Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 20.6 To Improve the Operation of the Rule, 3636-3641 [2022-01220]
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Federal Register / Vol. 87, No. 15 / Monday, January 24, 2022 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,7 the Exchange believes that the
proposed rule change would not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Debt
securities typically trade in a
decentralized over-the-counter (‘‘OTC’’)
dealer market that is less liquid and
transparent than the equities markets.
The Exchange believes that the
proposed change would increase
competition with these OTC venues by
reducing the cost of being approved as
and operating as an Exchange member
organization that solely trades bonds at
the Exchange, which the Exchange
believes will enhance market quality
through the additional display of
liquidity and increased execution
opportunities in Exchange-traded bonds
at the Exchange.
The Exchange notes that it operates in
a highly competitive market in which
market participants can readily favor
competing venues that are not
transparent. In such an environment,
the Exchange must continually review,
and consider adjusting its fees and
rebates to remain competitive with other
exchanges as well as with alternative
trading systems and other venues that
are not required to comply with the
statutory standards applicable to
exchanges. Because competitors are free
to modify their own fees and credits in
response, and because market
participants may readily adjust their
order routing practices, the Exchange
believes that the degree to which fee
changes in this market may impose any
burden on competition is extremely
limited. As a result of all of these
considerations, the Exchange does not
believe that the proposed change will
impair the ability of member
organizations or competing order
execution venues to maintain their
competitive standing in the financial
markets.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
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No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 8 of the Act and
subparagraph (f)(2) of Rule 19b–4 9
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 10 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
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 No.
SR–NYSE–2022–01, and should be
submitted on or before February 14,
2022.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
J. Matthew DeLesDernier,
Assistant Secretary.
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. SR–
NYSE–2022–01 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
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 No.
SR–NYSE–2022–01. 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
U.S.C. 78f(b)(8).
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BILLING CODE 8011–01–P
[Release No. 34–93988; SR–CboeBZX–
2022–004]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend Rule
20.6 To Improve the Operation of the
Rule
January 18, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
11, 2022, Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange filed the
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
11 17
CFR 200.30–3(a)(12).
15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
1
8 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
10 15 U.S.C. 78s(b)(2)(B).
9 17
7 15
[FR Doc. 2022–01224 Filed 1–21–22; 8:45 am]
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Federal Register / Vol. 87, No. 15 / Monday, January 24, 2022 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX Options’’)
proposes to amend Rule 20.6 to improve
the operation of the Rule. The text of the
proposed rule change is provided
below.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Rules of Cboe BZX Exchange, Inc.
*
*
*
*
*
Rule 20.6. Nullification and Adjustment of
Option Transactions Including Obvious
Errors
*
*
*
*
*
(b) Theoretical Price. Upon receipt of a
request for review and prior to any review of
a transaction execution price, the
‘‘Theoretical Price’’ for the option must be
determined. For purposes of this Rule, if the
applicable option series is traded on at least
one other options exchange, then the
Theoretical Price of an option series is the
last NBB just prior to the trade in question
with respect to an erroneous sell transaction
or the last NBO just prior to the trade in
question with respect to an erroneous buy
transaction unless one of the exceptions in
sub-paragraphs (b)(1) through (3) below
exists. For purposes of this provision, when
a single order received by the Exchange is
executed at multiple price levels, the last
NBB and last NBO just prior to the trade in
question would be the last NBB and last NBO
just prior to the Exchange’s receipt of the
order. The Exchange will rely on this
paragraph (b) and Interpretation and Policy
.03 of this Rule when determining
Theoretical Price.
(1)–(2) No change.
(3) Wide Quotes.
(A) The Exchange will determine the
Theoretical Price if the bid/ask differential of
the NBB and NBO for the affected series just
prior to the erroneous transaction was equal
to or greater than the Minimum Amount set
forth below and there was a bid/ask
differential less than the Minimum Amount
during the 10 seconds prior to the
transaction. If there was no bid/ask
differential less than the Minimum Amount
during the 10 seconds prior to the transaction
then the Theoretical Price of an option series
is the last NBB or NBO just prior to the
transaction in question, as set forth in
paragraph (b) above.
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Bid price at time of trade
Minimum amount
Below $2.00 ....................
2.00 to 5.00 ....................
Above 5.00 to 10.00 .......
Above 10.00 to 20.00 .....
Above 20.00 to 50.00 .....
Above 50.00 to 100.00 ...
Above 100.00 .................
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$0.75
1.25
1.50
2.50
3.00
4.50
6.00
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(B) Customer Transactions Occurring
Within 10 Seconds or Less After an Opening
or Reopening.
(i) The Exchange will determine the
Theoretical Price if the bid/ask differential of
the NBB and NBO for the affected series just
prior to the Customer’s erroneous transaction
was equal to or greater than the Minimum
Amount set forth in subparagraph (A) above
and there was a bid/ask differential less than
the Minimum Amount during the 10 seconds
prior to the transaction.
(ii) If there was no bid/ask differential less
than the Minimum Amount during the 10
seconds prior to the transaction, then the
Exchange will determine the Theoretical
Price if the bid/ask differential of the NBB
and NBO for the affected series just prior to
the Customer’s erroneous transaction was
equal to or greater than the Minimum
Amount set forth in subparagraph (A) above
and there was a bid/ask differential less than
the Minimum Amount anytime during the 10
seconds after an opening or re-opening.
(iii) If there was no bid/ask differential less
than the Minimum Amount during the 10
seconds following an opening or reopening,
then the Theoretical Price of an option series
is the last NBB or NBO just prior to the
Customer transaction in question, as set forth
in paragraph (b) above.
(iv) Customer transactions occurring more
than 10 seconds after an opening or reopening are subject to subparagraph (A)
above.
(c) Obvious Errors
(1)–(3) No change.
(4) Adjust or Bust. If it is determined that
an Obvious Error has occurred, the Exchange
shall take one of the actions listed below.
Upon taking final action, the Exchange shall
promptly notify both parties to the trade
electronically or via telephone.
(A) No change.
(B) Customer Transactions. Where at least
one party to the Obvious Error is a Customer,
the execution price of the transaction will be
adjusted by the Official pursuant to the table
immediately above. Any Customer Obvious
Error exceeding 50 contracts will be subject
to the Size Adjustment Modifier defined in
subparagraph (a)(4) above. However, if such
adjustment(s) would result in an execution
price higher (for buy transactions) or lower
(for sell transactions) than the Customer’s
limit price, the trade will be nullified, subject
to sub-paragraph (C) below.
*
*
*
*
*
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
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3637
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this rule change is to
amend Rule 20.6, ‘‘Nullification and
Adjustment of Options Transactions
including Obvious Errors,’’ to improve
the operation of the Rule. Following
discussions with other exchanges and a
cross-section of industry participants
and in coordination with the Listed
Options Market Structure Working
Group (‘‘LOMSWG’’) (collectively, the
‘‘Industry Working Group’’), the
Exchange proposes: (1) To amend
subsection (b)(3) of Rule 20.6 to permit
the Exchange to determine the
Theoretical Price of a Customer option
transaction in a wide market so long as
a narrow market exists at any point
during the 10-second period after an
opening or re-opening; and (2) to amend
subsection (c)(4)(B) of Rule 20.6 to
adjust, rather than nullify, Customer
transactions in Obvious Error situations,
provided the adjustment does not
violate the limit price. The Commission
recently approved an identical proposed
rule change of NYSE Arca, LLC (‘‘NYSE
Arca’’).5 The Exchange understands that
other options exchanges will also
submit substantively identical proposals
to the Commission.
Proposed Change to Subsection (b)(3)
Rule 20.6 has been part of various
harmonization efforts by the Industry
Working Group.6 These efforts have
often centered around the Theoretical
Price for which an options transaction
should be compared to determine
whether an Obvious Error has occurred.
For instance, all options exchanges have
adopted language comparable to Rule
20.6, Interpretation and Policy .03,7
which explains how an exchange is to
determine Theoretical Price at the open,
when there are no valid quotes, and
when there is a wide quote. This
5 See Securities Exchange Act Release No. 93818
(December 17, 2021), 86 FR 73009 (December 23,
2021) (SR–NYSEArca–2021–91).
6 See Securities Exchange Act Release No. 74556
(March 20, 2015), 80 FR 16031 (March 26, 2015)
(SR–BATS–2014–067).
7 See Securities Exchange Act Release No. 81084
(July 6, 2017), 82 FR 32216 (July 12, 2017) (SR–
BatsBZX–2017–35).
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includes at times the use of a singular
third-party vendor, known as a TP
Provider (currently CBOE Livevol, LLC).
Similarly, subsection (b)(3) of Rule
20.6 was previously harmonized across
all options exchanges to handle
situations where executions occur in
markets that are wide (as set forth in the
Rule).8 Under that subsection, the
Exchange determines the Theoretical
Price if the NBBO for the subject series
is wide immediately before execution
and a narrow market (as set forth in the
Rule) existed ‘‘during the 10 seconds
prior to the transaction.’’ The Rule goes
on to clarify that, should there be no
narrow quotes ‘‘during the 10 seconds
prior to the transaction,’’ the Theoretical
Price for the affected series is the NBBO
that existed at the time of execution
(regardless of its width).
In recent discussions, the Industry
Working Group has identified proposed
changes to subsection (b)(3) of Rule 20.6
that the Industry Working Group
believes would improve the Rule’s
functioning. Currently, subsection (b)(3)
does not permit the Exchange to
determine the Theoretical Price unless
there is a narrow quote 10 seconds prior
to the transaction. However, in the first
seconds of trading, there is no 10second period ‘‘prior to the
transaction.’’ Further, the Industry
Working Group has observed that prices
in certain series can be disjointed at the
start of trading. Accordingly, the
Exchange proposes to provide
additional protections to trading in
certain circumstances immediately after
the opening before liquidity has had a
chance to enter the market. The
Exchange proposes to amend subsection
(b)(3) to allow the Exchange to
determine the Theoretical Price in a
wide market so long as a narrow market
exists at any point during the 10-second
period after an opening or re-opening.
Specifically, the Exchange proposes
that the existing text of subsection (b)(3)
would become subparagraph ‘‘(A).’’ The
Exchange proposes to add the following
heading and text as subparagraph ‘‘(B)’’:
(B) Customer Transactions Occurring
Within 10 Seconds or Less After an Opening
or Reopening.
(i) The Exchange will determine the
Theoretical Price if the bid/ask differential of
the NBB and NBO for the affected series just
prior to the Customer’s erroneous transaction
was equal to or greater than the Minimum
Amount set forth in subparagraph (A) above
and there was a bid/ask differential less than
the Minimum Amount during the 10 seconds
prior to the transaction.
8 See Securities Exchange Act Release No. 74556
(March 20, 2015), 80 FR 16031 (March 26, 2015)
(SR–BATS–2014–067).
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(ii) If there was no bid/ask differential less
than the Minimum Amount during the 10
seconds prior to the transaction, then the
Exchange will determine the Theoretical
Price if the bid/ask differential of the NBB
and NBO for the affected series just prior to
the Customer’s erroneous transaction was
equal to or greater than the Minimum
Amount set forth in subparagraph (A) above
and there was a bid/ask differential less than
the Minimum Amount anytime during the 10
seconds after an opening or re-opening.
(iii) If there was no bid/ask differential less
than the Minimum Amount during the 10
seconds following an opening or reopening,
then the Theoretical Price of an option series
is the last NBB or NBO just prior to the
Customer transaction in question, as set forth
in paragraph (b) above.
(iv) Customer transactions occurring more
than 10 seconds after an opening or reopening are subject to subparagraph (A)
above.
The following examples illustrate the
functioning of the proposed rule change.
Consider that the NBBO of a series
opens as $0.01 at $4.00. A marketable
limit order to buy one contract arrives
one second later and is executed at
$4.00. In the third second of trading, the
NBBO narrows from $0.01 at $4.00 to
$2.00 at $2.10. While the execution
occurred in a market with wide widths,
there was no tight market within the 10
seconds prior to execution. Accordingly,
under the current rule, the trade would
not qualify for obvious error review, in
part due to the fact that there was only
a single second of trading before the
execution. Under the proposal, since a
tight market existed at some point in the
first 10 seconds of trading (i.e., in the
third second), the Exchange would be
able to determine the Theoretical Price
as provided in Interpretation and Policy
.03.
As another example, the NBBO for a
series opens as $0.01 at $4.00. In the
seventh second of trading, a marketable
limit order is received to buy one
contract and is executed at $4.00. Five
seconds later (i.e., in the twelfth second
of trading), the NBBO narrows from
$0.01 at $4.00 to $2.00 at $2.10. While
the execution occurred in a market with
wide widths, there was no tight market
within 10 seconds prior to execution.
Accordingly, under the current Rule, the
trade would not qualify for obvious
error review. Under the proposal, since
no tight market existed at any point
during the first 10 seconds of trading
(i.e., the narrow market occurred in the
twelfth second), the trade would not
qualify for obvious error review.
The proposed rule change would also
better harmonize subsection (b)(3) with
subsection (b)(1) of Rule 20.6. Under
subsection (b)(1), the Exchange is
permitted to determine the Theoretical
Price for transactions occurring as part
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of the Opening Process (as defined in
Rule 21.7) if there is no NBB or NBO for
the affected series just prior to the
erroneous transaction. However, under
the current version of subsection (b)(3),
a core trading transaction could occur in
the same wide market but the Exchange
would not be permitted to determine the
Theoretical Price. Consider an example
where, one second after the Exchange
opens a selected series, the NBBO is
$1.00 at $5.00. At 9:30:03, a customer
submits a marketable buy order to the
Exchange and pays $5.00. At 9:30:03, a
different exchange runs an opening
auction that results in a customer
paying $5.00 for the same selected
series. At 9:30:06, the NBBO changes
from $1.00 at $5.00 to $1.35 at $1.45.
Under the current version of subsection
(b)(3), the Exchange would not be able
to determine the Theoretical Price for
the trade occurring during core trading.
However, the trade on the other
exchange could be submitted for review
under subsection (b)(1) and that
exchange would be able to determine
the Theoretical Price. If the proposed
change to subsection (b)(3) were
approved, both of the trades occurring at
9:30:03 (on the Exchange during core
trading and on another exchange via
auction) would also be entitled to the
same review regarding the same
Theoretical Price based upon the same
time.
The proposal would not change any
obvious error review beyond the first 10
seconds of an opening or re-opening.
Proposed Change to Subsection (c)(4)(B)
The Exchange proposes to amend
subsection (c)(4)(B) of Rule 20.6—the
‘‘Adjust or Bust’’ rule for Customer
transactions in Obvious Error
situations—to adjust rather than nullify
such orders, provided the adjustment
does not violate the Customer’s limit
price. Currently, the Rule provides that
in Obvious Error situations, transactions
involving non-Customers should be
adjusted, while transactions involving
Customers are nullified, unless a certain
condition applies.9 The Industry
Working Group has concluded that the
treatment of these transactions should
be harmonized under the Rule, such
that transactions involving Customers
may benefit from adjustment, just as
non-Customer transactions currently do,
9 Specifically, the current Rule provides at
subsection (c)(4)(C) that if a TPH has 200 or more
Customer transactions under review concurrently
and the orders resulting in such transactions were
submitted during the course of two minutes or less,
where at least one party to the Obvious Error is a
non-Customer, then the Exchange will apply the
non-Customer adjustment criteria found in
subsection (c)(4)(A).
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except where such adjustment would
violate the Customer’s limit price; in
that instance, the trade would be
nullified.
Specifically, the Exchange proposes to
amend the text of subsection (c)(4)(B) to
add that where at least one party to the
Obvious Error is a Customer, ‘‘the
execution price of the transaction will
be adjusted by the Official pursuant to
the table immediately above. Any
Customer Obvious Error exceeding 50
contracts will be subject to the Size
Adjustment Modifier defined in
subparagraph (a)(4) of the Rule.
However, if such adjustment(s) would
result in an execution price higher (for
buy transactions) or lower (for sell
transactions) than the Customer’s limit
price,’’ the trade will be nullified. The
‘‘table immediately above’’ referenced in
the proposed text refers to the table at
current subsection (c)(4)(A), which
provides for the adjustment of prices a
specified amount away from the
Theoretical Price, rather than adjusting
the Theoretical Price.
The Exchange proposes no other
changes at this time.
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Implementation Date
The Exchange will announce the
operative date of the proposed changes
to Members via notice with appropriate
advanced notice, which will be posted
on the Exchange’s website. The
proposed changes will become operative
no sooner than six months from the date
the Commission approved the identical
NYSE Arca filing 10 in order for the
Exchange’s implementation of the
proposed rule changes to coincide with
the implementation of the same changes
on all other options exchanges.
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.11 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 12 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
10 See Securities Exchange Act Release No. 93818
(December 17, 2021), 86 FR 73009 (December 23,
2021) (SR–NYSEArca–2021–91).
11 15 U.S.C. 78f(b).
12 15 U.S.C. 78f(b)(5).
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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) 13 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
that the proposed change to subsection
(b)(3) of Rule 20.6 would remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, protect investors and the public
interest because it provides a method for
addressing Obvious Error Customer
transactions that occur in a wide market
at the opening of trading. Generally, a
wide market is an indication of a lack
of liquidity in the market such that the
market is unreliable. Current subsection
(b)(3) recognizes that a persistently wide
quote (i.e., more than 10 seconds)
should be considered the reliable
market regardless of its width but does
not address transactions that occur in a
wide market in the first seconds of
trading, where there is no preceding 10second period to reference. Accordingly,
in the first 10 seconds of trading, there
is no opportunity for a wide quote to
have persisted for a sufficiently lengthy
period such that the market should
consider it a reliable market for the
purposes of determining an Obvious
Error transaction.
The proposed change would rectify
this disparity and permit the Exchange
to consider whether a narrow quote is
present at any time during the 10second period after an opening or reopening. The presence of such a narrow
quote would indicate that the market
has gained sufficient liquidity and that
the previous wide market was
unreliable, such that it would be
appropriate for the Exchange to
determine the Theoretical Price of an
Obvious Error transaction. In this way,
the proposed rule harmonizes the
treatment of Customer transactions that
execute in an unreliable market at any
point of the trading day, by making
them uniformly subject to Exchange
determination of the Theoretical Price.
The Exchange believes that the
proposed change to subsection (c)(4)(B)
of the Rule would remove impediments
to and perfect the mechanism of a free
and open market and a national market
system and enhance the protection of
investors by harmonizing the treatment
of non-Customer transactions and
13 Id.
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Customer transactions under the Rule.
Under the current Rule, Obvious Error
situations involving non-Customer
transactions are adjusted, while those
involving Customer transactions are
generally nullified, unless they meet the
additional requirements of subsection
(c)(4)(C) (i.e., where a TPH has 200 or
more Customer transactions under
review concurrently and the orders
resulting in such transactions were
submitted during the course of two
minutes or less). The proposal would
harmonize the treatment of nonCustomer and Customer transactions by
providing for the adjustment of all such
transactions, except where such
adjustment would violate the
Customer’s limit price.
When it proposed the current rule in
2015, the Exchange believed there were
sound reasons for treating non-Customer
transactions and Customer transactions
differently. At the time, the Exchange
stated its belief that ‘‘Customers are not
necessarily immersed in the day-to-day
trading of the markets, are less likely to
be watching trading activity in a
particular option throughout the day,
and may have limited funds in their
trading accounts,’’ and that nullifying
Obvious Error transactions involving
Customers would give Customers
‘‘greater protections’’ than adjusting
such transactions by eliminating the
possibility that a Customer’s order will
be adjusted to a significantly different
price. The Exchange also noted its belief
that ‘‘Customers are . . . less likely to
have engaged in significant hedging or
other trading activity based on earlier
transactions, and thus, are less in need
of maintaining a position at an adjusted
price than non-Customers.’’ 14
Those assumptions about Customer
trading and hedging activity no longer
hold. The Exchange and the Industry
Working Group believe that over the
course of the last five years, Customers
that use options have become more
sophisticated, as retail broker-dealers
have enhanced the trading tools
available. Pursuant to OCC data,
volumes clearing in the Customer range
have expanded from 12,022,163 ADV in
2015 to 35,081,130 ADV in 2021. This
increase in trading activity underscores
the greater understanding of options by
Customers as a trading tool and its use
in the markets. Customers who trade
options today largely are more educated,
have better trading tools, and have
better access to financial news than any
14 See Securities Exchange Act Release No. 74556
(March 20, 2015), 80 FR 16031 (March 26, 2015)
(SR–BATS–2014–067).
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Federal Register / Vol. 87, No. 15 / Monday, January 24, 2022 / Notices
time prior.15 The proposed rule would
extend the hedging protections
currently enjoyed by non-Customers to
Customers, by allowing them to
maintain an option position at an
adjusted price, which would in turn
prevent a cascading effect by
maintaining the hedge relationship
between the option transaction and any
other transactions in a related security.
The Exchange believes that extending
such hedging protections to Customer
transactions would remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and
enhance the protection of investors by
providing greater certainty of execution
for all participants to options
transactions. Under the current Rule, a
Customer that believes its transaction
was executed pursuant to an Obvious
Error may be disincentivized from
submitting the transaction for review,
since during the review process, the
Customer would be uncertain whether
the trade would be nullified, and if so,
whether market conditions would still
permit the opportunity to execute a
related order at a better price after the
nullification ruling is finalized. In
contrast, under the proposed rule, the
Customer would know that the only
likely outcomes of submitting a trade to
Obvious Error review would be that the
trade would stand or be re-executed at
a better price; the trade would only be
nullified if the adjustment would violate
the order’s limit. Similarly, under the
current Rule, during the review period,
a market maker who traded contra to the
Customer would be uncertain if it
should retain any position executed to
hedge the original trade, or attempt to
unwind it, possibly at a significant loss.
Under the proposed rule change, this
uncertainty is largely eliminated, and
the question would be whether the
already executed and hedged trade
would be adjusted to a better price for
the Customer, or if it would stand as
originally executed. In this way, the
proposed rule enhances the protection
of investors and removes impediments
to and perfects the mechanism of a free
and open market and a national market
system.
The proposed rule also addresses the
concern the Exchange cited in its 2015
filing that adjusting, rather than
nullifying, Customer transactions could
lead to a Customer’s order being
adjusted to a significantly different
price. To address that concern, the
15 See
‘‘Retail Traders Adopt Options En Masse’’
by Dan Raju, available at https://www.nasdaq.com/
articles/retail-traders-adopt-options-en-masse-202012-08.
VerDate Sep<11>2014
18:11 Jan 21, 2022
Jkt 256001
proposed rule would prevent Customer
transactions from being adjusted to a
price that violates the order’s limit; if
the adjustment would violate a
Customer’s limit, the trade would
instead be nullified. The Exchange
believes it is in the best interest of
investors to expand the availability of
adjustments to Customer transactions in
all Obvious Error situations except
where the adjustment would violate the
Customer’s limit price.
Further, the Exchange believes that,
with respect to such proposed
adjustments to Customer transactions, it
is appropriate to use the same form of
adjustment as is currently in place with
respect to non-Customer transactions as
laid out in the table in subsection
(c)(4)(A). That is, the Exchange believes
that it is appropriate to adjust to prices
a specified amount away from the
Theoretical Price rather than to adjust
the Theoretical Price, even though the
Exchange has determined a given trade
to be erroneous in nature, because the
parties in question should have had
some expectation of execution at the
price or prices submitted. Also, it is
common that by the time it is
determined that an Obvious Error has
occurred, additional hedging and
trading activity has already occurred
based on the executions that previously
happened. The Exchange believes that
providing an adjustment to the
Theoretical Price in all cases would not
appropriately incentivize market
participants to maintain appropriate
controls to avoid potential errors, while
adjusting to prices a specified amount
away from the Theoretical Price would
incentivize such behavior.
The Exchange believes that the
proposal is not designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
The proposed change to subsection
(b)(3) would apply to all instances of a
wide market occurring within the first
10 seconds of trading followed by a
narrow market at any point in the
subsequent 10-second period, regardless
of the types of market participants
involved in such transactions. The
proposed change to subsection (c)(4)(B)
would harmonize the treatment of
Obvious Error transactions involving
Customers and non-Customers, no
matter what type of market participants
those parties may be.
For these reasons, the Exchange
believes that the proposal is consistent
with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
PO 00000
Frm 00146
Fmt 4703
Sfmt 4703
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change is identical to a
NYSE Arca proposed rule change
recently approved by the Commission.16
The Exchange anticipates that the other
options exchanges will adopt
substantively similar proposals, such
that there would be no burden on
intermarket competition from the
Exchange’s proposal. Accordingly, the
proposed change is not meant to affect
competition among the options
exchanges. For these reasons, the
Exchange believes that the proposed
rule change reflects this competitive
environment and does not impose any
undue burden on intermarket
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 17 and Rule 19b–4(f)(6) 18
thereunder. At any time within 60 days
of the filing of the proposed rule change,
the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
16 See Securities Exchange Act Release No. 93818
(December 17, 2021), 86 FR 73009 (December 23,
2021) (SR–NYSEArca–2021–91).
17 15 U.S.C. 78s(b)(3)(A).
18 17 CFR 240.19b–4(f)(6). In addition, Rule
19b–4(f)(6) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change at least five business
days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
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Federal Register / Vol. 87, No. 15 / Monday, January 24, 2022 / Notices
change should be approved or
disapproved.
should be submitted on or before
February 14, 2022.
IV. Solicitation of Comments
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
J. Matthew DeLesDernier,
Assistant Secretary.
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number
SR–CboeBZX–2022–004 on the subject
line.
Paper Comments
jspears on DSK121TN23PROD with NOTICES1
• Send paper comments in triplicate
to Vanessa Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CboeBZX–2022–004. 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–CboeBZX–2022–004 and
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3641
Ground Rules
➢ Board actions taken only in
designated areas on agenda
IV. Approval of Board Minutes of the
December 16, 2021 UCR Board
Meeting—UCR Board Chair
[FR Doc. 2022–01220 Filed 1–21–22; 8:45 am]
For Discussion and Possible Action
BILLING CODE 8011–01–P
Draft Minutes from the December 16,
2021 UCR Board meeting will be
reviewed. The Board will consider
action to approve.
UNIFIED CARRIER REGISTRATION
PLAN
Sunshine Act Meeting
January 27, 2022, from
12:00 p.m. to 3:00 p.m., Eastern time.
PLACE: This meeting will be accessible
via conference call and screensharing.
Any interested person may call 877–
853–5247 (US toll free), 888–788–0099
(US toll free), +1 929–205–6099 (US
toll), or +1 669–900–6833 (US toll),
Conference ID 997 9209 5957, to
participate in the meeting. The website
to participate via Zoom meeting and
screenshare is https://kellen.zoom.us/
meeting/register/tJ0qfuuopz4jH9OuYM
zVZU5qWXmcuft08lcA.
STATUS: This meeting will be open to the
public.
MATTERS TO BE CONSIDERED: The Unified
Carrier Registration Plan Board of
Directors (the ‘‘Board’’) will continue its
work in developing and implementing
the Unified Carrier Registration Plan
and Agreement. The subject matter of
the meeting will include:
TIME AND DATE:
Agenda
I. Welcome and Call to Order—UCR
Board Chair
The UCR Board Chair will welcome
attendees, call the meeting to order, call
roll for the Board, confirm the presence
of a quorum, and facilitate selfintroductions.
II. Verification of Publication of
Meeting Notice—UCR Executive
Director
The UCR Executive Director will
verify publication of the meeting notice
on the UCR website and distribution to
the UCR contact list via email followed
by subsequent publication of the notice
in the Federal Register.
III. Review and Approval of Board
Agenda—UCR Board Chair
For Discussion and Possible Action
The proposed Agenda will be
reviewed, and the Board will consider
adoption.
19 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00147
Fmt 4703
Sfmt 4703
V. Report of the Federal Motor Carrier
Safety Administration (FMCSA)—
FMCSA Representative
The FMCSA will provide a report on
any relevant activity.
VI. Extension of UCR Plan/Kellen
Company Contract—UCR Executive
Director and UCR Board Chair
For Discussion and Possible Board
Action
The UCR Executive Director and the
UCR Board Chair will present and
discuss with the Board a 1-year
extension to the existing agreement
between the UCR Plan and the Kellen
Company. The Board may take action to
approve the extension.
VII. Subcommittee Reports
Audit Subcommittee—UCR Audit
Subcommittee Chair
A. Update to Internal Controls
Accounting Guidelines—UCR Executive
Director and UCR Depository Manager
For Discussion and Possible Board
Action
The UCR Executive Director and the
UCR Depository Manager will discuss
potential amendments to the UCR
Accounting Guidelines based on
recommendations from a report on the
internal controls review that was
performed by an independent audit
firm, Williams, Benator & Libby (WBL).
Enhancements to the internal controls
policies recommended by WBL in their
report have been included in the
proposed update to the written internal
controls of the UCR Plan. The Board
may consider adoption of the
amendments to the UCR Accounting
Guidelines.
B. UCR Compliance Snapshot—UCR
Audit Subcommittee Chair
The UCR Audit Subcommittee Chair,
supported by the UCR Vice-Chair and
DSL Transportation, Inc., will review
audit compliance rates for the states for
registration years 2020, 2021, and 2022
and included compliance percentages
for Focused Anomaly Reviews (FARs),
E:\FR\FM\24JAN1.SGM
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]]>Agencies
[Federal Register Volume 87, Number 15 (Monday, January 24, 2022)]
[Notices]
[Pages 3636-3641]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01220]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93988; SR-CboeBZX-2022-004]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 20.6 To Improve the Operation of the Rule
January 18, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 11, 2022, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Exchange
filed the proposal as a ``non-controversial'' proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
[[Page 3637]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'')
proposes to amend Rule 20.6 to improve the operation of the Rule. The
text of the proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe BZX Exchange, Inc.
* * * * *
Rule 20.6. Nullification and Adjustment of Option Transactions
Including Obvious Errors
* * * * *
(b) Theoretical Price. Upon receipt of a request for review and
prior to any review of a transaction execution price, the
``Theoretical Price'' for the option must be determined. For
purposes of this Rule, if the applicable option series is traded on
at least one other options exchange, then the Theoretical Price of
an option series is the last NBB just prior to the trade in question
with respect to an erroneous sell transaction or the last NBO just
prior to the trade in question with respect to an erroneous buy
transaction unless one of the exceptions in sub-paragraphs (b)(1)
through (3) below exists. For purposes of this provision, when a
single order received by the Exchange is executed at multiple price
levels, the last NBB and last NBO just prior to the trade in
question would be the last NBB and last NBO just prior to the
Exchange's receipt of the order. The Exchange will rely on this
paragraph (b) and Interpretation and Policy .03 of this Rule when
determining Theoretical Price.
(1)-(2) No change.
(3) Wide Quotes.
(A) The Exchange will determine the Theoretical Price if the
bid/ask differential of the NBB and NBO for the affected series just
prior to the erroneous transaction was equal to or greater than the
Minimum Amount set forth below and there was a bid/ask differential
less than the Minimum Amount during the 10 seconds prior to the
transaction. If there was no bid/ask differential less than the
Minimum Amount during the 10 seconds prior to the transaction then
the Theoretical Price of an option series is the last NBB or NBO
just prior to the transaction in question, as set forth in paragraph
(b) above.
------------------------------------------------------------------------
Bid price at time of trade Minimum amount
------------------------------------------------------------------------
Below $2.00.......................................... $0.75
2.00 to 5.00......................................... 1.25
Above 5.00 to 10.00.................................. 1.50
Above 10.00 to 20.00................................. 2.50
Above 20.00 to 50.00................................. 3.00
Above 50.00 to 100.00................................ 4.50
Above 100.00......................................... 6.00
------------------------------------------------------------------------
(B) Customer Transactions Occurring Within 10 Seconds or Less
After an Opening or Reopening.
(i) The Exchange will determine the Theoretical Price if the
bid/ask differential of the NBB and NBO for the affected series just
prior to the Customer's erroneous transaction was equal to or
greater than the Minimum Amount set forth in subparagraph (A) above
and there was a bid/ask differential less than the Minimum Amount
during the 10 seconds prior to the transaction.
(ii) If there was no bid/ask differential less than the Minimum
Amount during the 10 seconds prior to the transaction, then the
Exchange will determine the Theoretical Price if the bid/ask
differential of the NBB and NBO for the affected series just prior
to the Customer's erroneous transaction was equal to or greater than
the Minimum Amount set forth in subparagraph (A) above and there was
a bid/ask differential less than the Minimum Amount anytime during
the 10 seconds after an opening or re-opening.
(iii) If there was no bid/ask differential less than the Minimum
Amount during the 10 seconds following an opening or reopening, then
the Theoretical Price of an option series is the last NBB or NBO
just prior to the Customer transaction in question, as set forth in
paragraph (b) above.
(iv) Customer transactions occurring more than 10 seconds after
an opening or re-opening are subject to subparagraph (A) above.
(c) Obvious Errors
(1)-(3) No change.
(4) Adjust or Bust. If it is determined that an Obvious Error
has occurred, the Exchange shall take one of the actions listed
below. Upon taking final action, the Exchange shall promptly notify
both parties to the trade electronically or via telephone.
(A) No change.
(B) Customer Transactions. Where at least one party to the
Obvious Error is a Customer, the execution price of the transaction
will be adjusted by the Official pursuant to the table immediately
above. Any Customer Obvious Error exceeding 50 contracts will be
subject to the Size Adjustment Modifier defined in subparagraph
(a)(4) above. However, if such adjustment(s) would result in an
execution price higher (for buy transactions) or lower (for sell
transactions) than the Customer's limit price, the trade will be
nullified, subject to sub-paragraph (C) below.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule change is to amend Rule 20.6,
``Nullification and Adjustment of Options Transactions including
Obvious Errors,'' to improve the operation of the Rule. Following
discussions with other exchanges and a cross-section of industry
participants and in coordination with the Listed Options Market
Structure Working Group (``LOMSWG'') (collectively, the ``Industry
Working Group''), the Exchange proposes: (1) To amend subsection (b)(3)
of Rule 20.6 to permit the Exchange to determine the Theoretical Price
of a Customer option transaction in a wide market so long as a narrow
market exists at any point during the 10-second period after an opening
or re-opening; and (2) to amend subsection (c)(4)(B) of Rule 20.6 to
adjust, rather than nullify, Customer transactions in Obvious Error
situations, provided the adjustment does not violate the limit price.
The Commission recently approved an identical proposed rule change of
NYSE Arca, LLC (``NYSE Arca'').\5\ The Exchange understands that other
options exchanges will also submit substantively identical proposals to
the Commission.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 93818 (December 17,
2021), 86 FR 73009 (December 23, 2021) (SR-NYSEArca-2021-91).
---------------------------------------------------------------------------
Proposed Change to Subsection (b)(3)
Rule 20.6 has been part of various harmonization efforts by the
Industry Working Group.\6\ These efforts have often centered around the
Theoretical Price for which an options transaction should be compared
to determine whether an Obvious Error has occurred. For instance, all
options exchanges have adopted language comparable to Rule 20.6,
Interpretation and Policy .03,\7\ which explains how an exchange is to
determine Theoretical Price at the open, when there are no valid
quotes, and when there is a wide quote. This
[[Page 3638]]
includes at times the use of a singular third-party vendor, known as a
TP Provider (currently CBOE Livevol, LLC).
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 74556 (March 20,
2015), 80 FR 16031 (March 26, 2015) (SR-BATS-2014-067).
\7\ See Securities Exchange Act Release No. 81084 (July 6,
2017), 82 FR 32216 (July 12, 2017) (SR-BatsBZX-2017-35).
---------------------------------------------------------------------------
Similarly, subsection (b)(3) of Rule 20.6 was previously harmonized
across all options exchanges to handle situations where executions
occur in markets that are wide (as set forth in the Rule).\8\ Under
that subsection, the Exchange determines the Theoretical Price if the
NBBO for the subject series is wide immediately before execution and a
narrow market (as set forth in the Rule) existed ``during the 10
seconds prior to the transaction.'' The Rule goes on to clarify that,
should there be no narrow quotes ``during the 10 seconds prior to the
transaction,'' the Theoretical Price for the affected series is the
NBBO that existed at the time of execution (regardless of its width).
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 74556 (March 20,
2015), 80 FR 16031 (March 26, 2015) (SR-BATS-2014-067).
---------------------------------------------------------------------------
In recent discussions, the Industry Working Group has identified
proposed changes to subsection (b)(3) of Rule 20.6 that the Industry
Working Group believes would improve the Rule's functioning. Currently,
subsection (b)(3) does not permit the Exchange to determine the
Theoretical Price unless there is a narrow quote 10 seconds prior to
the transaction. However, in the first seconds of trading, there is no
10-second period ``prior to the transaction.'' Further, the Industry
Working Group has observed that prices in certain series can be
disjointed at the start of trading. Accordingly, the Exchange proposes
to provide additional protections to trading in certain circumstances
immediately after the opening before liquidity has had a chance to
enter the market. The Exchange proposes to amend subsection (b)(3) to
allow the Exchange to determine the Theoretical Price in a wide market
so long as a narrow market exists at any point during the 10-second
period after an opening or re-opening.
Specifically, the Exchange proposes that the existing text of
subsection (b)(3) would become subparagraph ``(A).'' The Exchange
proposes to add the following heading and text as subparagraph ``(B)'':
(B) Customer Transactions Occurring Within 10 Seconds or Less
After an Opening or Reopening.
(i) The Exchange will determine the Theoretical Price if the
bid/ask differential of the NBB and NBO for the affected series just
prior to the Customer's erroneous transaction was equal to or
greater than the Minimum Amount set forth in subparagraph (A) above
and there was a bid/ask differential less than the Minimum Amount
during the 10 seconds prior to the transaction.
(ii) If there was no bid/ask differential less than the Minimum
Amount during the 10 seconds prior to the transaction, then the
Exchange will determine the Theoretical Price if the bid/ask
differential of the NBB and NBO for the affected series just prior
to the Customer's erroneous transaction was equal to or greater than
the Minimum Amount set forth in subparagraph (A) above and there was
a bid/ask differential less than the Minimum Amount anytime during
the 10 seconds after an opening or re-opening.
(iii) If there was no bid/ask differential less than the Minimum
Amount during the 10 seconds following an opening or reopening, then
the Theoretical Price of an option series is the last NBB or NBO
just prior to the Customer transaction in question, as set forth in
paragraph (b) above.
(iv) Customer transactions occurring more than 10 seconds after
an opening or re-opening are subject to subparagraph (A) above.
The following examples illustrate the functioning of the proposed
rule change. Consider that the NBBO of a series opens as $0.01 at
$4.00. A marketable limit order to buy one contract arrives one second
later and is executed at $4.00. In the third second of trading, the
NBBO narrows from $0.01 at $4.00 to $2.00 at $2.10. While the execution
occurred in a market with wide widths, there was no tight market within
the 10 seconds prior to execution. Accordingly, under the current rule,
the trade would not qualify for obvious error review, in part due to
the fact that there was only a single second of trading before the
execution. Under the proposal, since a tight market existed at some
point in the first 10 seconds of trading (i.e., in the third second),
the Exchange would be able to determine the Theoretical Price as
provided in Interpretation and Policy .03.
As another example, the NBBO for a series opens as $0.01 at $4.00.
In the seventh second of trading, a marketable limit order is received
to buy one contract and is executed at $4.00. Five seconds later (i.e.,
in the twelfth second of trading), the NBBO narrows from $0.01 at $4.00
to $2.00 at $2.10. While the execution occurred in a market with wide
widths, there was no tight market within 10 seconds prior to execution.
Accordingly, under the current Rule, the trade would not qualify for
obvious error review. Under the proposal, since no tight market existed
at any point during the first 10 seconds of trading (i.e., the narrow
market occurred in the twelfth second), the trade would not qualify for
obvious error review.
The proposed rule change would also better harmonize subsection
(b)(3) with subsection (b)(1) of Rule 20.6. Under subsection (b)(1),
the Exchange is permitted to determine the Theoretical Price for
transactions occurring as part of the Opening Process (as defined in
Rule 21.7) if there is no NBB or NBO for the affected series just prior
to the erroneous transaction. However, under the current version of
subsection (b)(3), a core trading transaction could occur in the same
wide market but the Exchange would not be permitted to determine the
Theoretical Price. Consider an example where, one second after the
Exchange opens a selected series, the NBBO is $1.00 at $5.00. At
9:30:03, a customer submits a marketable buy order to the Exchange and
pays $5.00. At 9:30:03, a different exchange runs an opening auction
that results in a customer paying $5.00 for the same selected series.
At 9:30:06, the NBBO changes from $1.00 at $5.00 to $1.35 at $1.45.
Under the current version of subsection (b)(3), the Exchange would not
be able to determine the Theoretical Price for the trade occurring
during core trading. However, the trade on the other exchange could be
submitted for review under subsection (b)(1) and that exchange would be
able to determine the Theoretical Price. If the proposed change to
subsection (b)(3) were approved, both of the trades occurring at
9:30:03 (on the Exchange during core trading and on another exchange
via auction) would also be entitled to the same review regarding the
same Theoretical Price based upon the same time.
The proposal would not change any obvious error review beyond the
first 10 seconds of an opening or re-opening.
Proposed Change to Subsection (c)(4)(B)
The Exchange proposes to amend subsection (c)(4)(B) of Rule 20.6--
the ``Adjust or Bust'' rule for Customer transactions in Obvious Error
situations--to adjust rather than nullify such orders, provided the
adjustment does not violate the Customer's limit price. Currently, the
Rule provides that in Obvious Error situations, transactions involving
non-Customers should be adjusted, while transactions involving
Customers are nullified, unless a certain condition applies.\9\ The
Industry Working Group has concluded that the treatment of these
transactions should be harmonized under the Rule, such that
transactions involving Customers may benefit from adjustment, just as
non-Customer transactions currently do,
[[Page 3639]]
except where such adjustment would violate the Customer's limit price;
in that instance, the trade would be nullified.
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\9\ Specifically, the current Rule provides at subsection
(c)(4)(C) that if a TPH has 200 or more Customer transactions under
review concurrently and the orders resulting in such transactions
were submitted during the course of two minutes or less, where at
least one party to the Obvious Error is a non-Customer, then the
Exchange will apply the non-Customer adjustment criteria found in
subsection (c)(4)(A).
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Specifically, the Exchange proposes to amend the text of subsection
(c)(4)(B) to add that where at least one party to the Obvious Error is
a Customer, ``the execution price of the transaction will be adjusted
by the Official pursuant to the table immediately above. Any Customer
Obvious Error exceeding 50 contracts will be subject to the Size
Adjustment Modifier defined in subparagraph (a)(4) of the Rule.
However, if such adjustment(s) would result in an execution price
higher (for buy transactions) or lower (for sell transactions) than the
Customer's limit price,'' the trade will be nullified. The ``table
immediately above'' referenced in the proposed text refers to the table
at current subsection (c)(4)(A), which provides for the adjustment of
prices a specified amount away from the Theoretical Price, rather than
adjusting the Theoretical Price.
The Exchange proposes no other changes at this time.
Implementation Date
The Exchange will announce the operative date of the proposed
changes to Members via notice with appropriate advanced notice, which
will be posted on the Exchange's website. The proposed changes will
become operative no sooner than six months from the date the Commission
approved the identical NYSE Arca filing \10\ in order for the
Exchange's implementation of the proposed rule changes to coincide with
the implementation of the same changes on all other options exchanges.
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\10\ See Securities Exchange Act Release No. 93818 (December 17,
2021), 86 FR 73009 (December 23, 2021) (SR-NYSEArca-2021-91).
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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.\11\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
\13\ Id.
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In particular, the Exchange believes that the proposed change to
subsection (b)(3) of Rule 20.6 would remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, protect investors and the public interest because it
provides a method for addressing Obvious Error Customer transactions
that occur in a wide market at the opening of trading. Generally, a
wide market is an indication of a lack of liquidity in the market such
that the market is unreliable. Current subsection (b)(3) recognizes
that a persistently wide quote (i.e., more than 10 seconds) should be
considered the reliable market regardless of its width but does not
address transactions that occur in a wide market in the first seconds
of trading, where there is no preceding 10-second period to reference.
Accordingly, in the first 10 seconds of trading, there is no
opportunity for a wide quote to have persisted for a sufficiently
lengthy period such that the market should consider it a reliable
market for the purposes of determining an Obvious Error transaction.
The proposed change would rectify this disparity and permit the
Exchange to consider whether a narrow quote is present at any time
during the 10-second period after an opening or re-opening. The
presence of such a narrow quote would indicate that the market has
gained sufficient liquidity and that the previous wide market was
unreliable, such that it would be appropriate for the Exchange to
determine the Theoretical Price of an Obvious Error transaction. In
this way, the proposed rule harmonizes the treatment of Customer
transactions that execute in an unreliable market at any point of the
trading day, by making them uniformly subject to Exchange determination
of the Theoretical Price.
The Exchange believes that the proposed change to subsection
(c)(4)(B) of the Rule would remove impediments to and perfect the
mechanism of a free and open market and a national market system and
enhance the protection of investors by harmonizing the treatment of
non-Customer transactions and Customer transactions under the Rule.
Under the current Rule, Obvious Error situations involving non-Customer
transactions are adjusted, while those involving Customer transactions
are generally nullified, unless they meet the additional requirements
of subsection (c)(4)(C) (i.e., where a TPH has 200 or more Customer
transactions under review concurrently and the orders resulting in such
transactions were submitted during the course of two minutes or less).
The proposal would harmonize the treatment of non-Customer and Customer
transactions by providing for the adjustment of all such transactions,
except where such adjustment would violate the Customer's limit price.
When it proposed the current rule in 2015, the Exchange believed
there were sound reasons for treating non-Customer transactions and
Customer transactions differently. At the time, the Exchange stated its
belief that ``Customers are not necessarily immersed in the day-to-day
trading of the markets, are less likely to be watching trading activity
in a particular option throughout the day, and may have limited funds
in their trading accounts,'' and that nullifying Obvious Error
transactions involving Customers would give Customers ``greater
protections'' than adjusting such transactions by eliminating the
possibility that a Customer's order will be adjusted to a significantly
different price. The Exchange also noted its belief that ``Customers
are . . . less likely to have engaged in significant hedging or other
trading activity based on earlier transactions, and thus, are less in
need of maintaining a position at an adjusted price than non-
Customers.'' \14\
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\14\ See Securities Exchange Act Release No. 74556 (March 20,
2015), 80 FR 16031 (March 26, 2015) (SR-BATS-2014-067).
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Those assumptions about Customer trading and hedging activity no
longer hold. The Exchange and the Industry Working Group believe that
over the course of the last five years, Customers that use options have
become more sophisticated, as retail broker-dealers have enhanced the
trading tools available. Pursuant to OCC data, volumes clearing in the
Customer range have expanded from 12,022,163 ADV in 2015 to 35,081,130
ADV in 2021. This increase in trading activity underscores the greater
understanding of options by Customers as a trading tool and its use in
the markets. Customers who trade options today largely are more
educated, have better trading tools, and have better access to
financial news than any
[[Page 3640]]
time prior.\15\ The proposed rule would extend the hedging protections
currently enjoyed by non-Customers to Customers, by allowing them to
maintain an option position at an adjusted price, which would in turn
prevent a cascading effect by maintaining the hedge relationship
between the option transaction and any other transactions in a related
security.
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\15\ See ``Retail Traders Adopt Options En Masse'' by Dan Raju,
available at https://www.nasdaq.com/articles/retail-traders-adopt-options-en-masse-2020-12-08.
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The Exchange believes that extending such hedging protections to
Customer transactions would remove impediments to and perfect the
mechanism of a free and open market and a national market system and
enhance the protection of investors by providing greater certainty of
execution for all participants to options transactions. Under the
current Rule, a Customer that believes its transaction was executed
pursuant to an Obvious Error may be disincentivized from submitting the
transaction for review, since during the review process, the Customer
would be uncertain whether the trade would be nullified, and if so,
whether market conditions would still permit the opportunity to execute
a related order at a better price after the nullification ruling is
finalized. In contrast, under the proposed rule, the Customer would
know that the only likely outcomes of submitting a trade to Obvious
Error review would be that the trade would stand or be re-executed at a
better price; the trade would only be nullified if the adjustment would
violate the order's limit. Similarly, under the current Rule, during
the review period, a market maker who traded contra to the Customer
would be uncertain if it should retain any position executed to hedge
the original trade, or attempt to unwind it, possibly at a significant
loss. Under the proposed rule change, this uncertainty is largely
eliminated, and the question would be whether the already executed and
hedged trade would be adjusted to a better price for the Customer, or
if it would stand as originally executed. In this way, the proposed
rule enhances the protection of investors and removes impediments to
and perfects the mechanism of a free and open market and a national
market system.
The proposed rule also addresses the concern the Exchange cited in
its 2015 filing that adjusting, rather than nullifying, Customer
transactions could lead to a Customer's order being adjusted to a
significantly different price. To address that concern, the proposed
rule would prevent Customer transactions from being adjusted to a price
that violates the order's limit; if the adjustment would violate a
Customer's limit, the trade would instead be nullified. The Exchange
believes it is in the best interest of investors to expand the
availability of adjustments to Customer transactions in all Obvious
Error situations except where the adjustment would violate the
Customer's limit price.
Further, the Exchange believes that, with respect to such proposed
adjustments to Customer transactions, it is appropriate to use the same
form of adjustment as is currently in place with respect to non-
Customer transactions as laid out in the table in subsection (c)(4)(A).
That is, the Exchange believes that it is appropriate to adjust to
prices a specified amount away from the Theoretical Price rather than
to adjust the Theoretical Price, even though the Exchange has
determined a given trade to be erroneous in nature, because the parties
in question should have had some expectation of execution at the price
or prices submitted. Also, it is common that by the time it is
determined that an Obvious Error has occurred, additional hedging and
trading activity has already occurred based on the executions that
previously happened. The Exchange believes that providing an adjustment
to the Theoretical Price in all cases would not appropriately
incentivize market participants to maintain appropriate controls to
avoid potential errors, while adjusting to prices a specified amount
away from the Theoretical Price would incentivize such behavior.
The Exchange believes that the proposal is not designed to permit
unfair discrimination between customers, issuers, brokers, or dealers.
The proposed change to subsection (b)(3) would apply to all instances
of a wide market occurring within the first 10 seconds of trading
followed by a narrow market at any point in the subsequent 10-second
period, regardless of the types of market participants involved in such
transactions. The proposed change to subsection (c)(4)(B) would
harmonize the treatment of Obvious Error transactions involving
Customers and non-Customers, no matter what type of market participants
those parties may be.
For these reasons, the Exchange believes that the proposal is
consistent with the Act.
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 proposed rule change is
identical to a NYSE Arca proposed rule change recently approved by the
Commission.\16\ The Exchange anticipates that the other options
exchanges will adopt substantively similar proposals, such that there
would be no burden on intermarket competition from the Exchange's
proposal. Accordingly, the proposed change is not meant to affect
competition among the options exchanges. For these reasons, the
Exchange believes that the proposed rule change reflects this
competitive environment and does not impose any undue burden on
intermarket competition.
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\16\ See Securities Exchange Act Release No. 93818 (December 17,
2021), 86 FR 73009 (December 23, 2021) (SR-NYSEArca-2021-91).
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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
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \17\ and
Rule 19b-4(f)(6) \18\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule
[[Page 3641]]
change should be approved or disapproved.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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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-CboeBZX-2022-004 on the subject line.
Paper Comments
Send paper comments in triplicate to Vanessa Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2022-004. 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-CboeBZX-2022-004 and should be submitted
on or before February 14, 2022.
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\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01220 Filed 1-21-22; 8:45 am]
BILLING CODE 8011-01-P
