Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 5.34 Concerning Drill-Through Protection and Fat Finger Check, 58872-58876 [2022-20944]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 187 (Wednesday, September 28, 2022)]
[Notices]
[Pages 58872-58876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20944]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95870; File No. SR-CBOE-2022-046]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 5.34 Concerning Drill-Through Protection and Fat Finger Check

September 22, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 15, 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 solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 5.34. 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,

[[Page 58873]]

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. Specifically, the 
Exchange proposes to amend its drill-through protection mechanism for 
both simple and complex orders and its limit order fat finger check.
    The Exchange proposes to amend Rule 5.34(a)(4) and (b)(6) to update 
the drill-through protection mechanism for simple and complex orders, 
respectively, to provide orders with additional execution 
opportunities. Pursuant to the current simple drill-through protection, 
if a buy (sell) order enters the Book at the conclusion of the opening 
auction process or would execute or post to the Book at the time of 
order entry, the System executes the order up to a buffer amount (the 
Exchange determines the buffer amount on a class and premium basis) 
above (below) the offer (bid) limit of the opening collar \3\ or the 
national best bid (``NBO'') (national best offer (``NBB'')) that 
existed at the time of order entry, respectively (the ``drill-through 
price'').\4\ The System enters a limit order (as long as it has a Time-
in-Force of Day, Good-til-Cancelled or Good-til-Day) (or unexecuted 
portion) not executed pursuant to the provision in the immediately 
preceding sentence in the Book with a displayed equal to the drill-
through price.\5\ The order (or unexecuted portion) rests in the Book 
at the drill-through price \6\ until the earlier to occur of its full 
execution and the end of the duration of a number of consecutive time 
periods (the Exchange determines on a class-by-class basis the number 
of periods, which may not exceed five, and the length of the time 
period in milliseconds, which may not exceed three seconds).\7\
---------------------------------------------------------------------------

    \3\ See Rule 5.31(a) for the definition of Opening Collars.
    \4\ See Rule 5.34(a)(4)(A).
    \5\ See Rule 5.34(a)(4)(C).
    \6\ The proposed rule change adds ``at the drill-through price'' 
in the first sentence of subparagraph (a)(1)(C)(i), which is a 
nonsubstantive change, as it reflects current functionality and is 
stated in the introductory paragraph to Rule 5.34(a)(1)(C). The 
proposed rule change merely includes this detail in the next portion 
of the rule for additional clarity.
    \7\ See Rule 5.34(a)(4)(C)(i).
---------------------------------------------------------------------------

    The proposed rule change amends Rule 5.34(a)(4)(C)(i) to eliminate 
the concept that there will be a maximum number of time periods and 
proposes that the order (or unexecuted portion) will rest in the Book 
at the drill-through price for the duration of consecutive time 
periods.\8\ The proposed rule change makes conforming changes to 
subparagraph (ii) by deleting references to ``the final period'' and 
subparagraph (iv) by deleting the reference to ``any remaining time 
period(s),'' as there will no longer be an Exchange-determined limited 
number of time periods. Currently, as set forth in current subparagraph 
(i), the drill-through mechanism will continue until the earlier to 
occur of the order's full execution and the end of the duration of the 
Exchange-determined number of time periods. The Exchange proposes to 
amend subparagraph (iv) to describe when the drill-through process will 
conclude. Specifically, proposed Rule 5.34(a)(4)(C)(iv) provides that 
the order continues through the process described in subparagraph (ii) 
(as proposed to be amended) until the earliest of the following to 
occur: (a) the order fully executes; (b) the User cancels the order; 
and (c) the order's limit price equals or is less than (if a buy order) 
or greater than (if a sell order) the drill-through price at any time 
during application of the drill-through mechanism, in which case the 
order rests in the Book at its limit price, subject to a User's 
instructions. In other words, the order will continue through 
consecutive time periods until it fully executes (unless it is 
cancelled by the User or reaches its limit price prior to full 
execution), compared to today when the order will continue through 
consecutive time periods until it fully executes or reaches the 
Exchange-determined final time period, at which time the order would 
route to PAR for manual handling (unless it is cancelled by the User or 
reaches its limit price prior to full execution). The Exchange believes 
eliminating the limit on the number of time periods may increase 
execution opportunities for limit orders, which will still continue to 
be bound by their limit prices and protected by the limit order fat 
finger check.\9\
---------------------------------------------------------------------------

    \8\ The Exchange will continue to determine on a class-by-class 
basis the length of the time periods in milliseconds, which may 
continue to not exceed three seconds.
    \9\ If a limit price is ``too far away'' from the market, the 
order will continue to be subject to the limit order fat finger 
protection set forth in Rule 5.34(c)(1) and thus will still be 
subject to protection against a potentially erroneous execution due 
to an order pricing error upon submission.
---------------------------------------------------------------------------

    The proposed rule change makes a similar change to the drill-
through protection mechanism for complex orders. Specifically, the 
proposed rule change eliminates the concept that, for complex orders 
for which the user does not establish a buffer amount (and instead the 
Exchange-determined default buffer amount applies),\10\ there will be a 
maximum number of time periods and proposes that the complex order (or 
unexecuted portion) will rest in the Book at the drill-through price 
for the duration of consecutive time periods.\11\ Currently, similar to 
the drill-through protection mechanism for simple orders (as described 
above), if a user enters a buy (sell) complex order into the System 
(and does not enter its own buffer amount), the System executes the 
order \12\ up to a buffer amount above (below) the Synthetic National 
Best Offer (``SNBO'') (Synthetic National Best Bid (``SNBB'')) that 
existed at the time of entry (the ``drill-through price'') or initiates 
a complex order auction (``COA'') at the drill-through price if the 
order would initiate a COA.\13\ For complex orders for which the user 
did not establish a buffer amount, the complex order (or unexecuted 
portion) rests in the COB with a displayed price equal to the drill-
through price until the earlier to occur of the complex order's full 
execution and the end of the duration of a number of time periods (the 
Exchange determines on a class-by-class basis the number of periods, 
which may not exceed five, and the length of the time period in 
milliseconds, which may not exceed three seconds). Following the end of 
each period prior to the final period, the System adds (if a buy order)

[[Page 58874]]

or subtracts (if a sell order) one buffer amount to the drill-through 
price displayed during the immediately preceding period (each new price 
becomes the ``drill-through price''). The complex order (or unexecuted 
portion) rests in the COB at that new drill-through price during the 
subsequent period. Following the end of the final period, the System 
cancels or routes to PAR for manual handling, subject to a User's 
instructions (such as to cancel the order), the complex order (or 
unexecuted portion) not executed during any time period.\14\
---------------------------------------------------------------------------

    \10\ See Rule 5.34(b)(6)(A).
    \11\ See proposed Rule 5.34(b)(6)(B). The proposed rule change 
has no impact on how the drill-through protection mechanism applies 
to a complex order for which the inputting user establishes a buffer 
amount, as in that situation, there is only a single time period 
pursuant to the current rule (which will continue to be the case).
    \12\ Executions occur pursuant to Rule 5.33(e).
    \13\ Unlike the simple order drill-through protection mechanism, 
the complex order drill-through protection mechanism permits users 
to establish a buffer amount different than the Exchange-determined 
default buffer amount. See Rule 5.34(b)(6)(A). A description of COAs 
is located in Rule 5.33(d).
    \14\ See current Rule 5.34(b)(6)(B)(i) and (ii). As set forth in 
current subparagraph (iv), if the complex order's limit price is 
reached during the application of the drill-through mechanism, the 
order will rest in the COB at its limit price.
---------------------------------------------------------------------------

    The proposed rule change amends Rule 5.34(b)(6)(B)(i) and (ii) to 
eliminate the concept that there will be a maximum number of time 
periods and proposes that the order (or unexecuted portion) will rest 
in the COB at the drill-through price for the duration of consecutive 
time periods when a User does not establish its own buffer amount.\15\ 
The proposed rule change makes conforming changes to current 
subparagraphs (i), (ii), and (iv) (proposed subparagraphs (ii) and 
(iii)) by deleting references to ``the final period'' and deleting the 
reference to ``any remaining time period(s),'' as there will no longer 
be an Exchange-determined limited number of time periods. Currently, as 
set forth in current subparagraphs (i), (ii), and (iv), if the 
inputting User does not establish a buffer amount for the complex 
order, the drill-through mechanism will continue until the earlier to 
occur of the order's full execution and the end of the duration of the 
Exchange-determined number of time periods (unless it is cancelled by 
the User or reaches its limit price prior to full execution), at which 
time the order would route to PAR for manual handling. The Exchange 
proposes to add to the end of proposed subparagraph (ii) when the 
drill-through process will conclude and what happens at that time for 
complex orders for which the user did not establish a buffer amount. 
Specifically, proposed Rule 5.34(b)(6)(B)(ii) provides that the complex 
order continues through the process described in proposed subparagraph 
(ii) until the earliest of the following to occur: (a) the complex 
order fully executes; (b) the User cancels the order; and (c) the 
complex order's limit price equals or is less than (if a buy order) or 
greater than (if a sell order) the drill-through price at any time 
during application of the drill-through mechanism, in which case the 
complex order rests in the COB at its limit price, subject to a User's 
instructions.\16\ In other words, a complex order for which the User 
did not establish a buffer amount will continue through consecutive 
time periods until it fully executes (or is cancelled or reaches its 
limit price), compared to today when the complex order will continue 
through consecutive time periods until it fully executes or reaches the 
Exchange-determined final time period, at which time the order would 
route to PAR for manual handling (unless otherwise cancelled by the 
User or reaches its limit price, as described in current subparagraph 
(iv)). The Exchange believes eliminating the limit on the number of 
time periods may increase execution opportunities for limit orders, 
which will still continue to be bound by their limit prices and 
protected by the limit order fat finger check.\17\
---------------------------------------------------------------------------

    \15\ The Exchange will continue to determine on a class-by-class 
basis the length of the time periods in milliseconds, which may 
continue to not exceed three seconds.
    \16\ Proposed clause (c) is applicable today and located in 
current subparagraph (iv). As described below, the proposed rule 
change merely moves this provision from current subparagraph (iv) to 
proposed subparagraph (ii).
    \17\ If a limit price is ``too far away'' from the market, the 
order will continue to be subject to the limit order fat finger 
protection set forth in Rule 5.34(c)(1) and thus will still be 
subject to protection against a potentially erroneous execution due 
to an order pricing error upon submission.
---------------------------------------------------------------------------

    The proposed rule change also makes certain nonsubstantive changes 
to Rule 5.34(b)(6). Specifically, the proposed rule change moves all 
provisions specific to the application of the drill-through mechanism 
if the user establishes a buffer amount into Rule 5.34(b)(6)(B)(i) and 
moves all provisions specific to the application of the drill-through 
mechanism if the user does not establish a buffer amount into Rule 
5.34(b)(6)(B)(ii). This includes incorporating into each of proposed 
subparagraphs (i) and (ii) how the System handles a complex order if 
its limit price equals or less than (if a buy order) or greater than 
(if a sell order) the drill-through price, as described in current 
subparagraph (iv). As a result, the proposed rule change deletes 
current subparagraph (iv). Additionally, the proposed rule change moves 
certain language regarding what happens if the SBBO changes during any 
period, which applies to all complex orders subject to the drill-
through protection mechanism, regardless of whether the user input its 
own buffer amount, to proposed subparagraph (iii) from current 
subparagraph (ii) and correspondingly changes current subparagraph 
(iii) to proposed subparagraph (iv). The proposed rule change makes a 
nonsubstantive change to the beginning of proposed subparagraph (iii) 
by changing ``However'' to ``Notwithstanding the above,'' as the 
Exchange believes that phrase is more appropriate.
    In addition, the Exchange proposes to amend Rule 5.34(c)(1)(D) to 
add Limit-on-Close orders \18\ to the list of orders to which the limit 
order fat finger check does not apply. Pursuant to the limit order fat 
finger check, if a User submits a buy (sell) limit order to the System 
with a price that is more than a buffer amount \19\ above (below) the 
NBO (NBB) for simple orders or the SNBO (SNBB) for complex orders, the 
System cancels or rejects the order.\20\ Currently, the limit order fat 
finger check does not apply to bulk messages, stop-limit orders, or 
Multi-Class Spread Orders.\21\ The Exchange proposes to also not apply 
the limit order fat finger check to Limit-on-Close orders. The limit 
order fat finger check applies to orders upon entry to the System. 
However, the limit price of a Limit-on-Close order is intended to 
relate to the price at the RTH market close, and thus may intentionally 
be further away from the NBBO or SNBBO, as applicable, at the time the 
order is entered. This may cause the order to be inadvertently rejected 
pursuant to this check. The Exchange believes it is not appropriate for 
this limit order to be subject to the fat finger check, as the check 
may inadvertently cause rejections for orders with limit prices that 
are intentionally ``far away'' from the market at the time of order 
entry.
---------------------------------------------------------------------------

    \18\ A ``Limit-on-Close'' or ``LOC'' order is a limit order that 
may not execute on the Exchange until three minutes prior to Regular 
Trading Hours (``RTH'') market close. At that time, the System 
enters LOC orders into the Book in time sequence (based on the times 
at which the System initially received them), where they may be 
processed in accordance with Rule 5.32. The System cancels an LOC 
order (or unexecuted portion) that does not execute by the RTH 
market close. Users may not designate an LOC order as All Sessions 
or RTH and Curb. Users may not designate bulk messages as LOC. A 
User may not designate an LOC order as Direct to PAR. See Rule 
5.6(d) (definition of ``Limit-on-Close'' and ``LOC'' order).
    \19\ The Exchange determines a default buffer amount on a class-
by-class basis; however, a User may establish a higher or lower 
amount than the Exchange default for a class.
    \20\ Rule 5.34(c)(1).
    \21\ Rule 5.34(c)(1)(D) and (E). The proposed rule change 
deletes subparagraph (E) and moves Multi-Class Spread Orders to the 
list of orders to which the check does not apply in subparagraph 
(D). This is a nonsubstantive change and merely combines two current 
provisions that exclude certain order types from the fat finger 
check into a single provision.

---------------------------------------------------------------------------

[[Page 58875]]

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.\22\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \23\ 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) \24\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule change to 
eliminate the maximum number of time periods for which a simple or 
complex order will rest in the Book or COB, respectively, during 
application of the drill-through protection mechanism will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, protect investors, because 
it will provide simple and complex orders with additional execution 
opportunities. These orders may continue to be available on the Book or 
COB, as applicable, for execution, at a wider range of prices, as 
opposed to today when such orders are cancelled or routed to PAR for 
manual handling after a specified number of time periods (depending on 
the User's instructions and if the order does not reach its limit price 
prior to the end of those time periods). The Exchange believes these 
additional execution opportunities will benefit investors that submit 
such orders and believes such orders will continue to receive 
protection against potentially erroneous executions, as the limit order 
fat finger check will continue to apply to them.
    The Exchange believes the proposed nonsubstantive rule changes to 
the complex order drill-through protection mechanism will protect 
investors and the public interest, because these changes improve the 
organization of this rule's provisions by grouping all provisions that 
apply when a User establishes its own buffer and all provisions that 
apply when a User does not establish its own buffer, eliminating 
potential confusion.
    Finally, the Exchange believes excluding Limit-on-Close orders from 
the limit order fat finger check will remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, protect investors, because it may reduce inadvertent 
rejections of Limit-on-Close orders, which may be purposely priced 
further away from the NBBO or SNBBO, as applicable, at the time of 
entry, as their limit prices are intended to relate to price at the RTH 
market close. Therefore, this proposed rule change may increase 
execution opportunities for Users that submit Limit-on-Close orders.

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 that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, because the amended drill-
through protection mechanism (for both simple and complex orders) and 
limit order fat finger check will continue to apply in the same manner 
to orders of all Users and may lead to increased execution 
opportunities. The Exchange does not believe that the proposed rule 
change will impose any burden on intermarket competition that is not 
necessary or appropriate in furtherance of purposes of the Act, because 
the proposed rule change relates solely to Exchange risk controls and 
how the Exchange handles orders subject to those risk controls.

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 \25\ and 
Rule 19b-4(f)(6) \26\ 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.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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 [email protected]. Please include File 
Number SR-CBOE-2022-046 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2022-046. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be

[[Page 58876]]

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-2022-046 and should be submitted on or before October 19, 2022.
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20944 Filed 9-27-22; 8:45 am]
BILLING CODE 8011-01-P