Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 5.4 and Make Corresponding Changes to Other Rules, 47529-47533 [2021-18236]
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Federal Register / Vol. 86, No. 162 / Wednesday, August 25, 2021 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021–18237 Filed 8–24–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92709; File No. SR–CBOE–
2021–046]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Amend Rule
5.4 and Make Corresponding Changes
to Other Rules
August 19, 2021.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’),2 and Rule 19b–4 thereunder,3
notice is hereby given that on August 6,
2021, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
Rule 5.4 and make corresponding
changes to other Rules. The text of the
proposed rule change is provided
below.
(additions are italicized; deletions are
[bracketed])
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Rules of Cboe Exchange, Inc.
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Rule 5.4. Minimum Increments for Bids and
Offers
(a) No change.
(b) Except as provided in Rule 5.33, the
minimum increment for bids and offers on
complex orders [with any ratio equal to or
greater than one-to-three (.333) and less than
or equal to three-to-one (3.00) for equity and
index options, and for Index Combo orders,]
is $0.01 or greater, which may be determined
by the Exchange on a class-by-class basis,
and the legs may be executed in $0.01
increments. [The minimum increment for
29 17
CFR 200.30–3(a)(12).
15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1
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bids and offers on complex orders with any
ratio less than one-to-three (.333) or greater
than three-to-one (3.00) for equity and index
options (except for Index Combo orders) is
the standard increment for the class pursuant
to paragraph (a), and the legs may be
executed in the minimum increment
applicable to the class pursuant to paragraph
(a).] Notwithstanding the foregoing, the
minimum increment for bids and offers on
complex orders in options on the S&P 500
Index (SPX) or on the S&P 100 Index (OEX
and XEO), except for box/roll spreads, is
$0.05 or greater, or in any increment, which
may be determined by the Exchange on a
class-by-class basis.
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Rule 5.33. Complex Orders
Trading of complex orders (as defined in
Rule 1.1) is subject to all other Rules
applicable to the trading of orders, unless
otherwise provided in this Rule 5.33.
(a)–(e) No change.
(f) Minimum Increments, Execution Prices,
and Priority.
(1) Minimum Increments. No change.
(2) Execution Prices and Complex Order
Priority.
(A) Complex Orders. The System does not
execute a complex order pursuant to this
Rule 5.33 at a net price:
(i)–(iv) No change.
(v) that would cause any component of the
complex strategy to be executed at a price
ahead of a Priority Customer Order on the
Simple Book without improving the BBO of
(a) at least one component of the complex
strategy, if the complex order has a ratio
equal to or greater than one-to-three (.333)
and less than or equal to three-to-one (3.00),
or is an Index Combo order, or (b) each
component of the complex strategy with a
Priority Customer Order at the BBO, if the
complex order has a ratio less than one-tothree (.333) or greater than three-to-one
(3.00).
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The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.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
self-regulatory organization 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 those 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 parts of such
statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The proposed rule change amends the
minimum increment for complex orders
with ratios of greater than three-to-one
or less than one-to-three. Currently,
Rule 5.4(b) provides that the minimum
increment for bids and offers on
complex orders with any ratio greater
than or equal to one-to-three (.333) and
less than or equal to three-to-one (3.00)
for equity and index options, and for
Index Combo 4 orders, is $0.01 or
greater, which may be determined by
the Exchange on a class-by-class basis,
and the legs may be executed in $0.01
increments. However, the minimum
increment for bids and offers on
complex orders with any ratio less than
one-to-three (.333) or greater than threeto-one (3.00) for equity and index
options (except for Index Combo orders)
is the standard increment for the class
pursuant to Rule 5.4(a), and the legs
may be executed in the minimum
increment applicable to the class
pursuant to paragraph 5.4(a).5 The
Exchange currently only permits
complex orders with ratios greater than
three-to-one or less than one-to-three for
execution on the Exchange’s trading
floor.6 The proposed rule change
provides that the minimum increment
for bids and offers on complex orders
with any ratio may be in $0.01 or
greater, as determined by the Exchange
on a class-by-class basis. This will
provide TPHs with the same pricing
flexibility with respect to all complex
orders they submit to the Exchange,
regardless of their ratios.
Complex orders involve special
pricing and handling. Bids and offers for
4 An ‘‘Index Combo’’ order is an order to
purchase or sell one or more index option series
and the offsetting number of Index Combinations
(with an ‘‘Index Combination’’ defined as a
purchase (sale) of an index option call and sale
(purchase) of an index option put with the same
underlying index, expiration date, and strike price)
defined by the delta (defined as the positive
(negative) number of Index Combinations that must
be sold (purchased) to establish a market neutral
hedge with one or more series of the same index
option. See Rule 5.33(b)(5).
5 The minimum increment for bids and offers on
complex orders in options on the S&P 500 Index
(SPX) or on the S&P 100 Index (OEX and XEO),
except for box/roll spreads, is $0.05 or greater, or
in any increment, which may be determined by the
Exchange on a class-by-class basis. Rule 5.4(c) sets
forth the minimum increment applicable to other
types of options.
6 If the Securities and Exchange Commission (the
‘‘Commission’’) approves the proposed rule change,
the Exchange intends to begin accepting complex
orders with ratios greater than three-to-one or less
than one-to-three for electronic execution, in
addition to open outcry.
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complex orders are typically
represented on the basis of a total debit
or credit for the order. After a complex
order executes at the total debit or
credit, the parties to the trade record the
contract quantities and prices for each
component option of the order. For
complex orders executed electronically,
the Exchange’s system performs this
calculation (within the pricing and
priority parameters set forth in Rule
5.33(f)). For complex orders executed in
open outcry, this task is straightforward
and uncomplicated when the total debit
or credit for a complex strategy
expressed in the minimum increment
under Rule 5.4(b).7 However, if a
complex order is unable to be expressed
in increments smaller than the
increment for the class (such as $0.05),
it may be difficult for brokers to obtain
the desired prices for their customers’
orders, because the transaction parties
must perform complicated and timeconsuming mathematical calculations to
break down a complex order into the
required contract quantities and prices
to fit within the constraint of executing
complex orders at a minimum
increment other than $0.01.8 This
difficulty is exacerbated when the
quantity of such an order is an odd lot
quantity (such as 106 contracts). The
result is that on active trading days,
brokers executing these types of orders
cannot be as efficient in representing
other customer orders that they are
holding. This difficulty exists for
complex orders with any ratio and with
legs in any combination.
The proposed rule change will enable
Trading Permit Holders (‘‘TPHs’’) to
execute complex orders more
7 For example, assume the market for the
December SPX 4350 calls is 18 bid, 19 asked, and
the market for the December SPX 4375 calls is 6.50
bid and 7.50 asked. The fair value of a call
comprised of one leg to buy and one leg to sell the
same number of contracts of this series is 11.50 (the
difference between the prices quoted for each
option). If an order to buy 100 of the 4350 calls and
to sell 100 of the 4375 calls is quoted and executed
at a net debit of 11.50 (expressed in a multiple of
the minimum increment), the parties to the trade
can easily determine and record a price for each
component option that comprises the complex
order. Any combination of purchase and sale prices
within the quoted ranges for the component options
that yield a net debit or credit of 11.50 could be
used (e.g., 18.50 for the 4350 calls, and 7 for the
4375 calls).
8 Using the example in the previous footnote, if
instead a customer wants to pay 11.48 rather than
11.50 for a complex order, in order to determine
prices for the component options that are expressed
in a multiple of $0.05 the trader must perform a
series of calculations. In this case, the trader might
determine that the trade must be split up into a 40contract spread that traded at a net debit of 11.45
and a 60-contract spread that traded at a net debit
of 11.50, which together yield a net debit of 11.48
for the entire amount. This is ultimately a better net
price for the customer.
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efficiently, including on behalf of
customers that wish to execute highly
complicated complex orders, by
permitting the parties to execute the
trades more expeditiously on the trading
floor. As noted above, the Exchange also
intends to accept complex orders with
ratios larger than three-to-one or smaller
than one-to-three for electronic
execution, which would further
improve efficiency of execution of
electronic orders, as the System would
perform this calculation. The Exchange
believes this increased efficiency would
increase execution opportunities for
complex orders with investment
strategies that do not fit within the
three-to-one ratio requirement.
Additionally, the proposed rule change
may enable TPHs to execute customers’
complex orders with these larger ratios
at better prices, rather than executing at
prices that fit within the confines of a
larger increment.
While the proposed rule change
amends the minimum increment at
which all complex orders and their legs
may execute, the Exchange does not
propose to extend the complex order
priority afforded to complex orders with
ratios equal to or greater than one-tothree and less than or equal to three-toone to these larger-ratio complex orders.
Electronic execution of complex orders
with any ratio will continue to be
required at net prices: (i) That would
cause any component of the complex
strategy to be executed at a price of zero;
(ii) worse than the Synthetic Best Bid or
Offer (‘‘SBBO’’) 9 or equal to the SBBO
when there is a priority customer order
at the SBBO (except all-or-none
(‘‘AON’’); (iii) that would cause any
component of the complex strategy to be
executed at a price worse than the
individual component prices on the
Simple Book; or (iv) worse than the
price that would be available if the
complex order legged into the Simple
Book. The proposed rule change amends
Rule 5.33(f)(2)(A)(v) to provide that a
complex order may not execute at a net
price that would cause any component
of the complex strategy to be executed
at a price ahead of a Priority Customer
Order on the Simple Book without
improving the BBO of (a) at least one
component of the complex strategy, if
the complex order has a ratio equal to
9 The ‘‘SBBO’’ means the best bid and offer on the
Exchange for a complex strategy calculated using
(1) for complex orders, the BBO for each component
(or the NBBO for a component if the BBO for that
component is not available) of a complex strategy
from the Simple Book; and (2) for stock-option
orders, the BBO for each option component (or the
NBBO for a component if the BBO for that
component is not available) and the NBBO of the
stock component of a complex strategy.
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or greater than one-to-three (.333) and
less than or equal to three-to-one (3.00),
or is an Index Combo order (which is
consistent with current functionality
and thus for all complex orders that may
be executed electronically), or (b) each
component the complex strategy with a
Priority Customer Order at the BBO, if
the complex order has a ratio less than
one-to-three (.333) or greater than threeto-one (3.00) (which is consistent with
current open outcry rules, where
complex orders with any such ratio may
currently be executed).10 As a result, to
the extent a complex order with a ratio
of four-to-one (for example) is submitted
for electronic execution, the complex
order may be executed at a net debit or
credit price only if each leg of the order
betters the corresponding bid (offer) of
a priority customer order(s) in the
Simple Book. Therefore, the complex
order priority rules will continue to
protect Priority Customer interest on the
Simple Book.
When the Exchange first proposed to
restrict penny pricing for complex
orders to those with ratios no greater
than three-to-one, investors had only
begun to use multi-leg strategies. At the
time, the Commission held that ‘‘ratio
orders within certain permissible ratios
may provide market participants with
greater flexibility and precision in
effectuating trading and hedging
strategies.’’ 11 In the nearly 20 years
since, market participants have
expanded the use and complexity of
multi-leg trading strategies, which
represent a critical portion of their
overall investment strategies, while the
rules regarding the increments of largerratio orders have remained unchanged
and no longer reflect the current
marketplace. Market participants
regularly submit legitimate multi-leg
trading and hedging strategies with
ratios greater than three-to-one (or less
than one-to-three). From January 3
10 See
Rule 5.85(b).
Securities Exchange Act Release 48858
(December 1, 2003), 68 FR 68128 (December 5,
2003) (SR–CBOE–2003–007) (‘‘Approval Order’’). In
approving ratio orders (which had ratios no less
than one-to-three and no greater than three-to-one),
the Commission stated that ‘‘[t]he Commission
believes that ratio orders within certain permissible
ratios may provide market participants with greater
flexibility and precision in effectuating trading and
hedging strategies. In addition, the Commission
believes that including such ratio orders in the
exception to the priority rules provided in CBOE
Rule 6.45(e) will facilitate the execution of ratio
orders. In this regard, the Commission believes that
the procedures governing the execution of complex
orders, such as ratio orders, serve to reduce the risk
of incomplete or inadequate executions while
increasing efficiency and competitive pricing by
requiring price improvement before the order can
receive priority over other orders.’’ Id. Pursuant to
SR–CBOE–2019–060, Rule 6.45 was replaced with
Rule 5.33.
11 See
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through June 17, 2021, nearly 31% of
complex orders executed on the
Exchange’s trading floor had a ratio
greater than three-to-one. For example,
a complex order consisting of one leg to
buy 30 VIX calls and another leg to sell
30 VIX puts—both in the same series—
combined with a third leg to purchase
100 VIX calls in a separate series that
have a delta of ‘‘30’’ (30% or .30) creates
a delta neutral position, and there is no
reason such a transaction should not
receive the complex order benefits.
However, market participants who
submit such orders are disadvantaged
compared to strategies with smaller
ratios due to the restrictiveness of the
current pricing increment. The
Exchange sees no reason to restrict
complex orders with a ratio of four-toone, for example, in a class with a
minimum increment of $0.05 from being
expressed in, or having their legs
execute in, $0.01 increments while legs
of complex orders with a ratio of threeto-one in the same class may be
expressed in, and have their legs
execute in, $0.01 increments.12 The
Exchange believes it is appropriate to
expand the availability of the smaller
pricing increment to complex orders
with larger ratios so that all market
participants may have the same
flexibility with respect to the pricing of
their multi-legged investment strategies,
regardless of ratio. In the same way the
Commission held that ‘‘the procedures
governing the execution of complex
orders, such as . . . orders [with ratios
no greater than three-to-one or less than
one-to-three], serve to reduce the risk of
incomplete or inadequate executions
while increasing efficiency and
competitive pricing by requiring price
improvement before the order can
receive priority over other orders[,]’’ 13
the Exchange believes expanding penny
pricing to all complex orders regardless
of ratios will serve to reduce the risk of
incomplete or inadequate executions for
larger-ratio complex orders while
increasing efficiency and competitive
pricing by requiring price improvement
12 Currently, simple orders in classes with
minimum increments of $0.05 or $0.10 may trade
in penny increments in certain circumstances. See,
e.g., Rule 5.37(a)(4) (pursuant to which the
minimum price improvement increment for the
Automated Improvement Mechanism (‘‘AIM’’) must
be at least $0.01, which is the current minimum
increment as determined by the Exchange for all
classes eligible for AIM except for S&P 500 Index
(‘‘SPX’’) options); and Rule 5.33(f)(1)(B) (pursuant
to which the option leg(s) of a stock-option order
may be $0.01 or greater, which the Exchange
determines on a class-by-class basis, regardless of
the minimum increments otherwise applicable to
the option leg(s)); see also Rule 5.39(a)(4).
13 See Approval Order at 68128.
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before the order can receive priority
over other orders.
The Exchange understands that the
Commission is concerned that the
simple order market may be somehow
disadvantaged by allowing larger-ratio
multi-legged orders to receive the
complex order benefit. The chief
concern appears to be that if the ratios
are too greatly expanded, market
participants will, for example, enter
multi-legged strategies designed
primarily to trade orders in a class in
pennies that cannot otherwise execute
as simple orders in that class in pennies
rather than to effectuate a bona fide
trading or hedging strategy.
Additionally, the Commission believes
there is a risk that market participants
may possibly enter such strategies to
trade ahead of orders on the book by a
smaller amount.14 The Exchange first
notes a significant amount of volume
executed on the Exchange is already
done in penny increments. From
January 3 through June 17, 2021, over
half the volume executed on the
Exchange as part of a complex order, the
majority of which (all electronic
complex orders and all open outcry
complex orders with ratios no greater
than three-to-one (which represents
nearly 70% of open outcry complex
orders)) are able to trade in pennies
(both the package price and leg prices,
except for SPX, for which the package
price must be in nickels, but the legs
may trade in pennies) under current
rules. Additionally, during that same
time period, approximately 43% of
simple volume on the Exchange
executed in AIM Auctions, which
permit executions in pennies (for all
classes except SPX). Therefore, the
majority of contracts that execute on the
Exchange already execute in pennies
(even though penny increments are
available for fewer than 400 classes),15
and the Exchange does not believe
permitting all complex orders to trade in
pennies will significantly increase the
volume that may already execute in
pennies on the Exchange.
The Exchange believes it is highly
unlikely that market participants will
submit non-bona-fide trading strategies
with larger ratios just to trade in
pennies. First, with respect to a nonbona-fide trading strategy, it is unlikely
14 Although the marketplace may in fact be better
served by a structure that does not require multilegged orders to, among other things, yield priority
to a simple order (which cannot on its own satisfy
the terms of a multi-leg order), this proposal does
not require the Commission to pass judgment on
that issue.
15 See Rule 5.4(d) (which provides that the penny
program applies to 363 of the over 2000 classes that
currently trade on the Exchange).
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other market participants would rest an
order for such a strategy on the complex
order book or be willing to execute
against such an order given that it is a
non-bona-fide strategy, thus reducing
the likelihood a market participant
would be able to execute such strategy.
Additionally, adding a single leg to a
larger order just to obtain penny pricing
may further reduce execution
opportunities for that order, because it
may be less likely that sufficient
contracts in the appropriate ratio would
be available. The Exchange also believes
it is unlikely market participants will
attempt to submit large-ratio complex
orders solely to use penny pricing to
trade ahead of customers on the simple
book. From January 2 to June 17, 2021,
there was only a customer order on the
top of the book across all series listed on
the Exchange for 0.328% of that time.
Therefore, there would be minimal
amounts of time when a market
participant would even have the need to
attempt to do this. Additionally, as
proposed, unlike complex orders with
ratios between one-to-three and three-toone, complex orders with ratios less
than one-to-three or greater than threeto-one will have to improve all legs with
customers on the book, rather than just
improve one leg like complex orders
with smaller ratios, and such orders
would also have to honor away markets.
Therefore, if a market participant were
to attempt to submit a complex order
with a large ratio 16 primarily to trade in
pennies or ahead of customers, it may
need to improve more legs than a
smaller ratio order, and would have to
honor all away markets, potentially
reducing any potential savings the
market participant was attempting to
achieve. Note also that rather than
adding an extra leg to a large order
simply to be able to improve the book
by $0.01 is unnecessary because such
order could already be executed in an
AIM Auction in $0.01 increments.
Additionally, these orders would be
subject to review by the Exchange’s
regulatory division, which may
determine submission of such orders to
be in violation of the Exchange’s Rules,
including Rule 8.1, which prohibits
TPHs from engaging in acts or practices
inconsistent with just and equitable
principles of trade. For these reasons,
the Exchange believes there is a de
minimis chance that market participants
would submit non-bona-fide trading
strategies to trade the legs in pennies or
16 A market participant could already attempt to
do this today by submitting a smaller-ratio complex
order by adding an inexpensive, out-of-the-money
leg to an order. However, the Exchange has not
observed this behavior.
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trade ahead of customers on the book
and that the benefits of permitting all
complex orders to trade in pennies
significantly outweigh this risk.
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.17 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 18 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) 19 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
the proposed rule change will remove
impediments to and perfect the
mechanism of a free and open market
and benefit investors, because it will
provide market participants with the
same pricing flexibility with respect to
all their complex trading and hedging
strategies. Market participants may
determine that investment and hedging
strategies with ratios greater than threeto-one or less than one-to-three are
appropriate for their investment
purposes, and the Exchange believes it
will benefit market participants if they
have additional flexibility to price their
investment and hedging strategies to
achieve their desired investment results.
The Exchange believes the proposed
rule change will help protect investors
by allowing market participants to
receive the benefit of complex order
pricing when executing bona-fide multilegged trading or hedging strategies. The
Exchange sees no reason to restrict
complex orders with a ratio of greater
three-to-one (or less than one-to three)
in a class with a minimum increment of
$0.05 from being expressed in, or having
their legs execute in, $0.01 increments
17 15
18 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
19 Id.
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while legs of complex orders with a
ratio equal to or less than or equal to
three-to-one (or greater than or equal to
one-to-three) in the same class may be
expressed in, and have their legs
execute in, $0.01 increments. The
proposed rule change will further
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, as
another options exchange permits
complex orders with any ratio and their
legs to trade in pennies.20
These changes will also enable traders
on the Exchange’s trading floor to more
efficiently execute all complex orders,
including on behalf of customers that
wish to execute highly complicated
complex orders, by permitting the
parties to execute the trades more
expeditiously.21 Additionally, as
discussed above, this may enable TPHs
to execute customers’ complex orders at
better prices, rather than executing at
prices that fit within the confines of a
larger increment, which ultimately
benefits investors.
The proposed rule change will
continue to protect priority customer
order interest on the Simple Book in the
same manner it does today, as all
complex orders with a ratio greater than
three-to-one or less than one-to-three
(except Index Combo orders) will
continue to be executed only if each leg
of the order improves the price of a
priority customer order on the Simple
Book on each leg by at least the
applicable minimum trading
increment.22 The proposed rule change
has no impact on the priority of
complex orders, as complex orders with
ratios less than .333 or greater than 3.00
will continue to be required to improve
the price of leg of the complex order for
which a Priority Customer Order is
resting at the BBO in the Simple Book,
and thus will continue to protect
Priority Customer Orders in the Simple
Book.
Furthermore, the Exchange believes
this proposal is consistent with the Act
20 See BOX Options LLC (‘‘BOX’’) Rule 7600(c)
(which rule is silent on the minimum increment for
orders submitted for execution on BOX’s trading
floor, but the Exchange has been informed by
multiple TPHs that are also members of BOX that
they may execute multi-legged orders (with ratios
greater than three-to-one or less than one-to-three)
on BOX’s trading floor in penny increments).
21 As noted above, there are instances in which
simple orders with minimum increments of $0.05
or $0.10 may trade in penny increments. See supra
note 8.
22 See proposed Rule 5.34(f)(A)(v) and current
Rule 5.85(b). As noted above, currently, complex
orders with ratios greater than three-to-one or less
than one-to-three may only be submitted for open
outcry trading. If the Commission approves the
proposed rule change, the Exchange will permit
such orders to be submitted for electronic execution
in addition to open outcry execution.
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
and SR–CBOE–2003–007 because in the
same way that the Commission held that
‘‘ratio orders within certain permissible
ratios may provide market participants
with greater flexibility and precision in
effectuating trading and hedging
strategies[,]’’ 23 complex orders that are
fully hedged may provide market
participants with greater flexibility and
precision in effectuating trading and
hedging strategies. The Exchange also
believe this proposal is consistent with
the Act and SR–CBOE–2003–007
because in the same way that the
Commission held that ‘‘including such
ratio orders in the exception to the
priority rules provided in CBOE Rule
6.45(e) will facilitate the execution of
ratio orders[,]’’ 24 including fully hedged
complex orders in the exception to the
priority rules provided in CBOE Rule
6.45(b)(ii) will facilitate the execution of
fully hedged complex orders. Finally, in
the same way that the Commission held
that ‘‘the procedures governing the
execution of complex orders, such as
ratio orders, serve to reduce the risk of
incomplete or inadequate executions
while increasing efficiency and
competitive pricing by requiring price
improvement before the order can
receive priority over other orders[,]’’ 25
the Exchange believes the procedures
governing the execution of fully hedged
complex orders serve to reduce the risk
of incomplete or inadequate executions
while increasing efficiency and
competitive pricing by requiring price
improvement before the order can
receive priority over other orders. The
Exchange believes the proposed changes
will increase opportunities for
execution of complex orders and lead to
tighter spreads on CBOE, which will
benefit investors. The Exchange also
believes that the proposed rule change
is designed to not permit unfair
discrimination among market
participants, as all market participants
may trade complex orders, and the
priority eligibility requirements apply to
complex orders of all market
participants.
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 the proposed
rule change will impose any burden on
intramarket competition, as the
proposed rule change will apply in the
23 See
Approval Order at 68128.
Id.
25 See Id.
24 See
E:\FR\FM\25AUN1.SGM
25AUN1
Federal Register / Vol. 86, No. 162 / Wednesday, August 25, 2021 / Notices
same manner to all TPHs. TPHs will
have the discretion to submit complex
orders with any ratio in the increments
permitted by the proposed rule change.
The proposed rule change will eliminate
a current pricing disparity that exists
between complex orders within the
same class and thus provide the same
pricing flexibility to all complex orders,
regardless of their ratios. The Exchange
does not believe the proposed rule
change will impose any burden on
intermarket competition, as it relates to
the representation and execution of
orders on the Exchange and will
continue to protect Priority Customer
Orders on the Simple Book. The
Exchange believes the proposed rule
change may promote competition, as
market participants will have additional
flexibility to execute their trading and
hedging strategies in a more efficient
manner and will permit all complex
orders in the same class to trade in the
same increments. Additionally, the
Exchange understands from TPHs that
another options market currently
permits complex orders with ratios
greater than three-to-one or less than
one-to-three and their legs to execute in
penny increments on its trading floor.26
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
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 Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
khammond on DSKJM1Z7X2PROD with NOTICES
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
26 See
supra note 16.
VerDate Sep<11>2014
16:54 Aug 24, 2021
Electronic Comments
DEPARTMENT OF STATE
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2021–046 on the subject line.
[Public Notice: 11515]
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–2021–046. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2021–046, and
should be submitted on or before
September 15, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021–18236 Filed 8–24–21; 8:45 am]
BILLING CODE 8011–01–P
27 17
Jkt 253001
PO 00000
CFR 200.30–3(a)(12).
Frm 00065
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47533
Industry Advisory Group; Notice of
Charter Renewal
The Department of State has renewed
the charter for the Bureau of Overseas
Buildings Operations’ (OBO) Industry
Advisory Group for an additional twoyear period. The committee advises
OBO’s senior management on issues
relating to real property portfolio
management, planning, acquisition,
sales, leasing, design, engineering,
construction, historic preservation,
resiliency, natural hazards, emergency
operations, program development, as
well as facilities operations and
maintenance.
OBO provides safe, secure, functional,
and resilient facilities that represent the
U.S. government to the host nation and
support staff in the achievement of U.S.
foreign policy objectives. These
facilities represent American values and
the best in American architecture,
design, engineering, technology,
sustainability, art, culture, and
construction execution.
The authority for this Notice is the
Federal Advisory Committee Act, 5
U.S.C. appendix. For further
information, please contact Christine
Foushee at FousheeCT@state.gov.
Kevin E. Bryant,
Deputy Director, Office of Directives
Management, U.S. Department of State.
[FR Doc. 2021–18227 Filed 8–24–21; 8:45 am]
BILLING CODE 4710–51–P
DEPARTMENT OF STATE
[Public Notice: 11512]
Industry Advisory Group; Notice of
Open Meeting
The Industry Advisory Group (IAG) of
the Bureau of Overseas Buildings
Operations (OBO), U.S. Department of
State, will meet on Friday, September
17, 2021, from 9:00 a.m. until 1:00 p.m.
Eastern Daylight Time. The meeting is
open to the public and will be held via
Webex Event.
The IAG serves the U.S. government
in a solely advisory capacity concerning
industry and academia’s latest concepts,
methods, best practices, innovations,
and ideas related to the OBO mission of
providing safe, secure, resilient and
functional facilities that represent the
U.S. government to the host nation and
support the Department’s achievement
of U.S. foreign policy objectives abroad.
The majority of the meeting will be
devoted to discussions between the
E:\FR\FM\25AUN1.SGM
25AUN1
]]>Agencies
[Federal Register Volume 86, Number 162 (Wednesday, August 25, 2021)]
[Notices]
[Pages 47529-47533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18236]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92709; File No. SR-CBOE-2021-046]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Rule 5.4 and Make
Corresponding Changes to Other Rules
August 19, 2021.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on August 6, 2021, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rule 5.4 and make corresponding changes to other Rules. The
text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 5.4. Minimum Increments for Bids and Offers
(a) No change.
(b) Except as provided in Rule 5.33, the minimum increment for
bids and offers on complex orders [with any ratio equal to or
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00) for equity and index options, and for Index Combo
orders,] is $0.01 or greater, which may be determined by the
Exchange on a class-by-class basis, and the legs may be executed in
$0.01 increments. [The minimum increment for bids and offers on
complex orders with any ratio less than one-to-three (.333) or
greater than three-to-one (3.00) for equity and index options
(except for Index Combo orders) is the standard increment for the
class pursuant to paragraph (a), and the legs may be executed in the
minimum increment applicable to the class pursuant to paragraph
(a).] Notwithstanding the foregoing, the minimum increment for bids
and offers on complex orders in options on the S&P 500 Index (SPX)
or on the S&P 100 Index (OEX and XEO), except for box/roll spreads,
is $0.05 or greater, or in any increment, which may be determined by
the Exchange on a class-by-class basis.
* * * * *
Rule 5.33. Complex Orders
Trading of complex orders (as defined in Rule 1.1) is subject to
all other Rules applicable to the trading of orders, unless
otherwise provided in this Rule 5.33.
(a)-(e) No change.
(f) Minimum Increments, Execution Prices, and Priority.
(1) Minimum Increments. No change.
(2) Execution Prices and Complex Order Priority.
(A) Complex Orders. The System does not execute a complex order
pursuant to this Rule 5.33 at a net price:
(i)-(iv) No change.
(v) that would cause any component of the complex strategy to be
executed at a price ahead of a Priority Customer Order on the Simple
Book without improving the BBO of (a) at least one component of the
complex strategy, if the complex order has a ratio equal to or
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00), or is an Index Combo order, or (b) each component of the
complex strategy with a Priority Customer Order at the BBO, if the
complex order has a ratio less than one-to-three (.333) or greater
than three-to-one (3.00).
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change amends the minimum increment for complex
orders with ratios of greater than three-to-one or less than one-to-
three. Currently, Rule 5.4(b) provides that the minimum increment for
bids and offers on complex orders with any ratio greater than or equal
to one-to-three (.333) and less than or equal to three-to-one (3.00)
for equity and index options, and for Index Combo \4\ orders, is $0.01
or greater, which may be determined by the Exchange on a class-by-class
basis, and the legs may be executed in $0.01 increments. However, the
minimum increment for bids and offers on complex orders with any ratio
less than one-to-three (.333) or greater than three-to-one (3.00) for
equity and index options (except for Index Combo orders) is the
standard increment for the class pursuant to Rule 5.4(a), and the legs
may be executed in the minimum increment applicable to the class
pursuant to paragraph 5.4(a).\5\ The Exchange currently only permits
complex orders with ratios greater than three-to-one or less than one-
to-three for execution on the Exchange's trading floor.\6\ The proposed
rule change provides that the minimum increment for bids and offers on
complex orders with any ratio may be in $0.01 or greater, as determined
by the Exchange on a class-by-class basis. This will provide TPHs with
the same pricing flexibility with respect to all complex orders they
submit to the Exchange, regardless of their ratios.
---------------------------------------------------------------------------
\4\ An ``Index Combo'' order is an order to purchase or sell one
or more index option series and the offsetting number of Index
Combinations (with an ``Index Combination'' defined as a purchase
(sale) of an index option call and sale (purchase) of an index
option put with the same underlying index, expiration date, and
strike price) defined by the delta (defined as the positive
(negative) number of Index Combinations that must be sold
(purchased) to establish a market neutral hedge with one or more
series of the same index option. See Rule 5.33(b)(5).
\5\ The minimum increment for bids and offers on complex orders
in options on the S&P 500 Index (SPX) or on the S&P 100 Index (OEX
and XEO), except for box/roll spreads, is $0.05 or greater, or in
any increment, which may be determined by the Exchange on a class-
by-class basis. Rule 5.4(c) sets forth the minimum increment
applicable to other types of options.
\6\ If the Securities and Exchange Commission (the
``Commission'') approves the proposed rule change, the Exchange
intends to begin accepting complex orders with ratios greater than
three-to-one or less than one-to-three for electronic execution, in
addition to open outcry.
---------------------------------------------------------------------------
Complex orders involve special pricing and handling. Bids and
offers for
[[Page 47530]]
complex orders are typically represented on the basis of a total debit
or credit for the order. After a complex order executes at the total
debit or credit, the parties to the trade record the contract
quantities and prices for each component option of the order. For
complex orders executed electronically, the Exchange's system performs
this calculation (within the pricing and priority parameters set forth
in Rule 5.33(f)). For complex orders executed in open outcry, this task
is straightforward and uncomplicated when the total debit or credit for
a complex strategy expressed in the minimum increment under Rule
5.4(b).\7\ However, if a complex order is unable to be expressed in
increments smaller than the increment for the class (such as $0.05), it
may be difficult for brokers to obtain the desired prices for their
customers' orders, because the transaction parties must perform
complicated and time-consuming mathematical calculations to break down
a complex order into the required contract quantities and prices to fit
within the constraint of executing complex orders at a minimum
increment other than $0.01.\8\ This difficulty is exacerbated when the
quantity of such an order is an odd lot quantity (such as 106
contracts). The result is that on active trading days, brokers
executing these types of orders cannot be as efficient in representing
other customer orders that they are holding. This difficulty exists for
complex orders with any ratio and with legs in any combination.
---------------------------------------------------------------------------
\7\ For example, assume the market for the December SPX 4350
calls is 18 bid, 19 asked, and the market for the December SPX 4375
calls is 6.50 bid and 7.50 asked. The fair value of a call comprised
of one leg to buy and one leg to sell the same number of contracts
of this series is 11.50 (the difference between the prices quoted
for each option). If an order to buy 100 of the 4350 calls and to
sell 100 of the 4375 calls is quoted and executed at a net debit of
11.50 (expressed in a multiple of the minimum increment), the
parties to the trade can easily determine and record a price for
each component option that comprises the complex order. Any
combination of purchase and sale prices within the quoted ranges for
the component options that yield a net debit or credit of 11.50
could be used (e.g., 18.50 for the 4350 calls, and 7 for the 4375
calls).
\8\ Using the example in the previous footnote, if instead a
customer wants to pay 11.48 rather than 11.50 for a complex order,
in order to determine prices for the component options that are
expressed in a multiple of $0.05 the trader must perform a series of
calculations. In this case, the trader might determine that the
trade must be split up into a 40-contract spread that traded at a
net debit of 11.45 and a 60-contract spread that traded at a net
debit of 11.50, which together yield a net debit of 11.48 for the
entire amount. This is ultimately a better net price for the
customer.
---------------------------------------------------------------------------
The proposed rule change will enable Trading Permit Holders
(``TPHs'') to execute complex orders more efficiently, including on
behalf of customers that wish to execute highly complicated complex
orders, by permitting the parties to execute the trades more
expeditiously on the trading floor. As noted above, the Exchange also
intends to accept complex orders with ratios larger than three-to-one
or smaller than one-to-three for electronic execution, which would
further improve efficiency of execution of electronic orders, as the
System would perform this calculation. The Exchange believes this
increased efficiency would increase execution opportunities for complex
orders with investment strategies that do not fit within the three-to-
one ratio requirement. Additionally, the proposed rule change may
enable TPHs to execute customers' complex orders with these larger
ratios at better prices, rather than executing at prices that fit
within the confines of a larger increment.
While the proposed rule change amends the minimum increment at
which all complex orders and their legs may execute, the Exchange does
not propose to extend the complex order priority afforded to complex
orders with ratios equal to or greater than one-to-three and less than
or equal to three-to-one to these larger-ratio complex orders.
Electronic execution of complex orders with any ratio will continue to
be required at net prices: (i) That would cause any component of the
complex strategy to be executed at a price of zero; (ii) worse than the
Synthetic Best Bid or Offer (``SBBO'') \9\ or equal to the SBBO when
there is a priority customer order at the SBBO (except all-or-none
(``AON''); (iii) that would cause any component of the complex strategy
to be executed at a price worse than the individual component prices on
the Simple Book; or (iv) worse than the price that would be available
if the complex order legged into the Simple Book. The proposed rule
change amends Rule 5.33(f)(2)(A)(v) to provide that a complex order may
not execute at a net price that would cause any component of the
complex strategy to be executed at a price ahead of a Priority Customer
Order on the Simple Book without improving the BBO of (a) at least one
component of the complex strategy, if the complex order has a ratio
equal to or greater than one-to-three (.333) and less than or equal to
three-to-one (3.00), or is an Index Combo order (which is consistent
with current functionality and thus for all complex orders that may be
executed electronically), or (b) each component the complex strategy
with a Priority Customer Order at the BBO, if the complex order has a
ratio less than one-to-three (.333) or greater than three-to-one (3.00)
(which is consistent with current open outcry rules, where complex
orders with any such ratio may currently be executed).\10\ As a result,
to the extent a complex order with a ratio of four-to-one (for example)
is submitted for electronic execution, the complex order may be
executed at a net debit or credit price only if each leg of the order
betters the corresponding bid (offer) of a priority customer order(s)
in the Simple Book. Therefore, the complex order priority rules will
continue to protect Priority Customer interest on the Simple Book.
---------------------------------------------------------------------------
\9\ The ``SBBO'' means the best bid and offer on the Exchange
for a complex strategy calculated using (1) for complex orders, the
BBO for each component (or the NBBO for a component if the BBO for
that component is not available) of a complex strategy from the
Simple Book; and (2) for stock-option orders, the BBO for each
option component (or the NBBO for a component if the BBO for that
component is not available) and the NBBO of the stock component of a
complex strategy.
\10\ See Rule 5.85(b).
---------------------------------------------------------------------------
When the Exchange first proposed to restrict penny pricing for
complex orders to those with ratios no greater than three-to-one,
investors had only begun to use multi-leg strategies. At the time, the
Commission held that ``ratio orders within certain permissible ratios
may provide market participants with greater flexibility and precision
in effectuating trading and hedging strategies.'' \11\ In the nearly 20
years since, market participants have expanded the use and complexity
of multi-leg trading strategies, which represent a critical portion of
their overall investment strategies, while the rules regarding the
increments of larger-ratio orders have remained unchanged and no longer
reflect the current marketplace. Market participants regularly submit
legitimate multi-leg trading and hedging strategies with ratios greater
than three-to-one (or less than one-to-three). From January 3
[[Page 47531]]
through June 17, 2021, nearly 31% of complex orders executed on the
Exchange's trading floor had a ratio greater than three-to-one. For
example, a complex order consisting of one leg to buy 30 VIX calls and
another leg to sell 30 VIX puts--both in the same series--combined with
a third leg to purchase 100 VIX calls in a separate series that have a
delta of ``30'' (30% or .30) creates a delta neutral position, and
there is no reason such a transaction should not receive the complex
order benefits. However, market participants who submit such orders are
disadvantaged compared to strategies with smaller ratios due to the
restrictiveness of the current pricing increment. The Exchange sees no
reason to restrict complex orders with a ratio of four-to-one, for
example, in a class with a minimum increment of $0.05 from being
expressed in, or having their legs execute in, $0.01 increments while
legs of complex orders with a ratio of three-to-one in the same class
may be expressed in, and have their legs execute in, $0.01
increments.\12\ The Exchange believes it is appropriate to expand the
availability of the smaller pricing increment to complex orders with
larger ratios so that all market participants may have the same
flexibility with respect to the pricing of their multi-legged
investment strategies, regardless of ratio. In the same way the
Commission held that ``the procedures governing the execution of
complex orders, such as . . . orders [with ratios no greater than
three-to-one or less than one-to-three], serve to reduce the risk of
incomplete or inadequate executions while increasing efficiency and
competitive pricing by requiring price improvement before the order can
receive priority over other orders[,]'' \13\ the Exchange believes
expanding penny pricing to all complex orders regardless of ratios will
serve to reduce the risk of incomplete or inadequate executions for
larger-ratio complex orders while increasing efficiency and competitive
pricing by requiring price improvement before the order can receive
priority over other orders.
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release 48858 (December 1,
2003), 68 FR 68128 (December 5, 2003) (SR-CBOE-2003-007) (``Approval
Order''). In approving ratio orders (which had ratios no less than
one-to-three and no greater than three-to-one), the Commission
stated that ``[t]he Commission believes that ratio orders within
certain permissible ratios may provide market participants with
greater flexibility and precision in effectuating trading and
hedging strategies. In addition, the Commission believes that
including such ratio orders in the exception to the priority rules
provided in CBOE Rule 6.45(e) will facilitate the execution of ratio
orders. In this regard, the Commission believes that the procedures
governing the execution of complex orders, such as ratio orders,
serve to reduce the risk of incomplete or inadequate executions
while increasing efficiency and competitive pricing by requiring
price improvement before the order can receive priority over other
orders.'' Id. Pursuant to SR-CBOE-2019-060, Rule 6.45 was replaced
with Rule 5.33.
\12\ Currently, simple orders in classes with minimum increments
of $0.05 or $0.10 may trade in penny increments in certain
circumstances. See, e.g., Rule 5.37(a)(4) (pursuant to which the
minimum price improvement increment for the Automated Improvement
Mechanism (``AIM'') must be at least $0.01, which is the current
minimum increment as determined by the Exchange for all classes
eligible for AIM except for S&P 500 Index (``SPX'') options); and
Rule 5.33(f)(1)(B) (pursuant to which the option leg(s) of a stock-
option order may be $0.01 or greater, which the Exchange determines
on a class-by-class basis, regardless of the minimum increments
otherwise applicable to the option leg(s)); see also Rule
5.39(a)(4).
\13\ See Approval Order at 68128.
---------------------------------------------------------------------------
The Exchange understands that the Commission is concerned that the
simple order market may be somehow disadvantaged by allowing larger-
ratio multi-legged orders to receive the complex order benefit. The
chief concern appears to be that if the ratios are too greatly
expanded, market participants will, for example, enter multi-legged
strategies designed primarily to trade orders in a class in pennies
that cannot otherwise execute as simple orders in that class in pennies
rather than to effectuate a bona fide trading or hedging strategy.
Additionally, the Commission believes there is a risk that market
participants may possibly enter such strategies to trade ahead of
orders on the book by a smaller amount.\14\ The Exchange first notes a
significant amount of volume executed on the Exchange is already done
in penny increments. From January 3 through June 17, 2021, over half
the volume executed on the Exchange as part of a complex order, the
majority of which (all electronic complex orders and all open outcry
complex orders with ratios no greater than three-to-one (which
represents nearly 70% of open outcry complex orders)) are able to trade
in pennies (both the package price and leg prices, except for SPX, for
which the package price must be in nickels, but the legs may trade in
pennies) under current rules. Additionally, during that same time
period, approximately 43% of simple volume on the Exchange executed in
AIM Auctions, which permit executions in pennies (for all classes
except SPX). Therefore, the majority of contracts that execute on the
Exchange already execute in pennies (even though penny increments are
available for fewer than 400 classes),\15\ and the Exchange does not
believe permitting all complex orders to trade in pennies will
significantly increase the volume that may already execute in pennies
on the Exchange.
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\14\ Although the marketplace may in fact be better served by a
structure that does not require multi-legged orders to, among other
things, yield priority to a simple order (which cannot on its own
satisfy the terms of a multi-leg order), this proposal does not
require the Commission to pass judgment on that issue.
\15\ See Rule 5.4(d) (which provides that the penny program
applies to 363 of the over 2000 classes that currently trade on the
Exchange).
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The Exchange believes it is highly unlikely that market
participants will submit non-bona-fide trading strategies with larger
ratios just to trade in pennies. First, with respect to a non-bona-fide
trading strategy, it is unlikely other market participants would rest
an order for such a strategy on the complex order book or be willing to
execute against such an order given that it is a non-bona-fide
strategy, thus reducing the likelihood a market participant would be
able to execute such strategy. Additionally, adding a single leg to a
larger order just to obtain penny pricing may further reduce execution
opportunities for that order, because it may be less likely that
sufficient contracts in the appropriate ratio would be available. The
Exchange also believes it is unlikely market participants will attempt
to submit large-ratio complex orders solely to use penny pricing to
trade ahead of customers on the simple book. From January 2 to June 17,
2021, there was only a customer order on the top of the book across all
series listed on the Exchange for 0.328% of that time. Therefore, there
would be minimal amounts of time when a market participant would even
have the need to attempt to do this. Additionally, as proposed, unlike
complex orders with ratios between one-to-three and three-to-one,
complex orders with ratios less than one-to-three or greater than
three-to-one will have to improve all legs with customers on the book,
rather than just improve one leg like complex orders with smaller
ratios, and such orders would also have to honor away markets.
Therefore, if a market participant were to attempt to submit a complex
order with a large ratio \16\ primarily to trade in pennies or ahead of
customers, it may need to improve more legs than a smaller ratio order,
and would have to honor all away markets, potentially reducing any
potential savings the market participant was attempting to achieve.
Note also that rather than adding an extra leg to a large order simply
to be able to improve the book by $0.01 is unnecessary because such
order could already be executed in an AIM Auction in $0.01 increments.
Additionally, these orders would be subject to review by the Exchange's
regulatory division, which may determine submission of such orders to
be in violation of the Exchange's Rules, including Rule 8.1, which
prohibits TPHs from engaging in acts or practices inconsistent with
just and equitable principles of trade. For these reasons, the Exchange
believes there is a de minimis chance that market participants would
submit non-bona-fide trading strategies to trade the legs in pennies or
[[Page 47532]]
trade ahead of customers on the book and that the benefits of
permitting all complex orders to trade in pennies significantly
outweigh this risk.
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\16\ A market participant could already attempt to do this today
by submitting a smaller-ratio complex order by adding an
inexpensive, out-of-the-money leg to an order. However, the Exchange
has not observed this behavior.
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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.\17\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ 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) \19\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
\19\ Id.
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In particular, the Exchange believes the proposed rule change will
remove impediments to and perfect the mechanism of a free and open
market and benefit investors, because it will provide market
participants with the same pricing flexibility with respect to all
their complex trading and hedging strategies. Market participants may
determine that investment and hedging strategies with ratios greater
than three-to-one or less than one-to-three are appropriate for their
investment purposes, and the Exchange believes it will benefit market
participants if they have additional flexibility to price their
investment and hedging strategies to achieve their desired investment
results. The Exchange believes the proposed rule change will help
protect investors by allowing market participants to receive the
benefit of complex order pricing when executing bona-fide multi-legged
trading or hedging strategies. The Exchange sees no reason to restrict
complex orders with a ratio of greater three-to-one (or less than one-
to three) in a class with a minimum increment of $0.05 from being
expressed in, or having their legs execute in, $0.01 increments while
legs of complex orders with a ratio equal to or less than or equal to
three-to-one (or greater than or equal to one-to-three) in the same
class may be expressed in, and have their legs execute in, $0.01
increments. The proposed rule change will further remove impediments to
and perfect the mechanism of a free and open market and a national
market system, as another options exchange permits complex orders with
any ratio and their legs to trade in pennies.\20\
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\20\ See BOX Options LLC (``BOX'') Rule 7600(c) (which rule is
silent on the minimum increment for orders submitted for execution
on BOX's trading floor, but the Exchange has been informed by
multiple TPHs that are also members of BOX that they may execute
multi-legged orders (with ratios greater than three-to-one or less
than one-to-three) on BOX's trading floor in penny increments).
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These changes will also enable traders on the Exchange's trading
floor to more efficiently execute all complex orders, including on
behalf of customers that wish to execute highly complicated complex
orders, by permitting the parties to execute the trades more
expeditiously.\21\ Additionally, as discussed above, this may enable
TPHs to execute customers' complex orders at better prices, rather than
executing at prices that fit within the confines of a larger increment,
which ultimately benefits investors.
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\21\ As noted above, there are instances in which simple orders
with minimum increments of $0.05 or $0.10 may trade in penny
increments. See supra note 8.
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The proposed rule change will continue to protect priority customer
order interest on the Simple Book in the same manner it does today, as
all complex orders with a ratio greater than three-to-one or less than
one-to-three (except Index Combo orders) will continue to be executed
only if each leg of the order improves the price of a priority customer
order on the Simple Book on each leg by at least the applicable minimum
trading increment.\22\ The proposed rule change has no impact on the
priority of complex orders, as complex orders with ratios less than
.333 or greater than 3.00 will continue to be required to improve the
price of leg of the complex order for which a Priority Customer Order
is resting at the BBO in the Simple Book, and thus will continue to
protect Priority Customer Orders in the Simple Book.
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\22\ See proposed Rule 5.34(f)(A)(v) and current Rule 5.85(b).
As noted above, currently, complex orders with ratios greater than
three-to-one or less than one-to-three may only be submitted for
open outcry trading. If the Commission approves the proposed rule
change, the Exchange will permit such orders to be submitted for
electronic execution in addition to open outcry execution.
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Furthermore, the Exchange believes this proposal is consistent with
the Act and SR-CBOE-2003-007 because in the same way that the
Commission held that ``ratio orders within certain permissible ratios
may provide market participants with greater flexibility and precision
in effectuating trading and hedging strategies[,]'' \23\ complex orders
that are fully hedged may provide market participants with greater
flexibility and precision in effectuating trading and hedging
strategies. The Exchange also believe this proposal is consistent with
the Act and SR-CBOE-2003-007 because in the same way that the
Commission held that ``including such ratio orders in the exception to
the priority rules provided in CBOE Rule 6.45(e) will facilitate the
execution of ratio orders[,]'' \24\ including fully hedged complex
orders in the exception to the priority rules provided in CBOE Rule
6.45(b)(ii) will facilitate the execution of fully hedged complex
orders. Finally, in the same way that the Commission held that ``the
procedures governing the execution of complex orders, such as ratio
orders, serve to reduce the risk of incomplete or inadequate executions
while increasing efficiency and competitive pricing by requiring price
improvement before the order can receive priority over other
orders[,]'' \25\ the Exchange believes the procedures governing the
execution of fully hedged complex orders serve to reduce the risk of
incomplete or inadequate executions while increasing efficiency and
competitive pricing by requiring price improvement before the order can
receive priority over other orders. The Exchange believes the proposed
changes will increase opportunities for execution of complex orders and
lead to tighter spreads on CBOE, which will benefit investors. The
Exchange also believes that the proposed rule change is designed to not
permit unfair discrimination among market participants, as all market
participants may trade complex orders, and the priority eligibility
requirements apply to complex orders of all market participants.
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\23\ See Approval Order at 68128.
\24\ See Id.
\25\ See Id.
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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 the proposed rule change will impose any burden on intramarket
competition, as the proposed rule change will apply in the
[[Page 47533]]
same manner to all TPHs. TPHs will have the discretion to submit
complex orders with any ratio in the increments permitted by the
proposed rule change. The proposed rule change will eliminate a current
pricing disparity that exists between complex orders within the same
class and thus provide the same pricing flexibility to all complex
orders, regardless of their ratios. The Exchange does not believe the
proposed rule change will impose any burden on intermarket competition,
as it relates to the representation and execution of orders on the
Exchange and will continue to protect Priority Customer Orders on the
Simple Book. The Exchange believes the proposed rule change may promote
competition, as market participants will have additional flexibility to
execute their trading and hedging strategies in a more efficient manner
and will permit all complex orders in the same class to trade in the
same increments. Additionally, the Exchange understands from TPHs that
another options market currently permits complex orders with ratios
greater than three-to-one or less than one-to-three and their legs to
execute in penny increments on its trading floor.\26\
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\26\ See supra note 16.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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 Exchange consents, the Commission will:
A. By order approve or disapprove such 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 is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2021-046 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-2021-046. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2021-046, and should be submitted
on or before September 15, 2021.
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\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-18236 Filed 8-24-21; 8:45 am]
BILLING CODE 8011-01-P
