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, 67387-67392 [2020-23361]
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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.
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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
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
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).
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Federal Register / Vol. 85, No. 205 / Thursday, October 22, 2020 / Notices
cancels or rejects a complex order (or
unexecuted portion) that is a limit order
for a debit strategy with a net credit
price that exceeds a pre-set buffer, a
limit order (or unexecuted portion) for
a credit strategy with a net debit price
that exceeds a pre-set buffer, or a market
order (or unexecuted portion) for a
credit strategy that would execute at a
net debit price that exceeds a pre-set
buffer (the pre-set buffers are
determined by the Exchange on a class
and strategy (i.e., vertical, calendar,
butterfly, orders with different
expiration dates and exercise prices)
basis). The System defines a complex
order as a debit (credit) if all pairs and
loners are debits (credits).7 For purposes
of the credit/debit price reasonability
check, a ‘‘pair’’ is a pair of legs in an
order for which both legs are calls or
both legs are puts, one leg is a buy and
one leg is a sell, and the legs have the
same expiration date but different
exercise prices (i.e., vertical),8 the same
exercise price but different expiration
dates (i.e., calendar),9 or the exercise
price for the call (put) with the farther
expiration date is lower (higher) than
the exercise price for the nearer
expiration date (which is a diagonal
pair). A ‘‘loner’’ is any leg in an order
that the System cannot pair with
another leg in the order.
The System determines whether an
order is a debit or credit based on
general options volatility and pricing
principles, which the Exchange
understands are used by market
participants in their option pricing
models. With respect to options with
the same underlying:
• If two calls (puts) have the same
expiration date, the price of the call
(put) with the lower (higher) exercise
price is more than the price of the call
(put) with the higher (lower) exercise
price; and
• if two calls (puts) have the same
exercise price, the price of the call (put)
with the nearer expiration is less than
the price of the call (put) with the
farther expiration.
In other words, a call (put) with a
lower (higher) exercise price is generally
7 See Rule 5.34(b)(3)(B)(i) and (ii). The System
also determines certain call and put butterfly
spreads as debits and credits.
8 See also Rule 5.34(b)(1)(A), which defines a
‘‘vertical spread’’ as a two-legged complex order
with one leg to buy a number of calls (puts) and
one leg to sell the same number of calls (puts) with
the same expiration date but different exercise
prices.
9 See also Rule 5.34(b)(1)(D), which defines a
‘‘calendar spread’’ as a two-legged complex order
with one leg to buy a number of calls (puts) and
one leg to sell the same number of calls (puts) with
the same exercise price but different expiration
dates.
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more expensive than a call (put) with a
higher (lower) exercise price, because
the ability to buy stock at a lower price
is more valuable than the ability to buy
stock at a higher price, and the ability
to sell stock at a higher price is more
valuable than the ability to sell stock at
a lower price. A call (put) with a farther
expiration is generally more expensive
than the price of a call (put) with a
nearer expiration, because locking in a
price further into the future involves
more risk for the buyer and seller and
thus is more valuable, making an option
(call or put) with a farther expiration
more expensive than an option with a
nearer expiration. Based on the
principles described above and
pursuant to Rule 5.34(b)(3)(B)(iii), the
System pairs calls (puts) under the
current debit/credit reasonability check,
as follows:
(1) The System first pairs legs to the
extent possible within each expiration
date, pairing one leg with the leg that
has the next highest exercise price.
(2) The System then pairs legs to the
extent possible across expiration dates,
pairing one call (put) with the call (put)
that has the next nearest expiration date
and the same or next lower (higher)
exercise price.
(3) A pair of calls is a credit (debit)
if the exercise price of the buy (sell) leg
is higher than the exercise price of the
sell (buy) leg (if the pair has the same
expiration date) or if the expiration date
of the sell (buy) leg is farther than the
expiration date of the buy (sell) leg (if
the exercise price of the sell (buy) leg is
the same as or lower than the exercise
price of the buy (sell) leg).
(4) A pair of puts is a credit (debit) if
the exercise price of the sell (buy) leg is
higher than the exercise price of the buy
(sell) leg (if the pair has the same
expiration date) or if the expiration date
of the sell (buy) leg is farther than the
expiration date of the buy (sell) leg (if
the exercise price of the sell (buy) leg is
the same as or higher than the exercise
price of the buy (sell) leg).
(5) A loner to buy is a debit, and a
loner to sell is a credit.
Additionally, the System does not
apply the debit/credit price
reasonability check to an order for
which the System cannot define
whether it is a debit or credit.
As indicated above, the debit/credit
reasonability check allows the Exchange
to determine a pre-set buffer on a classby-class and strategy basis (i.e., vertical,
calendar, butterfly, orders with different
expiration dates and exercise prices).
This flexibility allows the Exchange to
appropriately respond to the different
trading characteristics and market
conditions that have unique impact
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across different classes and different
strategies. For example, the Exchange
understands that in certain market
conditions, particularly in volatile
conditions, the general pricing
principles described above may not
apply to certain classes or strategies. It
is possible that the leg with the farther
expiration may be trading at a discount
and thus is worth less than the leg with
the nearer term expiration, and thus
entering a diagonal or calendar strategy
as a debit may be consistent with the
then-current market. Specifically,
certain classes may exhibit
backwardation,10 which occurs when
series with the farther expirations are
worth less than series with the nearer
term expirations. In such conditions, the
Exchange may deem it appropriate to
increase the buffer to permit these
orders to be accepted for electronic
processing. While an order with a
diagonal or calendar strategy entered as
a debit in normal market conditions
may appear erroneous and be
appropriately rejected, in volatile
market conditions, such an order
entered as a debit may be accurately
reflecting the market. As such, the
flexibility to establish pre-set buffers on
a class and strategy basis currently
permits the Exchange to provide a
calendar or diagonal strategy order
entered as a debit with electronic
execution opportunities, as applicable,
by modifying the buffer of these
strategies with legitimate debit prices
that are consistent with then-current
market conditions. In this way, the
System may accept such orders while
maintaining the check’s protection for
classes and strategies whose pricing is
not impacted by these market
conditions and are not experiencing
backwardation.
As stated above, for purposes of the
debit/credit reasonability check, the
System defines a vertical spread order
as a two-legged complex order with one
leg to buy a number of calls (puts) and
one leg to sell the same number of calls
(puts) with the same expiration date but
different exercise prices,11 and a
calendar spread order as a two-legged
complex order with one leg to buy a
number of calls (puts) and one leg to sell
the same number of calls (puts) with the
same exercise price but different
expiration dates.12 The Exchange notes
10 Specifically, European-settled options (which
is a group of classes) may experience
backwardation. For example, SPX is a European
style option that may be impacted by
backwardation in unusual or volatile market
conditions. Accordingly, the Exchange regularly
sets widened buffers for SPX diagonal pairs.
11 See Rule 5.34(b)(1)(A).
12 See Rule 5.34(b)(1)(D).
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that while the expiration date of the legs
of a vertical or calendar spread with an
A.M.-settled leg and a P.M.-settled leg
may be the same, the last trading date
of the two legs differs. For example, an
S&P 500 Index (‘‘SPX’’) option/SPX
Weekly (‘‘SPXW’’) vertical spread
would contain the same expiration date,
yet SPX options are A.M.-settled, thus
they stop trading on the Thursday prior
to Friday expiration, and SPXW options
are P.M.-settled, thus they stop trading
at the close on Friday expiration. As a
result, the time to expiration of trading
for each leg is different, which the
Exchange understands is what market
participants consider when pricing
options with an A.M.-settled/P.M.settled vertical strategy, similar to the
pricing of a diagonal spread, or when
pricing options with an A.M.-settled/
P.M.-settled calendar strategy—in other
words, market participants consider
these legs to have different expiration
dates. When applying the debit/credit
reasonability check, however, the
System currently considers a strategy
with one P.M.-settled leg and one A.M.settled leg with the same expiration date
and different exercise prices to be a
vertical strategy, rather than a diagonal
strategy., [sic] and it rejects a strategy
with one P.M.-settled leg and one A.M.settled leg with the same expiration date
and same exercise prices because it does
not recognize this strategy as a calendar
strategy. More specifically, the System
and the Rules do not currently consider
the difference in time between the
actual close of trading for the A.M.settled leg and the actual close of
trading the following day for the P.M.settled leg—it considers only that the
legs have the same expiration date. As
a result, the System does not determine
the credit (debit) net price for vertical or
calendar spread orders with a pair(s) of
A.M.-settled/P.M.-settled legs using the
same pricing principles for the debit/
credit reasonability check that the
Exchange understands market
participants use for these strategies, as
market participants consider these
spreads to have different expiration
dates, and thus to be diagonals (rather
than verticals) or calendars for pricing
purposes. That is, if a sell (buy) leg is
P.M.-settled (i.e., is ‘‘farther out’’ in time
until trading actually ceases) and is a
call (put) with an exercise price that is
the same as or lower (higher) than the
exercise price of the buy (sell) A.M.settled leg (thus making the P.M.-settled
leg more expensive), the System would
not treat this as a diagonal spread, nor
recognize it as a calendar spread,
pursuant to Rule 5.34(b)(3)(B)(iii)(c) and
(d), even though market participants
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would price these spreads as a diagonal
(if the legs have different exercise
prices) or calendar (if the legs have the
same exercise price) from a pricing
perspective.
Specifically, a vertical spread with
A.M.-settled/P.M.-settled legs
essentially emulates the manner in
which a diagonal strategy executes,
given that each leg in a diagonal strategy
ceases trading at different times
(because they have different expiration
dates) and diagonal spread legs, like
vertical spread legs, also have different
exercise prices. Likewise, a spread with
A.M.-settled/P.M.-settled legs with the
same exercise price essentially emulates
the manner in which a calendar spread
executes, given that each leg in a
calendar strategy ceases trading at
different times (because they have
different expiration dates). Under the
proposal, the debit/credit reasonability
check logic and Exchange-determined
buffers, where applicable, would apply
in the same manner as they do today for
calendar and diagonal spreads, as
applicable, to spreads with a pair(s) of
A.M.-settled/P.M.-settled legs.
Therefore, the proposed rule change
amends Rule 5.34(b)(3)(A) to provide
that, for the purposes of the debit/credit
price reasonability check, the System
considers a two-legged strategy with one
P.M.-settled leg and one A.M.-settled leg
with the same expiration date to be a
diagonal spread (where both legs have
different expiration dates and different
exercise prices), rather than a vertical
spread, or a calendar spread (where both
legs have the same exercise price).13 As
a result, the System will apply to such
vertical strategies, which are generally
priced using the same principles as
diagonal spreads and may be adjusted to
reflect backwardation (as described
above), the same debit/credit check
logic and pre-set buffers that it currently
applies to diagonal spreads. In addition,
the System will apply to such strategies,
which are generally priced using the
same principles as calendar spreads, the
same debit/credit check logic and preset buffers that it currently applies to
calendar spreads and not reject such
strategies because the legs have the
same expiration dates and exercise
prices. The Exchange believes the
enhancing the debit/credit price
reasonability check to consider a spread
that contains a pair of A.M.-settled/P.M.
settled legs with the same expiration
date as a diagonal or calendar, as
appropriate, will cause the System to
apply more accurate pricing principles
to them when determining whether to
13 See
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67389
accept or reject strategies with A.M.settled/P.M.-settled legs.
Regarding vertical spreads with A.M.settled/P.M.-settled legs with the same
expiration date and different exercise
prices, currently, if the System receives
such a vertical spread order, and the
exercise price for the sell leg is lower
than the exercise price of the buy leg
with a debit price, the System will
determine this to be a credit and reject
it (assuming it is outside of the buffer).
However, if the class is experiencing
backwardation, the debit price may be
appropriate. As discussed above, the
Exchange may widen the buffer for such
a class in such circumstances for
calendars and diagonals to account for
the backwardation. Therefore, if the
System receives a spread with A.M.settled/P.M.-settled legs in a class
experiencing backwardation during
unusual or volatile market conditions,
the System would apply a different
buffer to that spread than it would apply
to a diagonal spread. While the A.M.settled/P.M.-settled vertical spread
would likely have been priced using the
same pricing principles as the diagonal
spread, the System would reject the
vertical spread order, despite it likely
having a legitimate price, while
accepting the diagonal order with a
similarly legitimate price. Pursuant to
the proposed rule change the strategy
described above would be handled as a
diagonal and will have the opportunity
to be accepted and executed. Similarly,
the System will recognize a spread with
A.M.-settled/P.M.-settled legs with the
same expiration date and the same
exercise price as a calendar spread and
not reject such spread order.
The Exchange notes that it announces
any changes to the parameters of the
debit/credit reasonability check to
market participants by Exchange notice
pursuant to Rule 1.5. The Exchange
notes too that it will continue to
regularly monitor the application of the
debit/credit price reasonability check,
including the number of orders rejected
as a result of the check, as well as
continue to monitor orders that may be
executed at erroneous prices pursuant to
Rule 6.5. The Exchange currently
considers all of these factors, as well as
market conditions, investor demand,
and other relevant factors when
determining whether to modify the
debit/credit reasonability check buffer
or other risk control parameters in order
to attempt to create an appropriate
balance between protection against
executions at potentially erroneous
prices and provision of execution
opportunities for legitimately priced
orders.
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In addition to this, the proposed rule
change codifies the definition of
diagonal spreads in the current spread
definitions in Rule 5.34(b)(1).
Specifically, proposed Rule 5.34(b)(1)(E)
provides that a ‘‘diagonal’’ spread is a
two-legged complex order with one leg
to buy a number of calls (puts) and one
leg to sell the same number of calls
(puts) with different expiration dates
and different exercise prices. As noted
above, diagonal spreads are currently
described within Rule 5.34(b) and the
System currently applies the debit/
credit reasonability check and
Exchange-determined buffers to
diagonal spreads pursuant to Rule
5.34(b)(3)(A).14 The Exchange merely
inadvertently omitted codifying the
definition of diagonal spreads in a
previous rule filing that updated Rule
5.34 to allow the System to apply the
debit/credit reasonability check to
diagonals.15
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.16 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 17 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) 18 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 rule change will remove
impediments to and perfects the
mechanism of a free and open market
and national market system by applying
14 In light of the proposed codified definition, the
Exchange updates the current description of a
diagonal in Rule 5.34(b)(3)(A) to, instead, refer to
‘‘diagonal’’, as well as adds this reference to the
description of a diagonal in Rule 5.34(b)(3)(B)(iii).
15 See supra note 6.
16 15 U.S.C. 78f(b).
17 15 U.S.C. 78f(b)(5).
18 Id.
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the current debit/credit price
reasonability check logic for diagonal
spreads (which have different expiration
dates and thus cease trading on different
dates, as well as different exercise
prices) to spread orders with A.M.settled/P.M.-settled legs that have
different exercise prices but the same
expiration date (and are thus currently
defined as verticals) but similarly cease
trading on different dates. Additionally,
it will allow the System to recognize
spreads with A.M.-settled/P.M.-settled
legs that have the same exercise price
and the same expiration date, but
likewise cease trading on different
dates, to be calendar spreads (which
have different expiration dates and the
same exercise price). By considering
these particular orders to be diagonals
rather than verticals, or to be calendars,
the Exchange will apply the same
buffers to vertical strategies that have
legs that stop trading at different times
(i.e., one leg is A.M-settled and one leg
is P.M.-settled) as it applies to diagonal
strategies (which also have legs that stop
trading at different times), and will
apply the same buffers to strategies that
have legs that stop trading at different
times (i.e., one leg is A.M-settled and
one leg is P.M.-settled) and the same
exercise price as it applies to calendar
strategies. This handling of vertical
spreads is appropriate in classes in
which market conditions may cause the
P.M.-settled leg (with the farther time
until trading expiration) to trade at a
discount and be worth less than the
A.M.-settled leg (with the nearer time
until trading expiration). By considering
a vertical strategy with A.M.-settled/
P.M.-settled legs with the same
expiration date as diagonal rather than
a vertical, for purposes of the debit/
credit price reasonability check, the
proposed rule change will provide the
same execution opportunities for
legitimately priced vertical strategies
with A.M.-settled/P.M.-settled legs in
certain classes as it may for diagonal
strategies in certain classes given thencurrent market conditions. Additionally,
this handling of strategies with A.M.settled/P.M.-settled legs with the same
expiration date and different exercise
prices as calendar spreads will provide
those orders with opportunities to be
accepted and executed, rather than be
rejected because the debit/credit price
reasonability checks views the orders as
having legs with the same expiration
dates and exercise prices and thus does
not recognize it as a calendar spread.
As a result, the proposed rule change
ultimately protects investors by
continuing to prevent execution of
spreads with A.M.-settled/P.M.-settled
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legs that cease trading on different days
at potentially erroneous prices, while
also providing additional execution
opportunities for those spreads that may
be legitimately priced given thencurrent market conditions but may
currently be rejected when these orders
are treated as vertical spreads for the
purposes of the debit/credit
reasonability check, or are not
recognized as calendar spreads. This
proposed application of the debit/credit
price reasonability check promotes just
and equitable principles of trade, as it
is based on the same general option and
volatility pricing principles the System
currently uses to pair calls and puts for
other complex orders that also stop
trading on different days, and will result
in the handling of strategies with legs
that stop trading on different days in the
same manner during unusual or volatile
market conditions.
In addition to this, the Exchange notes
that the proposed rule change would not
raise any novel or unique issues for
investors as the debit/credit
reasonability check logic and Exchangedetermined buffers, where applicable,
would apply to strategies with A.M.settled/P.M.-settled legs in the same
manner as they do today for calendar
and diagonal spreads, which also have
legs that stop trading on different dates.
The Exchange will continue to
announce any changes to the parameters
of the debit/credit reasonability check to
market participants by Exchange notice,
to regularly monitor the application of
the debit/credit price reasonability
check and for orders that may be
executed at erroneous prices, to
consider market conditions, investor
demand, and other relevant factors
when determining whether to modify
the debit/credit reasonability check
buffer or other risk control parameter
amount in order to appropriately
balance providing protection against
executions at potentially erroneous
prices and providing execution
opportunities for legitimately priced
orders.
In addition to this, the proposed rule
change to codify the definition of
diagonal spreads in Rule 5.34(b) would
generally protect investors by adding
clarity to the Rules regarding a strategy
that is already described within the
Rules and to which the System
currently applies the debit/credit
reasonability check and Exchangedetermined price buffers.
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
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Federal Register / Vol. 85, No. 205 / Thursday, October 22, 2020 / Notices
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change will not impose
any burden on intramarket competition,
because the debit/credit price
reasonability check will continue to
apply to all incoming complex orders of
all TPHs in the same manner. The
proposed rule change would allow the
System to apply the logic and pre-set
buffers to vertical spreads with A.M.settled/P.M.-settled legs (and thus stop
trading on different dates) that it already
applies to other spreads that contain
legs that stop trading on different dates
and have different exercise prices (i.e.,
diagonals), as well as to apply the logic
and pre-set buffers to spreads with
A.M.-settled/P.M.-settled legs (and thus
stop trading on different dates) that it
already applies to other spreads that
contain legs that stop trading on
different dates and have the same
exercise prices (i.e., calendars). This, in
turn, will allow the System to apply the
appropriate Exchange-determined buffer
to such vertical orders, which the
Exchange understands market
participants price more similarly to a
diagonal spread as opposed to a vertical
spread, or to such calendar orders, given
the difference in the actual trading days
on which each leg stops trading, thus
allowing for legitimately priced
strategies with A.M.-settled/P.M.-settled
legs to execute as intended.
The proposed rule change does not
impose any burden on intermarket
competition, as it is an enhancement to
a price protection mechanism the
System applies to complex orders
submitted to the Exchange to determine
whether they should be accepted for
potential execution on the Exchange.
The Exchange believes the proposed
rule change would provide all market
participants with additional execution
opportunities when appropriate while
still providing protection from
anomalous or erroneous executions. To
the extent that market participants find
the proposed application of the debit/
credit reasonability check to their
vertical and calendar spreads with
A.M.-settled/P.M.-settled legs more
favorable for execution of their
legitimately priced orders, other
exchanges may adopt functionality to
similarly handle such complex
strategies.
Additionally, the proposed rule
change to codify the definition of
diagonal spreads to the Rules is a
nonsubstantive, noncompetitive change
that merely provides additional clarity
within the Rules regarding a term/
strategy that is already described in the
Rules and that the System already
accounts for pursuant to the Rules.
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17:35 Oct 21, 2020
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 19 and Rule
19b–4(f)(6) thereunder.20 Because the
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
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 21 and Rule 19b–4(f)(6)(iii)
thereunder.22
A proposed rule change filed under
Rule 19b–4(f)(6) 23 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),24 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Exchange states that market
participants have voiced concerns
regarding the System rejecting their
legitimately priced A.M.-settled/P.M.settled calendar spreads and vertical
spreads, especially closer in time to
A.M./P.M. expiration dates. The
Exchange believes that waiver of the
operative delay will protect investors by
allowing the Exchange to apply a
potentially widened buffer to A.M.settled/P.M.-settled vertical spreads
during volatile market conditions, and
by allowing the System to recognize and
accept A.M.-settled/P.M.-settled spreads
19 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
21 15 U.S.C. 78s(b)(3)(A).
22 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s 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.
23 17 CFR 240.19b–4(f)(6).
24 17 CFR 240.19b–4(f)(6)(iii).
20 17
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67391
with the same expiration date and
exercise price as calendar spreads,
rather than rejecting them. As discussed
above, the Exchange states that because
the component legs of an A.M.-settled/
P.M.-settled vertical spread cease
trading on different days, market
participants price A.M.-settled/P.M.settled vertical spreads more similarly
to diagonal spreads. In addition, market
participants treat A.M.-settled/P.M.settled spreads with component legs
that have the same exercise price and
expiration date as calendar spreads,
although the System currently does not
recognize them as calendar spreads. The
Commission believes that waiver of the
operative delay will allow the Exchange
to modify the debit/credit price
reasonability check so that it applies to
A.M.-settled/P.M.-settled calendar and
vertical spreads in a manner that is
consistent with market participants’
pricing of these spreads, and could help
to ensure that the price check does not
reject appropriately priced A.M.-settled/
P.M.-settled calendar and vertical
spreads. In addition, the Commission
believes that adding a definition of
diagonal spread will help to clarify the
operation of the rule. For these reasons,
the Commission believes that waiver of
the 30-day operative delay is consistent
with the protection of investors and the
public interest. According, the
Commission hereby waives the 30-day
operative delay and designates the
proposal operative upon filing.25
At any time within 60 days of the
filing of this 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 will institute proceedings
to determine whether the proposed rule
change 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:
25 For purposed only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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Federal Register / Vol. 85, No. 205 / Thursday, October 22, 2020 / Notices
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–2020–099 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–2020–099. 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–2020–099, 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. 2020–23361 Filed 10–21–20; 8:45 am]
BILLING CODE 8011–01–P
26 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
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Jkt 253001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90217; File No. SR–
NYSENAT–2020–05]
Self-Regulatory Organizations; NYSE
National, Inc.; Order Approving a
Proposed Rule Change To Establish
Fees for the NYSE National Integrated
Feed
October 16, 2020.
I. Introduction
On February 3, 2020, NYSE National,
Inc. (‘‘NYSE National’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘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 establish fees
for the NYSE National Integrated Feed.
The proposed rule change was
immediately effective upon filing with
the Commission pursuant to Section
19(b)(3)(A) of the Act.3 The proposed
rule change was published for comment
in the Federal Register on February 20,
2020.4 On April 1, 2020, the Division of
Trading and Markets (‘‘Division’’), for
the Commission pursuant to delegated
authority, temporarily suspended the
proposed rule change and instituted
proceedings to determine whether to
approve or disapprove the proposed
rule change.5 On June 12, 2020, the
Commission issued a request for
information and additional comment on
the proposed rule change.6 On August
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 See Securities Exchange Act Release No. 88211
(February 14, 2020), 85 FR 9847 (‘‘Notice’’).
Comments received on the Notice are available on
the Commission’s website at https://www.sec.gov/
comments/sr-nysenat-2020-05/
srnysenat202005.htm. The Commission notes that,
on December 4, 2019, NYSE National filed a
proposed rule change to establish fees for the NYSE
National Integrated Feed that are identical to the
fees proposed in this filing. See Securities Exchange
Act Release No. 87797 (December 18, 2019), 84 FR
71025 (December 26, 2019) (SR–NYSENAT–2019–
31). Comments received on SR–NYSENAT–2019–31
are available on the Commission’s website at
https://www.sec.gov/comments/sr-nysenat-2019-31/
srnysenat201931.htm. On January 31, 2020, the
Division of Trading and Markets, for the
Commission pursuant to delegated authority,
temporarily suspended SR–NYSENAT–2019–31
and instituted proceedings to determine whether to
approve or disapprove that proposed rule change.
See Securities Exchange Act Release No. 88109, 85
FR 6982 (February 6, 2020) (‘‘SR–NYSENAT–2019–
31 OIP’’). On February 3, 2020, NYSE National
withdrew SR–NYSENAT–2019–31. See Securities
Exchange Act Release No. 88118 (February 4, 2020),
85 FR 7611 (February 10, 2020).
5 See Securities Exchange Act Release No. 88538,
85 FR 19541 (April 7, 2020).
6 See Securities Exchange Act Release No. 89065,
85 FR 37123 (June 19, 2020) (‘‘Request for
2 17
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Frm 00063
Fmt 4703
Sfmt 4703
18, 2020, pursuant to Section 19(b)(2) of
the Act,7 the Division, for the
Commission pursuant to delegated
authority, designated a longer period
within which to issue an order
approving or disapproving the proposed
rule change.8 This order approves the
proposed rule change.
II. Description of the Proposed Rule
Change
NYSE National proposes to establish
fees for the NYSE National Integrated
Feed.9 According to NYSE National, the
NYSE National Integrated Feed is a
NYSE National-only market data feed
that provides vendors and subscribers
on a real-time basis with a unified view
of events, in sequence, as they appear
on the NYSE National matching
engine.10 The NYSE National Integrated
Feed includes depth-of-book order data,
last sale data, security status updates
(e.g., trade corrections and trading
halts), and stock summary messages.11 It
also includes information about NYSE
National’s best bid or offer at any given
time.12 NYSE National proposes the
following fees for the NYSE National
Integrated Feed:
• $2,500 per month access fee, which
would be charged (once per firm) to any
data recipient that receives a data feed
of the NYSE National Integrated Feed; 13
• $1,500 per month redistribution fee,
which would be charged (once per
redistributor account) to any
redistributor 14 of the NYSE National
Integrated Feed;
• $10 per month professional per user
fee and $1 per month non-professional
per user fee, which would apply to each
display device that has access to the
NYSE National Integrated Feed; 15
• Non-display use 16 fees:
Comment’’). Comments received on the Request for
Comment are available on the Commission’s
website at https://www.sec.gov/comments/srnysenat-2020-05/srnysenat202005.htm.
7 15 U.S.C. 78s(b)(2).
8 See Securities Exchange Act Release No. 89592,
85 FR 52174 (August 24, 2020).
9 The fees became effective on February 3, 2020.
Prior to February 3, 2020, NYSE National did not
charge any fees for the NYSE National Integrated
Feed. See Notice, supra note 4, at 9847.
10 See id.
11 See id.
12 See id.
13 Data recipients that only use display devices to
view NYSE National Integrated Feed data and do
not separately receive a data feed would not be
charged an access fee. See id. at 9848.
14 A redistributor would be a vendor or person
that provides a real-time NYSE National market
data product externally to a data recipient that is
not its affiliate or wholly-owned subsidiary, or to
any system that an external data recipient uses,
irrespective of the means of transmission or access.
See id.
15 See id.
16 Non-display use would mean accessing,
processing, or consuming the NYSE National
E:\FR\FM\22OCN1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 205 (Thursday, October 22, 2020)]
[Notices]
[Pages 67387-67392]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23361]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\ 15 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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
Pursuant to the debit/credit price reasonability check, the
Exchange
[[Page 67388]]
cancels or rejects a complex order (or unexecuted portion) that is a
limit order for a debit strategy with a net credit price that exceeds a
pre-set buffer, a limit order (or unexecuted portion) for a credit
strategy with a net debit price that exceeds a pre-set buffer, or a
market order (or unexecuted portion) for a credit strategy that would
execute at a net debit price that exceeds a pre-set buffer (the pre-set
buffers are determined by the Exchange on a class and strategy (i.e.,
vertical, calendar, butterfly, orders with different expiration dates
and exercise prices) basis). The System defines a complex order as a
debit (credit) if all pairs and loners are debits (credits).\7\ For
purposes of the credit/debit price reasonability check, a ``pair'' is a
pair of legs in an order for which both legs are calls or both legs are
puts, one leg is a buy and one leg is a sell, and the legs have the
same expiration date but different exercise prices (i.e., vertical),\8\
the same exercise price but different expiration dates (i.e.,
calendar),\9\ or the exercise price for the call (put) with the farther
expiration date is lower (higher) than the exercise price for the
nearer expiration date (which is a diagonal pair). A ``loner'' is any
leg in an order that the System cannot pair with another leg in the
order.
---------------------------------------------------------------------------
\7\ See Rule 5.34(b)(3)(B)(i) and (ii). The System also
determines certain call and put butterfly spreads as debits and
credits.
\8\ See also Rule 5.34(b)(1)(A), which defines a ``vertical
spread'' as a two-legged complex order with one leg to buy a number
of calls (puts) and one leg to sell the same number of calls (puts)
with the same expiration date but different exercise prices.
\9\ See also Rule 5.34(b)(1)(D), which defines a ``calendar
spread'' as a two-legged complex order with one leg to buy a number
of calls (puts) and one leg to sell the same number of calls (puts)
with the same exercise price but different expiration dates.
---------------------------------------------------------------------------
The System determines whether an order is a debit or credit based
on general options volatility and pricing principles, which the
Exchange understands are used by market participants in their option
pricing models. With respect to options with the same underlying:
If two calls (puts) have the same expiration date, the
price of the call (put) with the lower (higher) exercise price is more
than the price of the call (put) with the higher (lower) exercise
price; and
if two calls (puts) have the same exercise price, the
price of the call (put) with the nearer expiration is less than the
price of the call (put) with the farther expiration.
In other words, a call (put) with a lower (higher) exercise price
is generally more expensive than a call (put) with a higher (lower)
exercise price, because the ability to buy stock at a lower price is
more valuable than the ability to buy stock at a higher price, and the
ability to sell stock at a higher price is more valuable than the
ability to sell stock at a lower price. A call (put) with a farther
expiration is generally more expensive than the price of a call (put)
with a nearer expiration, because locking in a price further into the
future involves more risk for the buyer and seller and thus is more
valuable, making an option (call or put) with a farther expiration more
expensive than an option with a nearer expiration. Based on the
principles described above and pursuant to Rule 5.34(b)(3)(B)(iii), the
System pairs calls (puts) under the current debit/credit reasonability
check, as follows:
(1) The System first pairs legs to the extent possible within each
expiration date, pairing one leg with the leg that has the next highest
exercise price.
(2) The System then pairs legs to the extent possible across
expiration dates, pairing one call (put) with the call (put) that has
the next nearest expiration date and the same or next lower (higher)
exercise price.
(3) A pair of calls is a credit (debit) if the exercise price of
the buy (sell) leg is higher than the exercise price of the sell (buy)
leg (if the pair has the same expiration date) or if the expiration
date of the sell (buy) leg is farther than the expiration date of the
buy (sell) leg (if the exercise price of the sell (buy) leg is the same
as or lower than the exercise price of the buy (sell) leg).
(4) A pair of puts is a credit (debit) if the exercise price of the
sell (buy) leg is higher than the exercise price of the buy (sell) leg
(if the pair has the same expiration date) or if the expiration date of
the sell (buy) leg is farther than the expiration date of the buy
(sell) leg (if the exercise price of the sell (buy) leg is the same as
or higher than the exercise price of the buy (sell) leg).
(5) A loner to buy is a debit, and a loner to sell is a credit.
Additionally, the System does not apply the debit/credit price
reasonability check to an order for which the System cannot define
whether it is a debit or credit.
As indicated above, the debit/credit reasonability check allows the
Exchange to determine a pre-set buffer on a class-by-class and strategy
basis (i.e., vertical, calendar, butterfly, orders with different
expiration dates and exercise prices). This flexibility allows the
Exchange to appropriately respond to the different trading
characteristics and market conditions that have unique impact across
different classes and different strategies. For example, the Exchange
understands that in certain market conditions, particularly in volatile
conditions, the general pricing principles described above may not
apply to certain classes or strategies. It is possible that the leg
with the farther expiration may be trading at a discount and thus is
worth less than the leg with the nearer term expiration, and thus
entering a diagonal or calendar strategy as a debit may be consistent
with the then-current market. Specifically, certain classes may exhibit
backwardation,\10\ which occurs when series with the farther
expirations are worth less than series with the nearer term
expirations. In such conditions, the Exchange may deem it appropriate
to increase the buffer to permit these orders to be accepted for
electronic processing. While an order with a diagonal or calendar
strategy entered as a debit in normal market conditions may appear
erroneous and be appropriately rejected, in volatile market conditions,
such an order entered as a debit may be accurately reflecting the
market. As such, the flexibility to establish pre-set buffers on a
class and strategy basis currently permits the Exchange to provide a
calendar or diagonal strategy order entered as a debit with electronic
execution opportunities, as applicable, by modifying the buffer of
these strategies with legitimate debit prices that are consistent with
then-current market conditions. In this way, the System may accept such
orders while maintaining the check's protection for classes and
strategies whose pricing is not impacted by these market conditions and
are not experiencing backwardation.
---------------------------------------------------------------------------
\10\ Specifically, European-settled options (which is a group of
classes) may experience backwardation. For example, SPX is a
European style option that may be impacted by backwardation in
unusual or volatile market conditions. Accordingly, the Exchange
regularly sets widened buffers for SPX diagonal pairs.
---------------------------------------------------------------------------
As stated above, for purposes of the debit/credit reasonability
check, the System defines a vertical spread order as a two-legged
complex order with one leg to buy a number of calls (puts) and one leg
to sell the same number of calls (puts) with the same expiration date
but different exercise prices,\11\ and a calendar spread order as a
two-legged complex order with one leg to buy a number of calls (puts)
and one leg to sell the same number of calls (puts) with the same
exercise price but different expiration dates.\12\ The Exchange notes
[[Page 67389]]
that while the expiration date of the legs of a vertical or calendar
spread with an A.M.-settled leg and a P.M.-settled leg may be the same,
the last trading date of the two legs differs. For example, an S&P 500
Index (``SPX'') option/SPX Weekly (``SPXW'') vertical spread would
contain the same expiration date, yet SPX options are A.M.-settled,
thus they stop trading on the Thursday prior to Friday expiration, and
SPXW options are P.M.-settled, thus they stop trading at the close on
Friday expiration. As a result, the time to expiration of trading for
each leg is different, which the Exchange understands is what market
participants consider when pricing options with an A.M.-settled/P.M.-
settled vertical strategy, similar to the pricing of a diagonal spread,
or when pricing options with an A.M.-settled/P.M.-settled calendar
strategy--in other words, market participants consider these legs to
have different expiration dates. When applying the debit/credit
reasonability check, however, the System currently considers a strategy
with one P.M.-settled leg and one A.M.-settled leg with the same
expiration date and different exercise prices to be a vertical
strategy, rather than a diagonal strategy., [sic] and it rejects a
strategy with one P.M.-settled leg and one A.M.-settled leg with the
same expiration date and same exercise prices because it does not
recognize this strategy as a calendar strategy. More specifically, the
System and the Rules do not currently consider the difference in time
between the actual close of trading for the A.M.-settled leg and the
actual close of trading the following day for the P.M.-settled leg--it
considers only that the legs have the same expiration date. As a
result, the System does not determine the credit (debit) net price for
vertical or calendar spread orders with a pair(s) of A.M.-settled/P.M.-
settled legs using the same pricing principles for the debit/credit
reasonability check that the Exchange understands market participants
use for these strategies, as market participants consider these spreads
to have different expiration dates, and thus to be diagonals (rather
than verticals) or calendars for pricing purposes. That is, if a sell
(buy) leg is P.M.-settled (i.e., is ``farther out'' in time until
trading actually ceases) and is a call (put) with an exercise price
that is the same as or lower (higher) than the exercise price of the
buy (sell) A.M.-settled leg (thus making the P.M.-settled leg more
expensive), the System would not treat this as a diagonal spread, nor
recognize it as a calendar spread, pursuant to Rule
5.34(b)(3)(B)(iii)(c) and (d), even though market participants would
price these spreads as a diagonal (if the legs have different exercise
prices) or calendar (if the legs have the same exercise price) from a
pricing perspective.
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\11\ See Rule 5.34(b)(1)(A).
\12\ See Rule 5.34(b)(1)(D).
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Specifically, a vertical spread with A.M.-settled/P.M.-settled legs
essentially emulates the manner in which a diagonal strategy executes,
given that each leg in a diagonal strategy ceases trading at different
times (because they have different expiration dates) and diagonal
spread legs, like vertical spread legs, also have different exercise
prices. Likewise, a spread with A.M.-settled/P.M.-settled legs with the
same exercise price essentially emulates the manner in which a calendar
spread executes, given that each leg in a calendar strategy ceases
trading at different times (because they have different expiration
dates). Under the proposal, the debit/credit reasonability check logic
and Exchange-determined buffers, where applicable, would apply in the
same manner as they do today for calendar and diagonal spreads, as
applicable, to spreads with a pair(s) of A.M.-settled/P.M.-settled
legs. Therefore, the proposed rule change amends Rule 5.34(b)(3)(A) to
provide that, for the purposes of the debit/credit price reasonability
check, the System considers a two-legged strategy with one P.M.-settled
leg and one A.M.-settled leg with the same expiration date to be a
diagonal spread (where both legs have different expiration dates and
different exercise prices), rather than a vertical spread, or a
calendar spread (where both legs have the same exercise price).\13\ As
a result, the System will apply to such vertical strategies, which are
generally priced using the same principles as diagonal spreads and may
be adjusted to reflect backwardation (as described above), the same
debit/credit check logic and pre-set buffers that it currently applies
to diagonal spreads. In addition, the System will apply to such
strategies, which are generally priced using the same principles as
calendar spreads, the same debit/credit check logic and pre-set buffers
that it currently applies to calendar spreads and not reject such
strategies because the legs have the same expiration dates and exercise
prices. The Exchange believes the enhancing the debit/credit price
reasonability check to consider a spread that contains a pair of A.M.-
settled/P.M. settled legs with the same expiration date as a diagonal
or calendar, as appropriate, will cause the System to apply more
accurate pricing principles to them when determining whether to accept
or reject strategies with A.M.-settled/P.M.-settled legs.
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\13\ See supra note 5.
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Regarding vertical spreads with A.M.-settled/P.M.-settled legs with
the same expiration date and different exercise prices, currently, if
the System receives such a vertical spread order, and the exercise
price for the sell leg is lower than the exercise price of the buy leg
with a debit price, the System will determine this to be a credit and
reject it (assuming it is outside of the buffer). However, if the class
is experiencing backwardation, the debit price may be appropriate. As
discussed above, the Exchange may widen the buffer for such a class in
such circumstances for calendars and diagonals to account for the
backwardation. Therefore, if the System receives a spread with A.M.-
settled/P.M.-settled legs in a class experiencing backwardation during
unusual or volatile market conditions, the System would apply a
different buffer to that spread than it would apply to a diagonal
spread. While the A.M.-settled/P.M.-settled vertical spread would
likely have been priced using the same pricing principles as the
diagonal spread, the System would reject the vertical spread order,
despite it likely having a legitimate price, while accepting the
diagonal order with a similarly legitimate price. Pursuant to the
proposed rule change the strategy described above would be handled as a
diagonal and will have the opportunity to be accepted and executed.
Similarly, the System will recognize a spread with A.M.-settled/P.M.-
settled legs with the same expiration date and the same exercise price
as a calendar spread and not reject such spread order.
The Exchange notes that it announces any changes to the parameters
of the debit/credit reasonability check to market participants by
Exchange notice pursuant to Rule 1.5. The Exchange notes too that it
will continue to regularly monitor the application of the debit/credit
price reasonability check, including the number of orders rejected as a
result of the check, as well as continue to monitor orders that may be
executed at erroneous prices pursuant to Rule 6.5. The Exchange
currently considers all of these factors, as well as market conditions,
investor demand, and other relevant factors when determining whether to
modify the debit/credit reasonability check buffer or other risk
control parameters in order to attempt to create an appropriate balance
between protection against executions at potentially erroneous prices
and provision of execution opportunities for legitimately priced
orders.
[[Page 67390]]
In addition to this, the proposed rule change codifies the
definition of diagonal spreads in the current spread definitions in
Rule 5.34(b)(1). Specifically, proposed Rule 5.34(b)(1)(E) provides
that a ``diagonal'' spread is a two-legged complex order with one leg
to buy a number of calls (puts) and one leg to sell the same number of
calls (puts) with different expiration dates and different exercise
prices. As noted above, diagonal spreads are currently described within
Rule 5.34(b) and the System currently applies the debit/credit
reasonability check and Exchange-determined buffers to diagonal spreads
pursuant to Rule 5.34(b)(3)(A).\14\ The Exchange merely inadvertently
omitted codifying the definition of diagonal spreads in a previous rule
filing that updated Rule 5.34 to allow the System to apply the debit/
credit reasonability check to diagonals.\15\
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\14\ In light of the proposed codified definition, the Exchange
updates the current description of a diagonal in Rule 5.34(b)(3)(A)
to, instead, refer to ``diagonal'', as well as adds this reference
to the description of a diagonal in Rule 5.34(b)(3)(B)(iii).
\15\ See supra note 6.
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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.\16\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \17\ 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) \18\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes the proposed rule change will
remove impediments to and perfects the mechanism of a free and open
market and national market system by applying the current debit/credit
price reasonability check logic for diagonal spreads (which have
different expiration dates and thus cease trading on different dates,
as well as different exercise prices) to spread orders with A.M.-
settled/P.M.-settled legs that have different exercise prices but the
same expiration date (and are thus currently defined as verticals) but
similarly cease trading on different dates. Additionally, it will allow
the System to recognize spreads with A.M.-settled/P.M.-settled legs
that have the same exercise price and the same expiration date, but
likewise cease trading on different dates, to be calendar spreads
(which have different expiration dates and the same exercise price). By
considering these particular orders to be diagonals rather than
verticals, or to be calendars, the Exchange will apply the same buffers
to vertical strategies that have legs that stop trading at different
times (i.e., one leg is A.M-settled and one leg is P.M.-settled) as it
applies to diagonal strategies (which also have legs that stop trading
at different times), and will apply the same buffers to strategies that
have legs that stop trading at different times (i.e., one leg is A.M-
settled and one leg is P.M.-settled) and the same exercise price as it
applies to calendar strategies. This handling of vertical spreads is
appropriate in classes in which market conditions may cause the P.M.-
settled leg (with the farther time until trading expiration) to trade
at a discount and be worth less than the A.M.-settled leg (with the
nearer time until trading expiration). By considering a vertical
strategy with A.M.-settled/P.M.-settled legs with the same expiration
date as diagonal rather than a vertical, for purposes of the debit/
credit price reasonability check, the proposed rule change will provide
the same execution opportunities for legitimately priced vertical
strategies with A.M.-settled/P.M.-settled legs in certain classes as it
may for diagonal strategies in certain classes given then-current
market conditions. Additionally, this handling of strategies with A.M.-
settled/P.M.-settled legs with the same expiration date and different
exercise prices as calendar spreads will provide those orders with
opportunities to be accepted and executed, rather than be rejected
because the debit/credit price reasonability checks views the orders as
having legs with the same expiration dates and exercise prices and thus
does not recognize it as a calendar spread.
As a result, the proposed rule change ultimately protects investors
by continuing to prevent execution of spreads with A.M.-settled/P.M.-
settled legs that cease trading on different days at potentially
erroneous prices, while also providing additional execution
opportunities for those spreads that may be legitimately priced given
then-current market conditions but may currently be rejected when these
orders are treated as vertical spreads for the purposes of the debit/
credit reasonability check, or are not recognized as calendar spreads.
This proposed application of the debit/credit price reasonability check
promotes just and equitable principles of trade, as it is based on the
same general option and volatility pricing principles the System
currently uses to pair calls and puts for other complex orders that
also stop trading on different days, and will result in the handling of
strategies with legs that stop trading on different days in the same
manner during unusual or volatile market conditions.
In addition to this, the Exchange notes that the proposed rule
change would not raise any novel or unique issues for investors as the
debit/credit reasonability check logic and Exchange-determined buffers,
where applicable, would apply to strategies with A.M.-settled/P.M.-
settled legs in the same manner as they do today for calendar and
diagonal spreads, which also have legs that stop trading on different
dates. The Exchange will continue to announce any changes to the
parameters of the debit/credit reasonability check to market
participants by Exchange notice, to regularly monitor the application
of the debit/credit price reasonability check and for orders that may
be executed at erroneous prices, to consider market conditions,
investor demand, and other relevant factors when determining whether to
modify the debit/credit reasonability check buffer or other risk
control parameter amount in order to appropriately balance providing
protection against executions at potentially erroneous prices and
providing execution opportunities for legitimately priced orders.
In addition to this, the proposed rule change to codify the
definition of diagonal spreads in Rule 5.34(b) would generally protect
investors by adding clarity to the Rules regarding a strategy that is
already described within the Rules and to which the System currently
applies the debit/credit reasonability check and Exchange-determined
price buffers.
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
[[Page 67391]]
necessary or appropriate in furtherance of the purposes of the Act. The
proposed rule change will not impose any burden on intramarket
competition, because the debit/credit price reasonability check will
continue to apply to all incoming complex orders of all TPHs in the
same manner. The proposed rule change would allow the System to apply
the logic and pre-set buffers to vertical spreads with A.M.-settled/
P.M.-settled legs (and thus stop trading on different dates) that it
already applies to other spreads that contain legs that stop trading on
different dates and have different exercise prices (i.e., diagonals),
as well as to apply the logic and pre-set buffers to spreads with A.M.-
settled/P.M.-settled legs (and thus stop trading on different dates)
that it already applies to other spreads that contain legs that stop
trading on different dates and have the same exercise prices (i.e.,
calendars). This, in turn, will allow the System to apply the
appropriate Exchange-determined buffer to such vertical orders, which
the Exchange understands market participants price more similarly to a
diagonal spread as opposed to a vertical spread, or to such calendar
orders, given the difference in the actual trading days on which each
leg stops trading, thus allowing for legitimately priced strategies
with A.M.-settled/P.M.-settled legs to execute as intended.
The proposed rule change does not impose any burden on intermarket
competition, as it is an enhancement to a price protection mechanism
the System applies to complex orders submitted to the Exchange to
determine whether they should be accepted for potential execution on
the Exchange. The Exchange believes the proposed rule change would
provide all market participants with additional execution opportunities
when appropriate while still providing protection from anomalous or
erroneous executions. To the extent that market participants find the
proposed application of the debit/credit reasonability check to their
vertical and calendar spreads with A.M.-settled/P.M.-settled legs more
favorable for execution of their legitimately priced orders, other
exchanges may adopt functionality to similarly handle such complex
strategies.
Additionally, the proposed rule change to codify the definition of
diagonal spreads to the Rules is a nonsubstantive, noncompetitive
change that merely provides additional clarity within the Rules
regarding a term/strategy that is already described in the Rules and
that the System already accounts for pursuant to the Rules.
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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \19\ and Rule 19b-4(f)(6) thereunder.\20\
Because the 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 prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-
4(f)(6)(iii) thereunder.\22\
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\19\ 15 U.S.C. 78s(b)(3)(A)(iii).
\20\ 17 CFR 240.19b-4(f)(6).
\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's 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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A proposed rule change filed under Rule 19b-4(f)(6) \23\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\24\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Exchange states that
market participants have voiced concerns regarding the System rejecting
their legitimately priced A.M.-settled/P.M.-settled calendar spreads
and vertical spreads, especially closer in time to A.M./P.M. expiration
dates. The Exchange believes that waiver of the operative delay will
protect investors by allowing the Exchange to apply a potentially
widened buffer to A.M.-settled/P.M.-settled vertical spreads during
volatile market conditions, and by allowing the System to recognize and
accept A.M.-settled/P.M.-settled spreads with the same expiration date
and exercise price as calendar spreads, rather than rejecting them. As
discussed above, the Exchange states that because the component legs of
an A.M.-settled/P.M.-settled vertical spread cease trading on different
days, market participants price A.M.-settled/P.M.-settled vertical
spreads more similarly to diagonal spreads. In addition, market
participants treat A.M.-settled/P.M.-settled spreads with component
legs that have the same exercise price and expiration date as calendar
spreads, although the System currently does not recognize them as
calendar spreads. The Commission believes that waiver of the operative
delay will allow the Exchange to modify the debit/credit price
reasonability check so that it applies to A.M.-settled/P.M.-settled
calendar and vertical spreads in a manner that is consistent with
market participants' pricing of these spreads, and could help to ensure
that the price check does not reject appropriately priced A.M.-settled/
P.M.-settled calendar and vertical spreads. In addition, the Commission
believes that adding a definition of diagonal spread will help to
clarify the operation of the rule. For these reasons, the Commission
believes that waiver of the 30-day operative delay is consistent with
the protection of investors and the public interest. According, the
Commission hereby waives the 30-day operative delay and designates the
proposal operative upon filing.\25\
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\23\ 17 CFR 240.19b-4(f)(6).
\24\ 17 CFR 240.19b-4(f)(6)(iii).
\25\ For purposed only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of this 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 will institute proceedings to
determine whether the proposed rule change 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:
[[Page 67392]]
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-2020-099 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-2020-099. 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-2020-099, 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. 2020-23361 Filed 10-21-20; 8:45 am]
BILLING CODE 8011-01-P
