Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, to Make Qualified Contingent Cross Orders Available for FLEX Option Trading, 75071-75079 [2020-25909]

Download as PDF Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices under certain conditions, would not lose its exclusion if it notifies the Commission on Form N–6F of its intent to make an election to be regulated as a business development company. The company only has to file a Form N–6F once. The Commission estimates that on average approximately 4 companies file these notifications each year. Each of those companies need only make a single filing of Form N–6F. The Commission further estimates that this information collection imposes burden of 0.5 hours, resulting in a total annual PRA burden of 2 hours. Based on the estimated wage rate, the total cost to the industry of the hour burden for complying with Form N–6F would be approximately $736. The collection of information under Form N–6F is mandatory. The information provided under the form is not kept confidential. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. Written comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to David Bottom, Director/Chief Information Officer, Securities and Exchange Commission, C/O Cynthia Roscoe, 100 F Street NE, Washington, DC 20549; or send an email to: PRA_ Mailbox@sec.gov. jbell on DSKJLSW7X2PROD with NOTICES Dated: November 18, 2020. J. Matthew DeLesDernier, Assistant Secretary. Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, to Make Qualified Contingent Cross Orders Available for FLEX Option Trading November 18, 2020. On August 3, 2020, Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b-4 thereunder,2 a proposed rule change to make Qualified Contingent Cross Orders available for FLEX option trading. The proposed rule change was published for comment in the Federal Register on August 20, 2020.3 On October 1, 2020, the Commission designated a longer period for Commission action on the proposed rule change, until November 18, 2020.4 On October 23, 2020, the Exchange filed Amendment No. 1 to the proposed rule change, which replaced and superseded the proposed rule change.5 The Commission has not received any comments on the proposal. The Commission is publishing this notice and order to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons and to institute proceedings pursuant to Section 19(b)(2)(B) of the Act 6 to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1. I. The Exchange’s Description of the Proposed Rule Change, as Modified by Amendment No. 1 The Exchange proposes to amend Rule 5.70 and Rule 5.72, as well as Rule 5.33, to make Qualified Contingent Cross (‘‘QCC’’) Orders available for FLEX trading. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 89564 (August 14, 2020), 85 FR 51531. 4 See Securities Exchange Act Release No. 90062 (October 1, 2020), 85 FR 63312 (October 7, 2020). 5 Amendment No. 1 is available on the Commission’s website at: https://www.sec.gov/ comments/sr-cboe-2020-075/srcboe20200757940531-224727.pdf. 6 15 U.S.C. 78s(b)(2)(B). 2 17 BILLING CODE 8011–01–P 17:48 Nov 23, 2020 [Release No. 34–90457; File No. SR–CBOE– 2020–075] 1 15 [FR Doc. 2020–25894 Filed 11–23–20; 8:45 am] VerDate Sep<11>2014 SECURITIES AND EXCHANGE COMMISSION Jkt 253001 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 75071 website (http://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 amend Rule 5.70 and Rule 5.72, as well as Rule 5.33, to make QCC Orders, which includes Complex QCC Orders and QCC with Stock Orders, available for electronic FLEX trading. Currently, QCC Orders are available only for electronic non-FLEX trading. QCC Orders facilitate the execution of option orders that are part of Qualified Contingent Trades (‘‘QCTs’’),7 by permitting Trading Permit Holders (‘‘TPHs’’) to cross options orders without exposure while effecting the trade in the equities leg in another market at a price necessary to achieve the net price. Currently, TPHs may choose to submit the options component 7 See Rule 5.6(c), definition of ‘‘Qualified Contingent Cross or QCC’’, paragraph (1), which defines a ‘‘qualified contingent trade’’ as a transaction consisting of two or more component orders, executed as agent or principal, where: (A) At least one component is an NMS stock, as defined in Rule 600 of Regulation NMS under the Exchange Act; (B) all components are effected with a product or price contingency that either has been agreed to by all the respective counterparties or arranged for by a broker-dealer as principal or agent; (C) the execution of one component is contingent upon the execution of all other components at or near the same time; (D) the specific relationship between the component orders (e.g., the spread between the prices of the component orders) is determined by the time the contingent order is placed; (E) the component orders bear a derivative relationship to one another, represent different classes of shares of the same issuer, or involve the securities of participants in mergers or with intentions to merge that have been announced or cancelled; and (F) the transaction is fully hedged (without regard to any prior existing position) as a result of other components of the contingent trade. E:\FR\FM\24NON1.SGM 24NON1 75072 Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES of a QCT as a FLEX Option, yet, are currently unable to execute a FLEX Options component of a QCT on the Exchange in the same efficient, unexposed manner as they may execute a non-FLEX option component of a QCT on the Exchange. The Exchange now seeks to provide TPHs and their customers with the same QCC trading capabilities for FLEX trading that are currently available for non-FLEX trading, thus providing TPHs with the same capability to execute the options parts of QCTs that are comprised of FLEX Options. Rule 5.6(c) currently provides for the non-FLEX definition of a QCC Order. Specifically, a QCC order is comprised of an originating order to buy or sell at least 1,000 contracts (or 10,000 minioption contracts) that is identified as being part of a QCT coupled with a contra-side order or orders totaling an equal number of contracts. If a QCC Order has more than one option leg (a ‘‘Complex QCC Order’’), each option leg must have at least 1,000 standard option contracts (or 10,000 mini-option contracts). A QCC order represents one component of a QCT, which must be paired with a stock order. When a User enters a QCC Order, the User is responsible for executing the associated stock component of the QCT at or near the same time of the QCC order execution, just as a User is ultimately responsible for complying with execution requirements for any order a User submits. Indeed, the Exchange requires TPHs to properly mark all QCC Orders as such, and has a surveillance program in place which assesses TPH compliance with the requirements applicable to QCC Orders, including the requirement that the stock leg of the transaction be executed at or near the same time as the options leg.8 To execute the associated stock, a User may choose to either (1) separately submit an option order to the Exchange and the stock order to a stock execution venue in time to be executed at or near the same time of each other, or (2) submit a QCC with Stock Order. A QCC with Stock Order is a type of QCC Order (including a Complex QCC Order) entered with a stock component to be electronically communicated by the Exchange to a designated broker-dealer for execution on behalf of the submitting User and, as indicated, are available to Users on a voluntary basis.9 8 See Securities Exchange Act Release No. 15058 (June 17, 2011), 76 FR 35491 (Order Granting Approval of Proposed Rule Change Establishing Qualified Contingent Cross Orders) (‘‘QCC Approval Order’’). 9 See Rule 5.33(a), definition of ‘‘QCC with Stock Order’’. VerDate Sep<11>2014 17:48 Nov 23, 2020 Jkt 253001 The Exchange proposes to adopt Rule 5.72(e) 10 to govern FLEX QCC Orders. The proposed rule is simply making QCC Order available for FLEX, and as such, the definition of FLEX QCC Orders is substantively identical as nonFLEX QCC Orders in Rule 5.6(c) and FLEX QCC Orders will execute in substantially the same manner with few differences unique to trading in FLEX Trading. Proposed Rule 5.72(e) provides that a ‘‘FLEX QCC’’ order is comprised of an originating order to buy or sell at least 1,000 standard FLEX Option contracts (or 10,000 mini FLEX option contracts) that is identified as being part of a QCT (as defined in Rule 5.6(c)) coupled with a contra-side order or orders totaling an equal number of contracts. If a FLEX QCC order has more than one option leg (a ‘‘Complex FLEX QCC’’ order), each option leg must have at least 1,000 standard FLEX option contracts (or 10,000 mini FLEX option contracts). This is substantively identical to the non-FLEX QCC definition in Rule 5.6(c). The Exchange notes that Users will enter into the System all FLEX QCC Orders as they would any other FLEX Order pursuant to 5.72(b) (governing the order entry of FLEX Orders) and the applicable FLEX auction rules. As such, the Exchange points out that FLEX QCC Orders may only be submitted for series consistent with the FLEX Rules.11 Like QCC Orders submitted for non-FLEX trading,12 FLEX QCC Orders will execute automatically upon entry without exposure pursuant to proposed Rule 5.72(e)(1). The Exchange notes, as there is no FLEX Order Book, the corresponding provisions in Rule 5.6(c) 13 and 5.33(f)(2) regarding QCC Order execution requirements in connection with yielding to prices at which Priority Customer Orders may be resting in the Simple Book 14 and Complex Order Book (‘‘COB’’),15 and in Rule 5.6(c) 16 in connection with pricing QCC Orders at or between the NBBO 17 would not be applicable to QCC Orders submitted to FLEX.18 Proposed Rule 5.72(e)(1) also 10 The Exchange also moves current paragraph (e) to paragraph (f). 11 See Rules 5.72(b), (c), and (d). 12 See Rule 5.6(c), definition of ‘‘Qualified Contingent Cross or QCC’’, paragraph (2). 13 See id. 14 See Rule 5.6(c), definition of ‘‘Qualified Contingent Cross or QCC’’, subparagraph (2)(A)(i). 15 See Rule 5.6(c), definition of ‘‘Qualified Contingent Cross or QCC’’, subparagraph (2)(B)(i) and (iii). 16 See Rule 5.6(c), definition of ‘‘Qualified Contingent Cross or QCC’’, subparagraph (2). 17 See Rule 5.6(c), definition of ‘‘Qualified Contingent Cross or QCC’’, subparagraph (2)(A)(ii) and (B)(ii). 18 This is true for any FLEX Order. PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 provides that a FLEX QCC Order is cancelled if it cannot execute, and that Rule 5.9 (related to exposure of orders on the Exchange) does not apply to FLEX QCC orders, both of which are consistent with the current non-FLEX QCC Rules.19 Like QCC Orders submitted in non-FLEX classes,20 QCC orders submitted in FLEX classes must be entered in the standard increment for the class.21 Therefore, the proposed rule change adds in proposed Rule 5.72(e)(2) that FLEX QCC may only be entered in the increments applicable to FLEX Orders under Rule 5.4(c)(4). Proposed Rule 5.72(e)(1) also provides that a FLEX QCC with Stock order executes pursuant to Rule 5.33(l). The proposed rule change amends Rule 5.33(1) to specify that the provisions governing QCC with Stock include FLEX QCC with Stock. As such, pursuant to Rule 5.33(l), for a FLEX QCC with Stock Order, a User must include the same requisite information as they must include when submitting such orders for non-FLEX trading pursuant to Rule 5.33(l)(3)(A),22 and the System will process the option and stock components of such orders in the same manner as it does for non-FLEX QCC orders pursuant to Rule 5.33(l)(3)(B) and (C).23 The Exchange seeks to make QCC Orders available for FLEX trading due to the growing customer demand it has received for QCC functionality for FLEX trading. The Exchange notes that a number of TPHs have expressed to the Exchange that use of QCC for FLEX 19 See Rule 5.6(c), definition of ‘‘Qualified Contingent Cross or QCC’’, subparagraph (2)(C) and (2)(C), respectively. 20 See 5.6(c), definition of ‘‘Qualified Contingent Cross or QCC’’, paragraph (3). 21 See Rule 5.4(c)(4) (which sets forth minimum increments for FLEX options). 22 Rule 5.33(l)(3)(A) requires a User to include a net price for the stock and option components in accordance with the minimum increments for stock-option orders and (ii) identify the designated broker-dealer as set forth in Rule 5.33 (l)(2). 23 Rule 5.33(l)(3)(B) provides that the System executes the option component in accordance with Rule 5.6(c), but does not immediately send the User a trade execution report, and automatically communicates the stock component to the designated broker-dealer for execution at a stock trading venue. If the option component(s) of a QCC with Stock Order cannot execute, the System cancels the QCC with Stock Order, including both the stock and option components. Rule 5.33(l)(3)(C) provides that, if the System receives an execution report for the stock component of a QCC with Stock Order from the designated broker-dealer, the Exchange sends the User the trade execution report for the QCC with Stock order, including execution information for both the stock and option components. If the System receives a report from the designated broker-dealer that the stock component of a QCC with Stock Order cannot execute, the Exchange nullifies the option component trade and notifies the User of the reason for the nullification. E:\FR\FM\24NON1.SGM 24NON1 Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES options would increase the efficiency of their executions of the options component of a QCT if the options component consists of a FLEX Option. An investor may seek to use a FLEX Option as an appropriate hedge for a stock order but is currently unable to execute a FLEX Option that is part of a QCT on the Exchange in the same unexposed manner as it may execute a non-FLEX option on the Exchange. Currently, if a TPH wants to execute a FLEX Option that is intended to be part of a QCT, it would have to enter the FLEX Option as a FLEX Order separate from the stock portion or as a stockoption order, which must be exposed for at least three seconds prior to execution.24 Indeed, a clean cross of the FLEX Option component of a stockoption QCT would provide assurance to the parties to the QCT that their hedge will be maintained.25 This is particularly significant for a variety of managed funds that recognize the benefits to their investors in employing certain hedging strategies through FLEX Options that allow for their investors to mitigate risk and meet their objectives. For example, a strategy may have an investment goal of protecting potential losses down to a certain amount with the ability to participate in return up to a certain cap in a reference asset (e.g., underlying index or ETF) over a target outcome period that is usually a year or more out. Such a strategy may utilize a combination of FLEX call and put options in which expiration corresponds to the target outcome period overlaid on an exposure to the reference asset. On the seed day (or, the day in which the strategy is created and funded), the options package would reflect customized strikes, necessary to target the strategy’s trading objectives a year or more in advance and for which existing standard strikes are typically unavailable. The customized FLEX strikes are used for the duration of the life of the strategy and it is key that the appropriate combination of options is guaranteed to maintain the hedge. Additionally, the Exchange notes that the Rules currently permit Compression orders, which execute without exposure against another Compression order(s) totaling an equal number of options contracts, for trading in FLEX SPX options.26 That is, like the proposed 24 See Rule 5.72(c)(1)(F); Rule 5.73(c)(3); and Rule 5.74(c)(3). 25 Amendment No. 1 adds additional explanation and detail in support the use of QCC Orders in FLEX trading. 26 Amendment No. 1 adds explanation regarding another order type that may already execute without exposure in FLEX Options in support of FLEX QCC Orders. VerDate Sep<11>2014 17:48 Nov 23, 2020 Jkt 253001 FLEX QCC Orders, FLEX Compression orders are not exposed in a FLEX Auction pursuant to Rule 5.72.27 As noted above, to qualify as a QCT, the execution of one component is contingent upon the execution of all other components at or near the same time. The Exchange conducts surveillance of TPHs to ensure that TPHs execute the options component of a QCT at or near the same time as the stock component, in accordance with the QCT exemption.28 Therefore, there is compliance risk for TPHs if they do not execute the options component at or near the same time of execution of the stock component. Providing TPHs with QCC Order functionality for FLEX Options will reduce the compliance burden on TPHs by providing a more efficient means of executing the options component of a QCT if the options component consists of a FLEX Option, as QCC Orders did for non-FLEX options. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Securities Exchange Act of 1934 (the ‘‘Act’’) and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.29 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 30 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) 31 requirement that the rules of an exchange not be designed 27 See Securities Exchange Release Nos. 89707 (August 28, 2020), 85 FR 55040 (September 3, 2020) (SR–CBOE–2020–074) (Notice of Filing of a Proposed Rule Change Relating To Adopt Compression Orders); and 90179 (October 14, 2020), 85 FR 66590 (October 20, 2020) (SR–CBOE– 2020–074) (Order Granting Approval of a Proposed Rule Change To Adopt Position Compression Cross (‘‘PCC’’) Orders for SPX). As is the case with the proposed FLEX QCC orders, there would be no NBBO or protection of customer orders for the recently approved compression orders for FLEX Options. 28 See supra note 1; see also infra note 34. 29 15 U.S.C. 78f(b). 30 15 U.S.C. 78f(b)(5). 31 Id. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 75073 to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the proposal to make the QCC Order type available for electronic FLEX trading will facilitate TPHs’ execution of the options component of QCTs that are comprised of FLEX Options in the same manner that TPHs may currently execute the options component of QCTs that are comprised of non-FLEX options, thereby removing impediments to and perfecting the mechanism of a free and open market and national market system and, in general, protecting investors. QCC Orders for FLEX Options will execute in the same manner as QCC Orders for non-FLEX options; the proposed rule change merely expands the classes in which the Exchange may make QCC Orders available and provides a specific definition of FLEX QCC Orders for clarity. Moreover, the Exchange notes that stock-option orders (which, by definition, must also be a QCT) 32 are already permitted under the Rules for FLEX Options, and thus, the FLEX Options components of QCTs submitted as stock-option orders may currently execute at any price in FLEX (i.e., are not subject to an NBBO or yielding to Customer orders). The proposed rule change merely provides an alternative, more efficient manner of execution for the option component of larger-sized QCTs. The Exchange believes the availability of QCC Orders for FLEX Options will allow for a more efficient execution of the options component of a QCT on the Exchange. As noted above, to qualify as a QCT, the execution of one component is contingent upon the execution of all other components at or near the same time. The Exchange conducts surveillance to ensure a TPH executes the stock and option components of a QCT at or near the same time.33 As a result, if the option component does not execute when initially submitted to the Exchange, a TPH may be subject to compliance risk if it does not execute the option component at or near the same time of the execution of the stock component. Indeed, the Exchange notes that the compliance risk of not being able to execute a FLEX Options portion of a QCT at or near the same time of the execution of the stock component is greater in a FLEX auction, where it must be exposed for at least three seconds prior to execution, than for non-FLEX option orders that must be exposed for at least one second 34 unless submitted 32 See Interpretation and Policy .03 to Rule 5.33. QCC Approval Order. 34 See Rule 5.9. 33 See E:\FR\FM\24NON1.SGM 24NON1 75074 Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES into an auction with a shorter exposure period. The Exchange believes the proposed rule change will reduce this compliance risk for TPHs executing FLEX Options that are components of QCTs, which will protect investors and the public interest. Since the purpose of a QCT order is for all components to trade at or near the same time, the Exchange believes it is appropriate to provide TPHs with a mechanism to facilitate immediate execution of FLEX Options that comprise the options component of a QCT to reduce the compliance burden on TPHs when effecting QCTs with a FLEX Option component. The Exchange believes that proposed Rule 5.72(e), while substantially the same in almost all aspects to Rule 5.6(c) governing non-FLEX QCC, will provide clarity to TPHs regarding the submission of their QCC FLEX Options. The only difference between the FLEX and non-FLEX QCC Orders is that FLEX QCC Orders are not subject to the NBBO or prices of customers in the book. The Exchange notes this difference exists for any order type in non-FLEX trading versus FLEX trading.35 The Exchange notes that the proposed rule changes do not alter any of the current increments applicable to FLEX Options but merely provide additional detail within the specific provision covering QCC Orders regarding the standard increments already permissible for FLEX Options that will also apply to QCC FLEX Orders. As the Commission has previously found,36 the execution of QCTs is beneficial to the market as a whole as it contributes to the efficient functioning of the securities markets and the price discovery process. Pursuant to the QCT Release, the options portion of a QCT may consist of non-FLEX or FLEX Options [sic]. However, as noted above, without the availability of QCC Orders for FLEX Options, TPHs are subject to higher compliance risk with respect to QCTs with a FLEX Option component than TPHs who execute QCTs with a non-FLEX option component. The Exchange submits this proposed rule change in response to demand from TPHs and their institutional customers 37 to be able to execute the 35 The Exchange also notes that the requirement that a QCC order execute at a price at or better than the NBBO is not a unique execution requirement— every option order type approved by the Commission must execute at a price at or better than the NBBO in accordance with the linkage plan. See Rule 5.66. 36 See Securities Exchange Act Release No. 57620 (April 4, 2008), 73 FR 19271 (April 9, 2008) (‘‘QCT Release’’); and see QCC Approval Order. 37 Amendment No. 1 specifies the customer base for FLEX trading. VerDate Sep<11>2014 17:48 Nov 23, 2020 Jkt 253001 options components of QCTs comprised of a FLEX Option in the same manner that they are currently able to execute the options components of QCTs comprised of non-FLEX options. Therefore, the proposed rule change will provide TPHs whose hedging strategies involve FLEX Options with the same functionality currently available to TPHs whose hedging strategies involve non-FLEX Options. The Exchange believes this will provide investors with additional flexibility regarding execution of their hedging strategies related to stock positions, which flexibility ultimately benefits investors. Moreover, the Commission has stated that, while it believes that order exposure is generally beneficial to options markets, it recognizes that contingent trades can be useful trading tools for investors and other market participants, particularly those who trade the securities of issuers involved in mergers, different classes of shares of the same issuers, convertible securities, and equity derivatives such as options and that those who engage in contingent trades can benefit the market as a whole by studying the relationships between prices of such securities and executing contingent trades when they believe such relationships are out of line with what they believe to be fair value.38 The requirement that a non-FLEX QCC must execute at a price at or between the NBBO merely incorporates an execution requirement applicable to all option order types, as all options must execute at price at or better than the NBBO in accordance with linkage rules.39 Therefore, this execution requirement is not a heightened execution requirement for an unexposed option order. The additional requirement that a QCC order not execute at the same price as a Priority Customer incorporates the general principle of customer protection in the options markets.40 If the market model 38 See QCC Approval Order. Rule 5.66. In other words, if the definition of a QCC order did not include the provision that it must execute at a price at or better than the NBBO, QCC orders would still be required to execute at a price at or better than the NBBO. The Exchange believes inclusion of this explicit requirement for QCC orders was intended to highlight the difference between execution of the options component and the stock component, which may execute at any price, but was not a unique price requirement necessary for execution of an unexposed order. Every order type on the Exchange approved for non-FLEX trading and FLEX trading has this same distinction. 40 If there was not a customer order resting at the top of the book, then the second pricing requirement for QCC orders is simply ignored. As there is no book in the FLEX market, the proposed FLEX QCC order is equivalent to a non-FLEX QCC 39 See PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 for a class does not include customer priority, this is a heightened execution requirement for execution of an unexposed order.41 Even without this additional protection, the Exchange believes the proposed FLEX QCC order will protect investors, as it will provide Users of FLEX Options with the same functionality as Users of non-FLEX options. While the Exchange again notes that there is no FLEX book in which Customer orders (or any FLEX orders) may rest, and therefore the principles of customer priority are not currently applicable to FLEX trading, the Exchange observed the top of Book orders in non-FLEX symbols as a comparison point.42 In a random sample of data drawn from orders resting at the top of the Book,43 the Exchange observed that, on average, only 0.34% of all orders resting at the top of the Book were Customer orders. As such, the Exchange believes that, even if there was a book for FLEX Options, there would be minimal risk of executing a FLEX QCC at the same price as a Customer order in the Book. Additionally, primarily broker-dealers and institutional investors engage in FLEX trading. Indeed, executions in FLEX Options are generally larger and held long-term for strategies utilized by broker-dealers and institutional investors, as opposed to the smaller, more frequent trades with shorter expiration durations typically executed by retail investors. The Exchange also understands that many large retail brokerage firms do not accept FLEX Options or otherwise have high minimums which may discourage retail trading in FLEX Options.44 Therefore, there are minimal retail customer orders submitted into the FLEX market and thus it would be unlikely any would be resting at the top of a FLEX book if one existed for a de minimis (if any) amount order submitted when there is no customer order resting at the top of the book. 41 The Exchange has enabled customer priority for all equity option classes that trade on the Exchange (and thus for all classes in which TPHs may submit QCC orders). Therefore, all QCC orders submitted on the Exchange are subject to the same execution pricing requirements as non-QCC orders. 42 Amendment No. 1 adds a description of the top of Book data sample and the Exchange’s observations in connection with the data sample in support of QCC for FLEX trading and that, as proposed, FLEX QCC orders are consistent with the protection of investors. 43 The random sample was drawn over three days (September 25, September 30, and October 1, 2020) from a different Match Engine each sample day (one of which includes SPY). The sampling of data across different Match Engines is representative of the symbols that trade on the Exchange. 44 Amendment No. 1 adds additional detail regarding the de minimis amount of retail customer orders submitted into the FLEX market that would require additional protection. E:\FR\FM\24NON1.SGM 24NON1 Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES of time that would require additional protection. As discussed above, the Exchange believes the benefits of exposure on an order on the Exchange are outweighed by the benefits offered by immediate execution of these contingent order types. The Exchange does not believe market participants that engage in hedging strategies involving FLEX Options should not have access to the same functionality as market participants with hedging strategies involving non-FLEX options. The Exchange does not believe the propose rule change raises price protection concerns that market participants may submit FLEX QCC Orders for a FLEX series with slightly different terms than a non-FLEX series in order to get better pricing. Such risk, if any, exists today with respect to all FLEX trading. The Exchange again points out that the linkage rules and customer priority are currently not applicable to any orders submitted to FLEX, wherein there is no order book. The Exchange has observed no trends of TPHs submitting FLEX orders in order to avoid trading in the non-FLEX market. The Exchange believes the risk (if any) of a market participant trading a FLEX Option rather than a non-FLEX option with slightly different terms to use the FLEX market as a substitute for the non-FLEX market and achieve such a result is minimal. This possibility exists today with respect to all options the Exchange lists for FLEX and nonFLEX trading. The Exchange has not observed market participants attempting to trade in the FLEX market rather than the non-FLEX market for this purpose in classes in which this is possible today and believes there would be minimal, if any, benefit to do so. The Exchange compiled a dataset of all FLEX series listed on the Exchange in the last year 45 that matched non-FLEX series on the underlying, expiration date, put/call and exercise-style, but had different strikes. From the dataset, the Exchange was able to observe the differences in strike prices between FLEX series and listed series.46 The Exchange found that 99.90% of all SPX and SPXW FLEX series created were over $1.00 away from the matching SPX/SPXW listed series strikes, and that 90.10% of these were over $100.00 away from the matching listed series strikes. It also found that 97.61% of all equity and ETP 45 From October 14, 2019 through October 9, 2020. 46 Amendment No. 1 provides additional data in support of QCC Orders for FLEX trading, particularly demonstrating that there is minimal risk of trading in the FLEX market as a substitute for trading an economically equivalent option in the non-FLEX market. VerDate Sep<11>2014 17:48 Nov 23, 2020 Jkt 253001 FLEX series created were over $1.00 away from the matching listed series strikes, and that 83% of these were over $10.00 away from the matching listed series strikes and 44.97% of these were over $100.00 away from the matching listed series strikes. As a result, the Exchange believes that there is minimal (if any) risk that market participants desire or attempt to use the FLEX market as a substitute to avoid trading in the non-FLEX market. The Exchange believes attempting to execute an order in the FLEX market as a substitute for the non-FLEX market would minimize execution opportunities for that order. Such trading would be inefficient for market participants and could introduce price and execution risk to market participants’ trading strategies given the reduced liquidity, participation, and price discovery in the FLEX market compared to the non-FLEX market.47 Additionally, series with different terms have different prices and serve different investment purposes, so trading a ‘‘similar’’ FLEX series may not achieve the same investment objective as the non-FLEX series a TPH initially sought to trade. The Exchange notes if a FLEX QCC Orders execute at a price through the book of the ‘‘similar’’ non-FLEX series, while that would be a better price for one transaction participant, it would be a worse price for the participant on the opposite side, and thus it may be more difficult for the TPH to find sufficient contra party interest. For example, suppose the market for Aug ABC 800 call with a multiplier of 100 is 10.20–11.00. If a market participant sought interest from counterparties to execute a FLEX QCC Order to buy an Aug ABC 795 call with at 10.00, it is unlikely another market participant would sell at that price if they were looking to sell the Aug ABC 800 call, given that participant could sell the ‘‘similar’’ non-FLEX option series at 10.20, which would be a better price for that seller. Given the likely difficulties (such as reduced liquidity and potentially longer timeframe to receive execution) of trading in the FLEX market as a substitute for trading an economically equivalent option in the non-FLEX market (such as to obtain a better execution price), the Exchange believes the risk of this occurring is de minimis. The Exchange believes that any such risk is even lower for FLEX QCC Orders given the additional requirements that apply to FLEX QCC Orders, even without the heightened execution price requirement that a QCC 47 See Sections VII and X of the ODD regarding risks associated with FLEX Options. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 75075 Order cannot execute at the same price as a Priority Customer. The benefits of QCC Orders apply to FLEX options in the same manner as they do for nonFLEX options, which benefits the Exchange believes significantly outweigh any price protection risk that may exist in the FLEX market. Ultimately, as noted above, QCC Orders in FLEX Options will execute in a substantially similar manner as QCC Orders in non-FLEX options. In addition to this, the Exchange notes that the Rules currently permit Compression orders in FLEX SPX options which, like QCC Orders for FLEX trading, may execute immediately without exposure as opposed to being submitted to a FLEX Auction despite there being no NBBO or customer priority in the FLEX market. Finally, the Exchange notes that QCC functionality is a widely adopted industry order type wherein multiple other options exchanges currently have QCC functionality in place.48 B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange does not believe that the proposed rule change will impose any burden on intramarket competition that is not necessary or appropriate in furtherance of the purposes of the Act because QCC functionality is already available for non-FLEX options. The Exchange is simply proposing to make QCC Orders available for additional classes (FLEX Option classes). The Exchange notes that the proposed order type will be available to all Users on a voluntary basis, and Users are not required to use QCC Orders when executing QCTs. Users may continue to execute the options component of QCTs that are comprised of FLEX Options in the same manner as they do today. The proposed rule change will provide FLEX Traders with the same functionality that is currently available to non-FLEX Traders with respect to execution of option components of QCTs. The Exchange believes all TPHs should have access to this functionality so they can all execute option components of QCTs in the same manner, regardless of whether they choose to hedge the stock portions of QCTs with FLEX or nonFLEX options. 48 See e.g. Nasdaq Phlx Rules Options 3, Section 12 (electronic QCC orders), and Options 8, Section 32(e) (open outcry QCC orders); Nasdaq ISE Options 3, Section 12; BOX Options Rule 7110(c)(6); MIAX Options Rule 516(j); and NYSE Arca Options Rule 6.90–O. E:\FR\FM\24NON1.SGM 24NON1 75076 Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices The Exchange does not believe the proposed rule change will impose any burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act because the proposed rule change is merely making functionality currently available on the Exchange to additional option classes. As noted above, QCC Order functionality is currently available at other options exchanges, which may determine make QCC functionality available to additional option classes as well, including flexible options. To the extent the proposed rule change makes the Exchange a more attractive trading venue for market participants on other exchanges, those market participants may elect to become Exchange market participants. Overall, the Exchange believes the proposed rule change is appropriate for the protection of investors and the maintenance of fair and orderly markets to assure, among other things, the economically efficient execution of securities transactions. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. II. Proceedings To Determine Whether To Approve or Disapprove SR–CBOE– 2020–075, as Modified by Amendment No. 1, and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 49 to determine whether the proposed rule change, as modified by Amendment No. 1, should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposal. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as stated below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change to inform the Commission’s analysis of whether to approve or disapprove the proposal. jbell on DSKJLSW7X2PROD with NOTICES 49 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2) of the Act also provides that proceedings to determine whether to disapprove a proposed rule change must be concluded within 180 days of the date of publication of notice of the filing of the proposed rule change. See id. The time for conclusion of the proceedings may be extended for up to 60 days if the Commission finds good cause for such extension and publishes its reasons for so finding. See id. VerDate Sep<11>2014 17:48 Nov 23, 2020 Jkt 253001 Pursuant to Section 19(b)(2)(B) of the Act,50 the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with the Act, and, in particular, with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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.51 The Exchange’s proposal would expand the use of QCC Orders to electronic FLEX options. A QCC Order is comprised of an originating order to buy or sell at least 1,000 standard option contracts (or 10,000 mini-option contracts) that is identified as being part of a qualified contingent trade (‘‘QCT’’) coupled with a contra-side order or orders totaling an equal number of contracts and meeting the other conditions described below. As the Exchange stated in its proposal, QCC Orders facilitate the execution of option orders that are part of a QCT,52 by permitting TPHs to cross non-FLEX options orders without exposure to the market while effecting a trade in the NMS stock component of the order at a price necessary to achieve a net price. The Commission granted an exemption for QCTs that meet certain requirements from Rule 611(a) of Regulation NMS (‘‘QCT Exemption Order’’).53 The QCT Exemption Order enables each NMS stock component of a QCT trade to be exempt from Rule 611(a) of Regulation NMS for any trade-throughs.54 As the Commission previously stated in the QCC Approval Order, QCC Orders are permitted if the QCC Order is (1) part of a QCT under Regulation NMS; (2) for at least 1,000 contracts; (3) executed at a 50 Id. 51 15 U.S.C. 78f(b)(5). QCT is a transaction consisting of two or more component orders that involve both an option and equity stock component where the execution of one component is contingent upon the execution of all the other components at or near the same time. See supra note 7 (defining a QCT, which requires, among other things, that ‘‘at least one component must be an NMS stock, as defined in Rule 600 of Regulation NMS . . .’’). 53 See Securities Exchange Act Release No. 57620 (April 4, 2008), 73 FR 19271 (April 9, 2008) (‘‘QCT Exemption Release’’), which modifies a release initially granting the QCT exemption, Securities Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) (‘‘Original QCT Exemption Release’’). 54 See id. 52 A PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 price at or between the NBBO; and (4) cancelled if there is a public customer on the electronic book.55 The Commission also stated in the QCC Approval Order that the four required elements of the QCC Order ‘‘strikes an appropriate balance for the options market in that it is narrowly drawn and establishes a limited exception to the general principle of exposure and retains the general principle of customer priority in the options markets.’’ 56 The Exchange has stated that due to the structure of the FLEX options market, such as the lack of a customer order book and that FLEX options have no NBBO, that the applicable QCC Order requirements as to these matters are not applicable to FLEX orders and therefore are not applicable to the proposed FLEX QCC Order. The requirements for a QCC Order to execute at or between the NBBO and that a QCC Order cannot be executed at the same price as a customer order on the book are intended to mitigate the risks to market quality in both the options and underlying equity markets. The Exchange, however, has not detailed why such protections, and the underlying rationale for such protections, are unnecessary considering that FLEX options market participants would be granted an exception to the FLEX options electronic auction order exposure requirements, as well as the equity market trade-through rules, when executing a FLEX QCC Order under its proposal. The Commission therefore believes, as discussed in more detail below, that the Exchange’s proposal raises questions as to whether its proposal is consistent with the protection of investors and other requirements of Section 6(b)(5) of the Act, in addition to the maintenance of fair and orderly markets.57 Electronic FLEX options trading differs from electronic non-FLEX options because they allow TPHs to customize terms of the option contract (e.g., exercise style, expiration date, and strike price). Notably, FLEX options lack an order book and a requirement to yield to public customer interest. Electronic FLEX option transactions are also conducted through auctions which require an exposure interval that may 55 See QCC Approval Order, supra note 8, 76 FR at 35492. See also CBOE Rule 5.6(c)(2), which states, among things, that a ‘‘QCC Order with one option leg may execute automatically upon entry without exposure if the execution price: (i) Is not at the same price as a Priority Customer order resting in the Book; and (ii) is at or between the NBBO.’’ 56 See QCC Approval Order, supra note 8, 76 FR at 35492. 57 15 U.S.C. 78f(b)(5). E:\FR\FM\24NON1.SGM 24NON1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices not be less than three seconds prior to execution.58 As the Commission has stated in the past, order exposure in the options markets provides an incentive to options market makers to provide liquidity and therefore plays an important role in ensuring competition and price discovery in the options markets.59 The proposed FLEX QCC Order would permit TPHs to execute a FLEX options component of a QCT without the regular FLEX auction exposure requirement. Therefore, when applying the unique characteristics of the FLEX options market to the current QCC Order framework, the Commission believes there are questions as to whether the Exchange’s proposal is consistent with the guidance in the QCC Approval Order and the principles underlying the order, and whether the proposal is consistent with Section 6(b)(5) of the Act. In particular, the Commission is concerned that the proposed design of the QCC FLEX Order may negatively impact market quality in the options market by removing certain constraints required under the QCC Approval Order. The Exchange states that stockoption orders are already permitted to include FLEX options and ‘‘the FLEX Options components of QCTs submitted as stock-option orders may currently execute at any price in FLEX (i.e., are not subject to an NBBO or yielding to [c]ustomer orders on the book).’’ However, the Exchange fails to address that FLEX options that are currently part of a stock-option order are able to achieve potential price improvement through the electronic FLEX auction exposure process,60 while the proposed FLEX QCC Orders eliminates the exposure requirement. As a result, the proposal to allow FLEX QCC Orders will eliminate the opportunity for any price improvement for the option component, thereby allowing the TPH to set the price at which the FLEX options component of the QCT will cross without being subject to any limits such as an NBBO. Furthermore, the elimination of the exposure requirement reduces the overall transparency of the price discovery process within the FLEX market, which potentially harms a wider range of participants, for example, if participants are less able to use historical FLEX option prices to inform about the prices of other, similar FLEX options. The proposed FLEX QCC Order also raises concerns about its impact to 58 See CBOE Rule 5.72(c)(1)(F). QCC Approval Order, supra note 8, 76 FR at 35492. 60 See CBOE Rule 5.72(c). 59 See VerDate Sep<11>2014 17:48 Nov 23, 2020 Jkt 253001 market quality in the underlying stock leg of a QCC Order. In general, tradethroughs not only harm the individual participants who may receive worse prices, but they also increase wait times and execution risk for limit orders on the book, thereby reducing incentives for market participants to submit limit orders. In this respect, the Commission has previously recognized that any exemption to equity trade-through protection needs to be narrowly drawn. The QCT Exemption Order, in determining the scope of the exemption, states that defining the set of exemptions to trade-through protection too broadly ‘‘could unduly detract from the objectives of Rule 611’’; 61 these objectives include assuring ‘‘that markets effect trades at the best available prices,’’ but also ‘‘encourag[ing] the display of limit orders by increasing the likelihood that they will receive an execution in a timely manner.’’ 62 Thus, the Commission has determined that the exemption to trade-through prohibition should only be granted if strictly necessary so as to promote these equity market quality goals. In the FLEX market, the Exchange has not provided justification for why the exemption to equity trade-through protection is strictly necessary. Note that, to qualify as a QCT, only ‘‘the spread between the prices of the component orders’’ needs to be defined, not the prices themselves.63 In the non-FLEX market, if the facilitator of a QCT would be constrained to price both the option and stock legs at their respective NBBOs, the spread between the prices of the two legs would be pre-defined according to the spread between the option NBBO and the stock NBBO. However, in the FLEX market, given the flexibility in determining the price of the FLEX option leg (particularly if not subject to exposure), the Exchange has not explained why a broker could not simply determine a spread, and subsequently adjust the price of the option leg according to the realized price of the stock leg, thus avoiding the need to trade-through the equity market. Likewise, and potentially more concerning, since neither leg of the proposed FLEX QCC Order is constrained to execute at an NBBO, the Exchange has not explained what would prevent a facilitator from determining a spread and setting the price for the 61 See Original QCT Exemption Release, supra note 53, 71 FR at 52830. 62 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37505 (June 29, 2005) (Regulation NMS). 63 See QCT Exemption Release, supra note 53, 73 FR at 19272. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 75077 FLEX option leg such that the corresponding stock leg price results in a trade-through. In addition to the significant concerns discussed above regarding the proposal’s consistency with the guidance in the QCC Approval Order, and the principles underlying the order, that need to be addressed, the Exchange provided data on retail orders and market participation in FLEX and nonFLEX options in support of its proposal. The Exchange believes that the limited retail customer participation in the FLEX options market would mitigate the requirement for additional customer protections that exist for QCC Orders in the non-FLEX options market. Specifically, the Exchange states that ‘‘there are minimal retail customer orders submitted into the FLEX market and thus it would be unlikely any would be resting at the top of a FLEX book if one existed for a de minimis (if any) amount of time that would require additional protection.’’ The Commission is concerned that the proposal does not address how the lack of additional customer protections would be appropriate. The Commission notes that the Exchange did not provide specific data on the level of retail participation or whether that conclusion was based solely on the size of the orders in the FLEX options market. In addition, the Commission notes that the Exchange has stated previously in proposing certain changes to the FLEX options market that they were intended to broaden the base of investors that use FLEX options, including more retail participation.64 The Commission believes the Exchange has not provided sufficient data to support the conclusion that additional customer protections are unnecessary under the proposal. The Exchange also stated that it believes that the risk of market participants trading in the FLEX market as a substitute for the non-FLEX market is minimal. The Exchange has provided a summary of data that showed the 64 See Securities Exchange Act Release No. 66934 (May 7, 2012), 77 FR 27822, 27824 (May 11, 2012) (SR–CBOE–2012–040) (Notice of Proposed Rule Change Related to Permanent Approval of its Pilot on FLEX Minimum Value Sizes) (stating that ‘‘eliminating the minimum value size requirement would further broaden the base of investors that use FLEX [o]ptions to manage their trading and investment risk, including investors that current trade in OTC market for customized options, where similar size restrictions do not apply. The Exchange also believes that this may open up FLEX [o]ptions to more retail investors.’’). The pilot was permanently approved in Securities Exchange Act Release No. 67624 (August 8, 2012), 77 FR 48580 (August 14, 2012) (SR–CBOE–2012–040) (Order Granting Approval of Proposed Rule Change Related to Permanent Approval of its Pilot on FLEX Minimum Value Sizes). E:\FR\FM\24NON1.SGM 24NON1 jbell on DSKJLSW7X2PROD with NOTICES 75078 Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices number of customer orders resting in non-FLEX options at the top of the book and differences in strike prices in terms of dollar values between the FLEX and non-FLEX options that had similar terms. However, the data provided still raises questions as to whether the proposal would incentivize market participants to use FLEX options as a substitute for non-FLEX options in order to circumvent price and public customer priority constraints under the QCC Approval Order. For example, the data on strike prices for index options only compared SPX and SPXW listed series with SPX and SPXW FLEX series without considering a broader set of FLEX index options that would apply to the proposed FLEX QCC Order, including less liquid index options. In addition, the data sample on FLEX option strike price values would be more appropriately considered if the price differences between the FLEX and non-FLEX options market were described in proportion to the stock price rather than in dollar values. Moreover, the Exchange’s proposal does not provide any information on the market share between FLEX and nonFLEX index options and FLEX and nonFLEX equity and ETP options and its variation over time, which could help inform on whether traders have been steadily migrating between the nonFLEX and FLEX market. Furthermore, the Exchange stated that the proposed FLEX QCC Order would ‘‘reduce compliance burden on TPHs by providing a more efficient means of executing the options component of a QCT if the options component consists of a FLEX [o]ption.’’ The Exchange asserted in its proposal that the compliance risk of not being able to execute a FLEX options portion of a QCT at or near the same time of the execution of the stock component is greater in a FLEX auction where the FLEX order must be exposed for at least three second prior to execution. However, the Exchange has not provided any evidence or data on the number of violations or compliance issues that occurred as a result of needing to execute the FLEX option component after the minimum three second exposure period. Accordingly, the Commission requests data to support the Exchange’s assertion on compliance issues, including any information on the overall number of FLEX orders that are part of a stockoption order and the number of compliance issues occurring, including those in relation to the timing of execution of the stock and FLEX option component of the order. VerDate Sep<11>2014 17:48 Nov 23, 2020 Jkt 253001 Based on the above, the Commission believes there are questions as to whether the proposal is consistent with Section 6(b)(5) of the Act and the requirements that the rules of the exchange be designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and in general, to protect investors and the public interest, and whether the proposal is consistent with the maintenance of fair and orderly markets under the Act. Under the Commission’s Rules of Practice, the ‘‘burden to demonstrate that a proposed rule change is rule change is consistent with the [Act] and the rules and regulations issued thereunder . . . is on the [SRO] that proposed the rule change.’’ 65 The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding,66 and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Act and the applicable rules and regulations.67 Moreover, ‘‘unquestioning reliance’’ on an SRO’s representations in a proposed rule change would not be sufficient to justify Commission approval of a proposed rule change.68 For the reasons discussed above, the Commission believes it is appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of the Act to determine whether the proposal should be approved or disapproved. III. Procedure: Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the concerns identified above, as well as any others they may have with the proposal. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule change, as modified by Amendment No. 1, is inconsistent with Section 6(b)(5) 69 or any other provision of the Act, or the 65 Rule 700(b)(3), Commission Rules of Practice, 17 CFR 201.700(b)(3). 66 See id. 67 See id. 68 See Susquehanna Int’l Group, LLP v. Securities and Exchange Commission, 866 F.3d 442, 446–47 (D.C. Cir. 2017) (rejecting the Commission’s reliance on an SRO’s own determinations without sufficient evidence of the basis for such determinations). 69 15 U.S.C. 78f(b)(5). PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 rules and regulation thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4 under the Act, any request for an opportunity to make an oral presentation.70 Interested persons are invited to submit written data, views, and arguments regarding whether the proposed rule change, as modified by Amendment No. 1, should be approved or disapproved by December 15, 2020. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by December 29, 2020. The Commission asks that commenters address the sufficiency and merit of the Exchange’s statements in support of the proposed rule change, in addition to any other comments they may wish to submit about the proposed rule change. In particular, the Commission seeks comment on the statements of the Exchange contained in Amendment No. 1, and any other issues raised by the proposed rule change. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2020–075 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2020–075. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (http://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 70 Section 19(b)(2) of the Act, as amended by the Securities Act Amendments of 1975, Public Law 94–29 (June 4, 1975), grants the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Act Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). E:\FR\FM\24NON1.SGM 24NON1 Federal Register / Vol. 85, No. 227 / Tuesday, November 24, 2020 / Notices Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2020–075 and should be submitted by December 15, 2020. Rebuttal comments should be submitted by December 29, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.71 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–25909 Filed 11–23–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–90409; File No. SR– NYSEArca–2020–95] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE Arca BBO and NYSE Arca Trades by Modifying the Application of the Access Fee and Amending the Fees for NYSE Arca Trades by Adopting a Waiver Applicable to the Redistribution Fee November 12, 2020. jbell on DSKJLSW7X2PROD with NOTICES Correction In Notice document 2020–25391, appearing on pages 73522–73533, in the issue of Wednesday, November 18, 2020, make the following correction: On page 73533, in the first column, in the thirty-eighth line, the entry ‘‘December 9, 2021’’ is corrected to read ‘‘December 9, 2020’’. [FR Doc. C1–2020–25391 Filed 11–23–20; 8:45 am] BILLING CODE 1301–00–D 71 17 CFR 200.30–3(a)(57) and (58). VerDate Sep<11>2014 17:48 Nov 23, 2020 Jkt 253001 75079 SECURITIES AND EXCHANGE COMMISSION the most significant aspects of such statements. [Release No. 34–90449; File No. SR– PEARL–2020–25] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX PEARL Fee Schedule November 18, 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 November 5, 2020, MIAX PEARL, LLC (‘‘MIAX PEARL’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend the MIAX PEARL Fee Schedule (the ‘‘Fee Schedule’’) to increase the number of additional Limited Service MIAX Express Order Interface (‘‘MEO’’) Ports available to Members.3 The Exchange does not propose to amend the fees for additional Limited Service MEO Ports. The text of the proposed rule change is available on the Exchange’s website at http://www.miaxoptions.com/rulefilings/pearl at MIAX PEARL’s principal office, 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 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 The term ‘‘Member’’ means an individual or organization that is registered with the Exchange pursuant to Chapter II of these Rules for purposes of trading on the Exchange as an ‘‘Electronic Exchange Member’’ or ‘‘Market Maker.’’ Members are deemed ‘‘members’’ under the Exchange Act. See Exchange Rule 100. 2 17 PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 1. Purpose The Exchange proposes to amend the Fee Schedule to offer two (2) additional Limited Service MEO Ports to Members. The Exchange does not propose to amend the fees charged for the additional Limited Service MEO Ports. The Exchange initially filed the proposal to increase the number of Limited Service MEO Ports available to Members on June 30, 2020, with no change to the actual fee amounts being charged.4 The First Proposed Rule Change was published for comment in the Federal Register on July 20, 2020.5 The Exchange notes that the First Proposed Rule Change did not receive any comment letters. Nonetheless, the Exchange withdrew the First Proposed Rule Change on August 24, 2020.6 On August 25, 2020, the Exchange refiled its proposal to increase the number of Limited Service MEO Ports available to Members (without increasing the actual fee amounts) to provide further clarification regarding the Exchange’s annual cost for providing additional Limited Service MEO Ports.7 The Second Proposed Rule Change was published for comment in the Federal Register on September 11, 2020.8 Like the First Proposed Rule Change, the Second Proposed Rule Change did not receive any comment letters. Nonetheless, the Exchange withdrew the Second Proposed Rule Change on October 23, 2020 9 and submitted SR– PEARL–2020–21 (‘‘Third Proposed Rule Change’’). On October 26, 2020, the Exchange withdrew the Third Proposed Rule Change and submitted SR–PEARL– 2020–22 (‘‘Fourth Proposed Rule Change’’). The Fourth Proposed Rule Change to increase the number of 4 See Securities Exchange Act Release No. 89316 (July 14, 2020), 85 FR 43898 (July 20, 2020) (SR– PEARL–2020–09) (the ‘‘First Proposed Rule Change’’). 5 Id. 6 See Comment Letter from Christopher Solgan, VP, Senior Counsel, the Exchange, dated August 24, 2020, notifying the Commission that the Exchange will withdraw the First Proposed Rule Change. 7 See Securities Exchange Act Release No. 89774 (September 4, 2020), 85 FR 56281 (September 11, 2020) (SR–PEARL–2020–12) (the ‘‘Second Proposed Rule Change’’). 8 Id. 9 See Comment Letter from Christopher Solgan, VP, Senior Counsel, the Exchange, dated October 19, 2020, notifying the Commission that the Exchange would withdraw the Second Proposed Rule Change. E:\FR\FM\24NON1.SGM 24NON1

Agencies

[Federal Register Volume 85, Number 227 (Tuesday, November 24, 2020)]
[Notices]
[Pages 75071-75079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25909]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90457; File No. SR-CBOE-2020-075]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Instituting Proceedings to 
Determine Whether to Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment No. 1, to Make Qualified Contingent Cross Orders 
Available for FLEX Option Trading

November 18, 2020.
    On August 3, 2020, Cboe Exchange, Inc. (the ``Exchange'' or 
``CBOE'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to make Qualified Contingent Cross Orders 
available for FLEX option trading. The proposed rule change was 
published for comment in the Federal Register on August 20, 2020.\3\ On 
October 1, 2020, the Commission designated a longer period for 
Commission action on the proposed rule change, until November 18, 
2020.\4\ On October 23, 2020, the Exchange filed Amendment No. 1 to the 
proposed rule change, which replaced and superseded the proposed rule 
change.\5\ The Commission has not received any comments on the 
proposal. The Commission is publishing this notice and order to solicit 
comments on the proposed rule change, as modified by Amendment No. 1, 
from interested persons and to institute proceedings pursuant to 
Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89564 (August 14, 
2020), 85 FR 51531.
    \4\ See Securities Exchange Act Release No. 90062 (October 1, 
2020), 85 FR 63312 (October 7, 2020).
    \5\ Amendment No. 1 is available on the Commission's website at: 
https://www.sec.gov/comments/sr-cboe-2020-075/srcboe2020075-7940531-224727.pdf.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. The Exchange's Description of the Proposed Rule Change, as Modified 
by Amendment No. 1

    The Exchange proposes to amend Rule 5.70 and Rule 5.72, as well as 
Rule 5.33, to make Qualified Contingent Cross (``QCC'') Orders 
available for FLEX trading. The text of the proposed rule change is 
provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://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 amend Rule 5.70 and Rule 5.72, as well as 
Rule 5.33, to make QCC Orders, which includes Complex QCC Orders and 
QCC with Stock Orders, available for electronic FLEX trading. 
Currently, QCC Orders are available only for electronic non-FLEX 
trading.
    QCC Orders facilitate the execution of option orders that are part 
of Qualified Contingent Trades (``QCTs''),\7\ by permitting Trading 
Permit Holders (``TPHs'') to cross options orders without exposure 
while effecting the trade in the equities leg in another market at a 
price necessary to achieve the net price. Currently, TPHs may choose to 
submit the options component

[[Page 75072]]

of a QCT as a FLEX Option, yet, are currently unable to execute a FLEX 
Options component of a QCT on the Exchange in the same efficient, 
unexposed manner as they may execute a non-FLEX option component of a 
QCT on the Exchange. The Exchange now seeks to provide TPHs and their 
customers with the same QCC trading capabilities for FLEX trading that 
are currently available for non-FLEX trading, thus providing TPHs with 
the same capability to execute the options parts of QCTs that are 
comprised of FLEX Options.
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    \7\ See Rule 5.6(c), definition of ``Qualified Contingent Cross 
or QCC'', paragraph (1), which defines a ``qualified contingent 
trade'' as a transaction consisting of two or more component orders, 
executed as agent or principal, where: (A) At least one component is 
an NMS stock, as defined in Rule 600 of Regulation NMS under the 
Exchange Act; (B) all components are effected with a product or 
price contingency that either has been agreed to by all the 
respective counterparties or arranged for by a broker-dealer as 
principal or agent; (C) the execution of one component is contingent 
upon the execution of all other components at or near the same time; 
(D) the specific relationship between the component orders (e.g., 
the spread between the prices of the component orders) is determined 
by the time the contingent order is placed; (E) the component orders 
bear a derivative relationship to one another, represent different 
classes of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (F) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade.
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    Rule 5.6(c) currently provides for the non-FLEX definition of a QCC 
Order. Specifically, a QCC order is comprised of an originating order 
to buy or sell at least 1,000 contracts (or 10,000 mini-option 
contracts) that is identified as being part of a QCT coupled with a 
contra-side order or orders totaling an equal number of contracts. If a 
QCC Order has more than one option leg (a ``Complex QCC Order''), each 
option leg must have at least 1,000 standard option contracts (or 
10,000 mini-option contracts). A QCC order represents one component of 
a QCT, which must be paired with a stock order. When a User enters a 
QCC Order, the User is responsible for executing the associated stock 
component of the QCT at or near the same time of the QCC order 
execution, just as a User is ultimately responsible for complying with 
execution requirements for any order a User submits. Indeed, the 
Exchange requires TPHs to properly mark all QCC Orders as such, and has 
a surveillance program in place which assesses TPH compliance with the 
requirements applicable to QCC Orders, including the requirement that 
the stock leg of the transaction be executed at or near the same time 
as the options leg.\8\ To execute the associated stock, a User may 
choose to either (1) separately submit an option order to the Exchange 
and the stock order to a stock execution venue in time to be executed 
at or near the same time of each other, or (2) submit a QCC with Stock 
Order. A QCC with Stock Order is a type of QCC Order (including a 
Complex QCC Order) entered with a stock component to be electronically 
communicated by the Exchange to a designated broker-dealer for 
execution on behalf of the submitting User and, as indicated, are 
available to Users on a voluntary basis.\9\
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    \8\ See Securities Exchange Act Release No. 15058 (June 17, 
2011), 76 FR 35491 (Order Granting Approval of Proposed Rule Change 
Establishing Qualified Contingent Cross Orders) (``QCC Approval 
Order'').
    \9\ See Rule 5.33(a), definition of ``QCC with Stock Order''.
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    The Exchange proposes to adopt Rule 5.72(e) \10\ to govern FLEX QCC 
Orders. The proposed rule is simply making QCC Order available for 
FLEX, and as such, the definition of FLEX QCC Orders is substantively 
identical as non-FLEX QCC Orders in Rule 5.6(c) and FLEX QCC Orders 
will execute in substantially the same manner with few differences 
unique to trading in FLEX Trading. Proposed Rule 5.72(e) provides that 
a ``FLEX QCC'' order is comprised of an originating order to buy or 
sell at least 1,000 standard FLEX Option contracts (or 10,000 mini FLEX 
option contracts) that is identified as being part of a QCT (as defined 
in Rule 5.6(c)) coupled with a contra-side order or orders totaling an 
equal number of contracts. If a FLEX QCC order has more than one option 
leg (a ``Complex FLEX QCC'' order), each option leg must have at least 
1,000 standard FLEX option contracts (or 10,000 mini FLEX option 
contracts). This is substantively identical to the non-FLEX QCC 
definition in Rule 5.6(c). The Exchange notes that Users will enter 
into the System all FLEX QCC Orders as they would any other FLEX Order 
pursuant to 5.72(b) (governing the order entry of FLEX Orders) and the 
applicable FLEX auction rules. As such, the Exchange points out that 
FLEX QCC Orders may only be submitted for series consistent with the 
FLEX Rules.\11\ Like QCC Orders submitted for non-FLEX trading,\12\ 
FLEX QCC Orders will execute automatically upon entry without exposure 
pursuant to proposed Rule 5.72(e)(1). The Exchange notes, as there is 
no FLEX Order Book, the corresponding provisions in Rule 5.6(c) \13\ 
and 5.33(f)(2) regarding QCC Order execution requirements in connection 
with yielding to prices at which Priority Customer Orders may be 
resting in the Simple Book \14\ and Complex Order Book (``COB''),\15\ 
and in Rule 5.6(c) \16\ in connection with pricing QCC Orders at or 
between the NBBO \17\ would not be applicable to QCC Orders submitted 
to FLEX.\18\ Proposed Rule 5.72(e)(1) also provides that a FLEX QCC 
Order is cancelled if it cannot execute, and that Rule 5.9 (related to 
exposure of orders on the Exchange) does not apply to FLEX QCC orders, 
both of which are consistent with the current non-FLEX QCC Rules.\19\ 
Like QCC Orders submitted in non-FLEX classes,\20\ QCC orders submitted 
in FLEX classes must be entered in the standard increment for the 
class.\21\ Therefore, the proposed rule change adds in proposed Rule 
5.72(e)(2) that FLEX QCC may only be entered in the increments 
applicable to FLEX Orders under Rule 5.4(c)(4).
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    \10\ The Exchange also moves current paragraph (e) to paragraph 
(f).
    \11\ See Rules 5.72(b), (c), and (d).
    \12\ See Rule 5.6(c), definition of ``Qualified Contingent Cross 
or QCC'', paragraph (2).
    \13\ See id.
    \14\ See Rule 5.6(c), definition of ``Qualified Contingent Cross 
or QCC'', subparagraph (2)(A)(i).
    \15\ See Rule 5.6(c), definition of ``Qualified Contingent Cross 
or QCC'', subparagraph (2)(B)(i) and (iii).
    \16\ See Rule 5.6(c), definition of ``Qualified Contingent Cross 
or QCC'', subparagraph (2).
    \17\ See Rule 5.6(c), definition of ``Qualified Contingent Cross 
or QCC'', subparagraph (2)(A)(ii) and (B)(ii).
    \18\ This is true for any FLEX Order.
    \19\ See Rule 5.6(c), definition of ``Qualified Contingent Cross 
or QCC'', subparagraph (2)(C) and (2)(C), respectively.
    \20\ See 5.6(c), definition of ``Qualified Contingent Cross or 
QCC'', paragraph (3).
    \21\ See Rule 5.4(c)(4) (which sets forth minimum increments for 
FLEX options).
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    Proposed Rule 5.72(e)(1) also provides that a FLEX QCC with Stock 
order executes pursuant to Rule 5.33(l). The proposed rule change 
amends Rule 5.33(1) to specify that the provisions governing QCC with 
Stock include FLEX QCC with Stock. As such, pursuant to Rule 5.33(l), 
for a FLEX QCC with Stock Order, a User must include the same requisite 
information as they must include when submitting such orders for non-
FLEX trading pursuant to Rule 5.33(l)(3)(A),\22\ and the System will 
process the option and stock components of such orders in the same 
manner as it does for non-FLEX QCC orders pursuant to Rule 
5.33(l)(3)(B) and (C).\23\
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    \22\ Rule 5.33(l)(3)(A) requires a User to include a net price 
for the stock and option components in accordance with the minimum 
increments for stock-option orders and (ii) identify the designated 
broker-dealer as set forth in Rule 5.33 (l)(2).
    \23\ Rule 5.33(l)(3)(B) provides that the System executes the 
option component in accordance with Rule 5.6(c), but does not 
immediately send the User a trade execution report, and 
automatically communicates the stock component to the designated 
broker-dealer for execution at a stock trading venue. If the option 
component(s) of a QCC with Stock Order cannot execute, the System 
cancels the QCC with Stock Order, including both the stock and 
option components. Rule 5.33(l)(3)(C) provides that, if the System 
receives an execution report for the stock component of a QCC with 
Stock Order from the designated broker-dealer, the Exchange sends 
the User the trade execution report for the QCC with Stock order, 
including execution information for both the stock and option 
components. If the System receives a report from the designated 
broker-dealer that the stock component of a QCC with Stock Order 
cannot execute, the Exchange nullifies the option component trade 
and notifies the User of the reason for the nullification.
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    The Exchange seeks to make QCC Orders available for FLEX trading 
due to the growing customer demand it has received for QCC 
functionality for FLEX trading. The Exchange notes that a number of 
TPHs have expressed to the Exchange that use of QCC for FLEX

[[Page 75073]]

options would increase the efficiency of their executions of the 
options component of a QCT if the options component consists of a FLEX 
Option. An investor may seek to use a FLEX Option as an appropriate 
hedge for a stock order but is currently unable to execute a FLEX 
Option that is part of a QCT on the Exchange in the same unexposed 
manner as it may execute a non-FLEX option on the Exchange. Currently, 
if a TPH wants to execute a FLEX Option that is intended to be part of 
a QCT, it would have to enter the FLEX Option as a FLEX Order separate 
from the stock portion or as a stock-option order, which must be 
exposed for at least three seconds prior to execution.\24\ Indeed, a 
clean cross of the FLEX Option component of a stock-option QCT would 
provide assurance to the parties to the QCT that their hedge will be 
maintained.\25\ This is particularly significant for a variety of 
managed funds that recognize the benefits to their investors in 
employing certain hedging strategies through FLEX Options that allow 
for their investors to mitigate risk and meet their objectives. For 
example, a strategy may have an investment goal of protecting potential 
losses down to a certain amount with the ability to participate in 
return up to a certain cap in a reference asset (e.g., underlying index 
or ETF) over a target outcome period that is usually a year or more 
out. Such a strategy may utilize a combination of FLEX call and put 
options in which expiration corresponds to the target outcome period 
overlaid on an exposure to the reference asset. On the seed day (or, 
the day in which the strategy is created and funded), the options 
package would reflect customized strikes, necessary to target the 
strategy's trading objectives a year or more in advance and for which 
existing standard strikes are typically unavailable. The customized 
FLEX strikes are used for the duration of the life of the strategy and 
it is key that the appropriate combination of options is guaranteed to 
maintain the hedge.
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    \24\ See Rule 5.72(c)(1)(F); Rule 5.73(c)(3); and Rule 
5.74(c)(3).
    \25\ Amendment No. 1 adds additional explanation and detail in 
support the use of QCC Orders in FLEX trading.
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    Additionally, the Exchange notes that the Rules currently permit 
Compression orders, which execute without exposure against another 
Compression order(s) totaling an equal number of options contracts, for 
trading in FLEX SPX options.\26\ That is, like the proposed FLEX QCC 
Orders, FLEX Compression orders are not exposed in a FLEX Auction 
pursuant to Rule 5.72.\27\
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    \26\ Amendment No. 1 adds explanation regarding another order 
type that may already execute without exposure in FLEX Options in 
support of FLEX QCC Orders.
    \27\ See Securities Exchange Release Nos. 89707 (August 28, 
2020), 85 FR 55040 (September 3, 2020) (SR-CBOE-2020-074) (Notice of 
Filing of a Proposed Rule Change Relating To Adopt Compression 
Orders); and 90179 (October 14, 2020), 85 FR 66590 (October 20, 
2020) (SR-CBOE-2020-074) (Order Granting Approval of a Proposed Rule 
Change To Adopt Position Compression Cross (``PCC'') Orders for 
SPX). As is the case with the proposed FLEX QCC orders, there would 
be no NBBO or protection of customer orders for the recently 
approved compression orders for FLEX Options.
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    As noted above, to qualify as a QCT, the execution of one component 
is contingent upon the execution of all other components at or near the 
same time. The Exchange conducts surveillance of TPHs to ensure that 
TPHs execute the options component of a QCT at or near the same time as 
the stock component, in accordance with the QCT exemption.\28\ 
Therefore, there is compliance risk for TPHs if they do not execute the 
options component at or near the same time of execution of the stock 
component. Providing TPHs with QCC Order functionality for FLEX Options 
will reduce the compliance burden on TPHs by providing a more efficient 
means of executing the options component of a QCT if the options 
component consists of a FLEX Option, as QCC Orders did for non-FLEX 
options.
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    \28\ See supra note 1; see also infra note 34.
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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.\29\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \30\ 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) \31\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
    \31\ Id.
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    In particular, the proposal to make the QCC Order type available 
for electronic FLEX trading will facilitate TPHs' execution of the 
options component of QCTs that are comprised of FLEX Options in the 
same manner that TPHs may currently execute the options component of 
QCTs that are comprised of non-FLEX options, thereby removing 
impediments to and perfecting the mechanism of a free and open market 
and national market system and, in general, protecting investors. QCC 
Orders for FLEX Options will execute in the same manner as QCC Orders 
for non-FLEX options; the proposed rule change merely expands the 
classes in which the Exchange may make QCC Orders available and 
provides a specific definition of FLEX QCC Orders for clarity. 
Moreover, the Exchange notes that stock-option orders (which, by 
definition, must also be a QCT) \32\ are already permitted under the 
Rules for FLEX Options, and thus, the FLEX Options components of QCTs 
submitted as stock-option orders may currently execute at any price in 
FLEX (i.e., are not subject to an NBBO or yielding to Customer orders). 
The proposed rule change merely provides an alternative, more efficient 
manner of execution for the option component of larger-sized QCTs.
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    \32\ See Interpretation and Policy .03 to Rule 5.33.
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    The Exchange believes the availability of QCC Orders for FLEX 
Options will allow for a more efficient execution of the options 
component of a QCT on the Exchange. As noted above, to qualify as a 
QCT, the execution of one component is contingent upon the execution of 
all other components at or near the same time. The Exchange conducts 
surveillance to ensure a TPH executes the stock and option components 
of a QCT at or near the same time.\33\ As a result, if the option 
component does not execute when initially submitted to the Exchange, a 
TPH may be subject to compliance risk if it does not execute the option 
component at or near the same time of the execution of the stock 
component. Indeed, the Exchange notes that the compliance risk of not 
being able to execute a FLEX Options portion of a QCT at or near the 
same time of the execution of the stock component is greater in a FLEX 
auction, where it must be exposed for at least three seconds prior to 
execution, than for non-FLEX option orders that must be exposed for at 
least one second \34\ unless submitted

[[Page 75074]]

into an auction with a shorter exposure period. The Exchange believes 
the proposed rule change will reduce this compliance risk for TPHs 
executing FLEX Options that are components of QCTs, which will protect 
investors and the public interest. Since the purpose of a QCT order is 
for all components to trade at or near the same time, the Exchange 
believes it is appropriate to provide TPHs with a mechanism to 
facilitate immediate execution of FLEX Options that comprise the 
options component of a QCT to reduce the compliance burden on TPHs when 
effecting QCTs with a FLEX Option component.
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    \33\ See QCC Approval Order.
    \34\ See Rule 5.9.
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    The Exchange believes that proposed Rule 5.72(e), while 
substantially the same in almost all aspects to Rule 5.6(c) governing 
non-FLEX QCC, will provide clarity to TPHs regarding the submission of 
their QCC FLEX Options. The only difference between the FLEX and non-
FLEX QCC Orders is that FLEX QCC Orders are not subject to the NBBO or 
prices of customers in the book. The Exchange notes this difference 
exists for any order type in non-FLEX trading versus FLEX trading.\35\ 
The Exchange notes that the proposed rule changes do not alter any of 
the current increments applicable to FLEX Options but merely provide 
additional detail within the specific provision covering QCC Orders 
regarding the standard increments already permissible for FLEX Options 
that will also apply to QCC FLEX Orders.
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    \35\ The Exchange also notes that the requirement that a QCC 
order execute at a price at or better than the NBBO is not a unique 
execution requirement--every option order type approved by the 
Commission must execute at a price at or better than the NBBO in 
accordance with the linkage plan. See Rule 5.66.
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    As the Commission has previously found,\36\ the execution of QCTs 
is beneficial to the market as a whole as it contributes to the 
efficient functioning of the securities markets and the price discovery 
process. Pursuant to the QCT Release, the options portion of a QCT may 
consist of non-FLEX or FLEX Options [sic]. However, as noted above, 
without the availability of QCC Orders for FLEX Options, TPHs are 
subject to higher compliance risk with respect to QCTs with a FLEX 
Option component than TPHs who execute QCTs with a non-FLEX option 
component. The Exchange submits this proposed rule change in response 
to demand from TPHs and their institutional customers \37\ to be able 
to execute the options components of QCTs comprised of a FLEX Option in 
the same manner that they are currently able to execute the options 
components of QCTs comprised of non-FLEX options. Therefore, the 
proposed rule change will provide TPHs whose hedging strategies involve 
FLEX Options with the same functionality currently available to TPHs 
whose hedging strategies involve non-FLEX Options. The Exchange 
believes this will provide investors with additional flexibility 
regarding execution of their hedging strategies related to stock 
positions, which flexibility ultimately benefits investors.
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    \36\ See Securities Exchange Act Release No. 57620 (April 4, 
2008), 73 FR 19271 (April 9, 2008) (``QCT Release''); and see QCC 
Approval Order.
    \37\ Amendment No. 1 specifies the customer base for FLEX 
trading.
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    Moreover, the Commission has stated that, while it believes that 
order exposure is generally beneficial to options markets, it 
recognizes that contingent trades can be useful trading tools for 
investors and other market participants, particularly those who trade 
the securities of issuers involved in mergers, different classes of 
shares of the same issuers, convertible securities, and equity 
derivatives such as options and that those who engage in contingent 
trades can benefit the market as a whole by studying the relationships 
between prices of such securities and executing contingent trades when 
they believe such relationships are out of line with what they believe 
to be fair value.\38\
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    \38\ See QCC Approval Order.
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    The requirement that a non-FLEX QCC must execute at a price at or 
between the NBBO merely incorporates an execution requirement 
applicable to all option order types, as all options must execute at 
price at or better than the NBBO in accordance with linkage rules.\39\ 
Therefore, this execution requirement is not a heightened execution 
requirement for an unexposed option order. The additional requirement 
that a QCC order not execute at the same price as a Priority Customer 
incorporates the general principle of customer protection in the 
options markets.\40\ If the market model for a class does not include 
customer priority, this is a heightened execution requirement for 
execution of an unexposed order.\41\ Even without this additional 
protection, the Exchange believes the proposed FLEX QCC order will 
protect investors, as it will provide Users of FLEX Options with the 
same functionality as Users of non-FLEX options. While the Exchange 
again notes that there is no FLEX book in which Customer orders (or any 
FLEX orders) may rest, and therefore the principles of customer 
priority are not currently applicable to FLEX trading, the Exchange 
observed the top of Book orders in non-FLEX symbols as a comparison 
point.\42\ In a random sample of data drawn from orders resting at the 
top of the Book,\43\ the Exchange observed that, on average, only 0.34% 
of all orders resting at the top of the Book were Customer orders. As 
such, the Exchange believes that, even if there was a book for FLEX 
Options, there would be minimal risk of executing a FLEX QCC at the 
same price as a Customer order in the Book. Additionally, primarily 
broker-dealers and institutional investors engage in FLEX trading. 
Indeed, executions in FLEX Options are generally larger and held long-
term for strategies utilized by broker-dealers and institutional 
investors, as opposed to the smaller, more frequent trades with shorter 
expiration durations typically executed by retail investors. The 
Exchange also understands that many large retail brokerage firms do not 
accept FLEX Options or otherwise have high minimums which may 
discourage retail trading in FLEX Options.\44\ Therefore, there are 
minimal retail customer orders submitted into the FLEX market and thus 
it would be unlikely any would be resting at the top of a FLEX book if 
one existed for a de minimis (if any) amount

[[Page 75075]]

of time that would require additional protection. As discussed above, 
the Exchange believes the benefits of exposure on an order on the 
Exchange are outweighed by the benefits offered by immediate execution 
of these contingent order types. The Exchange does not believe market 
participants that engage in hedging strategies involving FLEX Options 
should not have access to the same functionality as market participants 
with hedging strategies involving non-FLEX options.
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    \39\ See Rule 5.66. In other words, if the definition of a QCC 
order did not include the provision that it must execute at a price 
at or better than the NBBO, QCC orders would still be required to 
execute at a price at or better than the NBBO. The Exchange believes 
inclusion of this explicit requirement for QCC orders was intended 
to highlight the difference between execution of the options 
component and the stock component, which may execute at any price, 
but was not a unique price requirement necessary for execution of an 
unexposed order. Every order type on the Exchange approved for non-
FLEX trading and FLEX trading has this same distinction.
    \40\ If there was not a customer order resting at the top of the 
book, then the second pricing requirement for QCC orders is simply 
ignored. As there is no book in the FLEX market, the proposed FLEX 
QCC order is equivalent to a non-FLEX QCC order submitted when there 
is no customer order resting at the top of the book.
    \41\ The Exchange has enabled customer priority for all equity 
option classes that trade on the Exchange (and thus for all classes 
in which TPHs may submit QCC orders). Therefore, all QCC orders 
submitted on the Exchange are subject to the same execution pricing 
requirements as non-QCC orders.
    \42\ Amendment No. 1 adds a description of the top of Book data 
sample and the Exchange's observations in connection with the data 
sample in support of QCC for FLEX trading and that, as proposed, 
FLEX QCC orders are consistent with the protection of investors.
    \43\ The random sample was drawn over three days (September 25, 
September 30, and October 1, 2020) from a different Match Engine 
each sample day (one of which includes SPY). The sampling of data 
across different Match Engines is representative of the symbols that 
trade on the Exchange.
    \44\ Amendment No. 1 adds additional detail regarding the de 
minimis amount of retail customer orders submitted into the FLEX 
market that would require additional protection.
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    The Exchange does not believe the propose rule change raises price 
protection concerns that market participants may submit FLEX QCC Orders 
for a FLEX series with slightly different terms than a non-FLEX series 
in order to get better pricing. Such risk, if any, exists today with 
respect to all FLEX trading. The Exchange again points out that the 
linkage rules and customer priority are currently not applicable to any 
orders submitted to FLEX, wherein there is no order book. The Exchange 
has observed no trends of TPHs submitting FLEX orders in order to avoid 
trading in the non-FLEX market. The Exchange believes the risk (if any) 
of a market participant trading a FLEX Option rather than a non-FLEX 
option with slightly different terms to use the FLEX market as a 
substitute for the non-FLEX market and achieve such a result is 
minimal. This possibility exists today with respect to all options the 
Exchange lists for FLEX and non-FLEX trading. The Exchange has not 
observed market participants attempting to trade in the FLEX market 
rather than the non-FLEX market for this purpose in classes in which 
this is possible today and believes there would be minimal, if any, 
benefit to do so. The Exchange compiled a dataset of all FLEX series 
listed on the Exchange in the last year \45\ that matched non-FLEX 
series on the underlying, expiration date, put/call and exercise-style, 
but had different strikes. From the dataset, the Exchange was able to 
observe the differences in strike prices between FLEX series and listed 
series.\46\ The Exchange found that 99.90% of all SPX and SPXW FLEX 
series created were over $1.00 away from the matching SPX/SPXW listed 
series strikes, and that 90.10% of these were over $100.00 away from 
the matching listed series strikes. It also found that 97.61% of all 
equity and ETP FLEX series created were over $1.00 away from the 
matching listed series strikes, and that 83% of these were over $10.00 
away from the matching listed series strikes and 44.97% of these were 
over $100.00 away from the matching listed series strikes. As a result, 
the Exchange believes that there is minimal (if any) risk that market 
participants desire or attempt to use the FLEX market as a substitute 
to avoid trading in the non-FLEX market.
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    \45\ From October 14, 2019 through October 9, 2020.
    \46\ Amendment No. 1 provides additional data in support of QCC 
Orders for FLEX trading, particularly demonstrating that there is 
minimal risk of trading in the FLEX market as a substitute for 
trading an economically equivalent option in the non-FLEX market.
---------------------------------------------------------------------------

    The Exchange believes attempting to execute an order in the FLEX 
market as a substitute for the non-FLEX market would minimize execution 
opportunities for that order. Such trading would be inefficient for 
market participants and could introduce price and execution risk to 
market participants' trading strategies given the reduced liquidity, 
participation, and price discovery in the FLEX market compared to the 
non-FLEX market.\47\ Additionally, series with different terms have 
different prices and serve different investment purposes, so trading a 
``similar'' FLEX series may not achieve the same investment objective 
as the non-FLEX series a TPH initially sought to trade. The Exchange 
notes if a FLEX QCC Orders execute at a price through the book of the 
``similar'' non-FLEX series, while that would be a better price for one 
transaction participant, it would be a worse price for the participant 
on the opposite side, and thus it may be more difficult for the TPH to 
find sufficient contra party interest. For example, suppose the market 
for Aug ABC 800 call with a multiplier of 100 is 10.20-11.00. If a 
market participant sought interest from counterparties to execute a 
FLEX QCC Order to buy an Aug ABC 795 call with at 10.00, it is unlikely 
another market participant would sell at that price if they were 
looking to sell the Aug ABC 800 call, given that participant could sell 
the ``similar'' non-FLEX option series at 10.20, which would be a 
better price for that seller. Given the likely difficulties (such as 
reduced liquidity and potentially longer timeframe to receive 
execution) of trading in the FLEX market as a substitute for trading an 
economically equivalent option in the non-FLEX market (such as to 
obtain a better execution price), the Exchange believes the risk of 
this occurring is de minimis. The Exchange believes that any such risk 
is even lower for FLEX QCC Orders given the additional requirements 
that apply to FLEX QCC Orders, even without the heightened execution 
price requirement that a QCC Order cannot execute at the same price as 
a Priority Customer. The benefits of QCC Orders apply to FLEX options 
in the same manner as they do for non-FLEX options, which benefits the 
Exchange believes significantly outweigh any price protection risk that 
may exist in the FLEX market.
---------------------------------------------------------------------------

    \47\ See Sections VII and X of the ODD regarding risks 
associated with FLEX Options.
---------------------------------------------------------------------------

    Ultimately, as noted above, QCC Orders in FLEX Options will execute 
in a substantially similar manner as QCC Orders in non-FLEX options. In 
addition to this, the Exchange notes that the Rules currently permit 
Compression orders in FLEX SPX options which, like QCC Orders for FLEX 
trading, may execute immediately without exposure as opposed to being 
submitted to a FLEX Auction despite there being no NBBO or customer 
priority in the FLEX market. Finally, the Exchange notes that QCC 
functionality is a widely adopted industry order type wherein multiple 
other options exchanges currently have QCC functionality in place.\48\
---------------------------------------------------------------------------

    \48\ See e.g. Nasdaq Phlx Rules Options 3, Section 12 
(electronic QCC orders), and Options 8, Section 32(e) (open outcry 
QCC orders); Nasdaq ISE Options 3, Section 12; BOX Options Rule 
7110(c)(6); MIAX Options Rule 516(j); and NYSE Arca Options Rule 
6.90-O.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because QCC functionality is 
already available for non-FLEX options. The Exchange is simply 
proposing to make QCC Orders available for additional classes (FLEX 
Option classes). The Exchange notes that the proposed order type will 
be available to all Users on a voluntary basis, and Users are not 
required to use QCC Orders when executing QCTs. Users may continue to 
execute the options component of QCTs that are comprised of FLEX 
Options in the same manner as they do today. The proposed rule change 
will provide FLEX Traders with the same functionality that is currently 
available to non-FLEX Traders with respect to execution of option 
components of QCTs. The Exchange believes all TPHs should have access 
to this functionality so they can all execute option components of QCTs 
in the same manner, regardless of whether they choose to hedge the 
stock portions of QCTs with FLEX or non-FLEX options.

[[Page 75076]]

    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because the 
proposed rule change is merely making functionality currently available 
on the Exchange to additional option classes. As noted above, QCC Order 
functionality is currently available at other options exchanges, which 
may determine make QCC functionality available to additional option 
classes as well, including flexible options. To the extent the proposed 
rule change makes the Exchange a more attractive trading venue for 
market participants on other exchanges, those market participants may 
elect to become Exchange market participants.
    Overall, the Exchange believes the proposed rule change is 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure, among other things, the economically 
efficient execution of securities transactions.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

II. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2020-075, as Modified by Amendment No. 1, and Grounds for Disapproval 
Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \49\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposal. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as stated below, the Commission seeks and encourages interested 
persons to provide comments on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposal.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
See id. The time for conclusion of the proceedings may be extended 
for up to 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding. See id.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\50\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with the Act, and, 
in particular, with Section 6(b)(5) of the Act, which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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.\51\
---------------------------------------------------------------------------

    \50\ Id.
    \51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange's proposal would expand the use of QCC Orders to 
electronic FLEX options. A QCC Order is comprised of an originating 
order to buy or sell at least 1,000 standard option contracts (or 
10,000 mini-option contracts) that is identified as being part of a 
qualified contingent trade (``QCT'') coupled with a contra-side order 
or orders totaling an equal number of contracts and meeting the other 
conditions described below. As the Exchange stated in its proposal, QCC 
Orders facilitate the execution of option orders that are part of a 
QCT,\52\ by permitting TPHs to cross non-FLEX options orders without 
exposure to the market while effecting a trade in the NMS stock 
component of the order at a price necessary to achieve a net price. The 
Commission granted an exemption for QCTs that meet certain requirements 
from Rule 611(a) of Regulation NMS (``QCT Exemption Order'').\53\ The 
QCT Exemption Order enables each NMS stock component of a QCT trade to 
be exempt from Rule 611(a) of Regulation NMS for any trade-
throughs.\54\ As the Commission previously stated in the QCC Approval 
Order, QCC Orders are permitted if the QCC Order is (1) part of a QCT 
under Regulation NMS; (2) for at least 1,000 contracts; (3) executed at 
a price at or between the NBBO; and (4) cancelled if there is a public 
customer on the electronic book.\55\
---------------------------------------------------------------------------

    \52\ A QCT is a transaction consisting of two or more component 
orders that involve both an option and equity stock component where 
the execution of one component is contingent upon the execution of 
all the other components at or near the same time. See supra note 7 
(defining a QCT, which requires, among other things, that ``at least 
one component must be an NMS stock, as defined in Rule 600 of 
Regulation NMS . . .'').
    \53\ See Securities Exchange Act Release No. 57620 (April 4, 
2008), 73 FR 19271 (April 9, 2008) (``QCT Exemption Release''), 
which modifies a release initially granting the QCT exemption, 
Securities Exchange Act Release No. 54389 (August 31, 2006), 71 FR 
52829 (September 7, 2006) (``Original QCT Exemption Release'').
    \54\ See id.
    \55\ See QCC Approval Order, supra note 8, 76 FR at 35492. See 
also CBOE Rule 5.6(c)(2), which states, among things, that a ``QCC 
Order with one option leg may execute automatically upon entry 
without exposure if the execution price: (i) Is not at the same 
price as a Priority Customer order resting in the Book; and (ii) is 
at or between the NBBO.''
---------------------------------------------------------------------------

    The Commission also stated in the QCC Approval Order that the four 
required elements of the QCC Order ``strikes an appropriate balance for 
the options market in that it is narrowly drawn and establishes a 
limited exception to the general principle of exposure and retains the 
general principle of customer priority in the options markets.'' \56\ 
The Exchange has stated that due to the structure of the FLEX options 
market, such as the lack of a customer order book and that FLEX options 
have no NBBO, that the applicable QCC Order requirements as to these 
matters are not applicable to FLEX orders and therefore are not 
applicable to the proposed FLEX QCC Order. The requirements for a QCC 
Order to execute at or between the NBBO and that a QCC Order cannot be 
executed at the same price as a customer order on the book are intended 
to mitigate the risks to market quality in both the options and 
underlying equity markets. The Exchange, however, has not detailed why 
such protections, and the underlying rationale for such protections, 
are unnecessary considering that FLEX options market participants would 
be granted an exception to the FLEX options electronic auction order 
exposure requirements, as well as the equity market trade-through 
rules, when executing a FLEX QCC Order under its proposal. The 
Commission therefore believes, as discussed in more detail below, that 
the Exchange's proposal raises questions as to whether its proposal is 
consistent with the protection of investors and other requirements of 
Section 6(b)(5) of the Act, in addition to the maintenance of fair and 
orderly markets.\57\
---------------------------------------------------------------------------

    \56\ See QCC Approval Order, supra note 8, 76 FR at 35492.
    \57\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Electronic FLEX options trading differs from electronic non-FLEX 
options because they allow TPHs to customize terms of the option 
contract (e.g., exercise style, expiration date, and strike price). 
Notably, FLEX options lack an order book and a requirement to yield to 
public customer interest. Electronic FLEX option transactions are also 
conducted through auctions which require an exposure interval that may

[[Page 75077]]

not be less than three seconds prior to execution.\58\ As the 
Commission has stated in the past, order exposure in the options 
markets provides an incentive to options market makers to provide 
liquidity and therefore plays an important role in ensuring competition 
and price discovery in the options markets.\59\ The proposed FLEX QCC 
Order would permit TPHs to execute a FLEX options component of a QCT 
without the regular FLEX auction exposure requirement. Therefore, when 
applying the unique characteristics of the FLEX options market to the 
current QCC Order framework, the Commission believes there are 
questions as to whether the Exchange's proposal is consistent with the 
guidance in the QCC Approval Order and the principles underlying the 
order, and whether the proposal is consistent with Section 6(b)(5) of 
the Act.
---------------------------------------------------------------------------

    \58\ See CBOE Rule 5.72(c)(1)(F).
    \59\ See QCC Approval Order, supra note 8, 76 FR at 35492.
---------------------------------------------------------------------------

    In particular, the Commission is concerned that the proposed design 
of the QCC FLEX Order may negatively impact market quality in the 
options market by removing certain constraints required under the QCC 
Approval Order. The Exchange states that stock-option orders are 
already permitted to include FLEX options and ``the FLEX Options 
components of QCTs submitted as stock-option orders may currently 
execute at any price in FLEX (i.e., are not subject to an NBBO or 
yielding to [c]ustomer orders on the book).'' However, the Exchange 
fails to address that FLEX options that are currently part of a stock-
option order are able to achieve potential price improvement through 
the electronic FLEX auction exposure process,\60\ while the proposed 
FLEX QCC Orders eliminates the exposure requirement. As a result, the 
proposal to allow FLEX QCC Orders will eliminate the opportunity for 
any price improvement for the option component, thereby allowing the 
TPH to set the price at which the FLEX options component of the QCT 
will cross without being subject to any limits such as an NBBO. 
Furthermore, the elimination of the exposure requirement reduces the 
overall transparency of the price discovery process within the FLEX 
market, which potentially harms a wider range of participants, for 
example, if participants are less able to use historical FLEX option 
prices to inform about the prices of other, similar FLEX options.
---------------------------------------------------------------------------

    \60\ See CBOE Rule 5.72(c).
---------------------------------------------------------------------------

    The proposed FLEX QCC Order also raises concerns about its impact 
to market quality in the underlying stock leg of a QCC Order. In 
general, trade-throughs not only harm the individual participants who 
may receive worse prices, but they also increase wait times and 
execution risk for limit orders on the book, thereby reducing 
incentives for market participants to submit limit orders. In this 
respect, the Commission has previously recognized that any exemption to 
equity trade-through protection needs to be narrowly drawn. The QCT 
Exemption Order, in determining the scope of the exemption, states that 
defining the set of exemptions to trade-through protection too broadly 
``could unduly detract from the objectives of Rule 611''; \61\ these 
objectives include assuring ``that markets effect trades at the best 
available prices,'' but also ``encourag[ing] the display of limit 
orders by increasing the likelihood that they will receive an execution 
in a timely manner.'' \62\ Thus, the Commission has determined that the 
exemption to trade-through prohibition should only be granted if 
strictly necessary so as to promote these equity market quality goals. 
In the FLEX market, the Exchange has not provided justification for why 
the exemption to equity trade-through protection is strictly necessary. 
Note that, to qualify as a QCT, only ``the spread between the prices of 
the component orders'' needs to be defined, not the prices 
themselves.\63\ In the non-FLEX market, if the facilitator of a QCT 
would be constrained to price both the option and stock legs at their 
respective NBBOs, the spread between the prices of the two legs would 
be pre-defined according to the spread between the option NBBO and the 
stock NBBO. However, in the FLEX market, given the flexibility in 
determining the price of the FLEX option leg (particularly if not 
subject to exposure), the Exchange has not explained why a broker could 
not simply determine a spread, and subsequently adjust the price of the 
option leg according to the realized price of the stock leg, thus 
avoiding the need to trade-through the equity market. Likewise, and 
potentially more concerning, since neither leg of the proposed FLEX QCC 
Order is constrained to execute at an NBBO, the Exchange has not 
explained what would prevent a facilitator from determining a spread 
and setting the price for the FLEX option leg such that the 
corresponding stock leg price results in a trade-through.
---------------------------------------------------------------------------

    \61\ See Original QCT Exemption Release, supra note 53, 71 FR at 
52830.
    \62\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37505 (June 29, 2005) (Regulation NMS).
    \63\ See QCT Exemption Release, supra note 53, 73 FR at 19272.
---------------------------------------------------------------------------

    In addition to the significant concerns discussed above regarding 
the proposal's consistency with the guidance in the QCC Approval Order, 
and the principles underlying the order, that need to be addressed, the 
Exchange provided data on retail orders and market participation in 
FLEX and non-FLEX options in support of its proposal. The Exchange 
believes that the limited retail customer participation in the FLEX 
options market would mitigate the requirement for additional customer 
protections that exist for QCC Orders in the non-FLEX options market. 
Specifically, the Exchange states that ``there are minimal retail 
customer orders submitted into the FLEX market and thus it would be 
unlikely any would be resting at the top of a FLEX book if one existed 
for a de minimis (if any) amount of time that would require additional 
protection.'' The Commission is concerned that the proposal does not 
address how the lack of additional customer protections would be 
appropriate. The Commission notes that the Exchange did not provide 
specific data on the level of retail participation or whether that 
conclusion was based solely on the size of the orders in the FLEX 
options market. In addition, the Commission notes that the Exchange has 
stated previously in proposing certain changes to the FLEX options 
market that they were intended to broaden the base of investors that 
use FLEX options, including more retail participation.\64\ The 
Commission believes the Exchange has not provided sufficient data to 
support the conclusion that additional customer protections are 
unnecessary under the proposal.
---------------------------------------------------------------------------

    \64\ See Securities Exchange Act Release No. 66934 (May 7, 
2012), 77 FR 27822, 27824 (May 11, 2012) (SR-CBOE-2012-040) (Notice 
of Proposed Rule Change Related to Permanent Approval of its Pilot 
on FLEX Minimum Value Sizes) (stating that ``eliminating the minimum 
value size requirement would further broaden the base of investors 
that use FLEX [o]ptions to manage their trading and investment risk, 
including investors that current trade in OTC market for customized 
options, where similar size restrictions do not apply. The Exchange 
also believes that this may open up FLEX [o]ptions to more retail 
investors.''). The pilot was permanently approved in Securities 
Exchange Act Release No. 67624 (August 8, 2012), 77 FR 48580 (August 
14, 2012) (SR-CBOE-2012-040) (Order Granting Approval of Proposed 
Rule Change Related to Permanent Approval of its Pilot on FLEX 
Minimum Value Sizes).
---------------------------------------------------------------------------

    The Exchange also stated that it believes that the risk of market 
participants trading in the FLEX market as a substitute for the non-
FLEX market is minimal. The Exchange has provided a summary of data 
that showed the

[[Page 75078]]

number of customer orders resting in non-FLEX options at the top of the 
book and differences in strike prices in terms of dollar values between 
the FLEX and non-FLEX options that had similar terms. However, the data 
provided still raises questions as to whether the proposal would 
incentivize market participants to use FLEX options as a substitute for 
non-FLEX options in order to circumvent price and public customer 
priority constraints under the QCC Approval Order. For example, the 
data on strike prices for index options only compared SPX and SPXW 
listed series with SPX and SPXW FLEX series without considering a 
broader set of FLEX index options that would apply to the proposed FLEX 
QCC Order, including less liquid index options. In addition, the data 
sample on FLEX option strike price values would be more appropriately 
considered if the price differences between the FLEX and non-FLEX 
options market were described in proportion to the stock price rather 
than in dollar values. Moreover, the Exchange's proposal does not 
provide any information on the market share between FLEX and non-FLEX 
index options and FLEX and non-FLEX equity and ETP options and its 
variation over time, which could help inform on whether traders have 
been steadily migrating between the non-FLEX and FLEX market.
    Furthermore, the Exchange stated that the proposed FLEX QCC Order 
would ``reduce compliance burden on TPHs by providing a more efficient 
means of executing the options component of a QCT if the options 
component consists of a FLEX [o]ption.'' The Exchange asserted in its 
proposal that the compliance risk of not being able to execute a FLEX 
options portion of a QCT at or near the same time of the execution of 
the stock component is greater in a FLEX auction where the FLEX order 
must be exposed for at least three second prior to execution. However, 
the Exchange has not provided any evidence or data on the number of 
violations or compliance issues that occurred as a result of needing to 
execute the FLEX option component after the minimum three second 
exposure period. Accordingly, the Commission requests data to support 
the Exchange's assertion on compliance issues, including any 
information on the overall number of FLEX orders that are part of a 
stock-option order and the number of compliance issues occurring, 
including those in relation to the timing of execution of the stock and 
FLEX option component of the order.
    Based on the above, the Commission believes there are questions as 
to whether the proposal is consistent with Section 6(b)(5) of the Act 
and the requirements that the rules of the exchange be designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, and in general, to protect investors 
and the public interest, and whether the proposal is consistent with 
the maintenance of fair and orderly markets under the Act.
    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is rule change is consistent 
with the [Act] and the rules and regulations issued thereunder . . . is 
on the [SRO] that proposed the rule change.'' \65\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\66\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Act and the applicable rules and regulations.\67\ 
Moreover, ``unquestioning reliance'' on an SRO's representations in a 
proposed rule change would not be sufficient to justify Commission 
approval of a proposed rule change.\68\
---------------------------------------------------------------------------

    \65\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \66\ See id.
    \67\ See id.
    \68\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the 
Commission's reliance on an SRO's own determinations without 
sufficient evidence of the basis for such determinations).
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission believes it is 
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of 
the Act to determine whether the proposal should be approved or 
disapproved.

III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
proposal. In particular, the Commission invites the written views of 
interested persons concerning whether the proposed rule change, as 
modified by Amendment No. 1, is inconsistent with Section 6(b)(5) \69\ 
or any other provision of the Act, or the rules and regulation 
thereunder. Although there do not appear to be any issues relevant to 
approval or disapproval that would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4 under the Act, any request for an 
opportunity to make an oral presentation.\70\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78f(b)(5).
    \70\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change, as modified by 
Amendment No. 1, should be approved or disapproved by December 15, 
2020. Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by December 29, 2020.
    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposed rule 
change, in addition to any other comments they may wish to submit about 
the proposed rule change. In particular, the Commission seeks comment 
on the statements of the Exchange contained in Amendment No. 1, and any 
other issues raised by the proposed rule change.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2020-075 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2020-075. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://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

[[Page 75079]]

Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2020-075 and should be submitted by 
December 15, 2020. Rebuttal comments should be submitted by December 
29, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\71\
---------------------------------------------------------------------------

    \71\ 17 CFR 200.30-3(a)(57) and (58).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25909 Filed 11-23-20; 8:45 am]
BILLING CODE 8011-01-P