Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 5.34(b) Related to Price Protections and Risk Controls for Complex Orders, 51723-51726 [2022-18095]
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Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 / Notices
Exemptive Order relating to section
18(f)(1) and the Applicants’ investments
in certain futures contracts and related
options, are superseded by rule 18f–4,
which became effective on February 19,
2021, and with which funds will have
to comply as of August 19, 2022. In
addition, as a general matter, a fund
trading in exchange-traded futures and
commodity options can rely on rule
17f–6, which permits funds to maintain
their assets with futures commission
merchants in connection with futures
contracts and commodity options traded
on U.S. and foreign exchanges.3
Section 38(a) of the Act states, in
relevant part, that the Commission shall
have authority to rescind an order as is
necessary or appropriate to the exercise
of the powers conferred upon the
Commission elsewhere in the Act.4 On
the basis of rules 18f–4 and 17f–6 and
the discussions in the releases adopting
each of those rules, and on the authority
granted to the Commission in section
38(a) of the Act, the Commission
intends to rescind the Exemptive Order.
The Commission intends to
rescind an order issued on May 16,
1984, on an application filed by VALIC
Timed Opportunity Fund, Inc. (the
‘‘Applicant’’), which granted
exemptions from sections 18(f)(1) and
17(f) of the Act (the ‘‘Exemptive Order
’’).1
Hearing or Notification of Hearing: An
order rescinding the Exemptive Order
will be issued unless the Commission
orders a hearing. Interested persons may
request a hearing by emailing the
Commission’s Secretary at SecretarysOffice@sec.gov. Hearing requests should
be received by the Commission by 5:30
p.m. on September 12, 2022. Hearing
requests should state the nature of the
writer’s interest, the reason for the
request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
emailing the Commission’s Secretary at
Secretarys-Office@sec.gov.
ADDRESSES: Secretary, Commission:
Secretarys-Office@sec.gov.
FOR FURTHER INFORMATION CONTACT:
Jessica Leonardo, Senior Counsel, at
202–551–7125, (Division of Investment
Management, Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
Commission issued the Exemptive
Order exempting the Applicant from the
provisions of section 18(f)(1) and
section 17(f) of the Act to the extent
necessary to permit it to invest in stock
index futures contracts and interest rate
futures contracts for hedging purposes.
The Exemptive Order was expressly
subject to compliance with the
undertakings made in the application.
On November 2, 2020, the
Commission adopted rule 18f–4, which
provides an updated and more
comprehensive approach to the
regulation of registered investment
company (‘‘fund’’) and business
development company use of
derivatives and certain other
transactions by replacing existing
Commission and staff guidance with a
codified, consistent regulatory
framework.2 The undertakings of the
Exemptive Order relating to section
18(f)(1) and the Applicant’s investments
in stock index futures contracts and
interest rate futures contracts are
superseded by rule 18f–4, which
Investment Company Act Release No. 34084 (Nov.
2, 2020) at https://www.sec.gov/rules/final/2020/ic34084.pdf.
3 See 17 CFR 270.17f–6; Custody of Investment
Company Assets with Futures Commissions
Merchants and Commodity Clearing Organizations,
Investment Company Act Release No. 22389 (Dec.
11, 1996), https://www.sec.gov/rules/final/ic22389.txt. We also note that based on filings on
Form N–CEN, no fund has reported that it relies on
the Exemptive Order.
4 15 U.S.C 80a–37(a). (stating in relevant part,
‘‘[t]he Commission shall have authority from time
to time to make, issue, amend, and rescind such
rules and regulations and such orders as are
necessary or appropriate . . . .’’).
1 VALIC Timed Opportunity Fund, Inc.,
Investment Company Act Release Nos. 13891 (Apr.
17, 1984) (notice) and 13943 (May 16, 1984) (order).
The Applicant has undergone several name changes
since the order was issued, and since December 31,
2001 has been named the ‘‘Asset Allocation Fund’’
(a series company of the registrant VALIC Company
I). See VALIC Company I, Statement of Additional
Information, Co, Oct. 1, 2015, https://www.sec.gov/
Archives/edgar/data/719423/000119312515327556/
d93331d485bpos.htm.
2 See Use of Derivatives by Registered Investment
Companies and Business Development Companies,
Investment Company Act Release No. 34084 (Nov.
2, 2020) at https://www.sec.gov/rules/final/2020/ic34084.pdf.
By the Commission,
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022–18101 Filed 8–22–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
34677; 812–05753]
VALIC Timed Opportunity Fund, Inc.;
Notice of Intention To Rescind Order
August 17, 2022.
Securities and Exchange
Commission (the ‘‘Commission’’).
ACTION: Notice of the Commission’s
intention to rescind an order pursuant
to section 38(a) of the Investment
Company Act of 1940 (‘‘Act’’).
AGENCY:
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SUMMARY:
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51723
became effective on February 19, 2021
and with which funds will have to
comply as of August 19, 2022. In
addition, as a general matter, a fund
trading in exchange-traded futures and
commodity options can rely on rule
17f–6, which permits funds to maintain
their assets with futures commission
merchants in connection with futures
contracts and commodity options traded
on U.S. and foreign exchanges.3
Section 38(a) of the Act states, in
relevant part, that the Commission shall
have authority to rescind an order as is
necessary or appropriate to the exercise
of the powers conferred upon the
Commission elsewhere in the Act.4 On
the basis of rules 18f–4 and 17f–6 and
the discussions in the releases adopting
each of those rules, and on the authority
granted to the Commission in section
38(a) of the Act, the Commission
intends to rescind the Exemptive Order.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022–18099 Filed 8–22–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95520; File No. SR–CBOE–
2022–041]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Amend Rule
5.34(b) Related to Price Protections
and Risk Controls for Complex Orders
August 17, 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 August 4,
2022, Cboe Exchange, Inc. (‘‘Exchange’’
or ‘‘Cboe Options’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
3 See 17 CFR 270.17f–6; Custody of Investment
Company Assets with Futures Commissions
Merchants and Commodity Clearing Organizations,
Investment Company Act Release No. 22389 (Dec.
11, 1996), https://www.sec.gov/rules/final/ic22389.txt. We also note that based on its filings on
Form N–CEN, the Applicant has not reported that
it relies on the Exemptive Order.
4 15 U.S.C. 80a–37(a). (stating in relevant part,
‘‘[t]he Commission shall have authority from time
to time to make, issue, amend, and rescind such
rules and regulations and such orders as are
necessary or appropriate . . . .’’).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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Federal Register / Vol. 87, No. 162 / Tuesday, August 23, 2022 / Notices
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
Rule 5.34(b) related to price protections
and risk controls for complex orders.
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://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
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The Exchange proposes to amend
Rule 5.34(b) related to price protections
and risk controls for complex orders.
Specifically, the proposed rule change
amends Rule 5.34(b)(4), which provides
for a buy strategy price check for
complex orders, to adopt an additional
buy strategy price check for certain
complex orders and amends Rule
5.34(b)(1) to provide clarity regarding
the definition of a skewed butterfly
spread.
First, the proposed rule change
amends Rule 5.34(b)(4) to adopt an
additional buy strategy price check for
complex orders.3 Specifically, the
3 Rule 5.34(b)(4) currently provides for one buy
strategy price check; that the System cancels or
rejects a limit complex order where all the
components of the strategy are to buy and the order
has (A) a price of zero, (B) a net credit price that
exceeds a pre-set buffer (which the Exchange
determines), or (C) a net debit price that is less than
the number of individual legs in the strategy (or
applicable ratio) multiplied by the minimum
increment. As a result of the proposed additional
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proposed rule change adopts Rule
5.34(b)(4)(B) to provide that the System
cancels or rejects a vertical or butterfly
spread 4 order to buy that has a price of
zero and is not designated as either IOC
or Direct to PAR, and the System does
not initiate a COA with a vertical or
butterfly spread order to buy that has a
price of zero unless the order is
auctioned via PAR. The Exchange may
apply this check on a class-by-class
basis.
The proposed buy strategy price
check is designed to prevent a
significant number of resting zeropriced vertical and butterfly buy
strategies from overwhelming the
complex order book (‘‘COB’’). The
Exchange has observed a significant and
increasing number of zero-priced
vertical and butterfly buy spread orders
in certain classes submitted to rest in
the COB, and does not believe the vast
majority of these orders to be
legitimately price.[sic] 5 The Exchange
notes that, while a zero-priced vertical
or butterfly buy spread order may be a
legitimately priced complex order, these
orders infrequently execute against an
opposing complex order and a majority
of such orders remain resting in the
COB. That is, it is rare that market
participants desire to sell such strategies
at a price of zero. The Exchange has
observed relatively few fills as
compared to the large number of these
zero-bid strategy orders that remain
resting in the COB.6 Such strategy
orders also create a substantial amount
of excess market data through which
market participants must parse. Indeed,
the Exchange notes that multiple
Trading Permit Holders (‘‘TPHs’’) have
expressed concern to the Exchange in
connection with the amount of excess
data that stems from the high number of
buy strategy price check, the proposed rule change
renumbers the current buy strategy price check in
Rule 5.34(b)(4) as 5.34(b)(4)(A).
4 For the purposes of Rule 5.34(b), the System
considers a true butterfly and a skewed butterfly to
be butterfly spread. The proposal explains this
definition in further detail below.
5 The Exchange believes that vertical and
butterfly spreads particularly are being used in this
manner given certain characteristics: a vertical
spread has the fewest number of legs (two) that
contain the same expiration and different strikes
and, therefore, is relatively less expensive and has
a greater chance of legging into the Simple book;
and a butterfly spread also has comparatively fewer
legs (three, as compared to a box spread, which has
four legs) that contain the same strike and
expiration [sic], and, given its structure, has a more
defined PnL (minimum and maximum possible
trading price limit) than other strategies, providing
it with more manageable risk.
6 From its analysis of such orders submitted from
January 2022 through July 2022, the Exchange
identified that approximately only 1.3% of the
approximately 177 million zero-priced buy vertical
and butterfly spread orders submitted to rest in the
COB received fills (including any in-part fills).
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zero-priced vertical and butterfly buy
strategies. In particular, the Exchange
understands that the high number of
zero-priced vertical and butterfly buy
strategies can impede liquidity
providers from executing against
marketable customer interest, as the
stream of incoming zero-priced vertical
and butterfly strategies creates new data
messages that liquidity providers must
process and synthesize into their
systems, interfering with liquidity
providers’ time and resources to
otherwise process, synthesize and react
to data messages in connection with
marketable customer interest. The
Exchange notes too that complex orders
also generate a COA auction message
before resting in the COB, and the COA
auction message volume resulting from
the influx of zero-priced vertical and
butterfly buy spread orders saturates the
auction market data and may deter
liquidity providers from providing
auction liquidity, which adversely
impacts customer orders. Additionally,
the Exchange has expended resources to
implement multiple System
enhancements in order to enable the
System to continue to handle the large
number of such strategies.
To illustrate this issue, the Exchange
reviewed the top 25 classes in which the
most orders were submitted during Q2
2022, and, of this sample of classes, the
Exchange identified 10 classes that
experienced (and continue to
experience) resting zero-priced vertical
and butterfly buy strategies
overwhelming their respective COBs.
On average, approximately 6.76% of the
orders submitted in these 10 classes
were zero-priced vertical and butterfly
buy strategies, whereas only
approximately 0.48% of the orders
submitted in the other 15 classes
(classes that the Exchange did not
identify as experiencing this issue) were
zero-priced vertical and butterfly buy
strategies. That is, the 10 classes in the
dataset reviewed by the Exchange and
identified as subject to this particular
issue, experienced approximately
1308% more zero-priced vertical and
butterfly buy spreads resting in their
COBs, on average, than the other 15
classes. Additionally, from an analysis
of zero-priced buy vertical and butterfly
spread orders submitted from January
2022 through July 2022, the Exchange
identified that approximately only 1.3%
of the approximately 177 million zeropriced buy vertical and butterfly spread
contracts submitted to rest in the COB
were filled. The Exchange further
identified that the majority of the zeropriced buy vertical and butterfly spread
orders were submitted by only a few
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firms, that, on average, received fills on
only approximately 0.04% of their zeropriced buy vertical and butterfly spread
contracts submitted to rest in the COB.
The proposed price check requires
zero-priced vertical and butterfly buy
spread orders to be designated only as
IOC 7 or Direct to PAR 8 to ensure that
such orders are either executed against
marketable orders immediately (in
whole or in part) and then cancelled
without resting in the COB or sent to
directly to a PAR workstation for
manual handling by a Floor Broker—
that is, also without resting in the COB.
Additionally, the proposed rule change
allows a zero-priced vertical and
butterfly buy spread order to initiate a
COA, only if such order is auctioned via
PAR.9 By allowing zero-priced vertical
and butterfly buy spread orders to be
submitted only as IOC or for manual
handling, including manual submission
into a COA, the proposed rule change
continues to provide execution
opportunities for orders with these
strategies that are legitimately priced at
zero, while preventing a significant
number of these orders from
overwhelming the COB, many of which
the Exchange believes do not have
legitimate prices. Additionally, the
proposed rule change provides that the
proposed price check may be
implemented on a class-by-class basis so
that the Exchange may determine
whether allowing zero-prices [sic]
vertical and butterfly buy spread orders
to rest in the COB is appropriate for
different classes, which may exhibit
different trading characteristics and
have different market models. The
Exchange notes that multiple provisions
governing price checks and risk controls
for complex orders permit the Exchange
to administer such price protections or
risk controls on a class-by-class basis.10
Second, the proposed rule change
updates the definition of skewed
butterfly spread to be consistent with
the manner in which the System defines
a skewed butterfly spread and what the
7 The terms ‘‘Immediate-or-Cancel’’ and ‘‘IOC’’
mean, for an order so designated, a limit order that
must execute in whole or in part as soon as the
System receives it; the System cancels and does not
post to the Book an IOC order (or unexecuted
portion) not executed immediately on the Exchange
or another options exchange. Users may designate
bulk messages as IOC. A User may not designate an
IOC order as Direct to PAR.
8 A ‘‘Direct to PAR’’ order is an order a User
designates to be routed directly to a specified PAR
workstation for manual handling. A User must
designate a Direct to PAR order as RTH Only.
9 To note, orders submitted manually to a COA
that do not execute at the end of the COA route
back to PAR for manual handling. See Rule
5.33(d)(5)(B) [sic].
10 See e.g., Rule 5.34(b)(3), (b)(6), (c)(1), and
(c)(10).
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System currently considers to be a
butterfly spread. Rule 5.34(b)(1)(B)
currently provides that, for the purposes
of Rule 5.34(b) (order and quote price
protection mechanisms and risk control
for complex orders), a butterfly spread
is a three-legged complex order with
two legs to buy (sell) the same number
of calls (puts) and one leg to sell (buy)
twice as many calls (puts), all with the
same expiration date but different
exercise prices, and the exercise price of
the middle leg is between the exercise
prices of the other legs. If the exercise
price of the middle leg is halfway 11
between the exercise prices of the other
legs, it is a ‘‘true’’ butterfly; otherwise,
it is a ‘‘skewed’’ butterfly. For the
purposes of Rule 5.34(b), the System
currently defines a skewed butterfly
more granularly than the current rule
text. The System considers a butterfly
spread to be a skewed butterfly where
the exercise price of the middle leg is
less in-the-money than the average of
the exercise prices of the other legs. To
illustrate, the System currently
considers, for example, a call butterfly
to buy one $40 call, sell two $65 calls,
and buy one $80 call to be a skewed
butterfly as the middle leg (selling $65
calls) is less in the money 12 than a $60
strike (which is the average of the $40
and $80 strikes) between the legs to buy
calls). Additionally, for the purposes of
Rule 5.34(b), the System currently
considers a true butterfly and a skewed
butterfly to be a butterfly spread. That
is, if a complex order is not a true
butterfly or a skewed butterfly, the
System does not consider it to be a
butterfly spread for the purposes of the
protection mechanisms and risk
controls rules. Therefore, to reflect more
accurately what the System considers to
be a skewed butterfly and a butterfly
spread generally, the proposed rule
change adopts language in Rule
5.34(b)(1) to provide, in relevant part,
that the System considers a true
butterfly and a skewed butterfly to be a
butterfly spread, and that if the exercise
price of the middle leg is less in-themoney than the average 13 of the
exercise prices of the other legs, it is a
‘‘skewed’’ butterfly. The proposed rule
11 See
infra.
call option is in the money if the price of
the underlying is higher than its strike price. Calls
increase in moneyness as the strike price decreases.
13 The proposed rule change also updates the
current definition of a true butterfly to refer to ‘‘the
average of’’ the exercise prices of the other legs,
instead of ‘‘halfway between’’ the exercise prices of
the other legs. The Exchange notes this verbiage
does not change the meaning of the rule text and
instead more specifically reflects the calculation
that arrives at the halfway point between the other
legs and is more consistent with proposed updated
definition of skewed butterfly.
12 A
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51725
change is merely a definitional
clarification to the rule text and does
not alter any current System
functionality, but instead adds clarity to
the Rule by more accurately reflecting
the manner in which the System
currently defines a skewed butterfly and
a butterfly spread.
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.14 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 15 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) 16 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 rule change removes
impediments to and perfects the
mechanism of a free and open market
and national market system, and, in
general, protects investors and the
public interest as it is designed to
prevent significant numbers of resting
zero-priced vertical and butterfly buy
spread orders from overwhelming the
COB, many of which are likely not
legitimately priced given their pattern of
trading. As described above, the
Exchange has recently observed a
significant and increasing number of
zero-priced vertical and butterfly buy
spread orders in certain classes
submitted to rest in the COB. Because
these orders are infrequently executed,
the majority of such orders remain
resting in the COB, creating a
substantial amount of excess market
data, which requires market participants
and the Exchange to unessentially
expend additional resources to handle
such data and which may impede
14 15
15 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
16 Id.
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liquidity providers from submitting
liquidity in response to otherwise
marketable interest, including resting
customer orders, and auctions. The
Exchange again notes that multiple
TPHs have expressed concern to the
Exchange in connection with the
amount of excess data that stems from
the high number of zero-priced vertical
and butterfly buy strategies. By allowing
zero-priced vertical and butterfly buy
spread orders to be submitted only as
IOC or for manual handling, including
manual submission to COA, the
proposed rule change continues to
provide execution opportunities for
these strategy orders, while preventing
an influx of such orders from
inundating the COB. Also, the Exchange
believes that the proposed rule change
to permit the Exchange to apply the
proposed price check on a class basis
protects investors as the proposed price
check, like other price protections and
risk controls permitted under the Rules
on a class basis,17 may be appropriate
for different classes as different classes
may exhibit different trading
characteristics and have different
market models.
Further, the Exchange believes that
the proposed rule change to clarify the
definition of a skewed butterfly and
butterfly spread removes impediments
to and perfects the mechanism of a free
and open market and national market
system by amending Rule 5.34(b)(1)(B)
to be more consistent with the manner
in which the System currently defines a
skewed butterfly and a butterfly spread
for the purposes of the protection
mechanisms and risk controls rules. The
proposed rule change is merely a
definitional clarification intended to
more accurately reflect how the System
currently works, thereby increasing
transparency in the Rule and ultimately
benefitting investors. The proposed
clarifications do not alter any current
functionality, but instead provides
clarity to the Rule by more precisely
defining a skewed butterfly and a
butterfly spread.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
price check for zero-priced vertical and
butterfly buy spread orders will impose
any burden on intramarket competition
because the proposed priced check will
apply to all such orders in the same
17 See
supra note 10.
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manner. The proposed price protection
will benefit investors and the
marketplace generally by preventing
significant numbers of resting zeropriced vertical and butterfly buy spread
orders from overwhelming the COB,
many of which are likely not
legitimately priced, while continuing to
provide execution opportunities for
such orders that are legitimately priced
at zero via the IOC instruction or
manual handling. The Exchange does
not believe the proposed price check
will impose any burden on intermarket
competition because it is designed
solely to mitigate the adverse impacts of
an increasingly significant number of
certain, infrequently executed complex
orders resting in the COB. Further, the
proposed rule change to clarify the
definition of skewed butterfly and
butterfly spread in Rule 5.34(b)(1)(B) is
not competitive in nature but are merely
a definitional clarification in the Rule,
consistent with existing System
functionality and intended to provide
clarity to the Rule by more accurately
reflecting the System’s current
definition of a skewed butterfly and a
butterfly spread for the purposes of the
purposes of the protection mechanisms
and risk controls rules. As stated, the
proposed clarification does not alter any
current functionality.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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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–2022–041 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2022–041. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2022–041, and
should be submitted on or before
September 13, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022–18095 Filed 8–22–22; 8:45 am]
BILLING CODE 8011–01–P
18 17
E:\FR\FM\23AUN1.SGM
CFR 200.30–3(a)(12).
23AUN1
]]>Agencies
[Federal Register Volume 87, Number 162 (Tuesday, August 23, 2022)]
[Notices]
[Pages 51723-51726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-18095]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95520; File No. SR-CBOE-2022-041]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Rule 5.34(b) Related to Price
Protections and Risk Controls for Complex Orders
August 17, 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 August 4, 2022, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to
[[Page 51724]]
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rule 5.34(b) related to price protections and risk controls
for complex orders. 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://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 5.34(b) related to price
protections and risk controls for complex orders. Specifically, the
proposed rule change amends Rule 5.34(b)(4), which provides for a buy
strategy price check for complex orders, to adopt an additional buy
strategy price check for certain complex orders and amends Rule
5.34(b)(1) to provide clarity regarding the definition of a skewed
butterfly spread.
First, the proposed rule change amends Rule 5.34(b)(4) to adopt an
additional buy strategy price check for complex orders.\3\
Specifically, the proposed rule change adopts Rule 5.34(b)(4)(B) to
provide that the System cancels or rejects a vertical or butterfly
spread \4\ order to buy that has a price of zero and is not designated
as either IOC or Direct to PAR, and the System does not initiate a COA
with a vertical or butterfly spread order to buy that has a price of
zero unless the order is auctioned via PAR. The Exchange may apply this
check on a class-by-class basis.
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\3\ Rule 5.34(b)(4) currently provides for one buy strategy
price check; that the System cancels or rejects a limit complex
order where all the components of the strategy are to buy and the
order has (A) a price of zero, (B) a net credit price that exceeds a
pre-set buffer (which the Exchange determines), or (C) a net debit
price that is less than the number of individual legs in the
strategy (or applicable ratio) multiplied by the minimum increment.
As a result of the proposed additional buy strategy price check, the
proposed rule change renumbers the current buy strategy price check
in Rule 5.34(b)(4) as 5.34(b)(4)(A).
\4\ For the purposes of Rule 5.34(b), the System considers a
true butterfly and a skewed butterfly to be butterfly spread. The
proposal explains this definition in further detail below.
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The proposed buy strategy price check is designed to prevent a
significant number of resting zero-priced vertical and butterfly buy
strategies from overwhelming the complex order book (``COB''). The
Exchange has observed a significant and increasing number of zero-
priced vertical and butterfly buy spread orders in certain classes
submitted to rest in the COB, and does not believe the vast majority of
these orders to be legitimately price.[sic] \5\ The Exchange notes
that, while a zero-priced vertical or butterfly buy spread order may be
a legitimately priced complex order, these orders infrequently execute
against an opposing complex order and a majority of such orders remain
resting in the COB. That is, it is rare that market participants desire
to sell such strategies at a price of zero. The Exchange has observed
relatively few fills as compared to the large number of these zero-bid
strategy orders that remain resting in the COB.\6\ Such strategy orders
also create a substantial amount of excess market data through which
market participants must parse. Indeed, the Exchange notes that
multiple Trading Permit Holders (``TPHs'') have expressed concern to
the Exchange in connection with the amount of excess data that stems
from the high number of zero-priced vertical and butterfly buy
strategies. In particular, the Exchange understands that the high
number of zero-priced vertical and butterfly buy strategies can impede
liquidity providers from executing against marketable customer
interest, as the stream of incoming zero-priced vertical and butterfly
strategies creates new data messages that liquidity providers must
process and synthesize into their systems, interfering with liquidity
providers' time and resources to otherwise process, synthesize and
react to data messages in connection with marketable customer interest.
The Exchange notes too that complex orders also generate a COA auction
message before resting in the COB, and the COA auction message volume
resulting from the influx of zero-priced vertical and butterfly buy
spread orders saturates the auction market data and may deter liquidity
providers from providing auction liquidity, which adversely impacts
customer orders. Additionally, the Exchange has expended resources to
implement multiple System enhancements in order to enable the System to
continue to handle the large number of such strategies.
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\5\ The Exchange believes that vertical and butterfly spreads
particularly are being used in this manner given certain
characteristics: a vertical spread has the fewest number of legs
(two) that contain the same expiration and different strikes and,
therefore, is relatively less expensive and has a greater chance of
legging into the Simple book; and a butterfly spread also has
comparatively fewer legs (three, as compared to a box spread, which
has four legs) that contain the same strike and expiration [sic],
and, given its structure, has a more defined PnL (minimum and
maximum possible trading price limit) than other strategies,
providing it with more manageable risk.
\6\ From its analysis of such orders submitted from January 2022
through July 2022, the Exchange identified that approximately only
1.3% of the approximately 177 million zero-priced buy vertical and
butterfly spread orders submitted to rest in the COB received fills
(including any in-part fills).
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To illustrate this issue, the Exchange reviewed the top 25 classes
in which the most orders were submitted during Q2 2022, and, of this
sample of classes, the Exchange identified 10 classes that experienced
(and continue to experience) resting zero-priced vertical and butterfly
buy strategies overwhelming their respective COBs. On average,
approximately 6.76% of the orders submitted in these 10 classes were
zero-priced vertical and butterfly buy strategies, whereas only
approximately 0.48% of the orders submitted in the other 15 classes
(classes that the Exchange did not identify as experiencing this issue)
were zero-priced vertical and butterfly buy strategies. That is, the 10
classes in the dataset reviewed by the Exchange and identified as
subject to this particular issue, experienced approximately 1308% more
zero-priced vertical and butterfly buy spreads resting in their COBs,
on average, than the other 15 classes. Additionally, from an analysis
of zero-priced buy vertical and butterfly spread orders submitted from
January 2022 through July 2022, the Exchange identified that
approximately only 1.3% of the approximately 177 million zero-priced
buy vertical and butterfly spread contracts submitted to rest in the
COB were filled. The Exchange further identified that the majority of
the zero-priced buy vertical and butterfly spread orders were submitted
by only a few
[[Page 51725]]
firms, that, on average, received fills on only approximately 0.04% of
their zero-priced buy vertical and butterfly spread contracts submitted
to rest in the COB.
The proposed price check requires zero-priced vertical and
butterfly buy spread orders to be designated only as IOC \7\ or Direct
to PAR \8\ to ensure that such orders are either executed against
marketable orders immediately (in whole or in part) and then cancelled
without resting in the COB or sent to directly to a PAR workstation for
manual handling by a Floor Broker--that is, also without resting in the
COB. Additionally, the proposed rule change allows a zero-priced
vertical and butterfly buy spread order to initiate a COA, only if such
order is auctioned via PAR.\9\ By allowing zero-priced vertical and
butterfly buy spread orders to be submitted only as IOC or for manual
handling, including manual submission into a COA, the proposed rule
change continues to provide execution opportunities for orders with
these strategies that are legitimately priced at zero, while preventing
a significant number of these orders from overwhelming the COB, many of
which the Exchange believes do not have legitimate prices.
Additionally, the proposed rule change provides that the proposed price
check may be implemented on a class-by-class basis so that the Exchange
may determine whether allowing zero-prices [sic] vertical and butterfly
buy spread orders to rest in the COB is appropriate for different
classes, which may exhibit different trading characteristics and have
different market models. The Exchange notes that multiple provisions
governing price checks and risk controls for complex orders permit the
Exchange to administer such price protections or risk controls on a
class-by-class basis.\10\
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\7\ The terms ``Immediate-or-Cancel'' and ``IOC'' mean, for an
order so designated, a limit order that must execute in whole or in
part as soon as the System receives it; the System cancels and does
not post to the Book an IOC order (or unexecuted portion) not
executed immediately on the Exchange or another options exchange.
Users may designate bulk messages as IOC. A User may not designate
an IOC order as Direct to PAR.
\8\ A ``Direct to PAR'' order is an order a User designates to
be routed directly to a specified PAR workstation for manual
handling. A User must designate a Direct to PAR order as RTH Only.
\9\ To note, orders submitted manually to a COA that do not
execute at the end of the COA route back to PAR for manual handling.
See Rule 5.33(d)(5)(B) [sic].
\10\ See e.g., Rule 5.34(b)(3), (b)(6), (c)(1), and (c)(10).
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Second, the proposed rule change updates the definition of skewed
butterfly spread to be consistent with the manner in which the System
defines a skewed butterfly spread and what the System currently
considers to be a butterfly spread. Rule 5.34(b)(1)(B) currently
provides that, for the purposes of Rule 5.34(b) (order and quote price
protection mechanisms and risk control for complex orders), a butterfly
spread is a three-legged complex order with two legs to buy (sell) the
same number of calls (puts) and one leg to sell (buy) twice as many
calls (puts), all with the same expiration date but different exercise
prices, and the exercise price of the middle leg is between the
exercise prices of the other legs. If the exercise price of the middle
leg is halfway \11\ between the exercise prices of the other legs, it
is a ``true'' butterfly; otherwise, it is a ``skewed'' butterfly. For
the purposes of Rule 5.34(b), the System currently defines a skewed
butterfly more granularly than the current rule text. The System
considers a butterfly spread to be a skewed butterfly where the
exercise price of the middle leg is less in-the-money than the average
of the exercise prices of the other legs. To illustrate, the System
currently considers, for example, a call butterfly to buy one $40 call,
sell two $65 calls, and buy one $80 call to be a skewed butterfly as
the middle leg (selling $65 calls) is less in the money \12\ than a $60
strike (which is the average of the $40 and $80 strikes) between the
legs to buy calls). Additionally, for the purposes of Rule 5.34(b), the
System currently considers a true butterfly and a skewed butterfly to
be a butterfly spread. That is, if a complex order is not a true
butterfly or a skewed butterfly, the System does not consider it to be
a butterfly spread for the purposes of the protection mechanisms and
risk controls rules. Therefore, to reflect more accurately what the
System considers to be a skewed butterfly and a butterfly spread
generally, the proposed rule change adopts language in Rule 5.34(b)(1)
to provide, in relevant part, that the System considers a true
butterfly and a skewed butterfly to be a butterfly spread, and that if
the exercise price of the middle leg is less in-the-money than the
average \13\ of the exercise prices of the other legs, it is a
``skewed'' butterfly. The proposed rule change is merely a definitional
clarification to the rule text and does not alter any current System
functionality, but instead adds clarity to the Rule by more accurately
reflecting the manner in which the System currently defines a skewed
butterfly and a butterfly spread.
---------------------------------------------------------------------------
\11\ See infra.
\12\ A call option is in the money if the price of the
underlying is higher than its strike price. Calls increase in
moneyness as the strike price decreases.
\13\ The proposed rule change also updates the current
definition of a true butterfly to refer to ``the average of'' the
exercise prices of the other legs, instead of ``halfway between''
the exercise prices of the other legs. The Exchange notes this
verbiage does not change the meaning of the rule text and instead
more specifically reflects the calculation that arrives at the
halfway point between the other legs and is more consistent with
proposed updated definition of skewed butterfly.
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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.\14\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \15\ 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) \16\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
\16\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes that the proposed rule change
removes impediments to and perfects the mechanism of a free and open
market and national market system, and, in general, protects investors
and the public interest as it is designed to prevent significant
numbers of resting zero-priced vertical and butterfly buy spread orders
from overwhelming the COB, many of which are likely not legitimately
priced given their pattern of trading. As described above, the Exchange
has recently observed a significant and increasing number of zero-
priced vertical and butterfly buy spread orders in certain classes
submitted to rest in the COB. Because these orders are infrequently
executed, the majority of such orders remain resting in the COB,
creating a substantial amount of excess market data, which requires
market participants and the Exchange to unessentially expend additional
resources to handle such data and which may impede
[[Page 51726]]
liquidity providers from submitting liquidity in response to otherwise
marketable interest, including resting customer orders, and auctions.
The Exchange again notes that multiple TPHs have expressed concern to
the Exchange in connection with the amount of excess data that stems
from the high number of zero-priced vertical and butterfly buy
strategies. By allowing zero-priced vertical and butterfly buy spread
orders to be submitted only as IOC or for manual handling, including
manual submission to COA, the proposed rule change continues to provide
execution opportunities for these strategy orders, while preventing an
influx of such orders from inundating the COB. Also, the Exchange
believes that the proposed rule change to permit the Exchange to apply
the proposed price check on a class basis protects investors as the
proposed price check, like other price protections and risk controls
permitted under the Rules on a class basis,\17\ may be appropriate for
different classes as different classes may exhibit different trading
characteristics and have different market models.
---------------------------------------------------------------------------
\17\ See supra note 10.
---------------------------------------------------------------------------
Further, the Exchange believes that the proposed rule change to
clarify the definition of a skewed butterfly and butterfly spread
removes impediments to and perfects the mechanism of a free and open
market and national market system by amending Rule 5.34(b)(1)(B) to be
more consistent with the manner in which the System currently defines a
skewed butterfly and a butterfly spread for the purposes of the
protection mechanisms and risk controls rules. The proposed rule change
is merely a definitional clarification intended to more accurately
reflect how the System currently works, thereby increasing transparency
in the Rule and ultimately benefitting investors. The proposed
clarifications do not alter any current functionality, but instead
provides clarity to the Rule by more precisely defining a skewed
butterfly and a butterfly spread.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed price check for zero-priced vertical and butterfly
buy spread orders will impose any burden on intramarket competition
because the proposed priced check will apply to all such orders in the
same manner. The proposed price protection will benefit investors and
the marketplace generally by preventing significant numbers of resting
zero-priced vertical and butterfly buy spread orders from overwhelming
the COB, many of which are likely not legitimately priced, while
continuing to provide execution opportunities for such orders that are
legitimately priced at zero via the IOC instruction or manual handling.
The Exchange does not believe the proposed price check will impose any
burden on intermarket competition because it is designed solely to
mitigate the adverse impacts of an increasingly significant number of
certain, infrequently executed complex orders resting in the COB.
Further, the proposed rule change to clarify the definition of skewed
butterfly and butterfly spread in Rule 5.34(b)(1)(B) is not competitive
in nature but are merely a definitional clarification in the Rule,
consistent with existing System functionality and intended to provide
clarity to the Rule by more accurately reflecting the System's current
definition of a skewed butterfly and a butterfly spread for the
purposes of the purposes of the protection mechanisms and risk controls
rules. As stated, the proposed clarification does not alter any current
functionality.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2022-041 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2022-041. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2022-041, and should be submitted
on or before September 13, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-18095 Filed 8-22-22; 8:45 am]
BILLING CODE 8011-01-P
