Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Amend Exchange Rule 5.34(b) Related to Price Protections and Risk Controls for Complex Orders, 61634-61636 [2022-22083]
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61634
Federal Register / Vol. 87, No. 196 / Wednesday, October 12, 2022 / Notices
Pezzullo, 100 F Street NE, Washington,
DC 20549, or by sending an email to:
PRA_Mailbox@sec.gov.
Dated: October 5, 2022.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–22098 Filed 10–11–22; 8:45 am]
BILLING CODE P
SECURITIES AND EXCHANGE
COMMISSION
jspears on DSK121TN23PROD with NOTICES
II. Description of the Proposed Rule
Change, as Modified by Amendment
No. 1
As described more fully in the Notice,
the Exchange proposes to amend
Exchange Rule 5.34(b)(4) to adopt a new
buy strategy price check for complex
orders. Under proposed Exchange Rule
5.34(b)(4)(B), the System cancels or
rejects a vertical or butterfly spread
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 Complex Order Auction (‘‘COA’’) with
a vertical or butterfly spread order to
buy that has a price of zero unless the
order is auctioned via PAR.6 The
SECURITIES AND EXCHANGE
COMMISSION
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget a
request for extension of the previously
approved collection of information
discussed below.
Form S–4 (17 CFR 239.25) is the form
used for registration under the
Securities Act of 1933 (15 U.S.C. 77a et
seq.) of securities issued in business
combination transactions. The
information collected is intended to
ensure the adequacy of information
available to investors in connection
with business combination transactions.
Form S–4 is a public document and all
information provided is mandatory.
Form S–4 takes approximately 3,820.89
hours per response to prepare and is
filed by 588 registrants annually. We
estimate that 25% of the 3,820.89 hours
per response (955.223 hours) is
prepared by the registrant for an annual
reporting burden of 561,671 hours
(955.223 hours per response × 588
responses).
An agency may conduct or sponsor,
and a person is not required to respond
to, a collection of information unless it
displays a currently valid control
number.
The public may view background
documentation for this information
collection at the following website:
www.reginfo.gov. Find this particular
information collection by selecting
‘‘Currently under 30-day Review—Open
for Public Comments’’ or by using the
search function. Written comments and
recommendations for the proposed
information collection should be sent
Jkt 259001
Dated: October 5 2022.
J. Matthew DeLesDernier,
Deputy Secretary.
BILLING CODE 8011–01–P
Submission for OMB Review;
Comment Request; Extension: Form
S–4
18:37 Oct 11, 2022
Exchange filed Amendment No. 1 to the
proposed rule change.5 The Commission
has received no comment letters
regarding the proposal. The Commission
is publishing this notice to solicit
comment on Amendment No. 1 and is
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
[FR Doc. 2022–22097 Filed 10–11–22; 8:45 am]
[SEC File No. 270–287, OMB Control No.
3235–0324]
VerDate Sep<11>2014
within 30 days of publication of this
notice by November 14, 2022 to (i)
www.reginfo.gov/public/do/PRAMain
and (ii) David Bottom, Director/Chief
Information Officer, Securities and
Exchange Commission, c/o John
Pezzullo, 100 F Street NE, Washington,
DC 20549, or by sending an email to:
PRA_Mailbox@sec.gov.
[Release No. 34–95987; File No. SR–CBOE–
2022–041]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Amend
Exchange Rule 5.34(b) Related to Price
Protections and Risk Controls for
Complex Orders
October 5, 2022.
I. Introduction
On August 4, 2022, Cboe Exchange,
Inc. (‘‘Exchange’’ or ‘‘Cboe Options’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend
Exchange Rule 5.34(b) to revise the
definition of butterfly spread and to
adopt a new buy strategy price check
that will reject or cancel vertical or
butterfly spread orders to buy that have
a price of zero and are not designated
as either Immediate-or-Cancel (‘‘IOC’’)
or Direct to PAR.3 The proposed rule
change was published for comment in
the Federal Register on August 23,
2022.4 On September 14, 2022, the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Under the Exchange’s rules, an Immediate-orCancel or IOC order is 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. 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. See Exchange Rule 5.6(b).
4 See Securities Exchange Act Release No. 95520
(August 17, 2022), 87 FR 51723 (‘‘Notice’’).
2 17
PO 00000
Frm 00076
Fmt 4703
Sfmt 4703
5 Amendment No. 1 revises the proposal to (1)
correct an error in the description section of the
Form 19b–4 by stating that the component legs of
a butterfly spread order have different strike prices;
(2) provide additional explanation by stating that,
in rare circumstances, market participants may seek
to sell a vertical or butterfly spread at a price of zero
to liquidate a position; (3) state that the proposal
continues to provide execution opportunities for
vertical and butterfly spread buy orders priced at
zero through the IOC instruction or manual
handling, while preventing these orders from
overwhelming the Complex Order Book (‘‘COB’’);
(4) state that the proposed price check does not
extend to zero-priced vertical or butterfly spread
sell orders, which will continue to be permitted to
rest on the COB; (5) correct an error in the
description section of the Form 19b–4 by stating
that between January and July 2022, only 1.3% of
the approximately 177 million zero-priced vertical
and butterfly spread contracts (rather than orders)
of the approximately 6.5 million orders submitted
to rest in the COB, were filled; and (6) state that
zero-bid vertical or butterfly spread orders may be
submitted as part of a paired order as a cross on
the trading floor or to a Complex Automated
Improvement Mechanism (‘‘C–AIM’’) auction.
Amendment No. 1 makes no changes to Exhibit 5
of the proposal. Amendment No. 1 is available on
the Commission’s website at https://www.sec.gov/
comments/sr-cboe-2022-041/srcboe2022041.htm.
6 For purposes of Exchange Rule 5.34(b), a
vertical spread is a two-legged complex order with
one leg to buy a number of calls (puts) and one leg
to sell the same number of calls (puts) with the
same expiration date but different exercise prices,
except as set forth in Exchange Rule 5.34(b)(3)(A).
See Exchange Rule 5.34(b)(1)(A). As discussed
below, Exchange Rule 5.34(b)(1)(B), as proposed to
be amended, defines a butterfly spread as a threelegged 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. The System
considers a true butterfly and a skewed butterfly to
be a butterfly spread. If the exercise price of the
middle leg is the average of the exercise prices of
the other legs, it is a ‘‘true’’ butterfly; and if the
exercise price of the middle leg is less in-the-money
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Federal Register / Vol. 87, No. 196 / Wednesday, October 12, 2022 / Notices
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Exchange may apply the proposed price
check on a class-by-class basis.7
The Exchange states that it has
observed a significant and increasing
number of zero-priced vertical and
butterfly spread buy orders in certain
classes submitted to rest in the COB.8
The Exchange further states that these
zero-priced buy orders execute
infrequently against an opposing
complex order and remain resting in the
COB because market participants rarely
desire to sell these strategies at a price
of zero.9 Based on its analysis of 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, of the approximately 6.5
million orders submitted to rest in the
COB, were filled.10 The Exchange states
that multiple Trading Permit Holders
(‘‘TPHs’’) have expressed concern
regarding the amount of excess market
data that results from zero-priced
vertical and butterfly spread buy
strategies, and the Exchange believes
that the high number of these orders
may impede liquidity providers from
executing against marketable customer
interest because the stream of incoming
strategies creates new data messages
that liquidity providers must process
and synthesize into their systems,
interfering with their time and resources
to process, synthesize, and react to data
messages in connection with marketable
customer interest.11 In addition, the
Exchange states that it has expended
resources to implement multiple System
enhancements to enable its System to
continue to handle the large number of
these strategies.12
The Exchange acknowledges that
there may be limited cases in which
market participants may seek to sell a
zero-priced vertical or butterfly spread,
including when liquidating a position.13
Under the proposal, zero-priced vertical
or butterfly spread sell orders will
continue to be permitted to rest on the
than the average of the exercise prices of the other
legs, it is a ‘‘skewed’’ butterfly.
7 See proposed Exchange Rule 5.34(b)(4)(B).
8 See Notice, 87 FR 51724.
9 See id.
10 See Amendment No. 1 at 4.
11 See Notice, 87 FR 51724. In addition, the
Exchange states that complex orders generate a
COA auction message before resting in the COB and
that 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. See id.
12 See id.
13 See Amendment No. 1 at 3.
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18:37 Oct 11, 2022
Jkt 259001
COB.14 By requiring zero-priced vertical
and butterfly spread buy orders to be
designated as IOC or Direct to PAR, the
Exchange states that proposed Exchange
Rule 5.34(b)(4)(B) will ensure that these
zero-priced buy orders are either
executed immediately against
marketable orders (in whole or in part)
and then cancelled, or are sent to
directly to a PAR workstation for
manual handling by a Floor Broker.15
The Exchange further states that 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 proposal continues to
provide execution opportunities for
vertical and butterfly spread strategies
that are legitimately priced at zero,
while preventing a significant number
of these orders from overwhelming the
COB.16 Proposed Exchange Rule
5.34(b)(4)(B) provides the Exchange
with flexibility to apply the proposed
price check on a class-by-class basis,
which will permit the Exchange to
determine whether allowing zero-priced
vertical and butterfly spread orders to
rest in the COB is appropriate for
different option classes, which may
exhibit different trading characteristics
and have different market models.17
The proposal also revises the
definition of butterfly spread in
Exchange Rule 5.34(b)(1)(B) to more
precisely define what the Exchange’s
System considers to be true and skewed
butterfly spreads for purposes of
Exchange Rule 5.34(b) and to provide
that the System considers both skewed
and true butterfly spreads to be butterfly
spreads. As described more fully in the
Notice, Exchange Rule 5.34(b)(1)(B)
currently states, in part, that ‘‘If the
exercise price of the middle leg is
halfway between the exercise prices of
the other legs, it is a ‘‘true’’ butterfly;
otherwise, it is a ‘‘skewed’’ butterfly.’’
The Exchange proposes to revise this
sentence to state that ‘‘If the exercise
price of the middle leg is the average of
the exercise prices of the other legs, it
is a ‘‘true’’ butterfly; and if the exercise
price of the middle leg is less-in-themoney than the average of the exercise
prices of the other legs, it is a ‘‘skewed’’
butterfly.’’ The Exchange states that the
proposed changes more accurately
reflect what the Exchange’s System
14 See
id.
Notice, 87 FR 51725. Proposed Exchange
Rule 5.34(b)(4)(B) also allows a zero-priced vertical
and butterfly spread buy order to initiate a COA if
the order is auctioned via PAR.
16 See id.
17 See id.
15 See
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
61635
considers to be a skewed butterfly and
a butterfly spread generally.18
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.19 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,20 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, 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, and
not be designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
For the reasons set forth below, the
Commission believes that the proposal
to adopt a price check that will reject or
cancel vertical and butterfly spread buy
orders with a price of zero that are not
designated as IOC or Direct to PAR is
designed to protect investors and the
public interest. As discussed above,
orders to buy a vertical or butterfly
spread for a price of zero execute
infrequently and instead remain resting
in the COB without being filled.21 The
Exchange states that these zero-priced
vertical and butterfly spread buy orders
generate a substantial amount of market
data that market participants must
process and synthesize into their
systems, and that this excess data, about
which TPHs have expressed concern,
may impede liquidity providers from
executing against marketable customer
interest.22 Although vertical and
butterfly spread buy orders priced at
zero will no longer be permitted to rest
in the COB, the proposal will provide
18 See
Notice, 87 FR 51725.
approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
20 15 U.S.C. 78f(b)(5).
21 See Notice, 87 FR 51724. As noted above, based
on its analysis of such orders submitted from
January 2022 through July 2022, the Exchange
found that approximately only 1.3% of the
approximately 177 million zero-priced buy vertical
and butterfly spread contracts, of the approximately
6.5 million orders submitted to rest in the COB,
were filled. See Amendment No. 1 at 4.
22 See Notice, 87 FR 51724. In addition, the
Exchange states that it has implemented multiple
System enhancements to enable its System to
handle the large number of these strategies. See id.
19 In
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Federal Register / Vol. 87, No. 196 / Wednesday, October 12, 2022 / Notices
for the continued execution of the
limited number of vertical and butterfly
spread orders that are legitimately
priced at zero. In this regard, vertical
and butterfly spread sell orders with a
price of zero will continue to have the
ability to rest in the COB and market
participants will be able to submit zeropriced vertical and butterfly spread IOC
buy orders to execute against the resting
zero-priced sell orders.23 In addition,
the proposal will allow market
participants to submit vertical and
butterfly spread buy orders with a price
of zero as Direct to PAR for manual
handling, and market participants will
continue to have the ability to submit
zero-bid vertical and butterfly spread
orders as part of a paired order in a
crossing transaction.24
The Commission believes that the
proposed changes to the definition of
butterfly spread are designed to protect
investors and the public interest by
providing more precise definitions of
skewed and true butterfly spreads.
IV. Solicitation of Comments on
Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 1 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–2022–041 on the subject line.
jspears on DSK121TN23PROD with NOTICES
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
23 See Amendment No. 1 at 3 and proposed
Exchange Rule 5.34(b)(4)(B).
24 See Exchange Rule 5.34(b)(4)(B) and
Amendment No. 1 at 4.
VerDate Sep<11>2014
18:37 Oct 11, 2022
Jkt 259001
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
November 2, 2022.
that it is consistent with the Act.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,25 to approve the proposed
rule change, as modified by Amendment
No. 1, on an accelerated basis.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 1 in the Federal
Register. As described more fully above,
Amendment No. 1 revises the proposal
to acknowledge more clearly that, in
limited circumstances, vertical and
butterfly spread sell orders may
legitimately be priced at zero, including
when a market participant seeks to
liquidate a position. Amendment No. 1
also states that zero-priced vertical and
butterfly spread sell orders will
continue to have the ability to rest in the
COB. Amendment No. 1 emphasizes
that the proposal provides methods for
executing vertical and butterfly spread
buy orders priced at zero by allowing
market participants to submit these
orders as IOC or for manual handling, or
as part of a paired crossing transaction.
In addition, Amendment No. 1 replaces
an incorrect reference to ‘‘approximately
177 million zero-priced buy vertical and
butterfly spread orders’’ with a correct
reference to ‘‘approximately 177 million
zero-priced buy vertical and butterfly
spread contracts,’’ which helps to
ensure that the proposal accurately
represents the scope of the issue that the
proposal seeks to address. Amendment
No. 1 raises no novel regulatory issues
and provides additional discussion that
assists the Commission in evaluating the
Exchange’s proposal and determining
Submission for OMB Review;
Comment Request; Extension: Form
F–7
PO 00000
Frm 00078
Fmt 4703
Sfmt 4703
VI. Conclusion
It is Therefore Ordered, pursuant to
Section 19(b)(2) of the Act,26 that the
proposed rule change (SR–CBOE–2022–
041), as modified by Amendment No. 1,
is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–22083 Filed 10–11–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–331, OMB Control No.
3235–0383]
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget this
request for extension of the previously
approved collection of information
discussed below.
Form F–7 (17 CFR 239.37) is a
registration statement under the
Securities Act of 1933 (15 U.S.C. 77a et
seq.) used to register securities that are
offered for cash upon the exercise of
rights granted to a registrant’s existing
security holders to purchase or
subscribe such securities. The
information collected is intended to
ensure that the information required to
be filed by the Commission permits
verification of compliance with
securities law requirements and assures
the public availability of such
information. The information provided
is mandatory and all information is
made available to the public upon
request. Form F–7 takes approximately
4 hours per response to prepare and is
filed by approximately 3 respondents.
25 15
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(2).
27 17 CFR 200.30–3(a)(12).
26 15
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]]>Agencies
[Federal Register Volume 87, Number 196 (Wednesday, October 12, 2022)]
[Notices]
[Pages 61634-61636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22083]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95987; File No. SR-CBOE-2022-041]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Amend Exchange
Rule 5.34(b) Related to Price Protections and Risk Controls for Complex
Orders
October 5, 2022.
I. Introduction
On August 4, 2022, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Exchange Rule 5.34(b) to
revise the definition of butterfly spread and to adopt a new buy
strategy price check that will reject or cancel vertical or butterfly
spread orders to buy that have a price of zero and are not designated
as either Immediate-or-Cancel (``IOC'') or Direct to PAR.\3\ The
proposed rule change was published for comment in the Federal Register
on August 23, 2022.\4\ On September 14, 2022, the Exchange filed
Amendment No. 1 to the proposed rule change.\5\ The Commission has
received no comment letters regarding the proposal. The Commission is
publishing this notice to solicit comment on Amendment No. 1 and is
approving the proposed rule change, as modified by Amendment No. 1, on
an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Under the Exchange's rules, an Immediate-or-Cancel or IOC
order is 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. 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. See Exchange Rule 5.6(b).
\4\ See Securities Exchange Act Release No. 95520 (August 17,
2022), 87 FR 51723 (``Notice'').
\5\ Amendment No. 1 revises the proposal to (1) correct an error
in the description section of the Form 19b-4 by stating that the
component legs of a butterfly spread order have different strike
prices; (2) provide additional explanation by stating that, in rare
circumstances, market participants may seek to sell a vertical or
butterfly spread at a price of zero to liquidate a position; (3)
state that the proposal continues to provide execution opportunities
for vertical and butterfly spread buy orders priced at zero through
the IOC instruction or manual handling, while preventing these
orders from overwhelming the Complex Order Book (``COB''); (4) state
that the proposed price check does not extend to zero-priced
vertical or butterfly spread sell orders, which will continue to be
permitted to rest on the COB; (5) correct an error in the
description section of the Form 19b-4 by stating that between
January and July 2022, only 1.3% of the approximately 177 million
zero-priced vertical and butterfly spread contracts (rather than
orders) of the approximately 6.5 million orders submitted to rest in
the COB, were filled; and (6) state that zero-bid vertical or
butterfly spread orders may be submitted as part of a paired order
as a cross on the trading floor or to a Complex Automated
Improvement Mechanism (``C-AIM'') auction. Amendment No. 1 makes no
changes to Exhibit 5 of the proposal. Amendment No. 1 is available
on the Commission's website at https://www.sec.gov/comments/sr-cboe-2022-041/srcboe2022041.htm.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
As described more fully in the Notice, the Exchange proposes to
amend Exchange Rule 5.34(b)(4) to adopt a new buy strategy price check
for complex orders. Under proposed Exchange Rule 5.34(b)(4)(B), the
System cancels or rejects a vertical or butterfly spread 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 Complex Order Auction
(``COA'') with a vertical or butterfly spread order to buy that has a
price of zero unless the order is auctioned via PAR.\6\ The
[[Page 61635]]
Exchange may apply the proposed price check on a class-by-class
basis.\7\
---------------------------------------------------------------------------
\6\ For purposes of Exchange Rule 5.34(b), a vertical spread is
a two-legged complex order with one leg to buy a number of calls
(puts) and one leg to sell the same number of calls (puts) with the
same expiration date but different exercise prices, except as set
forth in Exchange Rule 5.34(b)(3)(A). See Exchange Rule
5.34(b)(1)(A). As discussed below, Exchange Rule 5.34(b)(1)(B), as
proposed to be amended, defines a butterfly spread as 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. The System considers a true butterfly and a skewed
butterfly to be a butterfly spread. If the exercise price of the
middle leg is the average of the exercise prices of the other legs,
it is a ``true'' butterfly; and if the exercise price of the middle
leg is less in-the-money than the average of the exercise prices of
the other legs, it is a ``skewed'' butterfly.
\7\ See proposed Exchange Rule 5.34(b)(4)(B).
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The Exchange states that it has observed a significant and
increasing number of zero-priced vertical and butterfly spread buy
orders in certain classes submitted to rest in the COB.\8\ The Exchange
further states that these zero-priced buy orders execute infrequently
against an opposing complex order and remain resting in the COB because
market participants rarely desire to sell these strategies at a price
of zero.\9\ Based on its analysis of 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, of the approximately 6.5 million orders submitted to
rest in the COB, were filled.\10\ The Exchange states that multiple
Trading Permit Holders (``TPHs'') have expressed concern regarding the
amount of excess market data that results from zero-priced vertical and
butterfly spread buy strategies, and the Exchange believes that the
high number of these orders may impede liquidity providers from
executing against marketable customer interest because the stream of
incoming strategies creates new data messages that liquidity providers
must process and synthesize into their systems, interfering with their
time and resources to process, synthesize, and react to data messages
in connection with marketable customer interest.\11\ In addition, the
Exchange states that it has expended resources to implement multiple
System enhancements to enable its System to continue to handle the
large number of these strategies.\12\
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\8\ See Notice, 87 FR 51724.
\9\ See id.
\10\ See Amendment No. 1 at 4.
\11\ See Notice, 87 FR 51724. In addition, the Exchange states
that complex orders generate a COA auction message before resting in
the COB and that 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. See id.
\12\ See id.
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The Exchange acknowledges that there may be limited cases in which
market participants may seek to sell a zero-priced vertical or
butterfly spread, including when liquidating a position.\13\ Under the
proposal, zero-priced vertical or butterfly spread sell orders will
continue to be permitted to rest on the COB.\14\ By requiring zero-
priced vertical and butterfly spread buy orders to be designated as IOC
or Direct to PAR, the Exchange states that proposed Exchange Rule
5.34(b)(4)(B) will ensure that these zero-priced buy orders are either
executed immediately against marketable orders (in whole or in part)
and then cancelled, or are sent to directly to a PAR workstation for
manual handling by a Floor Broker.\15\ The Exchange further states that
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 proposal continues to provide execution
opportunities for vertical and butterfly spread strategies that are
legitimately priced at zero, while preventing a significant number of
these orders from overwhelming the COB.\16\ Proposed Exchange Rule
5.34(b)(4)(B) provides the Exchange with flexibility to apply the
proposed price check on a class-by-class basis, which will permit the
Exchange to determine whether allowing zero-priced vertical and
butterfly spread orders to rest in the COB is appropriate for different
option classes, which may exhibit different trading characteristics and
have different market models.\17\
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\13\ See Amendment No. 1 at 3.
\14\ See id.
\15\ See Notice, 87 FR 51725. Proposed Exchange Rule
5.34(b)(4)(B) also allows a zero-priced vertical and butterfly
spread buy order to initiate a COA if the order is auctioned via
PAR.
\16\ See id.
\17\ See id.
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The proposal also revises the definition of butterfly spread in
Exchange Rule 5.34(b)(1)(B) to more precisely define what the
Exchange's System considers to be true and skewed butterfly spreads for
purposes of Exchange Rule 5.34(b) and to provide that the System
considers both skewed and true butterfly spreads to be butterfly
spreads. As described more fully in the Notice, Exchange Rule
5.34(b)(1)(B) currently states, in part, that ``If the exercise price
of the middle leg is halfway between the exercise prices of the other
legs, it is a ``true'' butterfly; otherwise, it is a ``skewed''
butterfly.'' The Exchange proposes to revise this sentence to state
that ``If the exercise price of the middle leg is the average of the
exercise prices of the other legs, it is a ``true'' butterfly; and if
the exercise price of the middle leg is less-in-the-money than the
average of the exercise prices of the other legs, it is a ``skewed''
butterfly.'' The Exchange states that the proposed changes more
accurately reflect what the Exchange's System considers to be a skewed
butterfly and a butterfly spread generally.\18\
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\18\ See Notice, 87 FR 51725.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\19\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\20\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, 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, and not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\19\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\20\ 15 U.S.C. 78f(b)(5).
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For the reasons set forth below, the Commission believes that the
proposal to adopt a price check that will reject or cancel vertical and
butterfly spread buy orders with a price of zero that are not
designated as IOC or Direct to PAR is designed to protect investors and
the public interest. As discussed above, orders to buy a vertical or
butterfly spread for a price of zero execute infrequently and instead
remain resting in the COB without being filled.\21\ The Exchange states
that these zero-priced vertical and butterfly spread buy orders
generate a substantial amount of market data that market participants
must process and synthesize into their systems, and that this excess
data, about which TPHs have expressed concern, may impede liquidity
providers from executing against marketable customer interest.\22\
Although vertical and butterfly spread buy orders priced at zero will
no longer be permitted to rest in the COB, the proposal will provide
[[Page 61636]]
for the continued execution of the limited number of vertical and
butterfly spread orders that are legitimately priced at zero. In this
regard, vertical and butterfly spread sell orders with a price of zero
will continue to have the ability to rest in the COB and market
participants will be able to submit zero-priced vertical and butterfly
spread IOC buy orders to execute against the resting zero-priced sell
orders.\23\ In addition, the proposal will allow market participants to
submit vertical and butterfly spread buy orders with a price of zero as
Direct to PAR for manual handling, and market participants will
continue to have the ability to submit zero-bid vertical and butterfly
spread orders as part of a paired order in a crossing transaction.\24\
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\21\ See Notice, 87 FR 51724. As noted above, based on its
analysis of such orders submitted from January 2022 through July
2022, the Exchange found that approximately only 1.3% of the
approximately 177 million zero-priced buy vertical and butterfly
spread contracts, of the approximately 6.5 million orders submitted
to rest in the COB, were filled. See Amendment No. 1 at 4.
\22\ See Notice, 87 FR 51724. In addition, the Exchange states
that it has implemented multiple System enhancements to enable its
System to handle the large number of these strategies. See id.
\23\ See Amendment No. 1 at 3 and proposed Exchange Rule
5.34(b)(4)(B).
\24\ See Exchange Rule 5.34(b)(4)(B) and Amendment No. 1 at 4.
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The Commission believes that the proposed changes to the definition
of butterfly spread are designed to protect investors and the public
interest by providing more precise definitions of skewed and true
butterfly spreads.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 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 November 2, 2022.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. As described more fully above, Amendment No.
1 revises the proposal to acknowledge more clearly that, in limited
circumstances, vertical and butterfly spread sell orders may
legitimately be priced at zero, including when a market participant
seeks to liquidate a position. Amendment No. 1 also states that zero-
priced vertical and butterfly spread sell orders will continue to have
the ability to rest in the COB. Amendment No. 1 emphasizes that the
proposal provides methods for executing vertical and butterfly spread
buy orders priced at zero by allowing market participants to submit
these orders as IOC or for manual handling, or as part of a paired
crossing transaction. In addition, Amendment No. 1 replaces an
incorrect reference to ``approximately 177 million zero-priced buy
vertical and butterfly spread orders'' with a correct reference to
``approximately 177 million zero-priced buy vertical and butterfly
spread contracts,'' which helps to ensure that the proposal accurately
represents the scope of the issue that the proposal seeks to address.
Amendment No. 1 raises no novel regulatory issues and provides
additional discussion that assists the Commission in evaluating the
Exchange's proposal and determining that it is consistent with the Act.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\25\ to approve the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis.
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\25\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-CBOE-2022-041), as modified
by Amendment No. 1, is approved.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-22083 Filed 10-11-22; 8:45 am]
BILLING CODE 8011-01-P
