Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 6.5 To Improve the Operation of the Rule, 3592-3597 [2022-01222]
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Federal Register / Vol. 87, No. 15 / Monday, January 24, 2022 / Notices
engineering discipline. Historically,
awards have been made for such diverse
projects as accelerators, telescopes,
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networked sensors and instrumentation.
The growth and diversification of
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award expectations and comply with
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The BSR Guide is designed for use by
both our customer community and NSF
staff for guidance in executing these
reviews. The BSR Guide defines the
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overall framework and structure and
summarizes the details outlined in the
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Management principles and practices
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The submission of Award Recipient
and Project administrative business
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NSF has approximately twenty (20)
Major Facilities in various stages of
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Assessment and the assessment of
various risks factors.
Burden to the Public: The Foundation
estimates that approximately one and
half (1.5) Full Time Equivalents (FTEs)
are necessary for a major facility to
respond to the requirements of a BSR;
or 3,120 hours. With an average of four
(4) BSRs conducted a year, this equates
to roughly 12,000 public burden hours
annually.
Dated: January 19, 2022.
Suzanne H. Plimpton,
Reports Clearance Officer,National Science
Foundation.
[FR Doc. 2022–01249 Filed 1–21–22; 8:45 am]
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93990; SR–CBOE–2022–
003]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rule 6.5 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 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Exchange filed the proposal as a ‘‘noncontroversial’’ 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.
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 6.5 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 Exchange, Inc.
*
*
*
*
*
Rule 6.5. 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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
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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
.08 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.
Minimum
amount
Bid price at time of trade
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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 ........................................
$0.75
1.25
1.50
2.50
3.00
4.50
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 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
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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 subparagraph (4)(C) below.
*
*
*
*
*
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegal
RegulatoryHome.aspx), at the
Exchange’s Office of the Secretary, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this rule change is to
amend Rule 6.5, ‘‘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 6.5 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 6.5 to adjust,
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3593
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 6.5 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
6.5, Interpretation and Policy .08,7
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
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 6.5
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 6.5
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
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 Nos. 74898
(May 7, 2015), 80 FR 27354 (May 13, 2015) (SR–
CBOE–2015–039); and 80040 (February 14, 2017),
82 FR 11248 (February 21, 2017) (SR–CBOE–2016–
088).
7 See Securities Exchange Act Release No. 81516
(August 31, 2017), 82 FR 42375 (September 7, 2017)
(SR–CBOE–2017–058).
8 See Securities Exchange Act Release No. 74898
(May 7, 2015), 80 FR 27354 (May 13, 2015) (SR–
CBOE–2015–039).
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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)’’:
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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.
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
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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
.08.
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 6.5. 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 5.31) 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
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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 6.5—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,
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.
Implementation Date
The Exchange will announce the
operative date of the proposed changes
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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in accordance with Rule 1.5.10 The
proposed changes will become operative
no sooner than six months from the date
the Commission approved the identical
NYSE Arca filing 11 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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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.12 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 13 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) 14 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 6.5 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)
10 Pursuant to Rule 1.5, the Exchange announces
to TPHs all determinations it makes pursuant to the
Rules via: (1) Specifications, notices, or regulatory
circulars with appropriate advanced notice, which
are posted on the Exchange’s website, or as
otherwise provided in the Rules; (2) electronic
message; or (3) other communication method as
provided in the Rules.
11 See Securities Exchange Act Release No. 93818
(December 17, 2021), 86 FR 73009 (December 23,
2021) (SR–NYSEArca–2021–91).
12 15 U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(5).
14 Id.
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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
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,
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3595
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.’’ 15
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
time prior.16 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
15 See Securities Exchange Act Release No. 74898
(May 7, 2015), 80 FR 27354 (May 13, 2015) (SR–
CBOE–2015–039).
16 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.
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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
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18:11 Jan 21, 2022
Jkt 256001
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.17
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.
17 See Securities Exchange Act Release No. 93818
(December 17, 2021), 86 FR 73009 (December 23,
2021) (SR–NYSEArca–2021–91).
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
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 18 and Rule 19b–4(f)(6) 19
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
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2022–003 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–CBOE–2022–003. 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
18 15
U.S.C. 78s(b)(3)(A).
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.
19 17
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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–2022–003 and
should be submitted on or before
February 14, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–01222 Filed 1–21–22; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–93995; File No. SR–
CboeEDGA–2022–001]
jspears on DSK121TN23PROD with NOTICES1
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 4,
2022, Cboe EDGA Exchange, Inc.
(‘‘Exchange’’ or ‘‘EDGA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
VerDate Sep<11>2014
18:11 Jan 21, 2022
Jkt 256001
Cboe EDGA Exchange, Inc. (‘‘EDGA’’
or the ‘‘Exchange’’) is filing with the
Securities and Exchange Commission
(the ‘‘Commission’’) a proposed rule
change to amend the fees applicable to
various market data products. The text
of the proposed rule change is provided
in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/edga/),
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.
1. Purpose
Self-Regulatory Organizations; Cboe
EDGA Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend the
Fees Applicable to Various Market
Data Products
1 15
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
20 17
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
The Exchange proposes to amend the
Market Data section applicable to its
equities trading platform (‘‘EDGA
Equities’’). Particularly, the Exchange
proposes to (i) adopt a New External
Distributor Credit applicable to Cboe
One Premium, and (ii) extend the New
External Distributor Credit applicable to
EDGA Summary Depth Feed from one
(1) month to three (3) months.
By way of background, Cboe One
Premium is a data feed that
disseminates, on a real-time basis, the
aggregate best bid and offer (‘‘BBO’’) of
all displayed orders for securities traded
on EDGA and its affiliated exchanges
(i.e., Cboe BYX Exchange, Inc. (‘‘BYX’’),
Cboe EDGX Exchange, Inc. (‘‘EDGX’’),
and Cboe BZX Exchange, Inc. (‘‘BZX’’))
and contains optional functionality
which enables recipients to receive
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
3597
aggregated two-sided quotations from
EDGA and its affiliated equities
exchanges for up to five (5) price levels.3
Currently, the Exchange charges an
external distribution fee of $12,500 per
month to External Distributors 4 of Cboe
One Premium. The Exchange now
proposes to adopt a New External
Distributor Credit which provide that
new External Distributors of the Cboe
One Premium Feed will not be charged
an External Distributor Fee for their first
three (3) months in order to allow them
to enlist new Users to receive the Cboe
One Summary[sic] Feed. The Exchange
believes the proposal will incentivize
External Distributors to enlist new users
to receive Cboe One Premium. To
ensure consistency across the Cboe
Equity Exchanges, BZX, BYX, and
EDGX will be filing companion
proposals to reflect this proposal in
their respective fee schedules.
The Exchange notes that it offers
similar credits for other market data
products. For example, the Exchange
currently offers a one (1) month New
External Distributor Credit applicable to
Cboe One Summary,5 which is a data
feed that disseminates, on a real-time
basis, the aggregate BBO of all displayed
orders for securities traded on EDGA
and its affiliated equities exchanges and
also contains individual last sale
information for the EDGA and its
affiliated equities exchanges.6 It also
offers a New External Distributor Credit
of one (1) month for subscribers of
EDGA Summary Depth, which is a data
feed that offers aggregated two-sided
quotations for all displayed orders
entered into the System for up to five (5)
price levels. EDGA Summary Depth also
contains the individual last sale
information, Market Status, Trading
3 The Cboe Aggregated Market (‘‘Cboe One’’) Feed
is a data feed that contains the aggregate best bid
and offer of all displayed orders for securities
traded on the Exchange and its affiliated exchanges
(i.e., BYX, BZX, and EDGX). See Exchange Rule
13.8(b). The Cboe One Feed contains optional
functionality which enables recipients to receive
aggregated two-sided quotations from the Cboe
Equities Exchanges for up to five (5) price levels
(‘‘Cboe One Premium Feed’’). See Exchange Rule
13.8(b)(i). The Cboe One Premium external
distribution fee is equal to the aggregate EDGA
Summary Depth, BYX Summary Depth, EDGA
Summary Depth, and BZX Summary Depth external
distribution fees.
4 An External Distributor of an Exchange Market
Data product is a Distributor that receives the
Exchange Market Data product and then distributes
that data to a third party or one or more Users
outside the Distributor’s own entity.
5 See Exchange Rule 13.8(b).
6 The Exchange notes that when it first adopted
the New External Distributor Credit for Cboe One
Summary, it similarly applied for a new External
Distributor’s first three (3) months. See Securities
Exchange Act Release No. 74283 (February 18,
2015), 80 FR 9809 (February 24, 2015) (SR–EDGA–
2015–09).
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]]>Agencies
[Federal Register Volume 87, Number 15 (Monday, January 24, 2022)]
[Notices]
[Pages 3592-3597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01222]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93990; SR-CBOE-2022-003]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rule 6.5 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 Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I
and II below, which Items have been prepared by the Exchange. The
Exchange filed the proposal 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).
---------------------------------------------------------------------------
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 6.5 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 Exchange, Inc.
* * * * *
Rule 6.5. 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
[[Page 3593]]
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 .08 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.
------------------------------------------------------------------------
Minimum
Bid price at time of trade 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 subparagraph (4)(C) below.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule change is to amend Rule 6.5,
``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 6.5 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 6.5 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 6.5 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 6.5,
Interpretation and Policy .08,\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 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 Nos. 74898 (May 7,
2015), 80 FR 27354 (May 13, 2015) (SR-CBOE-2015-039); and 80040
(February 14, 2017), 82 FR 11248 (February 21, 2017) (SR-CBOE-2016-
088).
\7\ See Securities Exchange Act Release No. 81516 (August 31,
2017), 82 FR 42375 (September 7, 2017) (SR-CBOE-2017-058).
---------------------------------------------------------------------------
Similarly, subsection (b)(3) of Rule 6.5 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. 74898 (May 7, 2015),
80 FR 27354 (May 13, 2015) (SR-CBOE-2015-039).
---------------------------------------------------------------------------
In recent discussions, the Industry Working Group has identified
proposed changes to subsection (b)(3) of Rule 6.5 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
[[Page 3594]]
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 .08.
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 6.5. 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 5.31) 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 6.5--
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, 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
[[Page 3595]]
in accordance with Rule 1.5.\10\ The proposed changes will become
operative no sooner than six months from the date the Commission
approved the identical NYSE Arca filing \11\ 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\ Pursuant to Rule 1.5, the Exchange announces to TPHs all
determinations it makes pursuant to the Rules via: (1)
Specifications, notices, or regulatory circulars with appropriate
advanced notice, which are posted on the Exchange's website, or as
otherwise provided in the Rules; (2) electronic message; or (3)
other communication method as provided in the Rules.
\11\ 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.\12\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ Id.
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In particular, the Exchange believes that the proposed change to
subsection (b)(3) of Rule 6.5 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.'' \15\
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\15\ See Securities Exchange Act Release No. 74898 (May 7,
2015), 80 FR 27354 (May 13, 2015) (SR-CBOE-2015-039).
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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 time prior.\16\ 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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\16\ 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
[[Page 3596]]
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.\17\ 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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\17\ See Securities Exchange Act Release No. 93818 (December 17,
2021), 86 FR 73009 (December 23, 2021) (SR-NYSEArca-2021-91).
---------------------------------------------------------------------------
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 \18\ and
Rule 19b-4(f)(6) \19\ 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 change should be approved or disapproved.
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 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-CBOE-2022-003 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-CBOE-2022-003. 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
[[Page 3597]]
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-2022-003 and should be submitted on or before February 14, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01222 Filed 1-21-22; 8:45 am]
BILLING CODE 8011-01-P
