Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rules 11.9, 11.12, and 11.13, 13176-13182 [2023-04229]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 41 (Thursday, March 2, 2023)]
[Notices]
[Pages 13176-13182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-04229]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96976; File No. SR-CboeBZX-2023-012]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rules 11.9, 11.12, and 11.13

February 24, 2023.
    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 February 15, 2023, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission

[[Page 13177]]

(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to 
amend Rule 11.9(e)(3) to provide that orders may be modified from 
either sell long to sell short exempt (or vice versa) or sell short 
exempt to sell short (or vice versa) using a Replace Message. The 
Exchange also proposes to amend Rule 11.12(a)(4) to provide that a 
change in position from either sell long to sell short exempt (or vice 
versa) or sell short exempt to sell short (or vice versa) will result 
in a loss of time priority if made when a short sale circuit breaker 
pursuant to Rule 201 of Regulation SHO is in effect. Additionally, the 
Exchange proposes to amend Rule 11.13(b)(1) to provide when the 
Exchange may route orders with a short sale instruction when a short 
sale circuit breaker pursuant to Rule 201 of Regulation SHO is in 
effect. The text of the proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 11.12(a)(4) to reflect that if 
a User \5\ changes the position of an order from either sell long to 
sell short exempt (or vice versa) or sell short exempt to sell short 
(or vice versa) while a Regulation SHO Rule 201 \6\ short sale circuit 
breaker (the ``SSCB'') \7\ is in effect, the change will result in a 
loss of time priority. This proposed change is substantially similar to 
MIAX PEARL, LLC (``MIAX Pearl'') Rule 2616 (discussed infra).\8\ The 
Exchange also proposes to amend Rule 11.9(e)(3) to provide that an 
order may be modified from sell long to sell short exempt (or vice 
versa) or sell short exempt to sell short (or vice versa) using a 
Replace Message. Additionally, the Exchange proposes to amend Rule 
11.13(b)(1) (Regulation SHO) to make clear that short sale orders \9\ 
entered with an order instruction to post to an away trading center 
when an SSCB is in effect are eligible for routing by the Exchange.
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    \5\ See Exchange Rule 1.5(cc).
    \6\ See 17 CFR 242.201; Securities Exchange Act Release No. 
61595 (February 26, 2010), 75 FR 11232 (March 10, 2010).
    \7\ For any execution of a short sale order to occur on the 
Exchange when a short sale price test restriction is in effect, the 
price must be better than the national best bid (``NBB''), unless 
the sell order was initially displayed by the System at a price 
above then the current NBB or is market ``short exempt'' pursuant to 
Regulation SHO. See Exchange Rule 11.13(a)(1).
    \8\ See Securities Exchange Act Release No. 93506 (November 2, 
2021), 86 FR 61796 (November 8, 2021) (SR-PEARL-2021-35) (Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Changes, as Modified by Amendment No. 1, To Amend 
Exchange Rule 2616, Priority of Orders).
    \9\ See 17 CFR 242.200(a). The term ``short sale'' is defined as 
``any sale of a security which the seller does not own or any sale 
which is consummated by the delivery of a security borrowed by, or 
for the account of, the seller.''
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Priority Loss for Position Changes During an SSCB
    Pursuant to Exchange Rule 11.9(e)(3), certain order modifications 
may be made via a Replace Message (i.e., other than changing a limit 
order to a market order, only the price, stop price, the sell long or 
sell short indicator, Max Floor of a Reserve Order, and size of the 
order may be changed by a Replace Message), while other modifications 
require that the existing order be cancelled, and a new order be 
entered. Furthermore, pursuant to Rule 11.12(a)(4), when an order is 
cancelled or replaced in accordance with Rule 11.9(e)(3), such order 
will retain its priority only for certain types of modifications (e.g., 
changing an order's position from sell long to sell short or a decrease 
in the size of the order). Certain other types of order modifications 
\10\ (e.g., a change in the order's price) will otherwise receive a new 
timestamp and lose priority on the BZX Book.\11\ For example, if 
pursuant to Rule 11.9(e)(3) an order is modified from sell long to sell 
short, such modification may be accomplished via a Replace Message, and 
the System will, pursuant to Rule 11.12(a)(4), allow such order to 
retain its original timestamp and priority on the BZX Book.
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    \10\ See Rule 11.12(a)(4).
    \11\ See Rule 1.5(e).
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    The Exchange first proposes to amend Rule 11.9(e)(3) to provide 
that an order's position may be modified from sell long to sell short 
exempt (or vice versa) or sell short exempt to sell short (or vice 
versa) through the use of a Replace Message. The Exchange notes that 
Users complete a position modification from sell long to sell short 
exempt (or vice versa) or sell short exempt to sell short (or vice 
versa) using the same functionality to mark an order as either sell 
long or sell short under Rule 11.9(e)(3). The Exchange believes this 
change will provide additional specificity to the rule and ensure the 
rule uses terminology consistent with the description of Replace 
Messages and their impact on an order's priority under Exchange Rule 
11.12(a)(4) (discussed infra).
    The Exchange also proposes to amend Rule 11.12(a)(4) in order to 
align the Rule text with how the System currently behaves when an SSCB 
is in effect, and to provide clarification to Users that when an SSCB 
is in effect that changing an order's position from either sell long to 
sell short (or vice versa) or sell short exempt to sell short (or vice 
versa) will instead result in such order receiving a new timestamp and 
losing its original priority. The Exchange is not proposing to change 
the timestamp for modifications from either sell long to sell short (or 
vice versa) or sell short exempt to sell short (or vice versa) when an 
SSCB is not in effect. Additionally, the Exchange is also proposing to 
add language to Rule 11.12(a)(4) stating that a modification from sell 
long to sell short exempt (or vice versa) is a type of order 
modification that would retain time priority and would not receive a 
new timestamp, regardless of whether an SSCB is in effect (discussed 
infra).
    The Exchange also proposes a non-substantive change to Rule 
11.12(a)(4) to provide that an order is being modified

[[Page 13178]]

by a Replace Message rather than cancelled and replaced with a new 
order. This change is intended to provide that an order does not need 
to be cancelled and replaced with a new order, but rather includes 
modifications to orders via the use of a Replace Message. The proposed 
changes to Exchange Rule 11.12(a)(4) are based on previously-approved 
changes to MIAX Pearl Rule 2616(a)(5), which is substantially similar 
to Exchange Rule 11.12(a)(4).\12\
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    \12\ Supra note 8.
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    In the event that a User requests an order modification using a 
Replace Message, the System will first determine whether the 
modification is of a kind that may result in a loss of time priority in 
order to determine how the modification will be handled by the System. 
For example, as noted in Exchange Rule 11.12(a)(4), a modification to 
the price of an order will cause the loss of time priority. Therefore, 
in the event of a modification of the price of an order, the System 
will first determine that the type of modification may result in a loss 
of time priority and then handle the order accordingly by giving it a 
new timestamp.\13\ Since an order modification from sell long to sell 
short (or vice versa) or sell short exempt to sell short (or vice 
versa) may result in a change in price of the order when an SSCB is in 
effect, the Exchange immediately gives the order a new timestamp. As 
previously discussed, a modification from sell long to sell short (or 
vice versa) or a modification from sell short exempt to sell short (or 
vice versa) requires the System to determine whether an order must be 
re-priced to be compliant with the requirements of Regulation SHO. The 
Exchange notes, however, that an order modification from sell long to 
sell short exempt (or vice versa) does not require the System to 
determine whether the order shall be re-priced as a result of the 
modification, as both a sell long and a sell short exempt order may 
execute at a more aggressive price than a sell short order when an SSCB 
is in effect. Given that the System does not have to evaluate whether a 
price change is required as part of an order modification from sell 
long to sell short exempt (or vice versa), this specific order 
modification does not lose priority on the BZX Book.
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    \13\ Alternatively, as noted in Rule 11.12(a)(4) a modification 
that involves a decrease in the size of the order will not cause the 
loss of time priority. Therefore, in order to decrease the size of 
the order, the System will first determine that the type of 
modification will not result in a loss of time priority and will 
handle the order in a completely different manner than it would if 
the order would have resulted in a loss of time priority.
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    Specifically, if a sell long order is modified to a sell short 
order (or vice versa) or a sell short exempt order is modified to a 
sell short order (or vice versa) while an SSCB is in effect, the 
Exchange cannot simply change the order from sell long to sell short 
(or vice versa) or sell short exempt to sell short (or vice versa) 
while resting on the book, but rather must verify that the sell short 
order would not violate Rule 201(b)(1)(ii) \14\ of Regulation SHO 
before the order is re-added to the BZX Book. Therefore, as such a 
modification may result in a change of the order's price, the System 
gives the order a new timestamp, resulting in a loss of priority. 
Similarly, if a sell short order is modified to a sell long order (or 
vice versa) or a sell short order is modified to a sell short exempt 
(or vice versa) order while an SSCB is in effect, the order may be 
eligible to display at a more aggressive price. As such, the System 
gives the order a new timestamp, again resulting in a loss of time 
priority, but potentially in improved price priority. However, if an 
order is modified from sell long to sell short exempt (or vice versa) 
when an SSCB is in effect, the System does not have to take an 
additional step to evaluate whether the modification violates Rule 
201(b)(1)(ii) of Regulation SHO given that sell long and sell short 
exempt orders may execute at more aggressive prices that sell short 
orders during an SSCB. Accordingly, an order modification from sell 
long to sell short exempt (or vice versa) would not result in a loss of 
priority. Stated differently, the System treats orders marked sell long 
and sell short exempt the same, and only order modifications from 
either sell long to sell short (or vice versa) or sell short exempt to 
sell short (or vice versa) would cause an order to lose priority during 
an SSCB because the System is required to determine whether a change in 
the order's price is required as a consequence of the change in status 
from either sell long to sell short (or vice versa) or sell short 
exempt to sell short (or vice versa). This order price analysis by the 
System is required in order to prevent potential violations of Rule 
201(b)(1)(ii) of Regulation SHO as orders may be required to be re-
priced to prevent potential violations of Rule 201 when the SSCB is in 
effect.
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    \14\ Pursuant to Rule 201(b)(1)(ii) of Regulation SHO, the 
Exchange must establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the execution or display 
of a short sale order of a covered security at a price that is less 
than or equal to the current NBB during an SSCB.
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    To illustrate order behavior with a modification from sell long to 
sell short during an SSCB, consider the following example:
    Assume the National Best Bid and Offer (``NBBO'') \15\ in a given 
covered security \16\ is $5.00 x $5.10 while an SSCB is in effect. A 
User enters a non-displayed sell long order with a limit price of 
$5.00. Subsequently, the User modifies the position of the order from 
sell long to sell short, while the NBBO has remained the same. In order 
to effect the modification, the System determines that a modification 
from sell long to sell short may result in a change in the order's 
price in order to prevent potential violations of Rule 201(b)(1)(ii) of 
Regulation SHO, as orders may be required to be repriced to prevent 
potential violations of Rule 201 when the SSCB is in effect. 
Accordingly, the order loses its time priority in order for the System 
to handle the potential price change. In this example, the subject 
order resulted in a change of the order's price as the sell short order 
was not eligible for execution at a price equal to the NBB. 
Nonetheless, even if the modification would not have ultimately 
resulted in a price change, the modification would have necessarily 
caused the System to evaluate whether a price change was necessary and, 
thus, required a new timestamp, resulting in a loss of time priority.
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    \15\ See Exchange Rule 1.5(o).
    \16\ Rule 201(a)(1) of Regulation SHO defines the term ``covered 
security'' to mean any ``NMS stock'' as defined under Rule 
600(b)(48) of Regulation NMS. Rule 600(b)(48) of Regulation NMS 
defines an ``NMS stock'' as ``any NMS security other than an 
option.'' Rule 600(b)(47) of Regulation NMS defines an ``NMS 
security'' as ``any security or class of securities for which 
transaction reports are collected, processed, and made available 
pursuant to an effective transaction reporting plan, or an effective 
national market system plan for reporting transactions in listed 
options.'' See 17 CFR 242.201(a)(1); 17 CFR 242.600(b)(47); and 17 
CFR 242.600(b)(48).
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    Order modifications from sell long to sell short (or vice versa), 
sell long to sell short exempt (or vice versa), or sell short exempt to 
sell short (or vice versa) that occur when an SSCB is not in effect 
will not be subject to a loss of priority on the Exchange, as orders 
may be required to be re-priced to prevent potential violations of Rule 
201 of Regulation SHO, only when an SSCB is in effect. When an SSCB is 
not in effect the System does not have to take the additional step of 
determining whether a price change is required before effecting a 
position modification from sell long to sell short (or vice versa), 
sell long to sell short exempt (or vice versa),

[[Page 13179]]

or sell short exempt to sell short (or vice versa) and as such, these 
order modifications can be processed without a loss of priority.
Routing Clarification for Orders That Will Post to an Away Trading 
Center
    The Exchange is also proposing to amend Rule 11.13(b)(1) in order 
to codify that any sell short order that will post to an away Trading 
Center \17\ will be routed when an SSCB is in effect. Given that sell 
short orders that post to an away Trading Center are subjected to the 
receiving Trading Center's processes for handling sell short orders in 
compliance with Rule 201 of Regulation SHO,\18\ the Exchange believes 
the capability to route all sell short orders with the ability to post 
to an away market center during an SSCB is appropriate and that 
Exchange Rules should be amended to codify such functionality.\19\
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    \17\ Rule 600(b)(82) of Regulation NMS defines a ``Trading 
Center'' as ``a national securities exchange or national securities 
association that operates an SRO trading facility, an alternative 
trading system, an exchange market maker, an OTC market maker, or 
any other broker or dealer that executes orders internally by 
trading as principal or crossing orders as agent.'' See 17 CFR 
242.201(a)(9); 17 CFR 242.600(b)(82).
    \18\ Rule 201(b)(1) of Regulation SHO requires a Trading Center 
(e.g., Cboe BZX) to establish, maintain, and enforce written 
policies and procedures reasonably designed to prevent the execution 
or display of a short sale order of a covered security at a price 
that is less than or equal to the national best bid if the price of 
that covered security decrease by 10% or more from the covered 
security's closing price as determined by the listing market for the 
covered security as of the end of regular trading hours on the prior 
day. See 17 CFR 242.201(b)(1).
    \19\ See, e.g., Nasdaq Rule 4763; NYSE Rule 440B; and Nasdaq's 
Regulation SHO Frequently Asked Questions (updated March 10, 2011), 
available at https://nasdaqtrader.com/content/marketregulation/regsho/regshoFAQs.pdf.
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    The proposed rule change would provide Users with clarity as how 
the Exchange will handle routable sell short orders when the SSCB is in 
effect. For instance, Rule 11.13(b)(1) explicitly states that the Post 
to Away \20\ or ROOC \21\ routing options will post an order to another 
Trading Center's book when the SSCB is in effect.\22\ However, while 
Rule 11.13(b)(3)(K) provides that the RDOT \23\ routing option may post 
an order to another Trading Center's book (which could occur if the 
order is entered with a time-in-force (``TIF'') of Day),\24\ Rule 
11.13(b)(1) does not state that the RDOT routing option is available to 
orders marked sell short during an SSCB. The Exchange seeks to provide 
that any routing strategy that would post the remainder of the routed 
order to another Trading Center's book is eligible for routing during 
an SSCB. Under Exchange Rule 11.13(b)(1), IOC \25\ orders marked 
``short'' that are not eligible for routing during an SSCB will 
continue to be cancelled. The unfilled portions of limit orders marked 
``short'' that are ineligible for routing due to an SSCB will continue 
to be posted to the BZX Book subject to the price sliding process as 
defined in Exchange Rule 11.9(g).
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    \20\ See Exchange Rule 11.13(b)(3)(H). Post to Away is a routing 
option that routes the remainder of a routed order to and posts such 
order on the order book of a destination on the System routing table 
as specified by the User.
    \21\ See Exchange Rule 11.13(b)(3)(N). ROOC is a routing option 
for orders that the entering firm wishes to designate for 
participation in the opening, re-opening (following a halt, 
suspension, or pause), or closing process of a primary listing 
market other than the Exchange (IEX, NYSE, Nasdaq, NYSE American, or 
NYSE Arca) if received before the opening/re-opening/closing time of 
such market. If shares remain unexecuted after attempting to execute 
in the opening, re-opening, or closing process, they are either 
posted to the BZX Book, executed, or routed to destinations on the 
System routing table.
    \22\ The Exchange notes that orders routed pursuant to the Post 
to Away routing option that include a short sale instruction are 
identified as ``short'' and are subject to the receiving Trading 
Center's processes for handling sell short orders in compliance with 
Rule 201 of Regulation SHO. See Securities Exchange Act Release No. 
79149 (October 25, 2016) 81 FR 75464 (October 31, 2016) (SR-BatsBZX-
2016-65) (Notice of Filing and Immediate Effectiveness of a Proposed 
Rule Change to BZX Rule 11.13, Order Execution and Routing).
    \23\ See Exchange Rule 11.13(b)(3)(K). RDOT is a routing option 
under which an order checks the System for available shares and then 
is sent to destinations on the System routing table. If shares 
remain unexecuted after routing, they are sent to the NYSE and can 
be re-routed by the NYSE. If shares remain unexecuted after routing, 
they are posted to the NYSE, unless otherwise instructed by the 
User.
    \24\ A ``Day Order'' refers to a limit order to buy or sell 
which, if not executed, expires at the end of Regular Trading Hours. 
See Exchange Rule 11.9(b)(2). Day Orders routed pursuant to the RDOT 
routing option that include a short sale instruction are identified 
as ``short'' and are subject to the receiving Trading Center's 
processes for handling short sale orders in compliance with Rule 201 
of Regulation SHO.
    \25\ An ``IOC Order'' refers to a limit order that is to be 
executed in whole or part as soon as such order is received and the 
portion not immediately executed on the Exchange or another trading 
center is treated as cancelled and is not posted to the BZX Book. 
See Exchange Rule 11.9(b)(1).
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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.\26\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \27\ 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) \28\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ Id.
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    In particular, the proposed rule change to Rule 11.9(e)(3) is 
consistent with the protection of investors and the public interest 
because it aligns the rule text with the how the System currently 
operates and helps to eliminate any potential confusion Users may have 
regarding current Rule 11.9(e)(3). This proposed amendment will not 
change existing System behavior and Users will have more certainty 
about how orders may be modified, which is related to the proposed 
changes to Rule 11.12(a)(4).
    Additionally, the proposed rule change to Rule 11.12(a)(4) is 
designed to ensure all sell short orders are subjected to the 
Exchange's process for ensuring that the order would not violate Rule 
201(b)(1)(ii) of Regulation SHO during an SSCB. In order to verify the 
displayed price of an order with a position modification from sell long 
to sell short (or vice versa) or sell short exempt to sell short (or 
vice versa) during an SSCB, the System handles the modification as if a 
price change would occur, even if the modification does not ultimately 
result in a price change. If the System permitted such order 
modifications to forego this process, no order modifications from sell 
long to sell short (or vice versa) or sell short exempt to sell short 
(or vice versa) during an SSCB would result in a loss of time priority, 
and as a result, certain sell short orders could be permitted to 
display or execute at an impermissible price that would not comply with 
Rule 201(b)(1)(ii). The Exchange's process is designed to ensure 
compliance with Rule 201(b)(1)(ii) of Regulation SHO and is consistent 
with the protection of investors and the public interest. As designed, 
during an SSCB, the System determines up front whether an order 
modification could result in a price change before it can properly 
effect the modification. If the modification is of a type that may 
result in a price change to comply with Regulation SHO, the

[[Page 13180]]

System gives the order a new timestamp. As a result, such a 
modification from sell long to sell short (or vice versa) or sell short 
exempt to sell short (or vice versa) always results in a loss of time 
priority even if the modification did not result in a change of the 
order's price. Conversely, an order modification from sell long to sell 
short exempt (or vice versa) does not result in an order losing 
priority because the System does not conduct an order price analysis to 
ensure compliance with Rule 201(b)(1)(ii) of Regulation SHO as both 
sell long and sell short exempt orders may execute at more aggressive 
prices than sell short orders during an SSCB.
    Moreover, the Exchange processes billions of order modifications 
each month, with only a limited amount of modifications involving a 
change from sell long to sell short (or vice versa) or sell short 
exempt to sell short (or vice versa) during an SSCB. Out of the 
billions of order modifications processed by the Cboe affiliated equity 
exchanges during the months of May, June, and July 2022, the Exchange 
identified approximately 369,884 order modifications from sell long to 
sell short (or vice versa) or sell short exempt to sell short (or vice 
versa) across the Cboe affiliated equity exchanges during an SSCB that 
would potentially be affected by the proposed amendment to Rule 
11.12(a)(4).\29\ Given that 369,884 order modifications during an SSCB 
across the Cboe affiliated equity exchanges is an extremely small 
percentage of the billions of order modifications that the Cboe 
affiliated equity exchanges processed during the months of May, June, 
and July 2022, the Exchange believes that any benefit from restoring 
priority to this limited amount of order modifications is outweighed by 
the burden of changing the System to be able to conduct an order price 
analysis in real time to prevent potential violations of Rule 
201(b)(1)(ii) of Regulation SHO and to permit these orders to retain 
priority.
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    \29\ When identifying orders impacted by this functionality 
during May, June, and July 2022, the Exchange broadly identified any 
orders regardless of whether those orders were at or near the NBBO 
(i.e., marketable orders) at the time of the event. The Cboe 
affiliated equities exchanges refers to the Exchange, Cboe BYX 
Exchange, Inc. (``BYX''), Cboe EDGX Exchange, Inc. (``EDGX''), and 
Cboe EDGA Exchange, Inc. (``EDGA'').
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    In addition, the proposed change to Rule 11.12(a)(4) will also 
protect investors and the public interest because it continues to 
promote compliance with Regulation SHO, including Regulation SHO's 
order marking requirements \30\ and Users' compliance with any 
applicable exemptions. Users are currently able to modify their order's 
position using a Replace Message and the proposed rule change does not 
alter a User's ability to do so. Users are required to mark their 
orders properly upon entry and upon modification \31\ and the proposed 
amendment to Rule 11.12(a)(4) does not change this obligation. As they 
are required to do today, Users must also continue to ensure that their 
order complies with any applicable exemption from Regulation SHO that 
they seek to avail themselves of, not only at the time of entry, but 
also at the time they change an order's position via a Replace 
Message.\32\ The Exchange notes that it will continue to surveil for 
compliance with Exchange Rules 11.19 and 11.21 as well as Regulation 
SHO.
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    \30\ 17 CFR 242.200(g).
    \31\ See Exchange Rule 11.19 (``Short Sales''). The rule 
provides that ``[a]ll short sale orders shall be identified as 
``short'' or ``short exempt'' when entered into the System. If 
marked ``short exempt,'' the Exchange shall execute, display and/or 
route an order without regard to any short sale price test 
restriction in effect under Regulation SHO. The Exchange relies on 
the marking of an order as ``short exempt'' when handling such 
order, and thus, it is the entering Member's responsibility, not the 
Exchange's responsibility, to comply with the requirements of 
Regulation SHO relating to marking of orders as ``short exempt.''.''
    \32\ A change in an order's price or position as well as an 
increase in an order's size via a Replace Message implicitly results 
in a new order. All Users must, therefore, ensure continued 
compliance with the order marking and locate requirements of 
Regulation SHO (17 CFR 242.201) including compliance with Question 
2.6 of the Commission's ``Responses to Frequently Asked Questions 
Concerning Regulation SHO'' available at https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm (last accessed October 3, 
2022).
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    The proposed amendment to Rule 11.9(e)(3) is designed to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it does not seek to change how order 
modifications from either sell long to sell short exempt (or vice 
versa) or sell short exempt to sell short (or vice versa) are 
accomplished. Instead, the proposed change provides clarity to Users 
that a position change from either sell long to sell short exempt (or 
vice versa) or from sell short exempt to sell short (or vice versa) may 
be accomplished through the use of a Replace Message and does not 
require an order to be cancelled and a new order submitted in order to 
modify an order's position to sell short exempt. The proposed change to 
Rule 11.9(e)(3) will also provide continuity between Rule 11.9(e)(3) 
and the proposed changes to Rule 11.12(a)(4), and as such are directly 
intended to remove impediments to and perfect the mechanism of a free 
and open market and national market system.
    The proposed change to Rule 11.12(a)(4) removes impediments to and 
perfects the mechanism of a free and open market and a national market 
system because it addresses a limited scenario when a User modifies an 
order's position using a Replace Message during an SSCB. The proposed 
rule change specifically states that orders whose positions are 
modified from either sell long to sell short (or vice versa) or sell 
short exempt to sell short (or vice versa) using a Replace Message when 
an SSCB is not in effect will not receive a new timestamp and will not 
lose priority as compared to other orders on the BZX Book. Further, the 
proposed rule change provides that order modifications from sell long 
to sell short exempt (or vice versa) using a Replace Message will not 
lose priority as compared to other orders on the BZX Book, regardless 
of whether an SSCB is in effect. Additionally, the proposed change to 
Rule 11.12(a)(4) removes impediments to and perfects a free and open 
market system because it is designed to make clear to Users that orders 
may be modified using a Replace Message without losing priority subject 
to the limitations named in Rule 11.12(a)(4). This change does not 
amend the meaning or operation of Rule 11.12(a)(4).
    The proposed changes to Rule 11.13(b)(1) are designed to provide 
that any sell short order that will post to an away Trading Center will 
be routed when an SSCB is in effect. In addition, providing Users the 
ability to send sell short orders that will post to an away Trading 
Center, and thus are routable when an SSCB is in effect provides them 
additional flexibility with regard to the handling of their orders, and 
may provide additional execution opportunities for those orders. Given 
this, the proposed amendments to Rule 11.13(b)(1) are directly targeted 
at removing impediments to and perfecting the mechanism of a free and 
open market and national market system, as well as to assure fair 
competition among brokers and dealers and among exchange markets.
    The proposed change to Rule 11.13(b)(1) further promotes just and 
equitable principles of trade and perfects a free and open market 
system by identifying which orders containing routing instructions are 
eligible to route and post to an away market center during an SSCB. As 
all Trading Centers are required to comply with Rule 201(b)(1)(ii) of 
Regulation SHO, a User can expect that an order routed from the 
Exchange to an away market center will

[[Page 13181]]

be treated similarly on the away market center as it would on the 
Exchange during an SSCB. There is no change to the meaning or operation 
of this rule, but rather an amendment to make clear that an order that 
is eligible to post to an away market may be routed during an SSCB.

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 as the proposed rule changes 
are not being proposed for competitive reasons. Rather, the proposed 
amendment to Rule 11.9(e)(3) provides that modifications from sell long 
to sell short exempt (or vice versa) or from sell short exempt to sell 
short (or vice versa) may be accomplished through the use of a Replace 
Message. This proposed amendment will not change existing System 
behavior and Users will have more certainty about how orders may be 
modified, which is related to the proposed changes to Rule 11.12(a)(4). 
Order modifications from sell long to sell short (or vice versa) use 
the same Replace Message functionality as a modification from either 
sell long to sell short exempt (or vice versa) or from sell short 
exempt to sell short (or vice versa), and amending Rule 11.9(e)(3) to 
describe this behavior for Users is directly related to the Exchange's 
proposed changes to Rule 11.12(a)(4) and does not impose a burden on 
inter-market competition that is not necessary or appropriate in 
furtherance of the Act.
    Additionally, the proposed amendments to Rule 11.12(a)(4) will 
enhance the transparency of the rules by revising the rule text. By 
revising the rule text to align with the current System behavior, Users 
will be aware that if they modify their orders from sell long to sell 
short (or vice versa) or from sell short exempt to sell short (or vice 
versa) and an SSCB is in effect, their orders will be given a new 
timestamp and lose time priority. Users are free to consider this 
proposed change as part of their overall experience with the Exchange, 
which also includes execution quality and functionality offerings, when 
making order routing decisions. Additionally, the Exchange notes that 
the proposed rule change applies equally to all Users, and all Users' 
orders are subject to the described functionality, regardless of their 
size. Users may not opt-out of this System functionality.
    Furthermore, this loss of time priority for a position modification 
would only occur when an SSCB is in effect and the Exchange is required 
to comply with Rule 201 of Regulation SHO. The impact of an order 
modification from sell long to sell short (or vice versa) or sell short 
exempt to sell short (or vice versa) using a Replace Message during an 
SSCB with respect to loss of time priority is no different than when a 
User seeks to increase the size of their order using a Replace Message 
or when a User seeks to change the position of their order by 
cancelling the existing order and entering a new order. In each 
instance, the order will receive a new timestamp reflecting the time 
the modification was made and the order would lose priority as compared 
to other orders on the BZX Book.
    Furthermore, the proposed change to Rule 11.12(a)(4) does not 
impose any burden on inter-market competition that is not necessary or 
appropriate in furtherance of the Act in that the proposed change does 
not present a novel approach to sell short order handling. Indeed, the 
proposed changes to Rule 11.12(a)(4) are consistent with a recently 
approved amendment \33\ to MIAX Pearl Rule 2616(a).\34\ Pursuant to 
MIAX Pearl Rule 2616(a), any position modification involving a change 
from sell long to either sell short exempt or sell short (or vice 
versa) will result in the order receiving a new timestamp and the order 
losing priority, as compared to other orders resting on the book while 
an SSCB is in effect. The Exchange's proposed Rule is also similar to 
MIAX Pearl Rule 2616(a) in that modifications from sell long to sell 
short (or vice versa) and modifications from sell short exempt to sell 
short (or vice versa) will be subject to a loss of priority during an 
SSCB.
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    \33\ Supra note 8.
    \34\ MIAX Pearl Rule 2616(a) states: ``[i]n the event an order 
has been modified via a Cancel/Replace message in accordance with 
Rule 2614(e) above, such order only retains its timestamp if such 
modification involves a decrease in the size of the order, a change 
to the Max Floor of an order with a Reserve Quantity, or when a 
Short Sale Period, as defined in Exchange Rule 2614(g)(3)(A), is not 
in effect, a change in position from (A) sell to sell short; (B) 
sell to sell short exempt; (C) sell short to sell; (D) sell short to 
sell short exempt; (E) sell short exempt to sell; and (F) sell short 
exempt to sell short.''
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    While the proposed rule change is substantially similar to that of 
MIAX Pearl, the Exchange's proposal differs in that its proposal would 
not cause orders modified from sell long to sell short exempt (or vice 
versa) to lose priority during an SSCB, whereas MIAX Pearl Rule 2616(a) 
specifically states that a change from sell long to sell short exempt 
is a type of order modification that would be subject to a loss of 
priority during an SSCB. The Exchange's System does not view an order 
modification from sell long to sell short exempt (or vice versa) as a 
type of change which requires an order price analysis in order to 
prevent potential violations of Rule 201(b)(1)(ii) of Regulation SHO, 
and as such does not cause these types of order modifications to result 
in a loss of priority.
    In addition, the proposed rule change is more narrowly tailored 
than the rules of Investors Exchange LLC (``IEX''), which requires 
market participants to enter a new order where an order's position is 
changed even when an SSCB is not in effect \35\ and Nasdaq Stock 
Market, LLC (``Nasdaq''), which requires orders to be cancelled if the 
order's position is redesignated as short during a Short Sale Period 
and the order is not priced at a Permitted Price or higher under Nasdaq 
Rule 4763(e).\36\ In each instance mentioned above, the original order 
would need to be replaced with a new order and therefore would receive 
a new timestamp which would result in a loss of priority. The Exchange 
is seeking to only append a new timestamp and cause a loss of priority 
as compared to other orders on the BZX Book when an order's position is 
modified from sell long to sell short (or vice versa) or sell short 
exempt to sell short (or vice versa) during an SSCB, which is more 
narrowly-tailored than the rules governing similar order behavior on 
MIAX Pearl, IEX and Nasdaq.
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    \35\ See IEX Rule 11.190(d)(3) and IEX Rule 11.190(d)(4).
    \36\ See Nasdaq Equity 4, Rule 4756(a)(3).
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    Furthermore, the proposed change to Rule 11.13(b)(1) does not 
impose any burden on inter-market competition that is not necessary or 
appropriate in furtherance of the Act as it makes clear that orders 
that may post to away market centers will be routed during an SSCB. 
Users will have the ability to take this factor into consideration when 
determining which routing strategy to use when entering an order on the 
Exchange and are able to consider this proposed change as part of their 
overall experience with the Exchange. If a User disfavors this proposed 
change they are free to use a different routing strategy or submit an 
order directly to an away market center. This proposed change is not 
being proposed for competitive reasons, but rather to make clear that 
any order eligible to be posted to an away market center will be routed 
during an SSCB. As each market center is required to comply with Rule 
201 of Regulation SHO, the Exchange believes that any order eligible to 
be posted to an

[[Page 13182]]

away market center should be permitted to route, as the order would be 
subject to the away market center's rules regarding compliance with 
Rule 201 of Regulation SHO upon posting.

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: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
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 \37\ and Rule 19b-
4(f)(6) thereunder.\38\
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    \37\ 15 U.S.C. 78s(b)(3)(A).
    \38\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\39\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay. The Exchange states 
the proposed rule change provides clarity on how orders modified to 
sell short exempt are accomplished and the priority of orders marked 
sell short exempt. The Exchange believes that the proposed rule change 
related to modifications from sell long to sell short (or vice versa) 
or sell short exempt to sell short (or vice versa) that occur during an 
SSCB will affect only a small percentage of overall order 
modifications.\40\ Finally, the Exchange states that the proposed 
change to Rule 11.11(a) will permit orders containing routing 
instructions entered by all Users that would post to an away market 
during an SSCB to route to away market centers immediately upon 
becoming operative. The Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because the proposed rule change does not raise any new 
or novel issues. Accordingly, the Commission hereby waives the 
operative delay and designates the proposal operative upon filing.\41\
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    \39\ 17 CFR 240.19b-4(f)(6)(iii).
    \40\ See supra note 29.
    \41\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2023-012.

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-CboeBZX-2023-012. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2023-012, and should be 
submitted on or before March 23, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-04229 Filed 3-1-23; 8:45 am]
BILLING CODE 8011-01-P