Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Amend Rules 5.37 and 5.73 Related to the Solicitation of Market Makers for SPX Initiating Orders in the Automated Improvement Mechanism and FLEX Automated Improvement Mechanism, 10154-10157 [2021-03219]

Download as PDF 10154 Federal Register / Vol. 86, No. 31 / Thursday, February 18, 2021 / Notices (B) Clearing Agency’s Statement on Burden on Competition Act. Comments may be submitted by any of the following methods: ICE Clear Europe does not believe the proposed amendments would have any impact, or impose any burden, on competition not necessary or appropriate in furtherance of the purposes of the Act. The amendments are being adopted to update and clarify the Price Submission Disciplinary Procedure and would apply equally to all CDS Clearing Members. As a result, ICE Clear Europe does not expect that the proposed changes will adversely affect access to clearing or the ability of Clearing Members, their customers or other market participants to continue to clear contracts. ICE Clear Europe also does not believe the amendments would materially affect the cost of clearing or otherwise impact competition among Clearing Members or other market participants or limit market participants’ choices for selecting clearing services. Accordingly, ICE Clear Europe does not believe the amendments would impose any burden on competition not necessary or appropriate in furtherance of the purpose of the Act. Electronic Comments (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments relating to the proposed amendments have not been solicited or received by ICE Clear Europe. ICE Clear Europe will notify the Commission of any written comments received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action jbell on DSKJLSW7X2PROD with NOTICES Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, security-based swap submission or advance notice is consistent with the VerDate Sep<11>2014 17:47 Feb 17, 2021 Jkt 253001 • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– ICEEU–2021–002 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–ICEEU–2021–002. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be available for inspection and copying at the principal office of ICE Clear Europe and on ICE Clear Europe’s website at https:// www.theice.com/notices/ Notices.shtml?regulatoryFilings. 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–ICEEU–2021–002 and should be submitted on or before March 11, 2021. PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.12 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–03217 Filed 2–17–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91116; File No. SR–CBOE– 2020–050] Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Amend Rules 5.37 and 5.73 Related to the Solicitation of Market Makers for SPX Initiating Orders in the Automated Improvement Mechanism and FLEX Automated Improvement Mechanism February 11, 2021. I. Introduction On June 3, 2020, Cboe Exchange, Inc. (‘‘Exchange’’ or ‘‘Cboe’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to permit orders for the accounts of market makers with an appointment in S&P 500® Index Options (‘‘SPX’’) to be solicited for the initiating order submitted for execution against an agency order into an Automated Improvement Mechanism (‘‘AIM’’) auction or a FLEX AIM auction. The proposed rule change was published for comment in the Federal Register on June 18, 2020.3 On July 2, 2020, the Exchange submitted Amendment No. 1 to the proposed rule change, which replaced and superseded the proposed rule change in its entirety.4 On July 22, 2020, the Exchange submitted 12 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 89062 (June 12, 2020), 85 FR 36907. Comments received on the proposed rule change are available on the Commission’s website at: https://www.sec.gov/ comments/sr-cboe-2020-050/srcboe2020050.htm. 4 In Amendment No. 1, the Exchange: (1) Limited the scope of its original proposal, which would have permitted orders for the accounts of market makers with an appointment in any class to be solicited for the initiating order in an AIM or FLEX AIM auction in that class, to only allow market makers with an appointment in SPX to be solicited for the initiating order in an AIM or FLEX AIM auction in SPX; and (2) provided additional data, justification, and support for its modified proposal. The full text of Amendment No. 1 is available on the Commission’s website at: https://www.sec.gov/ comments/sr-cboe-2020-050/srcboe20200507382058-218888.pdf. 1 15 E:\FR\FM\18FEN1.SGM 18FEN1 Federal Register / Vol. 86, No. 31 / Thursday, February 18, 2021 / Notices Amendment No. 2 to the proposed rule change.5 On July 27, 2020, pursuant to Section 19(b)(2) of the Act,6 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.7 On August 21, 2020, the Commission published notice of Amendment Nos. 1 and 2 and instituted proceedings under Section 19(b)(2)(B) of the Act 8 to determine whether to approve or disapprove the proposed rule change, as modified by Amendment Nos. 1 and 2.9 On December 8, 2020, pursuant to Section 19(b)(2) of the Act,10 the Commission designated a longer period within which to approve or disapprove the proposed rule change, as modified by Amendment Nos. 1 and 2.11 This order approves the proposed rule change, as modified by Amendment Nos. 1 and 2. jbell on DSKJLSW7X2PROD with NOTICES II. Description of the Proposal, as Modified by Amendment Nos. 1 and 2 The Exchange proposes to permit orders for the accounts of market makers with an appointment in SPX to be solicited for the initiating order submitted for execution against an agency order in SPX options into a simple AIM auction pursuant to Rule 5.37 or a simple FLEX AIM auction pursuant to Rule 5.73.12 Currently, the introductory paragraphs of Rules 5.37 and 5.73 prohibit orders for the accounts of market makers with an 5 In Amendment No. 2, the Exchange: (1) Provided additional data, justification, and support for its proposal; and (2) made technical corrections and clarifications to the description of the proposal. The full text of Amendment No. 2 is available on the Commission’s website at: https://www.sec.gov/ comments/sr-cboe-2020-050/srcboe20200507464399-221161.pdf. 6 15 U.S.C. 78s(b)(2). 7 See Securities Exchange Act Release No. 89398, 85 FR 46197 (July 31, 2020). The Commission designated September 16, 2020 as the date by which the Commission shall approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change. 8 15 U.S.C. 78s(b)(2)(B). 9 See Securities Exchange Act Release No. 89635, 85 FR 53051 (August 27, 2020). 10 15 U.S.C. 78s(b)(2). 11 See Securities Exchange Act Release No. 90593, 85 FR 80842 (December 14, 2020). The Commission designated February 13, 2021 as the date by which the Commission shall approve or disapprove the proposed rule change, as modified by Amendment Nos. 1 and 2. 12 The initiating order is the order comprised of principal interest or a solicited order(s) submitted to trade against the order the submitting trading permit holder (the ‘‘Initiating TPH’’ or ‘‘Initiating FLEX Trader,’’ as applicable) represents as agent (the agency order). The Exchange states that AIM is currently not activated for SPX options, although FLEX AIM is currently activated for FLEX SPX options. See Amendment No. 1, supra note 4, at 4 & n.2. VerDate Sep<11>2014 17:47 Feb 17, 2021 Jkt 253001 appointment in the applicable class to be solicited to execute against the agency order in a simple AIM or FLEX AIM auction, respectively. The Exchange states that no similar restriction applies to crossing transactions in open outcry trading, where a significant portion of SPX options trade.13 The Exchange represents that brokers seeking liquidity to execute against customer orders on the trading floor regularly solicit appointed SPX market makers for this liquidity, as they are generally the primary source of pricing and liquidity for those options.14 The Exchange states that, during a period of time in which it suspended open outcry trading to help prevent the spread of the novel coronavirus and began operating in an all-electronic configuration, it activated AIM for SPX options and adopted a temporary rule change to permit market makers to be solicited for electronic crossing transactions in its exclusively-listed index options (including SPX options) when the Exchange’s trading floor was inoperable.15 According to the Exchange, while AIM was activated for SPX options, the Exchange observed price improvement benefits in AIM auctions for smaller, retail-sized SPX options.16 Although the Exchange has deactivated AIM for SPX options with the reopening of its trading floor, the Exchange further states that, if it determines to reactivate AIM for SPX options, it believes it is appropriate to permit orders for the account of an appointed SPX market maker to be submitted as the contra order, as the Exchange believes the liquidity provided by SPX market makers is necessary for brokers to initiate AIM auctions and create potential price improvement opportunities for those retail-sized orders.17 The Exchange also states that with additional market participants available for solicitation to represent the initiating order, the increased competition may encourage these participants to provide more aggressive prices to initiate an auction in SPX.18 The Exchange further states that, in multi-list classes, many market makers 13 See Rules 5.86 and 5.87. See also Amendment No. 1, supra note 4, at 4. 14 See Amendment No. 1, supra note 4, at 4. 15 See id. at 4–5. See also Rule 5.24(e)(1)(A); Securities Exchange Act Release No. 88886 (May 15, 2020), 85 FR 31008 (May 21, 2020) (SR–CBOE– 2020–047). 16 See Securities Exchange Act Release No. 89058 (June 12, 2020), 85 FR 36918 (June 18, 2020) (SR– CBOE–2020–051). 17 See Amendment No. 1, supra note 4, at 5–6. 18 See Amendment No. 2, supra note 5, at 4. PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 10155 serve as both appointed market makers on the Exchange and as market makers on other options exchanges and, as a result, can use their away market maker accounts to be solicited as a contra order for AIM auctions.19 The Exchange provides data from April 2020 demonstrating that approximately 99.6% of the orders submitted into all AIM auctions had initiating orders comprised of orders for accounts of away market makers, making up approximately 86.2% of the volume executed through AIM auctions.20 According to the Exchange, however, because SPX is an exclusively-listed class on the Exchange, a firm cannot serve as an SPX market maker at another options exchange.21 The Exchange represents that there are currently 28 trading permit holders with SPX appointments that would be available to participate in AIM auctions through both contra orders and auction responses.22 The Exchange provides data showing that during April and May 2020, when initiating orders could be comprised of orders for accounts of SPX market makers pursuant to a temporary rule, approximately 22% of initiating orders executed in SPX AIM auctions were comprised of orders for SPX market makers, representing approximately 45% of SPX volume executed in AIM auctions.23 The Exchange’s data further demonstrates that during April and May 2020, while approximately 76% of initiating orders executed in SPX AIM auctions were comprised of orders for accounts of away market makers, those orders represented only approximately 5% of the SPX volume executed through AIM auctions.24 The Exchange’s data also shows that during April and May 2020, SPX market makers executed approximately 31% of SPX volume executed through AIM auctions with auction responses.25 The Exchange also states that SPX market makers frequently serve as contra parties to crossing transactions on the trading floor and the proposed rule change will further align AIM auctions with SPX crossing executions that occur on the trading floor. According to the Exchange, for example, during February 2020, approximately 76% of SPX orders crossed on the trading floor (consisting of 2,944,161 contracts) included an order of an SPX 19 See Amendment No. 1, supra note 4, at 7. id. 21 See id. 22 See Amendment No. 2, supra note 5, at 3. 23 See Amendment No. 1, supra note 4, at 7. 24 See id. 25 See id. 20 See E:\FR\FM\18FEN1.SGM 18FEN1 10156 Federal Register / Vol. 86, No. 31 / Thursday, February 18, 2021 / Notices market maker on one side of the transaction.26 With respect to FLEX AIM, the Exchange states that, unlike in simple non-FLEX markets, FLEX market makers have no obligations to provide liquidity to FLEX classes and there is no book into which FLEX market makers may submit quotes to rest. According to the Exchange, therefore, appointed market makers in FLEX markets are on equal footing with all other market participants with respect to FLEX AIM auctions and permitting FLEX market makers to be solicited as the contra order in a FLEX AIM auction would provide all market participants with the opportunity to provide liquidity to execute against agency orders in FLEX AIM auctions in the same manner (i.e., through solicitation and responses).27 The Exchange also proposes to amend Rules 5.37(c)(5) and 5.73(c)(5) to codify that any user or FLEX Trader, respectively, other than the Initiating TPH or FLEX Trader, respectively, may submit responses to AIM and FLEX AIM auctions. The Exchange also proposes to specify that the system will reject a response with the same EFID as the initiating order.28 The Exchange represents that if the same user submits a response to an auction in which that same user had an order comprising the initiating order (even with a different EFID), the Exchange may take regulatory action against that user for a violation of the proposed rule.29 Further, with respect to any potential misuse of nonpublic information by an SPX market maker regarding an upcoming SPX AIM auction, the Exchange represents that it has existing rules that prohibit a pattern or practice of submitting orders or quotes for the purpose of disrupting or manipulating AIM auctions and that require trading permit holders to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information.30 III. Discussion and Commission Findings The Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent 26 See id. at 8. id. at 9. 28 See Rule 1.1 (defining EFID as an ‘‘Executing Firm ID’’). The Exchange states that, although the system is only able to reject responses with the same EFID as the initiating order, the rule prohibits all responses from the same user that represents the initiating order, even if orders for the same user have different EFIDs. See Amendment No. 1, supra note 4, at 10. 29 See Amendment No. 1, supra note 4, at 10. 30 See Amendment No. 2, supra note 5, at 5. See also Rules 5.37.02 and 8.10. jbell on DSKJLSW7X2PROD with NOTICES 27 See VerDate Sep<11>2014 17:47 Feb 17, 2021 Jkt 253001 with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.31 In particular, the Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with Section 6(b)(5) of the Act,32 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. The Commission also finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with Section 6(b)(8) of the Act,33 which requires that the rules of a national securities exchange do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. As described above, the Exchange proposes to permit orders for the accounts of market makers with an appointment in SPX to be solicited for the initiating order submitted for execution against an agency order in SPX options into an AIM auctions. In support of its proposal, the Exchange states that brokers seeking liquidity to execute against customer orders on the trading floor regularly solicit appointed SPX market makers for this liquidity, as they are generally the primary source of pricing and liquidity for those options. Accordingly, the Exchange believes the liquidity provided by SPX market makers is necessary for brokers to initiate AIM auctions and would create potential price improvement opportunities for retail-sized orders in SPX. As summarized in more detail above, the Exchange collected data during the time open outcry trading was temporarily suspended and SPX options traded in AIM auctions while the trading floor was inoperable. The data demonstrates that significant price improvement opportunities for retailsized orders occurred during this time. Two commenters agreed with Cboe that the proposal would increase liquidity for AIM auctions and thereby would increase execution and price improvement opportunities for retail 31 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 32 15 U.S.C. 78f(b)(5). 33 15 U.S.C. 78f(b)(8). PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 investors.34 One such commenter argued that removing the market maker solicitation prohibition would eliminate an inequity against market makers that unduly curtails liquidity to customer orders.35 Commenters also supported the proposal because it would better align the execution and price improvement opportunities in electronic crossing auctions with those available in open outcry trading, where no similar solicitation prohibition exists.36 After careful consideration, the Commission believes that the proposal is reasonably designed to protect investors and the public interest. The data provided by the Exchange supports the Exchange’s conclusion that the proposal could provide additional execution and price improvement opportunities for customer orders in SPX options submitted through the Exchange’s AIM auctions. As described above, the Exchange provided data demonstrating market maker participation in SPX AIM auctions during April and May 2020, the temporary period when SPX market makers were permitted to be solicited as contra side to the agency order in AIM auctions.37 The Commission believes that the Exchange’s data shows that SPX market makers represented a significant amount of SPX AIM volume during this period, both as initiating orders and through auction responses. Accordingly, the Exchange’s data supports a finding that permanently permitting initiating orders from SPX market makers is designed to increase the number of AIM auctions and consequently, provide a larger number of agency orders with the opportunity for price improvement. For example, an AIM agency order for less than 50 contracts is guaranteed price improvement of at least one minimum increment better than the then-current National Best Bid or National Best Offer.38 The Commission further believes that the proposed rule change will not impose any burden on competition that is not necessary or appropriate in 34 See letters to Vanessa Countryman, Secretary, Commission, from Richard J. McDonald, Susquehanna International Group, LLP, dated July 8, 2020, at 2 (‘‘SIG Letter’’) and Ellen Greene, Managing Director, Equities & Options Market Structure, The Securities Industry and Financial Markets Association, dated July 9, 2020, at 3 (‘‘SIFMA Letter’’). The SIG Letter and SIFMA Letter commented on Cboe’s original proposal, which would have applied the proposed rule change to all classes, not just SPX. 35 See SIG Letter, supra note 34, at 1. 36 See SIFMA Letter, supra note 34, at 3; SIG Letter, supra note 34, at 2. 37 See supra notes 23–25 and accompanying text. 38 See Amendment No. 1, supra note 4, at 8. E:\FR\FM\18FEN1.SGM 18FEN1 Federal Register / Vol. 86, No. 31 / Thursday, February 18, 2021 / Notices furtherance of the purposes of the Act. SPX market makers frequently serve as contra parties to crossing transactions on the trading floor. For example, during February 2020 (when the trading floor was open), approximately 76% of SPX orders crossed on the trading floor (consisting of 2,944,161 contracts) included an order of an SPX market maker one side of the transaction.39 Cboe states that this demonstrates the importance of appointed SPX market makers to the provision of liquidity in the SPX market with respect to crossing transactions, which liquidity would not be available to initiate electronic crossing transactions under the current AIM rule.40 Thus, the proposed rule change will further align open outcry and electronic crossing auctions in SPX and provide execution and price improvement opportunities in both auctions by permitting all market participants, not just Cboe SPX market makers, to be solicited to participate in AIM transactions. Moreover, because the Exchange’s rules no longer restrict the group of participants that may provide responses to AIM auctions,41 there are a number of appointed SPX market makers on the Exchange that would remain eligible to provide competitive responses to AIM auctions.42 According to the Exchange, there are currently 28 trading permit holders with SPX appointments that would be available to participate in AIM auctions through both contra orders and auction responses.43 Further, the proposal would allow for an increased number of participants to provide the contra-side interest necessary to initiate a competitive AIM auction, particularly in an exclusively-listed class such as SPX where away market makers are unavailable to provide such interest. The Exchange’s data demonstrated that during the temporary period, SPX market makers executed approximately 31% of SPX volume executed through AIM auctions with auction responses.44 Accordingly, the Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with the requirements of the Act. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,45 that the proposed rule change, as modified by Amendment Nos. 1 and 2 (SR–CBOE– 2020–050), be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.46 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–03219 Filed 2–17–21; 8:45 am] BILLING CODE 8011–01–P SURFACE TRANSPORTATION BOARD [Docket No. FD 36481] Sonoma-Marin Area Rail Transit District—Acquisition and Operation Exemption—North Coast Railroad Authority Sonoma-Marin Area Rail Transit District (SMART), a Class III rail carrier, has filed a verified notice of exemption under 49 CFR 1150.41 to acquire from North Coast Railroad Authority (NCRA) and operate approximately 87.65 miles of rail line (the Line), consisting of: (1) The line of railroad and right-of-way in fee between the Sonoma-Mendocino County, Cal., border at NWP milepost 89 and Healdsburg, Cal., at NWP milepost 68.2; and (2) the freight rail operating easement between Healdsburg, at NWP milepost 68.2 and Lombard, Cal., at SP milepost 63.4.1 The verified notice states that SMART and NCRA have executed an agreement pursuant to which SMART will acquire the Line from NCRA, and that SMART will become the freight operator of the Line, using a noncarrier contract operator. SMART certifies that its projected annual revenues as a result of this transaction will not exceed $5 million or the threshold required to qualify as a Class III carrier. SMART also certifies that the proposed acquisition and operation of the Line does not involve a provision or agreement that may limit future interchange with a third-party connecting carrier. The transaction may be consummated on or after March 4, 2021, the effective date of the exemption (30 days after the verified notice was filed). If the notice contains false or misleading information, the exemption is void ab initio. Petitions to revoke the exemption under 49 U.S.C. 10502(d) may be filed at any time. The filing of jbell on DSKJLSW7X2PROD with NOTICES 46 17 39 See Amendment No. 1, supra note 4, at 8. 40 See id. 41 See Rules 5.37(c)(5) (AIM) and 5.38(c)(5). 42 See text accompanying supra note 22. 43 See Amendment No. 2, supra note 5, at 3. 44 See Amendment No. 1, supra note 4, at 7. 45 15 U.S.C. 78s(b)(2). VerDate Sep<11>2014 17:47 Feb 17, 2021 Jkt 253001 CFR 200.30–3(a)(12). verified notice states that SMART owns the segment of the Line between Healdsburg and Lombard, subject to an easement for freight rail service over the segment, and that, through this verified notice, SMART will acquire the freight rail easement. See Sonoma-Marin Area Rail Transit Dist.—Acquis. Exemption—Nw. Pac. R.R. Auth., FD 34400 (STB served Mar. 10, 2004). 1 The PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 10157 a petition to revoke will not automatically stay the transaction. Petitions for stay must be filed no later than February 25, 2021 (at least seven days before the exemption becomes effective). All pleadings, referring to Docket No. FD 36481, should be filed with the Surface Transportation Board via efiling on the Board’s website. In addition, a copy of each pleading must be served on SMART’s representative, Kevin M. Sheys, Hogan Lovells US LLP, Columbia Square, 555 Thirteenth St. NW, Washington, DC 20004. According to SMART, this action is categorically excluded from environmental review under 49 CFR 1105.6(c) and from historic preservation reporting requirements under 49 CFR 1105.8(b). Board decisions and notices are available at www.stb.gov. Decided: February 12, 2021. By the Board, Allison C. Davis, Director, Office of Proceedings. Jeffrey Herzig, Clearance Clerk. [FR Doc. 2021–03377 Filed 2–17–21; 8:45 am] BILLING CODE 4915–01–P DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency FEDERAL RESERVE SYSTEM FEDERAL DEPOSIT INSURANCE CORPORATION Agency Information Collection Activities; Submission for OMB Review; Comment Request Office of the Comptroller of the Currency (OCC), Treasury; Board of Governors of the Federal Reserve System (Board); and Federal Deposit Insurance Corporation (FDIC). ACTION: Joint notice and request for comment. AGENCY: In accordance with the requirements of the Paperwork Reduction Act of 1995 (PRA), the OCC, the Board, and the FDIC (the agencies) may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. On November 30, 2020, the agencies, under the auspices of the Federal Financial Institutions Examination Council (FFIEC), requested public comment for 60 days on a proposal to revise and extend the SUMMARY: E:\FR\FM\18FEN1.SGM 18FEN1

Agencies

[Federal Register Volume 86, Number 31 (Thursday, February 18, 2021)]
[Notices]
[Pages 10154-10157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03219]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91116; File No. SR-CBOE-2020-050]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 
2, To Amend Rules 5.37 and 5.73 Related to the Solicitation of Market 
Makers for SPX Initiating Orders in the Automated Improvement Mechanism 
and FLEX Automated Improvement Mechanism

February 11, 2021.

I. Introduction

    On June 3, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
permit orders for the accounts of market makers with an appointment in 
S&P 500[supreg] Index Options (``SPX'') to be solicited for the 
initiating order submitted for execution against an agency order into 
an Automated Improvement Mechanism (``AIM'') auction or a FLEX AIM 
auction. The proposed rule change was published for comment in the 
Federal Register on June 18, 2020.\3\ On July 2, 2020, the Exchange 
submitted Amendment No. 1 to the proposed rule change, which replaced 
and superseded the proposed rule change in its entirety.\4\ On July 22, 
2020, the Exchange submitted

[[Page 10155]]

Amendment No. 2 to the proposed rule change.\5\ On July 27, 2020, 
pursuant to Section 19(b)(2) of the Act,\6\ the Commission designated a 
longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\7\ On August 
21, 2020, the Commission published notice of Amendment Nos. 1 and 2 and 
instituted proceedings under Section 19(b)(2)(B) of the Act \8\ to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment Nos. 1 and 2.\9\ On December 8, 2020, pursuant to 
Section 19(b)(2) of the Act,\10\ the Commission designated a longer 
period within which to approve or disapprove the proposed rule change, 
as modified by Amendment Nos. 1 and 2.\11\ This order approves the 
proposed rule change, as modified by Amendment Nos. 1 and 2.
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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. 89062 (June 12, 
2020), 85 FR 36907. Comments received on the proposed rule change 
are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050.htm.
    \4\ In Amendment No. 1, the Exchange: (1) Limited the scope of 
its original proposal, which would have permitted orders for the 
accounts of market makers with an appointment in any class to be 
solicited for the initiating order in an AIM or FLEX AIM auction in 
that class, to only allow market makers with an appointment in SPX 
to be solicited for the initiating order in an AIM or FLEX AIM 
auction in SPX; and (2) provided additional data, justification, and 
support for its modified proposal. The full text of Amendment No. 1 
is available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050-7382058-218888.pdf.
    \5\ In Amendment No. 2, the Exchange: (1) Provided additional 
data, justification, and support for its proposal; and (2) made 
technical corrections and clarifications to the description of the 
proposal. The full text of Amendment No. 2 is available on the 
Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050-7464399-221161.pdf.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 89398, 85 FR 46197 
(July 31, 2020). The Commission designated September 16, 2020 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 89635, 85 FR 53051 
(August 27, 2020).
    \10\ 15 U.S.C. 78s(b)(2).
    \11\ See Securities Exchange Act Release No. 90593, 85 FR 80842 
(December 14, 2020). The Commission designated February 13, 2021 as 
the date by which the Commission shall approve or disapprove the 
proposed rule change, as modified by Amendment Nos. 1 and 2.
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II. Description of the Proposal, as Modified by Amendment Nos. 1 and 2

    The Exchange proposes to permit orders for the accounts of market 
makers with an appointment in SPX to be solicited for the initiating 
order submitted for execution against an agency order in SPX options 
into a simple AIM auction pursuant to Rule 5.37 or a simple FLEX AIM 
auction pursuant to Rule 5.73.\12\ Currently, the introductory 
paragraphs of Rules 5.37 and 5.73 prohibit orders for the accounts of 
market makers with an appointment in the applicable class to be 
solicited to execute against the agency order in a simple AIM or FLEX 
AIM auction, respectively. The Exchange states that no similar 
restriction applies to crossing transactions in open outcry trading, 
where a significant portion of SPX options trade.\13\ The Exchange 
represents that brokers seeking liquidity to execute against customer 
orders on the trading floor regularly solicit appointed SPX market 
makers for this liquidity, as they are generally the primary source of 
pricing and liquidity for those options.\14\
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    \12\ The initiating order is the order comprised of principal 
interest or a solicited order(s) submitted to trade against the 
order the submitting trading permit holder (the ``Initiating TPH'' 
or ``Initiating FLEX Trader,'' as applicable) represents as agent 
(the agency order). The Exchange states that AIM is currently not 
activated for SPX options, although FLEX AIM is currently activated 
for FLEX SPX options. See Amendment No. 1, supra note 4, at 4 & n.2.
    \13\ See Rules 5.86 and 5.87. See also Amendment No. 1, supra 
note 4, at 4.
    \14\ See Amendment No. 1, supra note 4, at 4.
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    The Exchange states that, during a period of time in which it 
suspended open outcry trading to help prevent the spread of the novel 
coronavirus and began operating in an all-electronic configuration, it 
activated AIM for SPX options and adopted a temporary rule change to 
permit market makers to be solicited for electronic crossing 
transactions in its exclusively-listed index options (including SPX 
options) when the Exchange's trading floor was inoperable.\15\ 
According to the Exchange, while AIM was activated for SPX options, the 
Exchange observed price improvement benefits in AIM auctions for 
smaller, retail-sized SPX options.\16\ Although the Exchange has 
deactivated AIM for SPX options with the reopening of its trading 
floor, the Exchange further states that, if it determines to reactivate 
AIM for SPX options, it believes it is appropriate to permit orders for 
the account of an appointed SPX market maker to be submitted as the 
contra order, as the Exchange believes the liquidity provided by SPX 
market makers is necessary for brokers to initiate AIM auctions and 
create potential price improvement opportunities for those retail-sized 
orders.\17\ The Exchange also states that with additional market 
participants available for solicitation to represent the initiating 
order, the increased competition may encourage these participants to 
provide more aggressive prices to initiate an auction in SPX.\18\
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    \15\ See id. at 4-5. See also Rule 5.24(e)(1)(A); Securities 
Exchange Act Release No. 88886 (May 15, 2020), 85 FR 31008 (May 21, 
2020) (SR-CBOE-2020-047).
    \16\ See Securities Exchange Act Release No. 89058 (June 12, 
2020), 85 FR 36918 (June 18, 2020) (SR-CBOE-2020-051).
    \17\ See Amendment No. 1, supra note 4, at 5-6.
    \18\ See Amendment No. 2, supra note 5, at 4.
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    The Exchange further states that, in multi-list classes, many 
market makers serve as both appointed market makers on the Exchange and 
as market makers on other options exchanges and, as a result, can use 
their away market maker accounts to be solicited as a contra order for 
AIM auctions.\19\ The Exchange provides data from April 2020 
demonstrating that approximately 99.6% of the orders submitted into all 
AIM auctions had initiating orders comprised of orders for accounts of 
away market makers, making up approximately 86.2% of the volume 
executed through AIM auctions.\20\
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    \19\ See Amendment No. 1, supra note 4, at 7.
    \20\ See id.
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    According to the Exchange, however, because SPX is an exclusively-
listed class on the Exchange, a firm cannot serve as an SPX market 
maker at another options exchange.\21\ The Exchange represents that 
there are currently 28 trading permit holders with SPX appointments 
that would be available to participate in AIM auctions through both 
contra orders and auction responses.\22\ The Exchange provides data 
showing that during April and May 2020, when initiating orders could be 
comprised of orders for accounts of SPX market makers pursuant to a 
temporary rule, approximately 22% of initiating orders executed in SPX 
AIM auctions were comprised of orders for SPX market makers, 
representing approximately 45% of SPX volume executed in AIM 
auctions.\23\ The Exchange's data further demonstrates that during 
April and May 2020, while approximately 76% of initiating orders 
executed in SPX AIM auctions were comprised of orders for accounts of 
away market makers, those orders represented only approximately 5% of 
the SPX volume executed through AIM auctions.\24\ The Exchange's data 
also shows that during April and May 2020, SPX market makers executed 
approximately 31% of SPX volume executed through AIM auctions with 
auction responses.\25\
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    \21\ See id.
    \22\ See Amendment No. 2, supra note 5, at 3.
    \23\ See Amendment No. 1, supra note 4, at 7.
    \24\ See id.
    \25\ See id.
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    The Exchange also states that SPX market makers frequently serve as 
contra parties to crossing transactions on the trading floor and the 
proposed rule change will further align AIM auctions with SPX crossing 
executions that occur on the trading floor. According to the Exchange, 
for example, during February 2020, approximately 76% of SPX orders 
crossed on the trading floor (consisting of 2,944,161 contracts) 
included an order of an SPX

[[Page 10156]]

market maker on one side of the transaction.\26\
---------------------------------------------------------------------------

    \26\ See id. at 8.
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    With respect to FLEX AIM, the Exchange states that, unlike in 
simple non-FLEX markets, FLEX market makers have no obligations to 
provide liquidity to FLEX classes and there is no book into which FLEX 
market makers may submit quotes to rest. According to the Exchange, 
therefore, appointed market makers in FLEX markets are on equal footing 
with all other market participants with respect to FLEX AIM auctions 
and permitting FLEX market makers to be solicited as the contra order 
in a FLEX AIM auction would provide all market participants with the 
opportunity to provide liquidity to execute against agency orders in 
FLEX AIM auctions in the same manner (i.e., through solicitation and 
responses).\27\
---------------------------------------------------------------------------

    \27\ See id. at 9.
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    The Exchange also proposes to amend Rules 5.37(c)(5) and 5.73(c)(5) 
to codify that any user or FLEX Trader, respectively, other than the 
Initiating TPH or FLEX Trader, respectively, may submit responses to 
AIM and FLEX AIM auctions. The Exchange also proposes to specify that 
the system will reject a response with the same EFID as the initiating 
order.\28\ The Exchange represents that if the same user submits a 
response to an auction in which that same user had an order comprising 
the initiating order (even with a different EFID), the Exchange may 
take regulatory action against that user for a violation of the 
proposed rule.\29\ Further, with respect to any potential misuse of 
non-public information by an SPX market maker regarding an upcoming SPX 
AIM auction, the Exchange represents that it has existing rules that 
prohibit a pattern or practice of submitting orders or quotes for the 
purpose of disrupting or manipulating AIM auctions and that require 
trading permit holders to establish, maintain, and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
material, non-public information.\30\
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    \28\ See Rule 1.1 (defining EFID as an ``Executing Firm ID''). 
The Exchange states that, although the system is only able to reject 
responses with the same EFID as the initiating order, the rule 
prohibits all responses from the same user that represents the 
initiating order, even if orders for the same user have different 
EFIDs. See Amendment No. 1, supra note 4, at 10.
    \29\ See Amendment No. 1, supra note 4, at 10.
    \30\ See Amendment No. 2, supra note 5, at 5. See also Rules 
5.37.02 and 8.10.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1 and 2, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\31\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1 and 2, is 
consistent with Section 6(b)(5) of the Act,\32\ 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. The Commission also finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 2, is consistent with Section 6(b)(8) 
of the Act,\33\ which requires that the rules of a national securities 
exchange do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \31\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ 15 U.S.C. 78f(b)(8).
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    As described above, the Exchange proposes to permit orders for the 
accounts of market makers with an appointment in SPX to be solicited 
for the initiating order submitted for execution against an agency 
order in SPX options into an AIM auctions. In support of its proposal, 
the Exchange states that brokers seeking liquidity to execute against 
customer orders on the trading floor regularly solicit appointed SPX 
market makers for this liquidity, as they are generally the primary 
source of pricing and liquidity for those options. Accordingly, the 
Exchange believes the liquidity provided by SPX market makers is 
necessary for brokers to initiate AIM auctions and would create 
potential price improvement opportunities for retail-sized orders in 
SPX. As summarized in more detail above, the Exchange collected data 
during the time open outcry trading was temporarily suspended and SPX 
options traded in AIM auctions while the trading floor was inoperable. 
The data demonstrates that significant price improvement opportunities 
for retail-sized orders occurred during this time.
    Two commenters agreed with Cboe that the proposal would increase 
liquidity for AIM auctions and thereby would increase execution and 
price improvement opportunities for retail investors.\34\ One such 
commenter argued that removing the market maker solicitation 
prohibition would eliminate an inequity against market makers that 
unduly curtails liquidity to customer orders.\35\ Commenters also 
supported the proposal because it would better align the execution and 
price improvement opportunities in electronic crossing auctions with 
those available in open outcry trading, where no similar solicitation 
prohibition exists.\36\
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    \34\ See letters to Vanessa Countryman, Secretary, Commission, 
from Richard J. McDonald, Susquehanna International Group, LLP, 
dated July 8, 2020, at 2 (``SIG Letter'') and Ellen Greene, Managing 
Director, Equities & Options Market Structure, The Securities 
Industry and Financial Markets Association, dated July 9, 2020, at 3 
(``SIFMA Letter''). The SIG Letter and SIFMA Letter commented on 
Cboe's original proposal, which would have applied the proposed rule 
change to all classes, not just SPX.
    \35\ See SIG Letter, supra note 34, at 1.
    \36\ See SIFMA Letter, supra note 34, at 3; SIG Letter, supra 
note 34, at 2.
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    After careful consideration, the Commission believes that the 
proposal is reasonably designed to protect investors and the public 
interest. The data provided by the Exchange supports the Exchange's 
conclusion that the proposal could provide additional execution and 
price improvement opportunities for customer orders in SPX options 
submitted through the Exchange's AIM auctions. As described above, the 
Exchange provided data demonstrating market maker participation in SPX 
AIM auctions during April and May 2020, the temporary period when SPX 
market makers were permitted to be solicited as contra side to the 
agency order in AIM auctions.\37\ The Commission believes that the 
Exchange's data shows that SPX market makers represented a significant 
amount of SPX AIM volume during this period, both as initiating orders 
and through auction responses. Accordingly, the Exchange's data 
supports a finding that permanently permitting initiating orders from 
SPX market makers is designed to increase the number of AIM auctions 
and consequently, provide a larger number of agency orders with the 
opportunity for price improvement. For example, an AIM agency order for 
less than 50 contracts is guaranteed price improvement of at least one 
minimum increment better than the then-current National Best Bid or 
National Best Offer.\38\
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    \37\ See supra notes 23-25 and accompanying text.
    \38\ See Amendment No. 1, supra note 4, at 8.
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    The Commission further believes that the proposed rule change will 
not impose any burden on competition that is not necessary or 
appropriate in

[[Page 10157]]

furtherance of the purposes of the Act. SPX market makers frequently 
serve as contra parties to crossing transactions on the trading floor. 
For example, during February 2020 (when the trading floor was open), 
approximately 76% of SPX orders crossed on the trading floor 
(consisting of 2,944,161 contracts) included an order of an SPX market 
maker one side of the transaction.\39\ Cboe states that this 
demonstrates the importance of appointed SPX market makers to the 
provision of liquidity in the SPX market with respect to crossing 
transactions, which liquidity would not be available to initiate 
electronic crossing transactions under the current AIM rule.\40\ Thus, 
the proposed rule change will further align open outcry and electronic 
crossing auctions in SPX and provide execution and price improvement 
opportunities in both auctions by permitting all market participants, 
not just Cboe SPX market makers, to be solicited to participate in AIM 
transactions.
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    \39\ See Amendment No. 1, supra note 4, at 8.
    \40\ See id.
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    Moreover, because the Exchange's rules no longer restrict the group 
of participants that may provide responses to AIM auctions,\41\ there 
are a number of appointed SPX market makers on the Exchange that would 
remain eligible to provide competitive responses to AIM auctions.\42\ 
According to the Exchange, there are currently 28 trading permit 
holders with SPX appointments that would be available to participate in 
AIM auctions through both contra orders and auction responses.\43\ 
Further, the proposal would allow for an increased number of 
participants to provide the contra-side interest necessary to initiate 
a competitive AIM auction, particularly in an exclusively-listed class 
such as SPX where away market makers are unavailable to provide such 
interest. The Exchange's data demonstrated that during the temporary 
period, SPX market makers executed approximately 31% of SPX volume 
executed through AIM auctions with auction responses.\44\
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    \41\ See Rules 5.37(c)(5) (AIM) and 5.38(c)(5).
    \42\ See text accompanying supra note 22.
    \43\ See Amendment No. 2, supra note 5, at 3.
    \44\ See Amendment No. 1, supra note 4, at 7.
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    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 2, is consistent with the requirements 
of the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\45\ that the proposed rule change, as modified by Amendment Nos. 1 
and 2 (SR-CBOE-2020-050), be, and hereby is, approved.
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    \45\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-03219 Filed 2-17-21; 8:45 am]
BILLING CODE 8011-01-P
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