularly, the Exchange
believes that the current manner in
which de minimis price improvement
may occur via C–AIM, as well as FLEX
C–AIM, Auctions in connection with
Index Combo Orders in SPX (i.e.,
potentially only improved in sub-penny
increments) may discourage market
24 Amendment No. 1 corrects this cross reference
in the Exhibit 5 to reflect the appropriate Rule that
contains the definition of Index Combo Orders.
25 Amendment No. 1 add this footnote to clarify
that the Exchange will notify its TPHs of a
determination to include the stop price in auction
notification messages, pursuant to Rule 1.5, via a
specification, Notice, or Regulatory Circular with
appropriate advanced notice, which are posted on
the Exchange’s website, electronic message, or other
communication method as provided in the Rules.
26 Amendment No. 1 adds this language to Rule
5.37(c)(2) and Rule 5.38(c)(2) in the Exhibit 5.
27 See proposed Rules 5.73(c)(2) and 5.73(c)(5)(A).
PO 00000
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participants from providing contra-side
interest at the best prices and liquidity
providers from joining or improving at
meaningful increments. As such, the
proposed rule change is intended to
provide for substantially the same price
improvement opportunities at
meaningful increments on SPX complex
strategies submitted to C–AIM and
FLEX C–AIM that occur for the same
strategies on the trading floor. To
illustrate by using the same complex
strategy example above, if a User buys
800 of the November 3650 SPX Calls
tied to 100 September 3210 Combos,
using a delta of 12.5, pursuant to the
proposed rules, the System would
calculate the minimum increment by
the ratio of the non-combo leg (800) to
the number of combos (100) by the
minimum increment of $0.05.
Therefore, (800/100) × 0.05 = $0.40 as
the starting point for price improvement
during the C–AIM or FLEX C–AIM
Auction. In this way, by tying the
minimum increment to the legs of the
order, as opposed to the package price
inclusive of the combos, the Exchange
believes the proposed rule would
require market participants to respond
to the C–AIM or FLEX C–AIM Auctions
for SPX complex strategies at prices
more aligned with the prices at which
responses generally occur in open
outcry, i.e. prices in response to a
broker’s corresponding bids (offers)
based off of the market per leg at which
the trading crowd indicates it is willing
to buy (sell). If market participants may
participate in C–AIM or FLEX C–AIM
executions in connection with SPX
complex strategies by providing de
minimis price improvement compared
to price improvement that may occur on
the floor, the Exchange believes there
may be less interest by market
participants to take on the risk of
participating as a contra and may
negatively impact liquidity available on
the trading floor. As a result, the
Exchange believes this potentially
reduces price improvement
opportunities for customers.
Particularly, if the Exchange determines
to activate C–AIM in SPX when the
trading floor re-opens, the Exchange
believes the proposed rule change may
provide customers with additional
opportunities for more meaningful price
improvement and may encourage
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market participants to provide more
liquidity for C–AIM transactions in SPX
while also mitigating any potential
disincentive to provide liquidity on the
trading floor in SPX by better aligning
electronic and open outcry crossing of
SPX complex orders that include a
combo.
The Exchange notes that the proposed
rule change does not alter the minimum
increment as determined by the
Exchange for SPX complex strategies
and is consistent with the ability of the
Exchange to determine the minimum
increment for SPX (the proposed
minimum increment will be in
multiples of $0.05). Additionally, it
would not alter the manner in which the
System caps responses pursuant to Rule
5.38(c)(5)(B), wherein, if the BBO of any
component of the complex strategy or
the resting complex order, respectively,
is a Priority Customer order, a response
is capped at one minimum increment
lower (higher) than the better of the SBO
(SBB) or the offer (bid) of a resting
complex order at the top of the Complex
Order Book (‘‘COB’’). The System would
simply use the minimum increment
determined pursuant to the proposed
calculation for any response submitted
in connection with an Index Combo
Order in SPX.28 Instead, the proposed
rule change provides that price
improvement opportunities for such
orders submitted into C–AIM, as well
FLEX AIM, occur at the same
meaningful increments that market
participants reasonably would expect to
occur on such orders pursuant to the
current Rules and practice on the
trading floor. The Exchange believes
this may encourage a potential increase
in participation in the C–AIM and FLEX
AIM Auctions in SPX without a
corresponding negative impact on
participation or liquidity in open outcry
auctions once the trading floor reopens.
The Exchange believes that without the
proposed rule change, market
participants may improve the displayed
auction price by only a trivial amount,
thereby, potentially enabling liquidity
providers to ‘‘step ahead’’ of those that
are willing to trade with customer
orders at the auction price. Such
activity, in turn, may discourage market
participants from providing liquidity at
meaningful prices to commence an
auction. As such, the Exchange believes
that the proposed rule change to provide
price improvement at more significant
increments that are better aligned with
those received on the trading floor
would encourage market participants to
provide meaningful responses to
customer orders in electronic
auctions.29
In the same way, the Exchange
believes that the proposed rule change
to allow the System to disseminate the
initial price of an SPX AIM and C–AIM
Auction, as well as FLEX AIM Auction,
would more generally align the trading
of SPX options submitted for execution
into the electronic auctions with those
crossed on the trading floor. The
Exchange believes that the proposed
rule change would allow the Exchange
to address any uncertainties market
participants may have when pricing
SPX responses, given the more
complicated market models, greater risk,
higher notional value, larger sizes, and
increasingly more complex strategies in
SPX, by including the Agency Order
stop price in the auction notification
messages. This, in turn, may facilitate
market participants’ confidence in
pricing meaningful, competitive
responses during electronic auctions in
SPX in a manner substantially similar to
which the trading crowd’s market
allows for market participants to more
confidently price their responses
accordingly. As a result, this proposed
rule change is intended to incentivize
continued, competitive responses to
SPX electronic auctions in substantially
the same manner in which responses
may be priced on the trading floor, thus,
providing for potentially improved
liquidity and price improvement
opportunities for orders being executed
through those auctions. The Exchange
also notes that its affiliated options
exchange, Cboe EDGX Exchange, Inc.
(‘‘EDGX Options’’) corresponding
rules 30 governing the AIM and C–AIM
auction notification messages on EDGX
Options provide that its system initiates
the AIM or C–AIM auction processes by
sending an auction notification message
detailing the price, along with the same
fields currently detailed pursuant to
Cboe Options Rules 5.37(c)(2) and
5.38(c)(2) as well as 5.73(c)(2). Also,
pursuant to Exchange Rule 5.33(d)(1),
C2 Rule 6.13(d)(1), and EDGX Options
Rule 21.20(d)(1), the Exchange and its
affiliated options exchanges may
currently determine to include in
similar notification messages the limit
price of an order that initiates a
Complex Order Auction (‘‘COA’’), much
like that of the stop price of an AIM, C–
28 Amendment No. 1 adds language to clarify how
the System would cap responses that were
submitted in connection with an Index Combo
Order in SPX and received the minimum price
improvement pursuant to proposed Rule
5.38(c)(5)(A).
29 Amendment No. 1 adds additional detail
regarding the purpose of adopting the proposed
minimum increments for responses in connection
with Index Combo Orders in SPX.
30 See EDGX Options Rules 21.19(c)(2) and
21.22(c)(2).
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53049
AIM, or FLEX AIM Agency order that
initiates these auctions. The Exchange
further notes that similar electronic
auctions on other options exchanges
disseminate the price in their initial
auction messages.31
The Exchange believes that providing
similar response and execution
opportunities across these trading
facilities will serve to maintain
meaningful levels of liquidity, price
competition, and price improvement
opportunities in SPX during both
electronic and open outcry auctions
upon the reopening of the trading floor
if the Exchange determines to activate
AIM and C–AIM for SPX at that time. As
a result, the proposed rule change is
designed to ensure that C–AIM for
complex SPX strategies remains a viable
additional means of execution for SPX
complex orders, and that market
participants maintain the same
confidence in pricing their responses to
AIM and C–AIM Auctions in SPX as
they have during open outcry auctions,
and thus, will continue to provide more
execution and price improvement
opportunities for customers. Likewise,
the proposed rule change would align
the FLEX AIM and C–AIM Auction
process with the non-FLEX AIM and C–
AIM Auction process, potentially
providing the similar opportunities for
execution and price improvement in
connection with the same complex
strategies and similar meaningfully
price responses submitted into FLEX
AIM and providing investors with
continued consistency in the Exchange’s
auction rules, thus, mitigating any
confusion for those participating in both
non-FLEX and FLEX SPX trading.
III. Summary of Comment Letter
Received
To date the Commission has received
one comment letter on the proposal.32
The commenter supported the proposal
and agreed with Cboe’s assertion that
‘‘providing appointed Market-Makers
with an additional way to participate in
electronic auctions will expand
available liquidity for these auctions,
which may increase execution and price
improvement opportunities for
31 See MIAX Options Rule 5.18(d)(2), which
governs the commencement of a Complex Auction
on MIAX Options, and Rules 515A(a)(2)(i)(B) and
515A.12, which govern the request for response
message disseminated during MIAX Options’
electronic crossing auctions, PRIME and complex
PRIME; substantially similar to AIM and C–AIM;
see also NYSE American Options Rule 903G(a)(2),
which governs the information required in FLEX
Request for quotes.
32 See letter to Vanessa Countryman, Secretary,
Commission, from Ellen Greene, Managing Director,
Equities & Options Market Structure, The Securities
Industry and Financial Markets Association, dated
July 9, 2020.
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customers’ orders.’’ 33 The commenter
also believed that the proposed rule
change ‘‘would further align open
outcry and electronic crossing auctions
and the execution and price
improvement opportunities in both
auctions by permitting the same
participants to be solicited as contras in
both types of auctions across all classes
at all times.’’ 34 The commenter agreed
with Cboe that ‘‘there is no reason to
restrict Market-Makers ability to provide
liquidity into electronic auctions when
they are able to similarly provide that
liquidity in open outcry trading.’’ 35
IV. Proceedings To Determine Whether
to Approve or Disapprove SR–CBOE–
2020–052, 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 36 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
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,37 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,
33 See
id. at 3.
id.
35 See id.
36 15 U.S.C. 78s(b)(2)(B).
37 15 U.S.C. 78s(b)(2)(B).
34 See
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and not be designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers; 38 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.39
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.’’ 40 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,41 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
with the Act and the applicable rules
and regulations.42
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,43 any request
for an opportunity to make an oral
presentation.44
38 15
U.S.C. 78f(b)(5).
U.S.C. 89f(b)(8).
40 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
41 See id.
42 See id.
43 17 CFR 240.19b–4.
44 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
39 15
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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 rule-comments@
sec.gov. Please include File Number SR–
CBOE–2020–052 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2020–052. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
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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to make available publicly. All
submissions should refer to File
Number SR–CBOE–2020–052, 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.45
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–18830 Filed 8–26–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89635; File No. SR–CBOE–
2020–050]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of
Amendment Nos. 1 and 2 and Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To Amend
Rules 5.37 and 5.73 Related to the
Solicitation of Market Makers for SPX
Initiating Orders in the Automated
Improvement Mechanism and FLEX
Automated Improvement Mechanism
August 21, 2020.
I. Introduction
On June 3, 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 to
permit orders for the accounts of market
makers with an appointment in S&P
500® Index Options (‘‘SPX’’) to be
solicited for the initiating order
submitted for execution against an
agency order into an Automated
Improvement Mechanism (‘‘AIM’’)
auction or a FLEX AIM auction. The
proposed rule change was published for
comment in the Federal Register on
June 18, 2020.3 On July 2, 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 22,
khammond on DSKJM1Z7X2PROD with NOTICES
45 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 89062
(June 12, 2020), 85 FR 36907. Comments received
on the proposed rule change are available on the
Commission’s website at: https://www.sec.gov/
comments/sr-cboe-2020-050/srcboe2020050.htm.
4 In Amendment No. 1, the Exchange: (1) Limited
the scope of its original proposal, which would
have permitted orders for the accounts of market
1 15
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2020, the Exchange submitted
Amendment No. 2 to the proposed rule
change.5 On July 27, 2020, pursuant to
Section 19(b)(2) of the Act,6 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.7 The Commission
is publishing this notice and order to
solicit comment on the proposed rule
change, as modified by Amendment
Nos. 1 and 2, from interested persons
and to institute proceedings pursuant to
Section 19(b)(2)(B) of the Act 8 to
determine whether to approve or
disapprove the proposed rule change, as
modified by Amendment Nos. 1 and 2.
II. Exchange’s Description of the
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2
The Exchange proposes to permit
orders for the accounts of MarketMakers with an appointment in SPX to
be solicited for the Initiating Order 9
submitted for execution against an
Agency Order in SPX options into a
simple AIM Auction pursuant to Rule
5.37 or a simple FLEX AIM Auction
pursuant to Rule 5.73. The Exchange
does not generally activate AIM for SPX
options, and AIM for SPX options is
currently not activated.10 The
introductory paragraphs of Rules 5.37
and 5.73 prohibit orders for the
accounts of Market-Makers with an
appointment in the applicable class to
makers with an appointment in any class to be
solicited for the initiating order in an AIM or FLEX
AIM auction in that class, to only allow market
makers with an appointment in SPX to be solicited
for the initiating order in an AIM or FLEX AIM
auction in SPX; 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-2020-050/srcboe20200507382058-218888.pdf.
5 In Amendment No. 2, the Exchange: (1)
Provided additional data, justification, and support
for its proposal; and (2) made technical corrections
and clarifications to the description of the proposal.
The full text of Amendment No. 2 is available on
the Commission’s website at: https://www.sec.gov/
comments/sr-cboe-2020-050/srcboe20200507464399-221161.pdf.
6 15 U.S.C. 78s(b)(2).
7 See Securities Exchange Act Release No. 89398,
85 FR 46197 (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.
8 15 U.S.C. 78s(b)(2)(B).
9 The ‘‘Initiating Order’’ is the order comprised of
principal interest or a solicited order(s) submitted
to trade against the order the submitting Trading
Permit Holder (the ‘‘Initiating TPH’’ or ‘‘Initiating
FLEX Trader,’’ as applicable) represents as agent
(the ‘‘Agency Order’’).
10 FLEX AIM is generally activated, and currently
is activated, for FLEX SPX options.
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53051
be solicited to execute against the
Agency Order in a simple AIM or FLEX
AIM Auction, respectively. No similar
restriction applies to crossing
transactions in open outcry trading,
where a significant portion of SPX
options trade.11 As further discussed
below, brokers seeking liquidity to
execute against customer orders on the
trading floor regularly solicit appointed
SPX Market-Makers for this liquidity, as
they are generally the primary source of
pricing and liquidity for those options.
As of March 16, 2020, the Exchange
suspended open outcry trading to help
prevent the spread of the novel
coronavirus and began operating in an
all-electronic configuration.12 As a
result, the Exchange activated AIM for
SPX options for the first time to provide
market participants with a mechanism
to cross SPX options while the floor was
inoperable, which would otherwise not
be possible without open outcry trading
The Exchange adopted a temporary rule
change to permit Market-Makers to be
solicited for electronic crossing
transactions in its exclusively listed
index options (including SPX options)
when the Exchange’s trading floor was
inoperable. The Exchange believed this
would make the same sources of
liquidity for customer orders that are
generally available in open outcry
available for those orders in an
electronic-only environment.13 This was
particularly true for SPX options, for
which the Exchange enabled AIM for
the first time. The Exchange believed
not permitting Market-Makers to
participate as contras could have made
it difficult for brokers to find sufficient
liquidity to fill their customer orders,
which liquidity they generally solicited
from SPX Market-Makers on the trading
floor. For example, when the Exchange
operates in its a hybrid manner as it
currently is (with electronic and open
outcry trading), if a customer order is
not fully executable against electronic
bids and offers, a floor broker can
attempt to execute the order, or
remainder thereof, on the trading floor,
where the liquidity to trade with this
remainder is generally provided by
Market-Makers in the open outcry
trading crowd. Additionally, brokers
may solicit liquidity from upstairs
Market-Maker firms.
Upon the reopening of the trading
floor, the Exchange deactivated AIM for
SPX options. While AIM was activated
11 See
Rules 5.86 and 5.87.
Exchange continues to operate in an allelectronic environment, but currently plans to
reopen its trading floor on June 8, 2020.
13 See Rule 5.24(e)(1)(A); see also Securities
Exchange Act Release No. 88886 (May 15, 2020), 85
FR 31008 (May 21, 2020) (SR–CBOE–2020–047).
12 The
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[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Notices]
[Pages 53045-53051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18830]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89638; File No. SR-CBOE-2020-052]
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 Rules 5.37, 5.38, and 5.73
Related to Auction Notification Messages and Index Combo Orders in SPX
in the Automated Improvement Mechanism, Complex Automated Improvement
Mechanism, and FLEX Automated Improvement Mechanism
August 21, 2020.
I. Introduction
On June 3, 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 to
amend Rules 5.37, 5.38, and 5.73 to (1) allow the Exchange to determine
to disseminate the stop price in auction notification messages for
Automated Improvement Mechanism (``AIM''), Complex Automated
Improvement Mechanism (``C-AIM''), and FLEX AIM auctions in S&P
500[supreg] Index options (``SPX''); and (2) modify the minimum
increment for C-AIM and FLEX AIM auction responses for Index Combo
Orders in SPX. The proposed rule change was published for comment in
the Federal Register on June 18, 2020.\3\ On July 22, 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,
[[Page 53046]]
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. 89063 (June 12,
2020), 85 FR 36923. Comments received on the proposed rule change
are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-052/srcboe2020052.htm.
\4\ In Amendment No. 1, the Exchange amended the proposal to:
(1) To add that, when the proposed stop price dissemination in
auction notification messages is enabled for AIM, C-AIM, or FLEX AIM
auctions in SPX, it would apply to all such AIM, C-AIM, or FLEX AIM
auctions; (2) specify that the proposed minimum increment
modification would apply to Index Combo Orders in SPX, and to
correct an internal cross-reference in the proposed rules; (3)
provide additional detail to the description and examples of the
proposed modification to the minimum increment for Index Combo
Orders in SPX; and (4) provide additional justification and support
for the proposed rule change. The full text of Amendment No. 1 is
available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-052/srcboe2020052-7464403-221166.pdf.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 89400, 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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II. Exchange's Description of the Proposed Rule Change, as Modified by
Amendment No. 1
The Exchange proposes to amend Rule 5.38 and Rule 5.73 regarding
the minimum increment for Complex Automated Improvement Mechanism (``C-
AIM'') and FLEX AIM Auction responses, respectively, in connection with
Index Combo Orders in SPX,\8\ as well as Rule 5.37, Rule 5.38, and Rule
5.73 in connection with dissemination of the stop price in auction
notification messages for auctions in SPX.
---------------------------------------------------------------------------
\8\ Amendment No. 1 clarifies throughout the Form 19b-4 and in
the Exhibit 5 that the proposed rule change is applicable to Index
Combo Orders in SPX.
---------------------------------------------------------------------------
By way of background, the Exchange recently activated the Automated
Improvement Mechanism (``AIM'') and C-AIM Auctions in S&P 500 Index
(``SPX'') options.\9\ When submitting an Agency Order into a C-AIM
Auction, the Initiating Member must also submit a contra-side second
order for the same size as the Agency Order. This second order
guarantees that the Agency Order will receive an execution (i.e., it
acts as a stop). Upon commencement of a C-AIM Auction, market
participants submit responses to trade against the Agency Order. At the
end of an auction, depending on the contra-side interest available, the
contra order may be allocated a certain percentage of the Agency
Order.\10\
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\9\ The Exchange notes FLEX AIM in SPX had been activated prior
to March 16, 2020.
\10\ See generally Rule 5.38(e). The Exchange notes, too, that
the same process applies to the FLEX AIM Auction pursuant to the
FLEX Rules. See generally Rule 5.73(e).
---------------------------------------------------------------------------
When the Exchange is operating in its normal trading environment,
the Exchange has not activated C-AIM (or AIM) in SPX,\11\ thus all non-
FLEX crossing transactions in SPX were previously only able to occur on
the trading floor. Therefore, Trading Permit Holders may cross orders
only in open outcry on the trading floor. Pursuant to Rule 5.87(f), a
floor broker holding an order for the eligible order size is entitled
to cross a certain percentage \12\ of the order with facilitated (and
solicited orders, if designated by the Exchange for a class) after
satisfying public customer orders \13\ if the order trades at or
between the best bid or offer given by the crowd in response to the
floor broker's initial request for a market. Specifically, a floor
broker representing an order of the eligible order size or greater that
he wishes to cross (and the percentage of which he is entitled to
cross) must request bids and offers for such option series and make all
persons in the trading crowd, including the PAR Official, aware of his
request. In this way, the crossing mechanism on the trading floor
allows for the trading crowd to control the price of a crossing order
and indicates to responding TPHs and the crossing floor broker a
reasonable range at which the market is willing to buy (sell) at that
point in time. This provision is subject to the crossing rules in Rule
5.86 (subject to certain exceptions), which require disclosure of all
terms and conditions to the crowd (including the price) prior to
executing a cross.\14\
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\11\ The Exchange had activated C-AIM and AIM in SPX for the
first time as a result of the March 16, 2020 trading floor
suspension to help prevent the spread of COVID-19 and operated in an
all-electronic configuration beginning March 16, 2020 through June
15, 2020, when the trading floor reopened. The Exchange intends to
activate AIM and C-AIM in SPX as electronic crossing mechanisms
available for Users while the trading floor is open, subject to
approval of this proposed rule change and separate proposed rule
changes regarding AIM and C-AIM.
\12\ Currently, the Exchange has set the percentage as 40% (the
same crossing entitlement percentage as on AIM, C-AIM, and FLEX
AIM). See CBOE Regulatory Circular RG16-179, Participation
Entitlement Applicable to Crossing Orders in Open Outcry (November
18, 2016) available at https://www.cboe.com/publish/RegCir/RG16-179.pdf.
\13\ Similarly, the AIM and C-AIM percentage applies after
public customer orders are satisfied. See Rules 5.37(e) and 5.38(e).
\14\ See Rule 5.87, Interpretation and Policy .05.
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Moreover, orders in SPX generally take on greater risk than in
other option classes. SPX options tend to have a higher notional value
than options in other classes (e.g., they are ten times the notional
size of SPY options), trade much larger size than in other options
classes (indeed, even smaller sized orders in SPX would be considered
fairly large size in other classes), and effect increasingly more
complex strategies than executed in other classes (e.g., Index Combo
orders are more frequently submitted) or executed electronically (e.g.,
in open outcry complex orders trade with larger ratios that may be
negotiated by the trading crowd). Given these factors, SPX Market-
Makers on the floor generally have more confidence in the pricing of
their responses as the crosses start with a request for market and the
trading crowd then provides a ``ballpark'' of the prices at which they
are willing to trade and a Market-Maker may thus more confidently base
response on the market of other members of the trading crowd. The
Exchange notes, too, that these unique factors 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, whereas the auctions have historically been activated in all
other options classes.\15\
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\15\ 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, whereas AIM and C-AIM have
historically been activated in all other classes.
---------------------------------------------------------------------------
Pursuant to Rules 5.4(b) and 5.33(f)(1)(A), the minimum increment
for bids and offers on complex orders in options on SPX \16\ is $0.05
or greater, or in any increment determined by the Exchange. When
seeking to cross SPX complex orders on the trading floor, a floor
broker generally identifies the legs of the complex order and their
relative sizes to each other with a net package price. The Exchange
understands the trading crowd then generally provides a market based on
the strategy's theoretical value in an increment of $0.05 rather than
the value of the net package (which equals the strategy times the
ratio), which is particularly true when the complex order represented
is a delta neutral order that includes a combo. The Exchange has
observed that Index Combos in SPX comprise a significant portion of
crosses in SPX,\17\ and when the Exchange
[[Page 53047]]
activated C-AIM for SPX options, a significant amount of SPX volume
executed through C-AIM. An Index Combo Order in SPX is a complex order
that includes one or more SPX legs, hedged by an SPX combo, or
synthetic future, defined by the delta. Specifically, an ``Index
Combination'' is a purchase (sale) of an index option call and a sale
(purchase) of an index option put with the same expiration date and
strike price, and ``delta'' is the positive (negative) number of Index
Combinations that must be sold (bought) to establish a market neutral
hedge with one or more series of the same index option.\18\ A combo
often used in SPX is an at-the-money series in the quarterly expiration
that coincides with the CME E-mini S&P 500 futures contract expiration.
In order to hedge fully, the number of combos required is equal to the
number of units of the non-combo portion times the delta divided by
100. For example, 800 units of a 12.5-delta option would require 100
combos to be fully hedged (800 *12.5)/100 = 100 combos.
---------------------------------------------------------------------------
\16\ Except for box/roll spreads.
\17\ In April 2020, Index Combos in SPX comprised 60.5% of
crossed volume executed in SPX via AIM while the trading floor was
inoperable.
\18\ See Rule 5.33(b).
---------------------------------------------------------------------------
In open outcry, the trading crowd generally prices the combo hedge
portion separately. The price of the combo and the rest of the order
are ultimately packaged and sent out as a net package price for the
entire order on the customer fill report. If the crowd improves the
price on the non-combo leg by a minimum increment, or greater, that
price is given on each contract. For example, if the trading crowd
improves $0.10 on 800 contracts, the $0.10 improvement is on each of
the 800 contracts.\19\
---------------------------------------------------------------------------
\19\ Amendment No. 1 adds clarity around the use of Index Combo
Orders in SPX as well as the price improvement process on such
orders when submitted for open outcry trading.
---------------------------------------------------------------------------
Currently, Rule 5.38(c)(5)(A) and Rule 5.38(a)(4) provide that the
minimum price increment for C-AIM responses and Agency and Initiating
Orders, respectively, must be in an increment the Exchange determines
on a class basis--which, as described above, is $0.05 in SPX
options.\20\ The Exchange notes that the corresponding FLEX AIM Rules
5.73(c)(5)(A) and 5.73(a)(4) provide the same for FLEX AIM Auctions.
However, unlike on the trading floor, market participant responses
using this increment have generally improved the net package price
(based on then-current leg markets) by the minimum increment of $0.05.
More specifically, in an electronic auction the improvement increment
is given on each strategy unit. That is, if the order (per the example
above) is for 800:100:100 total quantity, the system treats this as 100
units of an 8:1:1 ratio strategy. If $0.05 of improvement is given, the
$0.05 applies to each of the 100 strategy units.\21\ While members of
the trading crowd on the trading floor are permitted to improve the net
package price (based on then-current leg markets) by the minimum
increment of $0.05 under the Rules, that is not the common practice, as
noted above. The Exchange believes this is because the parties to an
electronic complex order trade may compete only with respect to the net
price and are not able to negotiate the leg prices.
---------------------------------------------------------------------------
\20\ The System rejects a C-AIM response or Agency or Initiating
Order that is not in the applicable minimum increment.
\21\ Amendment No. 1 adds clarity regarding the price
improvement process for Index Combo Orders in SPX when submitted for
execution in an electronic auction.
---------------------------------------------------------------------------
Using the example above, consider, specifically, an Index Combo in
SPX to buy 800 SPX NOV 3650 calls, ``tied'' (meaning hedged by combos),
with a 12.5 delta. Systematized, the order has an 8:1:1 ratio, 100
times, and is as follows:
Leg 1 = Buy 800 SPX NOV 3650 Calls.
Leg 2 = Sell 100 SPX SEP 3210 Calls.
Leg 3 = Buy 100 SPX SEP 3210 Puts.
Consider, too, that the current quotes are as follows:
SPX NOV 3650 Call = $20.40 - $21.00
SPX SEP 3210 Call $120.00-$120.70.
SPX SEP 3210 Put $127.30-$128.00.
If the entire order were to trade at the implied/BBO prices, the
premium and total cash outlay would be as follows:
----------------------------------------------------------------------------------------------------------------
Option Premium Ratio Total cash
----------------------------------------------------------------------------------------------------------------
NOV 3650 Call.............................. $21.00 $168.00 $1,680,000.00 debit ($21*800*100).
SEP 3210 Call.............................. 120.00 120.00 1,200,000.00 credit (120*100*100).
SEP 3210 Put............................... 128.00 128.00 1,280,000.00 debit (128*100*100).
Net package................................ N/A 176.00 1,760,000.00 debit (176*100*100).
----------------------------------------------------------------------------------------------------------------
As described above, the trading crowd would generally price the
non-combo portion separately and, per the example above, if the crowd
improves the non-combo portion (Leg 1) by the minimum increment of
$0.10, prices would be as follows:
----------------------------------------------------------------------------------------------------------------
Option Premium Ratio Total cash
----------------------------------------------------------------------------------------------------------------
NOV 3650 Call.............................. $20.90 $167.20 $1,672,000.00 debit
($20.90*800*100).
SEP 3210 Call.............................. 120.00 120.00 1,200,000.00 credit (120*100*100).
SEP 3210 Put............................... 128.00 128.00 1,280,000.00 debit (128*100*100).
Net package................................ N/A 175.20 1,752,000.00 debit
(175.20*100*100).
----------------------------------------------------------------------------------------------------------------
As stated, if submitted for execution in an electronic auction, the
minimum improvement increment is $0.05 for complex orders in SPX. If
the electronic auction results in the minimum improvement increment of
$0.05, $0.05 of improvement would be given to each strategy unit (i.e.,
each of the 100 units would receive $0.05 of improvement). The prices
would be as follows: \22\
---------------------------------------------------------------------------
\22\ The Exchange notes that the System uses an algorithm to
determine how price improvement is distributed on a multi-leg
strategy. This example shows one possibility. The $0.05 improvement
cannot not be applied to Leg 1 because the ratio on that leg is `8',
therefore, there are not enough pennies to distribute given there
are only five pennies ($0.05) worth of improvement. This, then,
leaves the other two legs, both of which have a ratio of `1', in
which the System may distribute the five pennies of improvement per
strategy unit. In sum, the price improvement given is always
distributed in a manner that improves the leg market.
[[Page 53048]]
----------------------------------------------------------------------------------------------------------------
Option Premium Ratio Total cash
----------------------------------------------------------------------------------------------------------------
NOV 3650 Call.............................. $21.00 $168.00 $1,680,000.00 debit ($21*800*100).
SEP 3210 Call.............................. 120.03 120.03 1,200,300.00 credit
(120.03*100*100).
SEP 3210 Put............................... 127.98 127.98 1,279,800.00 debit
(127.98*100*100).
Net package................................ N/A 175.95 1,759,500.00 debit
(175.95*100*100).
----------------------------------------------------------------------------------------------------------------
Therefore, as demonstrated in the example, the difference between
pricing the combo and non-combo portions of the order separately when
trading in open outcry (where the example order would have received a
total price improvement of $0.80) and as a net package when trading in
an electronic auction (where the example order would have received a
total price improvement of only $0.05), may result in a significant
difference between the price improvement received.\23\
---------------------------------------------------------------------------
\23\ Amendment No. 1 replaces the example and explanation of the
differences between the price improvement process in open outcry
trading and in the electronic auctions, simplifying and clarifying
the example explanation as well as providing for additional detail.
---------------------------------------------------------------------------
In addition to this, current Rules 5.37(c)(2), 5.38(c)(2), and
5.73(c)(2) provide that the System initiates the AIM, C-AIM, and FLEX
AIM Auction processes, respectively, by sending an auction notification
message detailing the side, size, Auction ID, options series
(additionally, in the case of C-AIM Auctions, complex strategy, and in
the case of FLEX AIM Auctions, length of the auction period and complex
strategy, as applicable) of the Agency Order to all Users that elect to
receive AIM, C-AIM, or FLEX AIM Auction notification messages. AIM, C-
AIM, and FLEX AIM Auction notification messages are not included in the
disseminated BBO (in connection with AIM Auctions) or OPRA. As such,
the stop price of an Agency Order is not currently included in auction
notification messages. The Exchange believes that lack of an indication
of where an auction is set to begin, like the ballpark figure provided
by the trading crowd when crossing on the trading floor, may cause
apprehension in pricing competitive responses during the electronic
auctions in SPX, which may reduce liquidity and price improvement
during such auctions.
The Exchange is considering activating AIM and C-AIM in SPX when it
reopens the trading floor. To better align the C-AIM process for SPX
complex strategies with the open outcry crossing process for those
strategies, the Exchange proposes to amend Rule 5.38(c)(5)(A) to
provide that the minimum price increment for a C-AIM response in which
the Agency Order complex strategy is comprised of an Index Combo Order
in SPX (as defined in Rule 5.33(b)) \24\ will be the ratio of the non-
combo portion of the strategy to the number of combos, multiplied by
the minimum price increment the Exchange determines for options on SPX
Agency Orders pursuant to Rule 5.38(a)(4). Also, to better align the
AIM and C-AIM pricing process generally for responses with the open
outcry process, the Exchange proposes to amend Rules 5.37(c)(2) and
5.38(c)(2) to provide that the Exchange may also determine to include
the stop price in AIM and C-AIM Auction notification messages,
respectively, in SPX.\25\ If the stop price is enabled for SPX in AIM
or C-AIM, respectively, it will apply to all AIM auctions in SPX.\26\
Like all other information disseminated in an AIM and C-AIM Auction
notification message, the stop price will be available to all Users
that elect to receive auction notification messages. The Exchange notes
that the FLEX AIM Rules in connection with the auction process for FLEX
complex orders are substantially similar to the AIM and C-AIM Rules.
Therefore, to maintain consistency within the Rules between the FLEX
and non-FLEX auctions, the Exchange also proposes to amend the FLEX AIM
process for SPX complex strategies (i.e. for FLEX C-AIM) and for FLEX
AIM Auction notification messages in the same manner.\27\
---------------------------------------------------------------------------
\24\ Amendment No. 1 corrects this cross reference in the
Exhibit 5 to reflect the appropriate Rule that contains the
definition of Index Combo Orders.
\25\ Amendment No. 1 add this footnote to clarify that the
Exchange will notify its TPHs of a determination to include the stop
price in auction notification messages, pursuant to Rule 1.5, via a
specification, Notice, or Regulatory Circular with appropriate
advanced notice, which are posted on the Exchange's website,
electronic message, or other communication method as provided in the
Rules.
\26\ Amendment No. 1 adds this language to Rule 5.37(c)(2) and
Rule 5.38(c)(2) in the Exhibit 5.
\27\ See proposed Rules 5.73(c)(2) and 5.73(c)(5)(A).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule changes will create
similar price competition for these orders in electronic and open
outcry trading. Particularly, the Exchange believes that the current
manner in which de minimis price improvement may occur via C-AIM, as
well as FLEX C-AIM, Auctions in connection with Index Combo Orders in
SPX (i.e., potentially only improved in sub-penny increments) may
discourage market participants from providing contra-side interest at
the best prices and liquidity providers from joining or improving at
meaningful increments. As such, the proposed rule change is intended to
provide for substantially the same price improvement opportunities at
meaningful increments on SPX complex strategies submitted to C-AIM and
FLEX C-AIM that occur for the same strategies on the trading floor. To
illustrate by using the same complex strategy example above, if a User
buys 800 of the November 3650 SPX Calls tied to 100 September 3210
Combos, using a delta of 12.5, pursuant to the proposed rules, the
System would calculate the minimum increment by the ratio of the non-
combo leg (800) to the number of combos (100) by the minimum increment
of $0.05. Therefore, (800/100) x 0.05 = $0.40 as the starting point for
price improvement during the C-AIM or FLEX C-AIM Auction. In this way,
by tying the minimum increment to the legs of the order, as opposed to
the package price inclusive of the combos, the Exchange believes the
proposed rule would require market participants to respond to the C-AIM
or FLEX C-AIM Auctions for SPX complex strategies at prices more
aligned with the prices at which responses generally occur in open
outcry, i.e. prices in response to a broker's corresponding bids
(offers) based off of the market per leg at which the trading crowd
indicates it is willing to buy (sell). If market participants may
participate in C-AIM or FLEX C-AIM executions in connection with SPX
complex strategies by providing de minimis price improvement compared
to price improvement that may occur on the floor, the Exchange believes
there may be less interest by market participants to take on the risk
of participating as a contra and may negatively impact liquidity
available on the trading floor. As a result, the Exchange believes this
potentially reduces price improvement opportunities for customers.
Particularly, if the Exchange determines to activate C-AIM in SPX when
the trading floor re-opens, the Exchange believes the proposed rule
change may provide customers with additional opportunities for more
meaningful price improvement and may encourage
[[Page 53049]]
market participants to provide more liquidity for C-AIM transactions in
SPX while also mitigating any potential disincentive to provide
liquidity on the trading floor in SPX by better aligning electronic and
open outcry crossing of SPX complex orders that include a combo.
The Exchange notes that the proposed rule change does not alter the
minimum increment as determined by the Exchange for SPX complex
strategies and is consistent with the ability of the Exchange to
determine the minimum increment for SPX (the proposed minimum increment
will be in multiples of $0.05). Additionally, it would not alter the
manner in which the System caps responses pursuant to Rule
5.38(c)(5)(B), wherein, if the BBO of any component of the complex
strategy or the resting complex order, respectively, is a Priority
Customer order, a response is capped at one minimum increment lower
(higher) than the better of the SBO (SBB) or the offer (bid) of a
resting complex order at the top of the Complex Order Book (``COB'').
The System would simply use the minimum increment determined pursuant
to the proposed calculation for any response submitted in connection
with an Index Combo Order in SPX.\28\ Instead, the proposed rule change
provides that price improvement opportunities for such orders submitted
into C-AIM, as well FLEX AIM, occur at the same meaningful increments
that market participants reasonably would expect to occur on such
orders pursuant to the current Rules and practice on the trading floor.
The Exchange believes this may encourage a potential increase in
participation in the C-AIM and FLEX AIM Auctions in SPX without a
corresponding negative impact on participation or liquidity in open
outcry auctions once the trading floor reopens. The Exchange believes
that without the proposed rule change, market participants may improve
the displayed auction price by only a trivial amount, thereby,
potentially enabling liquidity providers to ``step ahead'' of those
that are willing to trade with customer orders at the auction price.
Such activity, in turn, may discourage market participants from
providing liquidity at meaningful prices to commence an auction. As
such, the Exchange believes that the proposed rule change to provide
price improvement at more significant increments that are better
aligned with those received on the trading floor would encourage market
participants to provide meaningful responses to customer orders in
electronic auctions.\29\
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\28\ Amendment No. 1 adds language to clarify how the System
would cap responses that were submitted in connection with an Index
Combo Order in SPX and received the minimum price improvement
pursuant to proposed Rule 5.38(c)(5)(A).
\29\ Amendment No. 1 adds additional detail regarding the
purpose of adopting the proposed minimum increments for responses in
connection with Index Combo Orders in SPX.
---------------------------------------------------------------------------
In the same way, the Exchange believes that the proposed rule
change to allow the System to disseminate the initial price of an SPX
AIM and C-AIM Auction, as well as FLEX AIM Auction, would more
generally align the trading of SPX options submitted for execution into
the electronic auctions with those crossed on the trading floor. The
Exchange believes that the proposed rule change would allow the
Exchange to address any uncertainties market participants may have when
pricing SPX responses, given the more complicated market models,
greater risk, higher notional value, larger sizes, and increasingly
more complex strategies in SPX, by including the Agency Order stop
price in the auction notification messages. This, in turn, may
facilitate market participants' confidence in pricing meaningful,
competitive responses during electronic auctions in SPX in a manner
substantially similar to which the trading crowd's market allows for
market participants to more confidently price their responses
accordingly. As a result, this proposed rule change is intended to
incentivize continued, competitive responses to SPX electronic auctions
in substantially the same manner in which responses may be priced on
the trading floor, thus, providing for potentially improved liquidity
and price improvement opportunities for orders being executed through
those auctions. The Exchange also notes that its affiliated options
exchange, Cboe EDGX Exchange, Inc. (``EDGX Options'') corresponding
rules \30\ governing the AIM and C-AIM auction notification messages on
EDGX Options provide that its system initiates the AIM or C-AIM auction
processes by sending an auction notification message detailing the
price, along with the same fields currently detailed pursuant to Cboe
Options Rules 5.37(c)(2) and 5.38(c)(2) as well as 5.73(c)(2). Also,
pursuant to Exchange Rule 5.33(d)(1), C2 Rule 6.13(d)(1), and EDGX
Options Rule 21.20(d)(1), the Exchange and its affiliated options
exchanges may currently determine to include in similar notification
messages the limit price of an order that initiates a Complex Order
Auction (``COA''), much like that of the stop price of an AIM, C-AIM,
or FLEX AIM Agency order that initiates these auctions. The Exchange
further notes that similar electronic auctions on other options
exchanges disseminate the price in their initial auction messages.\31\
---------------------------------------------------------------------------
\30\ See EDGX Options Rules 21.19(c)(2) and 21.22(c)(2).
\31\ See MIAX Options Rule 5.18(d)(2), which governs the
commencement of a Complex Auction on MIAX Options, and Rules
515A(a)(2)(i)(B) and 515A.12, which govern the request for response
message disseminated during MIAX Options' electronic crossing
auctions, PRIME and complex PRIME; substantially similar to AIM and
C-AIM; see also NYSE American Options Rule 903G(a)(2), which governs
the information required in FLEX Request for quotes.
---------------------------------------------------------------------------
The Exchange believes that providing similar response and execution
opportunities across these trading facilities will serve to maintain
meaningful levels of liquidity, price competition, and price
improvement opportunities in SPX during both electronic and open outcry
auctions upon the reopening of the trading floor if the Exchange
determines to activate AIM and C-AIM for SPX at that time. As a result,
the proposed rule change is designed to ensure that C-AIM for complex
SPX strategies remains a viable additional means of execution for SPX
complex orders, and that market participants maintain the same
confidence in pricing their responses to AIM and C-AIM Auctions in SPX
as they have during open outcry auctions, and thus, will continue to
provide more execution and price improvement opportunities for
customers. Likewise, the proposed rule change would align the FLEX AIM
and C-AIM Auction process with the non-FLEX AIM and C-AIM Auction
process, potentially providing the similar opportunities for execution
and price improvement in connection with the same complex strategies
and similar meaningfully price responses submitted into FLEX AIM and
providing investors with continued consistency in the Exchange's
auction rules, thus, mitigating any confusion for those participating
in both non-FLEX and FLEX SPX trading.
III. Summary of Comment Letter Received
To date the Commission has received one comment letter on the
proposal.\32\ The commenter supported the proposal and agreed with
Cboe's assertion that ``providing appointed Market-Makers with an
additional way to participate in electronic auctions will expand
available liquidity for these auctions, which may increase execution
and price improvement opportunities for
[[Page 53050]]
customers' orders.'' \33\ The commenter also believed that the proposed
rule change ``would further align open outcry and electronic crossing
auctions and the execution and price improvement opportunities in both
auctions by permitting the same participants to be solicited as contras
in both types of auctions across all classes at all times.'' \34\ The
commenter agreed with Cboe that ``there is no reason to restrict
Market-Makers ability to provide liquidity into electronic auctions
when they are able to similarly provide that liquidity in open outcry
trading.'' \35\
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\32\ See letter to Vanessa Countryman, Secretary, Commission,
from Ellen Greene, Managing Director, Equities & Options Market
Structure, The Securities Industry and Financial Markets
Association, dated July 9, 2020.
\33\ See id. at 3.
\34\ See id.
\35\ See id.
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IV. Proceedings To Determine Whether to Approve or Disapprove SR-CBOE-
2020-052, 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 \36\ 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 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.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\37\ 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; \38\ 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.\39\
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\37\ 15 U.S.C. 78s(b)(2)(B).
\38\ 15 U.S.C. 78f(b)(5).
\39\ 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.'' \40\ 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,\41\ 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.\42\
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\40\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\41\ See id.
\42\ 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,\43\
any request for an opportunity to make an oral presentation.\44\
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\43\ 17 CFR 240.19b-4.
\44\ 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-2020-052 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2020-052. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish
[[Page 53051]]
to make available publicly. All submissions should refer to File Number
SR-CBOE-2020-052, 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.\45\
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\45\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18830 Filed 8-26-20; 8:45 am]
BILLING CODE 8011-01-P
