Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance Its Drill-Through Protections and Make Other Clarifying Changes, 67383-67387 [2020-23360]
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Federal Register / Vol. 85, No. 205 / Thursday, October 22, 2020 / Notices
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Dated: October 20, 2020.
Vanessa A. Countryman,
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[FR Doc. 2020–23532 Filed 10–20–20; 4:15 pm]
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Enhance Its DrillThrough Protections and Make Other
Clarifying Changes
October 16, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
5, 2020, Cboe Exchange, Inc.
(‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
1. Purpose
[Release No. 34–90213; File No. SR–CBOE–
2020–094]
2 17
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to enhance
its drill-through protections and make
other clarifying changes. The text of the
proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/About
CBOE/CBOELegalRegulatory
Home.aspx), at the Exchange’s Office of
the Secretary, and at the Commission’s
Public Reference Room.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
1 15
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to enhance its
drill-through protections for simple and
complex orders and make other
clarifying changes. Currently, pursuant
to Rule 5.34(a)(4) and (b)(6), the System
will execute a marketable buy (sell)
order or complex order,3 respectively,
up to a buffer amount above (below) the
limit of the Opening Collar or the
national best offer (‘‘NBO’’) (national
best bid (‘‘NBB’’)), as applicable, or the
synthetic national best offer (‘‘SNBO’’)
or synthetic national best bid (‘‘SNBB’’),
respectively (the ‘‘drill-through price’’).
The System enters any order (or
unexecuted portion), simple 4 or
complex, into the book or the complex
order book (‘‘COB’’), respectively, at the
drill-through price for a specified period
3 The System may also initiate a complex order
auction (‘‘COA’’) at the drill-through price for a
complex order that would otherwise initiate a COA.
4 Market orders or limit orders (or unexecuted
portions) with times-in-force of immediate-orcancel (‘‘IOC’’) or fill-or-kill (‘‘FOK’’) are cancelled
rather than be entered into the book. Limit orders
with times-in-force of day, good-til-cancelled
(‘‘GTC’’), or good-til-day (‘‘GTD) may enter the
book.
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of time (determined by the Exchange).5
At the end of the time period, the
System cancels any portion of the order
not executed during that time period.
The Exchange proposes to permit
orders to rest in the book or COB, as
applicable, for multiple time periods
and at more aggressive displayed prices
during each time period.6 Specifically,
for a limit order (or unexecuted portion)
with a Time-in-Force of Day, GTC, or
GTD, or a complex order, the System
enters the order in the Book or COB
with a displayed 7 price equal to the
drill-through price (as discussed below,
if an order’s limit price is less aggressive
than the drill-through price, the order
will rest in the Book or COB, as
applicable, at its limit price and subject
to the User’s instructions, and the drillthrough mechanism as proposed to be
amended would no longer apply to the
order).8 The order (or unexecuted
portion) will rest in the book or COB, as
applicable, until the earliest to occur of
the order’s full execution and the end of
the duration of the number of time
periods.9 Following the end of each
period prior to the final period, the
System adds (if a buy order) or subtracts
(if a sell order) one buffer amount to the
drill-through price displayed during the
immediately preceding period (each
new price becomes the ‘‘drill-through
5 The current time period is two seconds, and the
current default amounts are available in the
technical specifications available at https://
cdn.cboe.com/resources/membership/US_Options_
BOE_Specification.pdf. Upon implementation of
the proposed rule change, the Exchange will likely
reduce the length of the time period and maintain
the same buffer amounts.
6 The Exchange will announce to Trading Permit
Holders the buffer amount, the number of time
periods, and the length of the time periods in
accordance with Rule 1.5. The Exchange notes that
each time period will be the same length (as
designated by the Exchange), and the buffer amount
applied for each time period will be the same.
7 Currently, the drill-through price is the price of
orders and complex orders in the book or COB,
respectively. The proposed rule change clarifies
that the drill-through price is displayed, which is
consistent with current functionality.
8 See proposed Rule 5.34(a)(4)(C) and (b)(6)(B).
9 The Exchange will determine on a class-by-class
basis the number of time periods, which may not
exceed five, and the length of the time period,
which may not exceed three seconds. See proposed
Rule 5.34(a)(4)(C)(i) and (b)(6)(B)(i). While the
current rule does not permit the Exchange to
determine different time periods for different
classes, the proposed rule change adds class
flexibility so that the Exchange may determine
different time periods for different classes, which
may exhibit different trading characteristics and
have different market models. This is consistent
with flexibility the current Rules provide the
Exchange with respect to other portions of the drillthrough protection, such as the buffer amount for
simple orders (the proposed rule change also adds
this flexibility for determining the buffer amount for
complex orders). See Rule 5.34(a)(4)(C) [sic] and
(b)(6)(A) [sic].
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price’’).10 The order (or unexecuted
portion) rests in the book or COB, as
applicable, at that new drill-through
price for the duration of the subsequent
period. Following the end of the final
period, the System cancels or routes to
PAR for manual handling, subject to a
User’s instructions, the simple or
complex order (or unexecuted portion)
not executed during any time period.
The Exchange has received feedback
from Users that the current application
of the drill-through mechanism is too
limited. The Exchange believes this
proposed rule change will provide
additional execution opportunities for
these orders (or unexecuted portions)
while providing protection against
execution at prices that may be
erroneous.
For example, suppose the Exchange’s
market for a series in a class with a 0.05
minimum increment is 0.90–1.00,
represented by a quote for 10 contracts
on each side (the quote offer is Quote
A). The following sell orders or quote
offers for the series also rest in the book:
• Order A: 10 contracts at 1.05;
• Quote B: 10 contracts at 1.10;
• Order B: 10 contracts at 1.15; and
• Order C: 20 contracts at 1.25.
The market for away exchanges is
0.80–1.45. The Exchange’s buffer
amount for the class is 0.10, the drillthrough resting time period is one
second, and the number of time periods
is three.
The System receives an incoming
order to buy 100 at 1.40, which executes
against resting orders and quotes as
follows: 10 against Quote A at 1.00
(which is the national best offer), 10
against Order A at 1.05, and 10 against
Quote B at 1.10. The System will not
automatically execute any of the
remaining 70 contracts from the
incoming buy order against Order B,
because 1.15 is more than 0.10 away
from the national best offer at the time
of order entry of 1.00 and thus exceeds
the drill-through price check. The 70
unexecuted contracts then rest in the
book for one second at a price of 1.10
(the initial drill-through price). No
incoming orders are entered during that
one-second time period to trade against
the remaining 70 contracts. The System
then re-prices the buy order in the book
10 The System will apply a timestamp to the order
(or unexecuted portion) based on the time it enters
or is re-priced in the book or COB, as applicable,
for priority purposes. See proposed Rule
5.34(a)(4)(C)(iii) and (b)(6)(B)(iii). This is consistent
with the current drill-through functionality,
pursuant to which the System applies a timestamp
to the order (or unexecuted portion) based on the
time it enters the book or COB, as applicable,
modified to reflect the multiple price levels at
which an order may rest. See current Rule
5.34(a)(4)(D) and (b)(6)(A).
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at a new drill-through price of 1.20
(drill-through price plus one buffer of
0.10). Ten contracts immediately
execute against Order B at a price of
1.15 (the buy order is still handled as
the ‘‘incoming order’’ that executes
against the resting Order B, and thus
receives price improvement to 1.15). An
incoming order to sell 20 contracts at
1.20 enters the book and executes
against 20 of the resting contracts at that
price. At the end of the second onesecond time period, there are 40
remaining contracts. These contracts
then rest in the book at a price of 1.30
for the final one second time period.
Twenty contracts immediately execute
against Order C at a price of 1.25. No
incoming orders are entered during that
time period to trade against the
remaining 20 contracts. At the end of
the final one-second time period, the
System cancels the remaining 20
contracts (if the order is electronic only)
or routes the remaining portion of the
order to PAR for manual handling (if the
order is default).11
Currently, Users may establish a
higher or lower buffer amount than the
default amount set by the Exchange
with respect to complex orders subject
to the drill-through protection.12
Pursuant to the proposed rule change, if
a User establishes its own buffer
amount, the drill-through protection
will work as it does today. In other
words, if a User establishes its own
buffer amount, a complex order will rest
in the COB for one time period at the
drill-through price and any unexecuted
portion will be cancelled (or route to
PAR as proposed) at the end of the time
period. The proposed rule change
clarifies that the length of the time
period will continue to be determined
by the Exchange, and will be the same
as the length of the time period that
applies to complex orders for which the
User does not establish its own buffer
amount. The Exchange believes this is
consistent with a User’s desire to set its
own buffer to accommodate its own risk
tolerance. All Users have the ability
either to establish their own buffer
amounts for complex orders, and thus
have unexecuted orders rest for one
time period, or let their complex orders
be subject to the Exchange default buffer
amount for complex orders, and thus
have unexecuted orders rest at multiple
price points for multiple time periods,
as proposed.
Currently, any simple or complex
order (or unexecuted portion) that does
11 The proposed drill-through protection for
complex orders works in an identical manner.
12 See Rule 5.34(b)(6) (proposed subparagraph
(b)(6)(A)).
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not execute after resting on the book or
COB, respectively, at the drill-through
price is cancelled.13 The proposed rule
change provides that a simple or
complex order (or unexecuted portion)
that does not execute after the time
period(s) will be cancelled or routed to
PAR for manual handling, subject to a
User’s instructions.14 The Exchange
believes this will be consistent with
order instructions Users may apply and
thus User’s desired handling of their
orders.15
The proposed rule change also makes
certain clarifying and nonsubstantive
changes, including movement of certain
terms and provisions within Rule
5.34(a)(4) and (b)(6) due to the proposed
rule changes described above. First, the
proposed rule change combines the
provisions in current subparagraphs (A)
and (B) of Rule 5.34(a)(4) into proposed
subparagraph (A). The drill-through
protection in the following
subparagraphs of Rule 5.34(a)(4)
(currently and as proposed) apply to
orders that enter the Book at the
conclusion of the opening auction and
intraday in the same manner. Current
Rule 5.34(a)(4)(C) and (D) (proposed
subparagraphs (B) and (C)) provide that
the System handles orders not executed
pursuant to current subparagraph (A) in
accordance with those subparagraphs,
inadvertently omitting that current
subparagraphs (C) and (D) (and
proposed subparagraphs (B) and (C))
also apply to orders described in current
subparagraph (B). The proposed rule
change clarifies that the drill-through
protection applies to all orders that
would enter the Book at prices worse
than the drill-through price, including
orders not executed during the opening
auction and orders entered intraday.
This is consistent with and a
clarification of current functionality.
Second, the proposed rule change
adds clarifying language regarding how
the System handles orders for which the
limit price is equal to or less than (if a
buy order) or greater than (if a sell
order) the drill-through price. Current
Rule 5.34(b)(6) contemplates that
complex orders with limit prices equal
13 See current Rule 5.34(a)(4)(D) and (b)(6)(B).
Note the current Rules use the language ‘‘cancel or
reject’’ while the proposed rule change deletes
‘‘reject,’’ as both terms have the same result and
merely relate to internal System code, making the
use of both terms unnecessary.
14 See proposed Rule 5.34(a)(4)(C)(ii) and
(b)(6)(2).
15 See Rule 5.6(c) (definitions of ‘‘default,’’ which
provides that an order will be subject to electronic
processing and routed to PAR for manual handling
if not eligible for electronic processing, and
‘‘electronic only,’’ which provides that an order will
be subject to electronic processing but will not
route to PAR for manual handling if not eligible for
electronic processing).
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to or less aggressive than the drillthrough price will not be subject to the
mechanism pursuant to which orders
will rest in the COB for a time period
and then be cancelled. Specifically,
Rule 5.34(b)(6)(A) states if a buy (sell)
complex order would execute or enter
the COB at a price higher (lower) than
the drill-through price, the System
enters the complex order into the COB
with a price equal to the drill-through
price and rests for the time period in
accordance with the drill-through
mechanism. Additionally, Rule
5.34(b)(6)(B) states that any complex
order with a displayed price equal to the
drill-through price (unless the drillthrough price equals the order’s limit
price) will rest in the COB for the drillthrough time period. Therefore,
currently, if the limit price of a complex
order is less aggressive than or equal to
the drill-through price (i.e., if a buy
(sell) complex order (or unexecuted
portion) would execute or enter the COB
at a price lower (higher) than or equal
to the drill-through price), the complex
order will rest in the COB, as applicable,
and the drill-through mechanism stops
(i.e., the time period will not occur and
the System will not cancel the order).
This is also true for simple orders but
is not specified in the current Rules.
The proposed rule change clarifies
that notwithstanding the provisions
described above regarding an order or
complex order resting in the book or
COB, respectively, for brief time periods
at drill-through prices, if a buy (sell)
order’s limit price equals or is less
(greater) than the drill-through price at
any time during application of the drillthrough mechanism, the order rests in
the book or COB, as applicable, subject
to a User’s instructions,16 at its limit
price and any remaining time period(s)
described above do not occur.17 If the
drill-through price is equal to or more
aggressive than the order’s limit price,
the additional protection of having the
order rest in the COB for a short time
period is not necessary given that the
order will rest at the limit price entered
by the User (and thus an acceptable
execution price for that User).
Additionally, displaying an order at a
drill-through price (a price at which
execution is possible) worse than the
limit price of the order would be
inconsistent with the terms of the order.
This is consistent with current
functionality (updated to reflect the
proposed rule change to allow multiple
16 For example, the order will remain in force
subject to any time-in-force instruction applied to
the order by the User upon entry.
17 See proposed Rule 5.34(a)(4)(C)(iv) and
(b)(6)(B)(iv).
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time periods) and the definition of limit
orders and merely clarifies this in the
Rules.
Third, the proposed rule change
corrects the market order reference in
current Rule 5.34(a)(4)(D) (proposed
Rule 5.34(a)(4)(C)) to limit order. That
subparagraph relates to orders with
times-in-force of day, GTC, or GTD that
will rest in the book for a time period
at the drill-through price. However,
market orders by definition 18 do not
rest in the book and would not have
those times-in-force, which are contrary
to the character of market orders. The
System applies the functionality
described in that subparagraph to limit
orders with those times-in-force. The
proposed rule change conforms the rule
to current System functionality and to
the definition of market and limit
orders, as limit orders not fully executed
upon entry will rest in the book while
market orders not fully executed upon
entry will be cancelled and not rest in
the book.19
Fourth, the proposed rule change
clarifies in proposed Rule
5.34(b)(6)(B)(ii) that if the synthetic best
bid or offer (‘‘SBBO’’) changes prior to
the end of any time period but the
complex order cannot leg into the
simple book, and the new SBB or SBO,
as applicable, crosses the drill-through
price, the System changes the displayed
price of the complex order to the new
SBB or SBO, as applicable, plus or
minus the applicable minimum
increment for the class. The current
Rule states that $0.01 is added to or
subtracted from the new SBBO.
However, a class may have a minimum
increment other than $0.01 pursuant to
Rule 5.4(b). Currently, the System adds
or subtracts the applicable minimum
increment. The proposed rule change
corrects an inadvertent error in the
Rules to conform to current System
functionality and Rules regarding
minimum increments for complex
orders. The proposed rule change will
ensure that a complex order will rest in
the COB only with a displayed price in
the applicable minimum increment
applicable for the class of that complex
order. The proposed rule change also
clarifies that the complex order will rest
in the COB (the current rule text says
the complex order is not cancelled), and
adds detail that the complex order rests
18 See
Rule 5.6(b).
proposed rule change also reorders the
terms limit and market orders in current Rule
5.34(a)(4)(C) (proposed subparagraph (a)(4)(B)). This
is a nonsubstantive change, as the times-in-force of
immediate-or-cancel or fill-or-kill described in that
subparagraph are applicable to limit orders rather
than market orders, which by definition are
immediate-or-cancel.
19 The
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67385
at that displayed price, subject to a
User’s instructions, and if it was not the
final period, any remaining time
period(s) do not occur.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.20 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 21 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 22 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
the proposed enhancement to the drillthrough mechanism removes
impediments to and perfects the
mechanism of a free and open market
and a national market system, and, in
general, protects investors and the
public interest. The proposed rule
change will permit orders (or
unexecuted portions) to rest in the book
or COB, as applicable, at different
displayed prices for a brief but overall
longer period of time, which will
provide market participants’ orders with
additional execution opportunities
while continuing to protect them against
execution at potentially erroneous
prices. The proposed enhancement to
the drill-through protection is similar to
current drill-through functionality. The
Exchange may determine the buffer
amount for orders and the time period
in which orders may rest in the book or
COB. The proposed rule change permits
an order to rest at multiples of the buffer
amount, which would have the same
effect as the Exchange setting a larger
buffer amount. For example, if the
Exchange set a buffer amount of $0.75,
that would allow orders to execute at
20 15
21 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
22 Id.
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any price no further than $0.75 away
from the NBBO or SNBBO at the time
of order entry (including at prices $0.25
and $0.50 away from the NBBO or
SNBBO at the time of order entry). This
allows for the same potential execution
prices that would be possible if the
Exchange set a buffer of $0.25 and three
time periods under the proposed rule
change. While the overall time period
for which an order may rest in the book
or COB may be longer than the currently
permissible time period, the longer time
period will still be relatively brief
(maximum of 15 seconds). The
Exchange notes it may maintain the
same buffer amounts that are in place
today. However, rather than increase the
buffer amount at one time, the proposed
rule change adds the overall larger
buffer amount incrementally over a
potentially overall longer time period.
While this may permit executions at
prices farther away from the NBBO or
SNBBO at the time of order entry, it will
still never permit executions at prices
through orders’ limit prices. This will
provide execution opportunities for
orders at incremental amounts away
from the NBBO or SNBBO, as
applicable, over a slightly longer time
period and thus against a potentially
larger number of orders. Users also have
the ability to cancel orders prior to the
completion of the time periods if they
do not want the orders resting for a
longer period of time (and Users can set
their own buffer for complex orders,
which would cause those complex
orders to rest for a single time period
rather than multiple as proposed).
Additionally, the proposed rule
change to permit orders to route orders
to PAR for manual handling rather than
cancel if consistent with the order
instructions will remove impediments
to and perfect the mechanism of a free
and open market and national market
system, as well as protect investors,
because it will allow the System to
handle orders in a manner that is
consistent with the intent of a User’s
order instruction to route orders to PAR
for manual handling that are not eligible
for electronic processing. Manual
handling rather than cancellation of
orders in these circumstances may
provide these orders with additional
execution opportunities. Manual
handling permits opportunities for
brokers to evaluate the prices of orders
based on then-existing market
conditions, which creates minimal risk
of executions at erroneous prices. Users
that prefer to have their orders continue
to be cancelled following the drillthrough mechanism may include the
appropriate instructions on their orders.
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The Exchange notes another risk control
provides for the routing of orders to
PAR for manual handling after the
application of that control.23
The Exchange believes the proposed
clarifying and nonsubstantive changes
to the drill-through protection rules
protect investors by adding
transparency to the rules regarding the
drill-through functionality. These
changes are consistent with current
functionality and thus do not impact the
applicability of the drill-through
mechanism to orders.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that the
proposed rule change will impose any
burden on intramarket competition that
is not necessary or appropriate in
furtherance of the purposes of the Act
because the enhanced drill-through
protection will apply to all marketable
orders in the same manner. Users may
cancel orders resting on the Book during
the drill-through time periods or set
their own buffer with respect to
complex orders if they do not want their
orders resting for a longer period of time
as proposed. With respect to the
proposed rule change pursuant to which
orders may route to PAR for manual
handling following being subject to the
drill-through mechanism, Users can
decide whether their orders may be
eligible to route to PAR subject to the
proposed rule change. If Users prefer
their orders be cancelled following the
drill-through mechanism (as occurs
today), they can include an instruction
on their orders that the order be handled
electronically only.
The Exchange does not believe that
the proposed rule change will impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the purposes of the Act
because it relates solely to how and
when marketable orders will rest on the
Exchange’s book or COB. The proposed
enhancement to the drill-through
protection is consistent with the current
protection and provides orders subject
to the protection with additional
execution opportunities while providing
continued protection against execution
against potentially erroneous prices.
The Exchange believes the proposed
rule change would ultimately provide
all market participants with additional
execution opportunities when
23 See
PO 00000
Rule 5.34(a)(1).
Frm 00057
Fmt 4703
appropriate while providing protection
from erroneous execution. The
Exchange believes the proposal will
enhance risk protections, the individual
firm benefits of which flow downstream
to counterparties both at the Exchange
and at other options exchanges, which
increases systemic protections as well.
The Exchange believes enhancing risk
protections will allow Users to enter
orders and quotes with further reduced
fear of inadvertent exposure to excessive
risk, which will benefit investors
through increased liquidity for the
execution of their orders. Without
adequate risk management tools, such as
the one proposed to be enhanced in this
filing, Trading Permit Holders could
reduce the amount of order flow and
liquidity they provide. Such actions
may undermine the quality of the
markets available to customers and
other market participants. Accordingly,
the proposed rule change is designed to
encourage Trading Permit Holders to
submit additional order flow and
liquidity to the Exchange. The proposed
flexibility may similarly provide
additional execution opportunities,
which further benefits liquidity in
potentially volatile markets. In addition,
providing Trading Permit Holders with
more tools for managing risk will
facilitate transactions in securities
because, as noted above, Trading Permit
Holders will have more confidence
protections are in place that reduce the
risks from potential system errors and
market events.
The proposed clarifying and
nonsubstantive changes are consistent
with current functionality and are
intended to add clarity to the Rules, and
thus the Exchange expects those
changes to have no competitive impact.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 24 and
24 15
Sfmt 4703
E:\FR\FM\22OCN1.SGM
U.S.C. 78s(b)(3)(A)(iii).
22OCN1
Federal Register / Vol. 85, No. 205 / Thursday, October 22, 2020 / Notices
subparagraph (f)(6) of Rule 19b–4
thereunder.25
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2020–094 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–2020–094. 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
25 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
VerDate Sep<11>2014
17:35 Oct 21, 2020
Jkt 253001
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2020–094 and
should be submitted on or before
November 12, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–23360 Filed 10–21–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90212; File No. SR–CBOE–
2020–099]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rule 5.34 in
Connection With Its Debit/Credit Price
Reasonability Check
October 16, 2020,
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
13, 2020, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Exchange filed the proposal pursuant to
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
26 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
1 15
PO 00000
Frm 00058
Fmt 4703
Sfmt 4703
67387
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
Rule 5.34 in connection with its debit/
credit price reasonability check. The
text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposed to amend
Rule 5.34(b)(3), which provides for its
debit/credit price reasonability check.
Specifically, the proposed rule change
amends Rule 5.34(b)(3)(A) in connection
with two-legged strategies that have one
A.M.-settled leg and one P.M.-settled leg
with the same expiration date.5 The
proposed rule change also codifies the
definition of diagonal spreads in Rule
5.34(b)(1)(E), which is already a strategy
described in Rule 5.34(b)(3) and
handled by the System in connection
with the debit/credit reasonability
check, the codified definition of which
was inadvertently omitted in the rule
filing that allowed the System to apply
the debit/credit reasonability check to
diagonal spreads.6
Pursuant to the debit/credit price
reasonability check, the Exchange
5 The proposed rule change also updates the
definition of vertical spread in Rule 5.34(b)(1)(A)
and the definition of calendar spread in Rule
5.34(b)(1)(D) in light of the proposed change to Rule
5.34(b)(3)(A).
6 See Securities Exchange Release No. 88923 (May
21, 2020), 85 FR 32086 (May 28, 2020) (SR–CBOE–
2020–046).
E:\FR\FM\22OCN1.SGM
22OCN1
]]>Agencies
[Federal Register Volume 85, Number 205 (Thursday, October 22, 2020)]
[Notices]
[Pages 67383-67387]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23360]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90213; File No. SR-CBOE-2020-094]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance
Its Drill-Through Protections and Make Other Clarifying Changes
October 16, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 5, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to enhance its drill-through protections and make other clarifying
changes. The text of the proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to enhance its drill-through protections for
simple and complex orders and make other clarifying changes. Currently,
pursuant to Rule 5.34(a)(4) and (b)(6), the System will execute a
marketable buy (sell) order or complex order,\3\ respectively, up to a
buffer amount above (below) the limit of the Opening Collar or the
national best offer (``NBO'') (national best bid (``NBB'')), as
applicable, or the synthetic national best offer (``SNBO'') or
synthetic national best bid (``SNBB''), respectively (the ``drill-
through price''). The System enters any order (or unexecuted portion),
simple \4\ or complex, into the book or the complex order book
(``COB''), respectively, at the drill-through price for a specified
period of time (determined by the Exchange).\5\ At the end of the time
period, the System cancels any portion of the order not executed during
that time period.
---------------------------------------------------------------------------
\3\ The System may also initiate a complex order auction
(``COA'') at the drill-through price for a complex order that would
otherwise initiate a COA.
\4\ Market orders or limit orders (or unexecuted portions) with
times-in-force of immediate-or-cancel (``IOC'') or fill-or-kill
(``FOK'') are cancelled rather than be entered into the book. Limit
orders with times-in-force of day, good-til-cancelled (``GTC''), or
good-til-day (``GTD) may enter the book.
\5\ The current time period is two seconds, and the current
default amounts are available in the technical specifications
available at https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf. Upon implementation of the
proposed rule change, the Exchange will likely reduce the length of
the time period and maintain the same buffer amounts.
---------------------------------------------------------------------------
The Exchange proposes to permit orders to rest in the book or COB,
as applicable, for multiple time periods and at more aggressive
displayed prices during each time period.\6\ Specifically, for a limit
order (or unexecuted portion) with a Time-in-Force of Day, GTC, or GTD,
or a complex order, the System enters the order in the Book or COB with
a displayed \7\ price equal to the drill-through price (as discussed
below, if an order's limit price is less aggressive than the drill-
through price, the order will rest in the Book or COB, as applicable,
at its limit price and subject to the User's instructions, and the
drill-through mechanism as proposed to be amended would no longer apply
to the order).\8\ The order (or unexecuted portion) will rest in the
book or COB, as applicable, until the earliest to occur of the order's
full execution and the end of the duration of the number of time
periods.\9\ Following the end of each period prior to the final period,
the System adds (if a buy order) or subtracts (if a sell order) one
buffer amount to the drill-through price displayed during the
immediately preceding period (each new price becomes the ``drill-
through
[[Page 67384]]
price'').\10\ The order (or unexecuted portion) rests in the book or
COB, as applicable, at that new drill-through price for the duration of
the subsequent period. Following the end of the final period, the
System cancels or routes to PAR for manual handling, subject to a
User's instructions, the simple or complex order (or unexecuted
portion) not executed during any time period. The Exchange has received
feedback from Users that the current application of the drill-through
mechanism is too limited. The Exchange believes this proposed rule
change will provide additional execution opportunities for these orders
(or unexecuted portions) while providing protection against execution
at prices that may be erroneous.
---------------------------------------------------------------------------
\6\ The Exchange will announce to Trading Permit Holders the
buffer amount, the number of time periods, and the length of the
time periods in accordance with Rule 1.5. The Exchange notes that
each time period will be the same length (as designated by the
Exchange), and the buffer amount applied for each time period will
be the same.
\7\ Currently, the drill-through price is the price of orders
and complex orders in the book or COB, respectively. The proposed
rule change clarifies that the drill-through price is displayed,
which is consistent with current functionality.
\8\ See proposed Rule 5.34(a)(4)(C) and (b)(6)(B).
\9\ The Exchange will determine on a class-by-class basis the
number of time periods, which may not exceed five, and the length of
the time period, which may not exceed three seconds. See proposed
Rule 5.34(a)(4)(C)(i) and (b)(6)(B)(i). While the current rule does
not permit the Exchange to determine different time periods for
different classes, the proposed rule change adds class flexibility
so that the Exchange may determine different time periods for
different classes, which may exhibit different trading
characteristics and have different market models. This is consistent
with flexibility the current Rules provide the Exchange with respect
to other portions of the drill-through protection, such as the
buffer amount for simple orders (the proposed rule change also adds
this flexibility for determining the buffer amount for complex
orders). See Rule 5.34(a)(4)(C) [sic] and (b)(6)(A) [sic].
\10\ The System will apply a timestamp to the order (or
unexecuted portion) based on the time it enters or is re-priced in
the book or COB, as applicable, for priority purposes. See proposed
Rule 5.34(a)(4)(C)(iii) and (b)(6)(B)(iii). This is consistent with
the current drill-through functionality, pursuant to which the
System applies a timestamp to the order (or unexecuted portion)
based on the time it enters the book or COB, as applicable, modified
to reflect the multiple price levels at which an order may rest. See
current Rule 5.34(a)(4)(D) and (b)(6)(A).
---------------------------------------------------------------------------
For example, suppose the Exchange's market for a series in a class
with a 0.05 minimum increment is 0.90-1.00, represented by a quote for
10 contracts on each side (the quote offer is Quote A). The following
sell orders or quote offers for the series also rest in the book:
Order A: 10 contracts at 1.05;
Quote B: 10 contracts at 1.10;
Order B: 10 contracts at 1.15; and
Order C: 20 contracts at 1.25.
The market for away exchanges is 0.80-1.45. The Exchange's buffer
amount for the class is 0.10, the drill-through resting time period is
one second, and the number of time periods is three.
The System receives an incoming order to buy 100 at 1.40, which
executes against resting orders and quotes as follows: 10 against Quote
A at 1.00 (which is the national best offer), 10 against Order A at
1.05, and 10 against Quote B at 1.10. The System will not automatically
execute any of the remaining 70 contracts from the incoming buy order
against Order B, because 1.15 is more than 0.10 away from the national
best offer at the time of order entry of 1.00 and thus exceeds the
drill-through price check. The 70 unexecuted contracts then rest in the
book for one second at a price of 1.10 (the initial drill-through
price). No incoming orders are entered during that one-second time
period to trade against the remaining 70 contracts. The System then re-
prices the buy order in the book at a new drill-through price of 1.20
(drill-through price plus one buffer of 0.10). Ten contracts
immediately execute against Order B at a price of 1.15 (the buy order
is still handled as the ``incoming order'' that executes against the
resting Order B, and thus receives price improvement to 1.15). An
incoming order to sell 20 contracts at 1.20 enters the book and
executes against 20 of the resting contracts at that price. At the end
of the second one-second time period, there are 40 remaining contracts.
These contracts then rest in the book at a price of 1.30 for the final
one second time period. Twenty contracts immediately execute against
Order C at a price of 1.25. No incoming orders are entered during that
time period to trade against the remaining 20 contracts. At the end of
the final one-second time period, the System cancels the remaining 20
contracts (if the order is electronic only) or routes the remaining
portion of the order to PAR for manual handling (if the order is
default).\11\
---------------------------------------------------------------------------
\11\ The proposed drill-through protection for complex orders
works in an identical manner.
---------------------------------------------------------------------------
Currently, Users may establish a higher or lower buffer amount than
the default amount set by the Exchange with respect to complex orders
subject to the drill-through protection.\12\ Pursuant to the proposed
rule change, if a User establishes its own buffer amount, the drill-
through protection will work as it does today. In other words, if a
User establishes its own buffer amount, a complex order will rest in
the COB for one time period at the drill-through price and any
unexecuted portion will be cancelled (or route to PAR as proposed) at
the end of the time period. The proposed rule change clarifies that the
length of the time period will continue to be determined by the
Exchange, and will be the same as the length of the time period that
applies to complex orders for which the User does not establish its own
buffer amount. The Exchange believes this is consistent with a User's
desire to set its own buffer to accommodate its own risk tolerance. All
Users have the ability either to establish their own buffer amounts for
complex orders, and thus have unexecuted orders rest for one time
period, or let their complex orders be subject to the Exchange default
buffer amount for complex orders, and thus have unexecuted orders rest
at multiple price points for multiple time periods, as proposed.
---------------------------------------------------------------------------
\12\ See Rule 5.34(b)(6) (proposed subparagraph (b)(6)(A)).
---------------------------------------------------------------------------
Currently, any simple or complex order (or unexecuted portion) that
does not execute after resting on the book or COB, respectively, at the
drill-through price is cancelled.\13\ The proposed rule change provides
that a simple or complex order (or unexecuted portion) that does not
execute after the time period(s) will be cancelled or routed to PAR for
manual handling, subject to a User's instructions.\14\ The Exchange
believes this will be consistent with order instructions Users may
apply and thus User's desired handling of their orders.\15\
---------------------------------------------------------------------------
\13\ See current Rule 5.34(a)(4)(D) and (b)(6)(B). Note the
current Rules use the language ``cancel or reject'' while the
proposed rule change deletes ``reject,'' as both terms have the same
result and merely relate to internal System code, making the use of
both terms unnecessary.
\14\ See proposed Rule 5.34(a)(4)(C)(ii) and (b)(6)(2).
\15\ See Rule 5.6(c) (definitions of ``default,'' which provides
that an order will be subject to electronic processing and routed to
PAR for manual handling if not eligible for electronic processing,
and ``electronic only,'' which provides that an order will be
subject to electronic processing but will not route to PAR for
manual handling if not eligible for electronic processing).
---------------------------------------------------------------------------
The proposed rule change also makes certain clarifying and
nonsubstantive changes, including movement of certain terms and
provisions within Rule 5.34(a)(4) and (b)(6) due to the proposed rule
changes described above. First, the proposed rule change combines the
provisions in current subparagraphs (A) and (B) of Rule 5.34(a)(4) into
proposed subparagraph (A). The drill-through protection in the
following subparagraphs of Rule 5.34(a)(4) (currently and as proposed)
apply to orders that enter the Book at the conclusion of the opening
auction and intraday in the same manner. Current Rule 5.34(a)(4)(C) and
(D) (proposed subparagraphs (B) and (C)) provide that the System
handles orders not executed pursuant to current subparagraph (A) in
accordance with those subparagraphs, inadvertently omitting that
current subparagraphs (C) and (D) (and proposed subparagraphs (B) and
(C)) also apply to orders described in current subparagraph (B). The
proposed rule change clarifies that the drill-through protection
applies to all orders that would enter the Book at prices worse than
the drill-through price, including orders not executed during the
opening auction and orders entered intraday. This is consistent with
and a clarification of current functionality.
Second, the proposed rule change adds clarifying language regarding
how the System handles orders for which the limit price is equal to or
less than (if a buy order) or greater than (if a sell order) the drill-
through price. Current Rule 5.34(b)(6) contemplates that complex orders
with limit prices equal
[[Page 67385]]
to or less aggressive than the drill-through price will not be subject
to the mechanism pursuant to which orders will rest in the COB for a
time period and then be cancelled. Specifically, Rule 5.34(b)(6)(A)
states if a buy (sell) complex order would execute or enter the COB at
a price higher (lower) than the drill-through price, the System enters
the complex order into the COB with a price equal to the drill-through
price and rests for the time period in accordance with the drill-
through mechanism. Additionally, Rule 5.34(b)(6)(B) states that any
complex order with a displayed price equal to the drill-through price
(unless the drill-through price equals the order's limit price) will
rest in the COB for the drill-through time period. Therefore,
currently, if the limit price of a complex order is less aggressive
than or equal to the drill-through price (i.e., if a buy (sell) complex
order (or unexecuted portion) would execute or enter the COB at a price
lower (higher) than or equal to the drill-through price), the complex
order will rest in the COB, as applicable, and the drill-through
mechanism stops (i.e., the time period will not occur and the System
will not cancel the order). This is also true for simple orders but is
not specified in the current Rules.
The proposed rule change clarifies that notwithstanding the
provisions described above regarding an order or complex order resting
in the book or COB, respectively, for brief time periods at drill-
through prices, if a buy (sell) order's limit price equals or is less
(greater) than the drill-through price at any time during application
of the drill-through mechanism, the order rests in the book or COB, as
applicable, subject to a User's instructions,\16\ at its limit price
and any remaining time period(s) described above do not occur.\17\ If
the drill-through price is equal to or more aggressive than the order's
limit price, the additional protection of having the order rest in the
COB for a short time period is not necessary given that the order will
rest at the limit price entered by the User (and thus an acceptable
execution price for that User). Additionally, displaying an order at a
drill-through price (a price at which execution is possible) worse than
the limit price of the order would be inconsistent with the terms of
the order. This is consistent with current functionality (updated to
reflect the proposed rule change to allow multiple time periods) and
the definition of limit orders and merely clarifies this in the Rules.
---------------------------------------------------------------------------
\16\ For example, the order will remain in force subject to any
time-in-force instruction applied to the order by the User upon
entry.
\17\ See proposed Rule 5.34(a)(4)(C)(iv) and (b)(6)(B)(iv).
---------------------------------------------------------------------------
Third, the proposed rule change corrects the market order reference
in current Rule 5.34(a)(4)(D) (proposed Rule 5.34(a)(4)(C)) to limit
order. That subparagraph relates to orders with times-in-force of day,
GTC, or GTD that will rest in the book for a time period at the drill-
through price. However, market orders by definition \18\ do not rest in
the book and would not have those times-in-force, which are contrary to
the character of market orders. The System applies the functionality
described in that subparagraph to limit orders with those times-in-
force. The proposed rule change conforms the rule to current System
functionality and to the definition of market and limit orders, as
limit orders not fully executed upon entry will rest in the book while
market orders not fully executed upon entry will be cancelled and not
rest in the book.\19\
---------------------------------------------------------------------------
\18\ See Rule 5.6(b).
\19\ The proposed rule change also reorders the terms limit and
market orders in current Rule 5.34(a)(4)(C) (proposed subparagraph
(a)(4)(B)). This is a nonsubstantive change, as the times-in-force
of immediate-or-cancel or fill-or-kill described in that
subparagraph are applicable to limit orders rather than market
orders, which by definition are immediate-or-cancel.
---------------------------------------------------------------------------
Fourth, the proposed rule change clarifies in proposed Rule
5.34(b)(6)(B)(ii) that if the synthetic best bid or offer (``SBBO'')
changes prior to the end of any time period but the complex order
cannot leg into the simple book, and the new SBB or SBO, as applicable,
crosses the drill-through price, the System changes the displayed price
of the complex order to the new SBB or SBO, as applicable, plus or
minus the applicable minimum increment for the class. The current Rule
states that $0.01 is added to or subtracted from the new SBBO. However,
a class may have a minimum increment other than $0.01 pursuant to Rule
5.4(b). Currently, the System adds or subtracts the applicable minimum
increment. The proposed rule change corrects an inadvertent error in
the Rules to conform to current System functionality and Rules
regarding minimum increments for complex orders. The proposed rule
change will ensure that a complex order will rest in the COB only with
a displayed price in the applicable minimum increment applicable for
the class of that complex order. The proposed rule change also
clarifies that the complex order will rest in the COB (the current rule
text says the complex order is not cancelled), and adds detail that the
complex order rests at that displayed price, subject to a User's
instructions, and if it was not the final period, any remaining time
period(s) do not occur.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\20\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \21\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \22\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ Id.
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In particular, the Exchange believes the proposed enhancement to
the drill-through mechanism removes impediments to and perfects the
mechanism of a free and open market and a national market system, and,
in general, protects investors and the public interest. The proposed
rule change will permit orders (or unexecuted portions) to rest in the
book or COB, as applicable, at different displayed prices for a brief
but overall longer period of time, which will provide market
participants' orders with additional execution opportunities while
continuing to protect them against execution at potentially erroneous
prices. The proposed enhancement to the drill-through protection is
similar to current drill-through functionality. The Exchange may
determine the buffer amount for orders and the time period in which
orders may rest in the book or COB. The proposed rule change permits an
order to rest at multiples of the buffer amount, which would have the
same effect as the Exchange setting a larger buffer amount. For
example, if the Exchange set a buffer amount of $0.75, that would allow
orders to execute at
[[Page 67386]]
any price no further than $0.75 away from the NBBO or SNBBO at the time
of order entry (including at prices $0.25 and $0.50 away from the NBBO
or SNBBO at the time of order entry). This allows for the same
potential execution prices that would be possible if the Exchange set a
buffer of $0.25 and three time periods under the proposed rule change.
While the overall time period for which an order may rest in the book
or COB may be longer than the currently permissible time period, the
longer time period will still be relatively brief (maximum of 15
seconds). The Exchange notes it may maintain the same buffer amounts
that are in place today. However, rather than increase the buffer
amount at one time, the proposed rule change adds the overall larger
buffer amount incrementally over a potentially overall longer time
period. While this may permit executions at prices farther away from
the NBBO or SNBBO at the time of order entry, it will still never
permit executions at prices through orders' limit prices. This will
provide execution opportunities for orders at incremental amounts away
from the NBBO or SNBBO, as applicable, over a slightly longer time
period and thus against a potentially larger number of orders. Users
also have the ability to cancel orders prior to the completion of the
time periods if they do not want the orders resting for a longer period
of time (and Users can set their own buffer for complex orders, which
would cause those complex orders to rest for a single time period
rather than multiple as proposed).
Additionally, the proposed rule change to permit orders to route
orders to PAR for manual handling rather than cancel if consistent with
the order instructions will remove impediments to and perfect the
mechanism of a free and open market and national market system, as well
as protect investors, because it will allow the System to handle orders
in a manner that is consistent with the intent of a User's order
instruction to route orders to PAR for manual handling that are not
eligible for electronic processing. Manual handling rather than
cancellation of orders in these circumstances may provide these orders
with additional execution opportunities. Manual handling permits
opportunities for brokers to evaluate the prices of orders based on
then-existing market conditions, which creates minimal risk of
executions at erroneous prices. Users that prefer to have their orders
continue to be cancelled following the drill-through mechanism may
include the appropriate instructions on their orders. The Exchange
notes another risk control provides for the routing of orders to PAR
for manual handling after the application of that control.\23\
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\23\ See Rule 5.34(a)(1).
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The Exchange believes the proposed clarifying and nonsubstantive
changes to the drill-through protection rules protect investors by
adding transparency to the rules regarding the drill-through
functionality. These changes are consistent with current functionality
and thus do not impact the applicability of the drill-through mechanism
to orders.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because the enhanced drill-
through protection will apply to all marketable orders in the same
manner. Users may cancel orders resting on the Book during the drill-
through time periods or set their own buffer with respect to complex
orders if they do not want their orders resting for a longer period of
time as proposed. With respect to the proposed rule change pursuant to
which orders may route to PAR for manual handling following being
subject to the drill-through mechanism, Users can decide whether their
orders may be eligible to route to PAR subject to the proposed rule
change. If Users prefer their orders be cancelled following the drill-
through mechanism (as occurs today), they can include an instruction on
their orders that the order be handled electronically only.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act because it
relates solely to how and when marketable orders will rest on the
Exchange's book or COB. The proposed enhancement to the drill-through
protection is consistent with the current protection and provides
orders subject to the protection with additional execution
opportunities while providing continued protection against execution
against potentially erroneous prices.
The Exchange believes the proposed rule change would ultimately
provide all market participants with additional execution opportunities
when appropriate while providing protection from erroneous execution.
The Exchange believes the proposal will enhance risk protections, the
individual firm benefits of which flow downstream to counterparties
both at the Exchange and at other options exchanges, which increases
systemic protections as well. The Exchange believes enhancing risk
protections will allow Users to enter orders and quotes with further
reduced fear of inadvertent exposure to excessive risk, which will
benefit investors through increased liquidity for the execution of
their orders. Without adequate risk management tools, such as the one
proposed to be enhanced in this filing, Trading Permit Holders could
reduce the amount of order flow and liquidity they provide. Such
actions may undermine the quality of the markets available to customers
and other market participants. Accordingly, the proposed rule change is
designed to encourage Trading Permit Holders to submit additional order
flow and liquidity to the Exchange. The proposed flexibility may
similarly provide additional execution opportunities, which further
benefits liquidity in potentially volatile markets. In addition,
providing Trading Permit Holders with more tools for managing risk will
facilitate transactions in securities because, as noted above, Trading
Permit Holders will have more confidence protections are in place that
reduce the risks from potential system errors and market events.
The proposed clarifying and nonsubstantive changes are consistent
with current functionality and are intended to add clarity to the
Rules, and thus the Exchange expects those changes to have no
competitive impact.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \24\ and
[[Page 67387]]
subparagraph (f)(6) of Rule 19b-4 thereunder.\25\
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\24\ 15 U.S.C. 78s(b)(3)(A)(iii).
\25\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2020-094 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-2020-094. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2020-094 and should be submitted on
or before November 12, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23360 Filed 10-21-20; 8:45 am]
BILLING CODE 8011-01-P
