Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance Its Drill-Through Protection Processes for Simple Orders and Make Other Clarifying Changes, 54376-54381 [2023-17107]
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Federal Register / Vol. 88, No. 153 / Thursday, August 10, 2023 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98060; File No. SR–C2–
2023–017]
Self-Regulatory Organizations; Cboe
C2 Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Enhance Its DrillThrough Protection Processes for
Simple Orders and Make Other
Clarifying Changes
August 4, 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 July 24,
2023, Cboe C2 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘C2’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘C2’’) proposes to enhance its drillthrough protection processes for simple
orders and make other clarifying
changes. 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/
options/regulation/rule_filings/ctwo/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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1. Purpose
The purpose of this rule filing is to
amend Rule 5.34(a), Order and Quote
Price Protection Mechanisms and Risk
Controls (Simple Orders), to enhance
the drill-through protection process for
simple orders and make other clarifying
changes.
Drill-through price protection is
currently described in Exchange Rule
5.34(a)(4)(A). Under Rule 5.34(a)(4)(A),
if a buy (sell) order enters the Book 3 at
the conclusion of the opening auction
process or would execute or post to the
Book at the time of order entry, the
System 4 executes the order up to a
buffer amount (the Exchange determines
the buffer amount on a class and
premium basis) above (below) the offer
(bid) limit of the Opening Collar 5 or the
National Best Offer (‘‘NBO’’) (National
Best Bid (‘‘NBB’’)) that existed at the
time of order entry, respectively (the
‘‘drill-through price’’).6
Rule 5.34(a)(4)(C) establishes an
iterative drill-through process, whereby
the Exchange permits orders to rest in
the Book for multiple time periods and
at more aggressive displayed prices
during each time period.7 Specifically,
for a limit order (or unexecuted portion)
with a Time-in-Force of Day, Good-tilCancelled (‘‘GTC’’), or Good-til-Date
(‘‘GTD’’), the System enters the order in
the Book with a displayed price equal
to the drill-through price. The order (or
unexecuted portion) will rest in the
Book at the drill-through price for the
duration of consecutive time periods
(the Exchange determines on a class-byclass basis the length of the time period
in milliseconds, which may not exceed
three seconds).8 Following the end of
3 ‘‘Book’’ means the electronic book of simple
orders and quotes maintained by the System, which
single book is used during both the regular trading
hours and global trading hours trading sessions. See
Rule 1.1 (definition of, ‘‘Book’’).
4 ‘‘System’’ means the Exchange’s hybrid trading
platform that integrates electronic and open outcry
trading of option contracts on the Exchange and
includes any connectivity to the foregoing trading
platform that is administered by or on behalf of the
Exchange, such as a communications hub. See Rule
1.1 (definition of, ‘‘System’’).
5 See Rule 5.31(a) for the definition of Opening
Collar.
6 See Rule 5.34(a)(4)(A).
7 The Exchange will announce to Trading Permit
Holders the buffer amount and the length of the
time periods in accordance with Rule 1.5. The
Exchange notes that each time period will be the
same length (as designated by the Exchange), and
the buffer amount applied for each time period will
be the same.
8 See Rule 5.34(a)(4)(C). The proposed rule
change defines this time period as an ‘‘iteration.’’
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each period, the System adds (if a buy
order) or subtracts (if a sell order) one
buffer amount (the Exchange determines
the buffer amount on a class-by-class
basis) to the drill-through price
displayed during the immediately
preceding period (each new price
becomes the ‘‘drill-through price’’).9
The order (or unexecuted portion) rests
in the Book at that new drill-through
price for the duration of the subsequent
period. The System applies a timestamp
to the order (or unexecuted portion)
based on the time it enters or is repriced in the Book for priority reasons.
The order continues through this
iterative process until the earliest of the
following to occur: (a) the order fully
executes; (b) the User 10 cancels the
order; and (c) the buy (sell) order’s limit
price equals or is less (greater) than the
drill-through price at any time during
application of the drill-through
mechanism, in which case the order
rests in the Book at its limit price,
subject to a User’s instructions.
Currently, the above-described
iterative drill-through process does not
apply to market orders.11 Specifically, if
a buy (sell) market order would execute
at the time of order entry, the System
executes the order up to the Exchangedetermined buffer amount above
(below) the NBO (NBB) at the time of
order entry and then rejects any
remaining amount.12 For example,
suppose a market order to buy two
contracts enters the System; assume that
the drill-through price buffer for a
certain option series is $0.90 and that
the following quotes are in the Book:
Quote 1 (NBBO): 1 @5.00 × 1 @7.00;
Quote 2: 2 @4.00 × 1 @8.00. One
contract in the market order will
execute against the 7.00 offer quote. The
remaining one contract of the market
order is cancelled, because the next best
offer of 8.00 is 1.00 above the NBO,
which is more than the 0.90 buffer
amount.
The Exchange proposes for market
orders with a Time-in-Force of Day to go
through the iterative drill-through
process described above.13 In the above
example, rather than cancel the
remaining one contract, the System
would rest the one contract in the Book
9 See
Rule 5.34(a)(4)(C).
term ‘‘User’’ shall mean any Trading
Privilege Holder (TPH) or Sponsored User who is
authorized to obtain access to the System pursuant
to Rule 5.5.
11 Rule 5.34(a)(4)(A) and (B).
12 Id.
13 See proposed Rule 5.34(a)(4)(C). The proposed
rule change also adds ‘‘a’’ prior to the term ‘‘Timein-Force’’ in that provision, which was
inadvertently omitted; this is a nonsubstantive
grammatical change that conforms the language to
that in subparagraph (B).
10 The
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at the drill-through price of 7.90 (i.e. the
NBO plus the buffer amount) for the
Exchange-determined time period. At
the end of that time period, assuming
the market has not changed, the
remaining one contract would execute
against the 8.00 offer, which is within
a buffer amount of the subsequent drillthrough price of 8.80. As a result, like
super-aggressive limit orders (except for
those with Time-in-Force of Immediateor-Cancel (‘‘IOC’’) or Fill-or-Kill
(‘‘FOK’’)) do today, market orders
(except for those with Time-in-Force of
IOC) will have additional execution
opportunities pursuant to the drillthrough process. As the proposed rule
change only applies to market orders
with a Time-in-Force of Day, the
Exchange also proposes to amend Rule
5.34(a)(4)(B) to specify that the System
will reject any market order with a
Time-in-Force of IOC (or unexecuted
portion) not executed pursuant to Rule
5.34(a)(4)(A).14 The Exchange believes it
is appropriate to not have a market
order with a Time-in-Force of IOC to go
through the iteration process, because
the iteration process would be
inconsistent with the IOC instruction
(and thus the user’s intent). Further, the
Exchange proposes to amend Rule
5.34(a)(4)(A) to more generally describe
when applicable order types may
become subject to drill-through
protection. Specifically, the Exchange
proposes to specify that the protections
described in Rule 5.34(a)(4)(A) become
applicable if a buy (sell) order, to which
Rule 5.34(a)(4) would apply, (i) enters
the Book at the conclusion of opening
auction process, or (ii) would execute or
post to the Book when it enters the
Book.15
The Exchange also proposes to amend
Rule 5.34(a)(1)(A)(ii) to exclude from
the current protections for market orders
in no-bid series certain orders that
would be otherwise subject to the drillthrough protection under the proposed
rule changes. Currently, under Rule
5.34(a)(1)(A)(ii), if the System receives a
sell market order in a series after it is
open for trading with an NBB of zero,
and the NBO in the series is greater than
$0.50, the System cancels or rejects the
market order. The Exchange proposes
amending this protection in the event a
drill-through process is in progress.
Specifically, the Exchange proposes to
amend Rule 5.34(a)(1)(A)(ii) to note that
in the event the System receives a sell
market order in a series after it is open
14 There is no change to the handling of market
orders with a Time-in-Force of GTC or GTD as a
result of this rule change; such orders will continue
to be rejected by the Exchange.
15 This includes, for example, when a Stop (StopLoss) or Stop-Limit order is elected.
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for trading with an NBB of zero and the
NBO in the series is greater than $0.50,
if the drill-through process is in
progress for sell orders and the sell
market order would be subject to drillthrough protection, then the order
would join the on-going drill-through
process in the then-current iteration and
at the then-current drill-through price,
regardless of NBBO. The Exchange
believes it is not optimal for these
orders to be immediately booked at the
minimum tick increment, as under the
proposed rule change, such orders
would instead, be subject to the drillthrough protection mechanism
described under Rule 5.34(a)(4), which
may allow opportunity for execution at
a more beneficial price level than the
minimum tick increment.
Further, the Exchange proposes to
amend Rule 5.34(a)(2) to specifically
exclude orders that would be subject to
drill-through protection from the market
order NBBO width protections
described therein. Currently, under Rule
5.34(a)(2), if a User submits a market
order to the System when the NBBO
width is greater than x% of the
midpoint of the NBBO, subject to a
minimum and maximum dollar amount
(as determined by the Exchange on a
class-by-class basis), the System cancels
or rejects the market order. The
Exchange proposes amending Rule
5.34(a)(2) to exclude Stop (Stop-Loss) 16
and Market-on-Close orders from this
protection. Such orders may
intentionally be further away from the
NBBO at the time the order is entered,
and the protection may cause the orders
to be inadvertently rejected pursuant to
this check. The Exchange believes it is
not optimal for these orders to be
subject to the market order NBBO width
protection, as the check may
inadvertently cause rejections for orders
that may otherwise not have an
opportunity to execute if they are
immediately cancelled due to market
width. Under the proposed rule change,
such orders would instead, upon entry
into the Book (when elected in
accordance with their definitions), be
subject to the drill-through protection
mechanism described under Rule
5.34(a)(4). The Exchange also proposes
a clarification to Rule 5.34(a)(4)(E).
Currently, under Rule 5.34(a)(4)(E), if
16 A
‘‘Stop (Stop-Loss)’’ order is an order to buy
(sell) that becomes a market order when the
consolidated last sale price (excluding prices from
complex order trades if outside of the NBBO) or
NBB (NBO) for a particular option contract is equal
to or above (below) the stop price specified by the
User. Users may not designate a Stop Order as All
Sessions. Users may not designate bulk messages as
Stop Orders. See Rule 5.6(c) (definition of ‘‘Stop
(Stop-Loss)’’ order).
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54377
multiple Stop (Stop-Loss) or StopLimit 17 orders to buy (sell) have the
same stop price and are thus triggered
by the same trade price or NBBO, and
would execute or post to the Book, the
System uses the contra-side NBBO that
existed at the time the first order in
sequence was entered into the Book as
the drill-through price for all orders.
The Exchange proposes to remove the
conditional language noting that such
Stop (Stop-Loss) or Stop-Limit orders to
buy (sell) must have the same stop
price, as it is possible that orders with
different stop prices may be triggered by
the same trade price or NBBO. Further,
the Exchange proposes to add language
stating that, where multiple orders are
simultaneously re-priced, the orders
will be prioritized under subparagraph
(C)(v) of Rule 5.34(a)(4) and will be
sequenced based on the original time
each order was entered into the Book.
For example, assume that the drillthrough price buffer for a certain option
series is $0.90, and that the following
quotes are in the Book: Quote 1 (NBBO):
1 @5.00 × 1 @7.00; Quote 2: 2 @4.00 ×
1 @8.00. Additionally, the following
Stop orders are being held in the System
when Quote 2 is updated to 2 @4.00 ×
1 @6.50 (the System received these stop
orders in the below sequence):
Order 1: Sell 1 @Market, Stop Price =
$6.50
Order 2: Sell 1 @Market, Stop Price =
$6.55
Order 3: Sell 1 @$3.95, Stop Price =
$6.60
Each of orders 1, 2 and 3 have a stop
price less than the NBO, and will
therefore be triggered by the 6.50 quote
and enter the Book for execution or
posting. A drill-through price for all
three orders is set at the contra-side
NBB of 5.00. Per proposed Rule
5.34(a)(4)(C), the orders will go through
the drill-through process as follows:
1. Order 1 will execute against Quote
1 @$5.00.
2. Orders 2 and 3 are posted to sell at
$4.10 for the Exchange-determined time
period.
3. Drill-through process continues for
orders 2 and 3 until they are canceled
or executed.
As amended, under Rule 5.34(a)(4)(E),
all Stop (Stop-Loss) and Stop-Limit
17 A ‘‘Stop-Limit’’ order is an order to buy (sell)
that becomes a limit order when the consolidated
last sale price (excluding prices from complex order
trades if outside the NBBO) or NBB (NBO) for a
particular option contract is equal to or above
(below) the stop price specified by the User. A User
may not designate a Stop-Limit Order as All
Sessions. Users may not designate bulk messages as
Stop-Limit Orders. A User may not designate a bulk
orders as Stop Limit orders. See Rule 5.6(c)
(definition of ‘‘Stop-Limit’’ order).
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orders elected as a result of the same
election trigger (NBBO update or last
sale price) will continue to use the same
reference price for drill-through (even
though they may have different stop
prices).
The Exchange proposes to amend
Rule 5.34(a)(4)(c)(ii), to specify that if at
any time during the drill-through
process, the NBO (NBB) changes to be
below (above) the current drill-through
price, such NBO (NBB) will become the
new drill-through price and a new drillthrough will immediately begin. As a
result, any improvements to the market
that occur while the drill-through is in
process will be incorporated, thereby
providing Users with further
opportunity to be priced within the
market while still being protected.
Under the proposed rule change, any
limit order with a price that is less
aggressive than the new drill-through
price would be entered in the Book at
its limit price.
The Exchange also proposes to add
Rule 5.34(a)(4)(C)(iv) 18 to provide that if
the System receives a market or limit
order that would be subject to the drillthrough process while a drill-through is
in progress in the same series, the order
joins the ongoing drill-through process
in the then-current iteration and at the
then-current drill-through price. Under
the proposed rule, orders that come in
while a drill-through is in process
receive the benefit of joining the drillthrough at the NBBO at the time of
entry, as opposed to immediately
executing or being displayed at a more
aggressive price than the drill-through
price. By way of illustration, consider
the following example:
Assume that the drill-through price
buffer for a certain option series is
$0.90, and that the following quotes are
in the Book: Quote 1 (NBBO): 1 @5.00
× 1 @7.00; Quote 2: 2 @4.00 × 1 @8.00.
The System receives the following
orders in the below sequence:
Order 1: Sell 1 @Market, Stop Price =
$6.50
Order 2: Sell 1 @Market, Stop Price =
$6.55
Order 3: Sell 1 @$3.95, Stop Price $6.60
Order 4: Sell 2 @Market, Stop Price =
$4.50
During this time, Quote 2 is updated
to: 2 @4.00 × 1 @6.50. Orders 1, 2, and
3 are elected, and the drill-through
reference price for all three orders is set
to contra-side NBB of 5.00.
1. Order 1 executes Quote 1 @$5.00.
18 As a result of the additional provisions
described herein, the proposed rule change
renumbers current subparagraph (iv) to be proposed
subparagraph (vi).
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2. Orders 2 and 3 are posted to sell @
$4.10 (drill-through price) for the
Exchange-determined time period.
3. Order 4 is elected due to updated
best offer of $4.10, and joins Orders 2
and 3 at the iterative drill-through price
of $4.10. The offer is updated to 4 @
$4.10.
4. Order 5 (Sell 10 @Market (Day)) and
Order 6 (Sell 1 @$4.05 Limit (Day)) enter
the Book. Per proposed Rule
5.34(a)(4)(C)(iv), Orders 5 and 6 join the
drill-through iteration at the drillthrough reference price of $4.10, and the
best offer is updated to 15 @$4.10.
5. The drill-through process continues
for orders 2, 3, 4, 5, and 6 until the
contracts are canceled or executed.
Because the proposed rule change
may result in multiple orders going
through the drill-through process at the
same price and at the same time, the
proposed rule change also describes
how these orders will be prioritized and
allocated when executing against resting
interest or incoming interest.
Specifically, proposed Rule
5.34(a)(4)(C)(v) states the System
prioritizes orders that are part of the
same drill-through iteration (A) based
on the time the System enters or
reprices them in the Book (i.e., in time
priority) when, after an iteration, the
new drill-through price makes the
order(s) marketable against resting
orders and (B) in accordance with the
applicable base allocation algorithm
when executing against any incoming
interest. The Exchange believes this is
appropriate because incoming
marketable orders would ultimately
execute in time priority today.
Additionally, having multiple orders
execute in accordance with the
applicable base allocation algorithm
when executing against incoming
interest is consistent with how resting
orders execute against incoming
interest.
Continuing from the above example,
assume the drill-through process iterates
to the next drill-through price, which
would be $3.20. In doing so, Order 6
posts at its limit price of $4.05, and the
rest of the orders are eligible to execute
in time sequence against the resting
$4.00 bid. Per proposed Rule
5.34(a)(4)(C)(v), the orders will go
through the drill-through process as
follows:
1. Order 2 (Sell 1 @Market) will execute
against Quote 2 @$4.00
2. Order 3 (Sell 1 @$3.95) will execute
against Quote 2 @$4.00
3. The Quote 2 is exhausted, and the
next best bid is Quote 1 for 5 @$3.00
4. Remaining drill-through is Order 4
(Sell 2 @Market) and Order 5 (Sell 10
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@Market). Market is now 5 @$3.00 ×
12 @$3.20, and the drill-through
process continues until these
contracts are executed or cancelled.
If, prior to the next drill-through
iteration, Order 7 (buy 5 @$3.25) is
entered and executes against Orders 4
and 5 at $3.20, the allocation will
depend on the allocation algorithm for
the relevant class, under the amended
Rule.
1. If pro-rata, Order 7 trades 1 contract
against Order 4 and 4 contracts
against Order 5.
2. If price-time, Order 7 trades 2
contracts against Order 4 and 3
contracts against Order 5.
3. Remaining size on Order 4 (if
applicable) and Order 5 will continue
to drill-through as described in
previous examples.
The Exchange also proposes to amend
Rule 5.34(a)(4)(C)(vi).19 Currently, the
rule states that an order will continue
through the drill-through process until
the earliest of the following to occur: (a)
the order fully executes; (b) the User
cancels the order; and (c) the buy (sell)
order’s limit price equals or is less
(greater) than the drill-through price at
any time during application of the drillthrough mechanism, in which case the
orders rests in the Book at its limit
price, subject to a User’s instruction.
The Exchange proposes to amend part
(c) to remove reference to when the
order’s limit price equals the drillthrough price, since under the drillthrough process, if a buy (sell) order’s
limit price equals the drill-through price
during the application of the drillthrough mechanism it will remain part
of the drill-through process, until the
order’s limit price is less (greater) than
the drill-through price, at which point it
will rest in the Book at its limit price.
The Exchange also proposes to remove
reference to a User’s instruction, as
there is no additional instruction that
would allow a User to choose a different
order handling option once the buy
(sell) order limit price is less (greater)
than the drill-through price.
Finally, the Exchange proposes to add
Rule 5.34(a)(4)(C)(vii) to specify that the
drill-through protection mechanism
applies during all trading sessions and
to provide clarity as to what happens to
orders that are undergoing the drillthrough process at the end of a trading
session. Under the proposed rule
change, if an order(s) (or unexecuted
portion(s)) is undergoing the drillthrough process at the end of a Global
Trading Hours (‘‘GTH’’) 20 session, then
19 Id.
20 The Exchange does not currently operate a GTH
session. In the event the Exchange were to operate
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the drill-through process concludes and
the order(s) (or unexecuted portions(s))
enters the Regular Trading Hours
(‘‘RTH’’) 21 Queuing Book 22 as a market
order or limit order (at its limits price)
on that same trading day, subject to a
User’s instructions. If an order(s) (or
unexecuted portion(s)) is undergoing
the drill-through process at the end of
its last eligible trading session for that
trading day (i.e., RTH), the drill-through
process concludes. Any order (or
unexecuted portion) with a Time-inForce of (i) Day is canceled, and (ii) GTC
or GTD enters the Queuing Book for the
next eligible trading session (i.e., GTH
or RTH) as a market order or limit order
(at its limit price).
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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.23 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 24 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) 25 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
the proposed rule change to enhance
drill-through protections for simple
a GTH session, it would begin at 8:30 a.m. and go
until 9:15 a.m. ET on Monday through Friday.
21 RTH for transactions in equity options
(including options on individual stocks, ETFs,
ETNs, and other securities) are the normal business
days and hours set forth in the rules of the primary
market currently trading the securities underlying
the options, except for options on ETFs, ETNs,
Index Portfolio Shares, Index Portfolio Receipts,
and Trust Issued Receipts the Exchange designates
to remain open for trading beyond 4:00 p.m. Eastern
Time (ET) but in no case later than 4:15 p.m. ET.
RTH for transactions in index options are from 9:30
a.m. to 4:15 p.m. ET, subject to certain exceptions.
22 See Rule 5.31 for the definition of Queuing
Book.
23 15 U.S.C. 78f(b).
24 15 U.S.C. 78f(b)(5).
25 Id.
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orders and to make certain market
orders eligible for drill-through
protection will remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, protect
investors, because it will provide these
orders with additional and consistent
execution opportunities and
protections. The primary purpose of the
drill-through price protection is to
prevent orders from executing at prices
‘‘too far away’’ from the market when
they enter the Book for potential
execution. The Exchange believes the
proposed rule change is consistent with
this purpose, because Users who submit
market orders with a Time-in-Force of
Day will receive the same level of drillthrough price protection against
execution at potentially erroneous
prices that is currently afforded to
supermarketable limit orders while
receiving the same additional execution
opportunities. Supermarketable limit
orders currently go through the drillthrough process, and market orders with
a Time-in-Force of Day are functionally
similar to supermarketable limit orders.
Therefore, the Exchange believes it is
appropriate to provide both types of
orders with the same price protection.
Further, the proposed rule change to
provide that any new market and limit
orders that would be subject to drillthrough protection will join any inprogress drill-through iterations and
display at the then-current drill-through
price (and the corresponding changes
regarding allocation and prioritization)
allows new orders to receive the same
level of price protection as other orders
undergoing the drill-through process.
The proposed rule change will allow all
orders additional execution
opportunities while continuing to
protect them against execution at
potentially erroneous prices. Similarly,
the Exchange believes the proposed
change to consider changes to the NBO
(NBB) during drill-through and to
update the drill-through price to such
NBO (NBB) should it be lower (higher)
than the drill-through price will further
provide opportunity for execution at
reasonable prices by capturing any
market moves that may result in more
aggressive prices.
The Exchange believes the proposal
will enhance risk protections, the
individual firm benefits of which flow
downstream to counterparties both at
the Exchange and at other options
exchanges, which increases systemic
protections as well. The Exchange
believes enhancing risk protections will
allow Users to enter orders and quotes
with further reduced fear of inadvertent
exposure to excessive risk, which will
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Sfmt 4703
54379
benefit investors through increased
exposure to liquidity for the execution
of their orders.
Additionally, the Exchange believes
changes to specifically exclude from
market order NBBO width and market
order in no-bid series protections
certain orders that would be subject to
drill-through protection will remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, protect investors. Specifically,
the Exchange believes the changes to
exclude certain orders that would be
subject to drill-through protection from
market order NBBO width protections
may reduce inadvertent rejection of
such orders which may be purposely
priced far away from the NBBO at the
time of entry and may otherwise miss an
opportunity for execution if
immediately cancelled. The Exchange
also believes the changes to exclude
certain orders that would be subject to
drill-through protection from market
order in no-bid series protections may
allow opportunity for execution at a
more beneficial price level than if they
were immediately booked at the
minimum tick increment. This proposed
rule change may increase execution
opportunities for Users that submit such
Stop (Stop-Loss) and Market-on-Close
orders (in the case of market order
NBBO width protections) and sell
market orders with an NBB of zero
when the NBO in the series is greater
than $0.50 (in the case of market orders
in no-bid series protections).
The Exchange believes the proposed
change to Rule 5.34(a)(4)(E) will protect
investors because it clarifies that if
multiple Stop (Stop-Loss) and StopLimit orders are triggered by the same
trade price or NBBO (even if the orders
have different stop prices), and would
execute or post to the Book, the System
uses the contra-side NBBO that existed
at the time the first order in sequence
was entered into the Book as the drillthrough price for all orders. The
Exchange believes that the proposed
rule change will bring greater
transparency and clarity to the rulebook,
thus benefitting investors.
Finally, the Exchange believes the
proposed changes to clarify when an
order ceases to remain a part of the drillthrough process and to specify what
happens to orders undergoing drillthrough at the end of a trading session
will protect investors by adding
transparency to the rules regarding the
drill-through functionality and provide
greater certainty as to the application of
the drill-through process.
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ddrumheller on DSK120RN23PROD with NOTICES1
54380
Federal Register / Vol. 88, No. 153 / Thursday, August 10, 2023 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that the
proposed rule change will impose any
burden on intramarket competition that
is not necessary or appropriate in
furtherance of the purposes of the Act
because the enhanced drill-through
protection will apply to all marketable
orders in the same manner.
Additionally, it will provide the same
price protection and execution
opportunities to relevant market orders
that are currently provided to
supermarketable limit orders, which
function in a similar manner.
The Exchange does not believe that
the proposed rule change will impose
any burden on intermarket competition
that is not necessary or appropriate in
furtherance of the purposes of the Act.
The proposed enhancement to the drillthrough protection is consistent with
the current protection and provides
relevant market orders with improved
protection against execution at
potentially erroneous prices through
drill-through price protection in
accordance with User instructions.
Additionally, the proposed rule change
relates specifically to a price protection
offered on the Exchange and how the
System handles orders as part of this
price protection mechanism.
The Exchange believes the proposed
rule change would ultimately provide
all market participants with additional
execution opportunities when
appropriate while providing protection
from erroneous execution. The
Exchange believes the proposal will
enhance risk protections, the individual
firm benefits of which flow downstream
to counterparties both at the Exchange
and at other options exchanges, which
increases systemic protections as well.
The Exchange believes enhancing risk
protections will allow Users to enter
orders and quotes with further reduced
fear of inadvertent exposure to excessive
risk, which will benefit investors
through increased exposure to liquidity
for the execution of their orders.
Without adequate risk management
tools, Trading Permit Holders could
reduce the amount of order flow and
liquidity they provide. Such actions
may undermine the quality of the
markets available to customers and
other market participants. Accordingly,
the proposed rule change is designed to
encourage Trading Permit Holders to
submit additional order flow and
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17:28 Aug 09, 2023
Jkt 259001
liquidity to the Exchange. Accordingly,
the proposed rule change is designed to
encourage Trading Permit Holders to
submit additional order flow and
liquidity to the Exchange. The proposed
flexibility may similarly provide
additional execution opportunities,
which further benefits liquidity in
potentially volatile markets. In addition,
providing Trading Permit Holders with
more tools for managing risk will
facilitate transactions in securities
because, as noted above, Trading Permit
Holders will have more confidence
protections are in place that reduce the
risks from potential system errors and
market events.
Finally, the proposed clarifying
changes are not intended to have any
impact on competition, but rather codify
current functionality to add
transparency to the Rules.
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)(iii) of the Act 26 and
subparagraph (f)(6) of Rule 19b–4
thereunder.27
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 shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
26 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
27 17
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Fmt 4703
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
C2–2023–017 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–C2–2023–017. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–C2–2023–017 and should be
submitted on or before August 31, 2023.
E:\FR\FM\10AUN1.SGM
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Federal Register / Vol. 88, No. 153 / Thursday, August 10, 2023 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–17107 Filed 8–9–23; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[Release No. 34–98056; File No. SR–GEMX–
2023–09]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Reduce GEMX’s
Options Regulatory Fee
August 4, 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 July 25,
2023, Nasdaq GEMX, LLC (‘‘GEMX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II,
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
GEMX’s Pricing Schedule at Options 7,
Section 5 to reduce the GEMX Options
Regulatory Fee or ‘‘ORF.’’
While the changes proposed herein
are effective upon filing, the Exchange
has designated the amendments become
operative on August 1, 2023.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/gemx/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
ddrumheller on DSK120RN23PROD with NOTICES1
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
28 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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17:28 Aug 09, 2023
Jkt 259001
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.
GEMX proposes to lower its ORF from
$0.0013 to $0.0012 per contract side on
August 1, 2023. Previously, GEMX
lowered or waived its ORF in 2019,
2021, 2022 and 2023.3 After a review of
its regulatory revenues and regulatory
costs, the Exchange proposes to reduce
the ORF to ensure that revenue
collected from the ORF, in combination
with other regulatory fees and fines,
does not exceed the Exchange’s total
regulatory costs.
Volumes in the options industry went
over 900,000,000 in 2023. GEMX has
taken measures this year as well as in
prior years to lower and waive its ORF
to ensure that revenue collected from
the ORF, in combination with other
regulatory fees and fines, does not
exceed the Exchange’s total regulatory
costs. Despite those prior measures,
GEMX will need to reduce its ORF again
to account for trading volumes in the
first half of 2023 that were higher than
the Exchange forecast for ORF
assessment purposes, which resulted in
the collection of more ORF revenues
than anticipated in the first half of 2023.
At this time, GEMX believes that the
options volume it experienced in the
first half of 2023 is likely to persist. The
anticipated options volume would
continue to impact GEMX’s ORF
collection which, in turn, has caused
GEMX to propose reducing the ORF to
ensure that revenue collected from the
ORF, in combination with other
regulatory fees and fines, would not
exceed the Exchange’s total regulatory
costs.
3 See Securities Exchange Act Release No. 85140
(February 14, 2019), 84 FR 5511 (February 21, 2019)
(SR–GEMX–2019–01) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend the Options Regulatory Fee); 92698
(August 18, 2021), 86 FR 47355 (August 24, 2021)
(SR–GEMX–2021–08) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
to Amend GEMX’s Options Regulatory Fee); 94069
(January 26, 2022), 87 FR 5545 (February 1, 2022)
(SR–GEMX–2022–03) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
To Reduce GEMX’s Options Regulatory Fee); and
96598 (January 3, 2023), 88 FR 1308 (January 9,
2023) (SR–GEMX–2022–14) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change
To Reduce GEMX’s Options Regulatory Fee).
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54381
Collection of ORF
GEMX will continue to assess its ORF
for each customer option transaction
that is either: (1) executed by a Member
on GEMX; or (2) cleared by an GEMX
Member at The Options Clearing
Corporation (‘‘OCC’’) in the customer
range,4 even if the transaction was
executed by a non-Member of GEMX,
regardless of the exchange on which the
transaction occurs.5 If the OCC clearing
member is a GEMX Member, ORF is
assessed and collected on all cleared
customer contracts (after adjustment for
CMTA 6); and (2) if the OCC clearing
member is not a GEMX Member, ORF is
collected only on the cleared customer
contracts executed at GEMX, taking into
account any CMTA instructions which
may result in collecting the ORF from a
non-Member.7
In the case where a Member both
executes a transaction and clears the
transaction, the ORF will be assessed to
and collected from that Member. In the
case where a Member executes a
transaction and a different Member
clears the transaction, the ORF will be
assessed to and collected from the
Member who clears the transaction and
not the Member who executes the
transaction. In the case where a nonMember executes a transaction at an
away market and a Member clears the
transaction, the ORF will be assessed to
and collected from the Member who
clears the transaction. In the case where
a Member executes a transaction on
GEMX and a non-Member clears the
transaction, the ORF will be assessed to
the Member that executed the
transaction on GEMX and collected
from the non-Member who cleared the
transaction. In the case where a Member
executes a transaction at an away
market and a non-Member clears the
transaction, the ORF will not be
4 Participants must record the appropriate
account origin code on all orders at the time of
entry of the order. The Exchange represents that it
has surveillances in place to verify that members
mark orders with the correct account origin code.
5 The Exchange uses reports from OCC when
assessing and collecting the ORF.
6 CMTA or Clearing Member Trade Assignment is
a form of ‘‘give-up’’ whereby the position will be
assigned to a specific clearing firm at OCC.
7 By way of example, if Broker A, a GEMX
Member, routes a customer order to CBOE and the
transaction executes on CBOE and clears in Broker
A’s OCC Clearing account, ORF will be collected by
GEMX from Broker A’s clearing account at OCC via
direct debit. While this transaction was executed on
a market other than GEMX, it was cleared by a
GEMX Member in the member’s OCC clearing
account in the customer range, therefore there is a
regulatory nexus between GEMX and the
transaction. If Broker A was not a GEMX Member,
then no ORF should be assessed and collected
because there is no nexus; the transaction did not
execute on GEMX nor was it cleared by a GEMX
Member.
E:\FR\FM\10AUN1.SGM
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]]>Agencies
[Federal Register Volume 88, Number 153 (Thursday, August 10, 2023)]
[Notices]
[Pages 54376-54381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17107]
[[Page 54376]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98060; File No. SR-C2-2023-017]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance
Its Drill-Through Protection Processes for Simple Orders and Make Other
Clarifying Changes
August 4, 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 July 24, 2023, Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``C2'') proposes to
enhance its drill-through protection processes for simple orders and
make other clarifying changes. 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/options/regulation/rule_filings/ctwo/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule filing is to amend Rule 5.34(a), Order and
Quote Price Protection Mechanisms and Risk Controls (Simple Orders), to
enhance the drill-through protection process for simple orders and make
other clarifying changes.
Drill-through price protection is currently described in Exchange
Rule 5.34(a)(4)(A). Under Rule 5.34(a)(4)(A), if a buy (sell) order
enters the Book \3\ at the conclusion of the opening auction process or
would execute or post to the Book at the time of order entry, the
System \4\ executes the order up to a buffer amount (the Exchange
determines the buffer amount on a class and premium basis) above
(below) the offer (bid) limit of the Opening Collar \5\ or the National
Best Offer (``NBO'') (National Best Bid (``NBB'')) that existed at the
time of order entry, respectively (the ``drill-through price'').\6\
---------------------------------------------------------------------------
\3\ ``Book'' means the electronic book of simple orders and
quotes maintained by the System, which single book is used during
both the regular trading hours and global trading hours trading
sessions. See Rule 1.1 (definition of, ``Book'').
\4\ ``System'' means the Exchange's hybrid trading platform that
integrates electronic and open outcry trading of option contracts on
the Exchange and includes any connectivity to the foregoing trading
platform that is administered by or on behalf of the Exchange, such
as a communications hub. See Rule 1.1 (definition of, ``System'').
\5\ See Rule 5.31(a) for the definition of Opening Collar.
\6\ See Rule 5.34(a)(4)(A).
---------------------------------------------------------------------------
Rule 5.34(a)(4)(C) establishes an iterative drill-through process,
whereby the Exchange permits orders to rest in the Book for multiple
time periods and at more aggressive displayed prices during each time
period.\7\ Specifically, for a limit order (or unexecuted portion) with
a Time-in-Force of Day, Good-til-Cancelled (``GTC''), or Good-til-Date
(``GTD''), the System enters the order in the Book with a displayed
price equal to the drill-through price. The order (or unexecuted
portion) will rest in the Book at the drill-through price for the
duration of consecutive time periods (the Exchange determines on a
class-by-class basis the length of the time period in milliseconds,
which may not exceed three seconds).\8\ Following the end of each
period, the System adds (if a buy order) or subtracts (if a sell order)
one buffer amount (the Exchange determines the buffer amount on a
class-by-class basis) to the drill-through price displayed during the
immediately preceding period (each new price becomes the ``drill-
through price'').\9\ The order (or unexecuted portion) rests in the
Book at that new drill-through price for the duration of the subsequent
period. The System applies a timestamp to the order (or unexecuted
portion) based on the time it enters or is re-priced in the Book for
priority reasons. The order continues through this iterative process
until the earliest of the following to occur: (a) the order fully
executes; (b) the User \10\ cancels the order; and (c) the buy (sell)
order's limit price equals or is less (greater) than the drill-through
price at any time during application of the drill-through mechanism, in
which case the order rests in the Book at its limit price, subject to a
User's instructions.
---------------------------------------------------------------------------
\7\ The Exchange will announce to Trading Permit Holders the
buffer amount and the length of the time periods in accordance with
Rule 1.5. The Exchange notes that each time period will be the same
length (as designated by the Exchange), and the buffer amount
applied for each time period will be the same.
\8\ See Rule 5.34(a)(4)(C). The proposed rule change defines
this time period as an ``iteration.''
\9\ See Rule 5.34(a)(4)(C).
\10\ The term ``User'' shall mean any Trading Privilege Holder
(TPH) or Sponsored User who is authorized to obtain access to the
System pursuant to Rule 5.5.
---------------------------------------------------------------------------
Currently, the above-described iterative drill-through process does
not apply to market orders.\11\ Specifically, if a buy (sell) market
order would execute at the time of order entry, the System executes the
order up to the Exchange-determined buffer amount above (below) the NBO
(NBB) at the time of order entry and then rejects any remaining
amount.\12\ For example, suppose a market order to buy two contracts
enters the System; assume that the drill-through price buffer for a
certain option series is $0.90 and that the following quotes are in the
Book: Quote 1 (NBBO): 1 @5.00 x 1 @7.00; Quote 2: 2 @4.00 x 1 @8.00.
One contract in the market order will execute against the 7.00 offer
quote. The remaining one contract of the market order is cancelled,
because the next best offer of 8.00 is 1.00 above the NBO, which is
more than the 0.90 buffer amount.
---------------------------------------------------------------------------
\11\ Rule 5.34(a)(4)(A) and (B).
\12\ Id.
---------------------------------------------------------------------------
The Exchange proposes for market orders with a Time-in-Force of Day
to go through the iterative drill-through process described above.\13\
In the above example, rather than cancel the remaining one contract,
the System would rest the one contract in the Book
[[Page 54377]]
at the drill-through price of 7.90 (i.e. the NBO plus the buffer
amount) for the Exchange-determined time period. At the end of that
time period, assuming the market has not changed, the remaining one
contract would execute against the 8.00 offer, which is within a buffer
amount of the subsequent drill-through price of 8.80. As a result, like
super-aggressive limit orders (except for those with Time-in-Force of
Immediate-or-Cancel (``IOC'') or Fill-or-Kill (``FOK'')) do today,
market orders (except for those with Time-in-Force of IOC) will have
additional execution opportunities pursuant to the drill-through
process. As the proposed rule change only applies to market orders with
a Time-in-Force of Day, the Exchange also proposes to amend Rule
5.34(a)(4)(B) to specify that the System will reject any market order
with a Time-in-Force of IOC (or unexecuted portion) not executed
pursuant to Rule 5.34(a)(4)(A).\14\ The Exchange believes it is
appropriate to not have a market order with a Time-in-Force of IOC to
go through the iteration process, because the iteration process would
be inconsistent with the IOC instruction (and thus the user's intent).
Further, the Exchange proposes to amend Rule 5.34(a)(4)(A) to more
generally describe when applicable order types may become subject to
drill-through protection. Specifically, the Exchange proposes to
specify that the protections described in Rule 5.34(a)(4)(A) become
applicable if a buy (sell) order, to which Rule 5.34(a)(4) would apply,
(i) enters the Book at the conclusion of opening auction process, or
(ii) would execute or post to the Book when it enters the Book.\15\
---------------------------------------------------------------------------
\13\ See proposed Rule 5.34(a)(4)(C). The proposed rule change
also adds ``a'' prior to the term ``Time-in-Force'' in that
provision, which was inadvertently omitted; this is a nonsubstantive
grammatical change that conforms the language to that in
subparagraph (B).
\14\ There is no change to the handling of market orders with a
Time-in-Force of GTC or GTD as a result of this rule change; such
orders will continue to be rejected by the Exchange.
\15\ This includes, for example, when a Stop (Stop-Loss) or
Stop-Limit order is elected.
---------------------------------------------------------------------------
The Exchange also proposes to amend Rule 5.34(a)(1)(A)(ii) to
exclude from the current protections for market orders in no-bid series
certain orders that would be otherwise subject to the drill-through
protection under the proposed rule changes. Currently, under Rule
5.34(a)(1)(A)(ii), if the System receives a sell market order in a
series after it is open for trading with an NBB of zero, and the NBO in
the series is greater than $0.50, the System cancels or rejects the
market order. The Exchange proposes amending this protection in the
event a drill-through process is in progress. Specifically, the
Exchange proposes to amend Rule 5.34(a)(1)(A)(ii) to note that in the
event the System receives a sell market order in a series after it is
open for trading with an NBB of zero and the NBO in the series is
greater than $0.50, if the drill-through process is in progress for
sell orders and the sell market order would be subject to drill-through
protection, then the order would join the on-going drill-through
process in the then-current iteration and at the then-current drill-
through price, regardless of NBBO. The Exchange believes it is not
optimal for these orders to be immediately booked at the minimum tick
increment, as under the proposed rule change, such orders would
instead, be subject to the drill-through protection mechanism described
under Rule 5.34(a)(4), which may allow opportunity for execution at a
more beneficial price level than the minimum tick increment.
Further, the Exchange proposes to amend Rule 5.34(a)(2) to
specifically exclude orders that would be subject to drill-through
protection from the market order NBBO width protections described
therein. Currently, under Rule 5.34(a)(2), if a User submits a market
order to the System when the NBBO width is greater than x% of the
midpoint of the NBBO, subject to a minimum and maximum dollar amount
(as determined by the Exchange on a class-by-class basis), the System
cancels or rejects the market order. The Exchange proposes amending
Rule 5.34(a)(2) to exclude Stop (Stop-Loss) \16\ and Market-on-Close
orders from this protection. Such orders may intentionally be further
away from the NBBO at the time the order is entered, and the protection
may cause the orders to be inadvertently rejected pursuant to this
check. The Exchange believes it is not optimal for these orders to be
subject to the market order NBBO width protection, as the check may
inadvertently cause rejections for orders that may otherwise not have
an opportunity to execute if they are immediately cancelled due to
market width. Under the proposed rule change, such orders would
instead, upon entry into the Book (when elected in accordance with
their definitions), be subject to the drill-through protection
mechanism described under Rule 5.34(a)(4). The Exchange also proposes a
clarification to Rule 5.34(a)(4)(E). Currently, under Rule
5.34(a)(4)(E), if multiple Stop (Stop-Loss) or Stop-Limit \17\ orders
to buy (sell) have the same stop price and are thus triggered by the
same trade price or NBBO, and would execute or post to the Book, the
System uses the contra-side NBBO that existed at the time the first
order in sequence was entered into the Book as the drill-through price
for all orders. The Exchange proposes to remove the conditional
language noting that such Stop (Stop-Loss) or Stop-Limit orders to buy
(sell) must have the same stop price, as it is possible that orders
with different stop prices may be triggered by the same trade price or
NBBO. Further, the Exchange proposes to add language stating that,
where multiple orders are simultaneously re-priced, the orders will be
prioritized under subparagraph (C)(v) of Rule 5.34(a)(4) and will be
sequenced based on the original time each order was entered into the
Book.
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\16\ A ``Stop (Stop-Loss)'' order is an order to buy (sell) that
becomes a market order when the consolidated last sale price
(excluding prices from complex order trades if outside of the NBBO)
or NBB (NBO) for a particular option contract is equal to or above
(below) the stop price specified by the User. Users may not
designate a Stop Order as All Sessions. Users may not designate bulk
messages as Stop Orders. See Rule 5.6(c) (definition of ``Stop
(Stop-Loss)'' order).
\17\ A ``Stop-Limit'' order is an order to buy (sell) that
becomes a limit order when the consolidated last sale price
(excluding prices from complex order trades if outside the NBBO) or
NBB (NBO) for a particular option contract is equal to or above
(below) the stop price specified by the User. A User may not
designate a Stop-Limit Order as All Sessions. Users may not
designate bulk messages as Stop-Limit Orders. A User may not
designate a bulk orders as Stop Limit orders. See Rule 5.6(c)
(definition of ``Stop-Limit'' order).
---------------------------------------------------------------------------
For example, assume that the drill-through price buffer for a
certain option series is $0.90, and that the following quotes are in
the Book: Quote 1 (NBBO): 1 @5.00 x 1 @7.00; Quote 2: 2 @4.00 x 1
@8.00. Additionally, the following Stop orders are being held in the
System when Quote 2 is updated to 2 @4.00 x 1 @6.50 (the System
received these stop orders in the below sequence):
Order 1: Sell 1 @Market, Stop Price = $6.50
Order 2: Sell 1 @Market, Stop Price = $6.55
Order 3: Sell 1 @$3.95, Stop Price = $6.60
Each of orders 1, 2 and 3 have a stop price less than the NBO, and
will therefore be triggered by the 6.50 quote and enter the Book for
execution or posting. A drill-through price for all three orders is set
at the contra-side NBB of 5.00. Per proposed Rule 5.34(a)(4)(C), the
orders will go through the drill-through process as follows:
1. Order 1 will execute against Quote 1 @$5.00.
2. Orders 2 and 3 are posted to sell at $4.10 for the Exchange-
determined time period.
3. Drill-through process continues for orders 2 and 3 until they
are canceled or executed.
As amended, under Rule 5.34(a)(4)(E), all Stop (Stop-Loss) and
Stop-Limit
[[Page 54378]]
orders elected as a result of the same election trigger (NBBO update or
last sale price) will continue to use the same reference price for
drill-through (even though they may have different stop prices).
The Exchange proposes to amend Rule 5.34(a)(4)(c)(ii), to specify
that if at any time during the drill-through process, the NBO (NBB)
changes to be below (above) the current drill-through price, such NBO
(NBB) will become the new drill-through price and a new drill-through
will immediately begin. As a result, any improvements to the market
that occur while the drill-through is in process will be incorporated,
thereby providing Users with further opportunity to be priced within
the market while still being protected. Under the proposed rule change,
any limit order with a price that is less aggressive than the new
drill-through price would be entered in the Book at its limit price.
The Exchange also proposes to add Rule 5.34(a)(4)(C)(iv) \18\ to
provide that if the System receives a market or limit order that would
be subject to the drill-through process while a drill-through is in
progress in the same series, the order joins the ongoing drill-through
process in the then-current iteration and at the then-current drill-
through price. Under the proposed rule, orders that come in while a
drill-through is in process receive the benefit of joining the drill-
through at the NBBO at the time of entry, as opposed to immediately
executing or being displayed at a more aggressive price than the drill-
through price. By way of illustration, consider the following example:
---------------------------------------------------------------------------
\18\ As a result of the additional provisions described herein,
the proposed rule change renumbers current subparagraph (iv) to be
proposed subparagraph (vi).
---------------------------------------------------------------------------
Assume that the drill-through price buffer for a certain option
series is $0.90, and that the following quotes are in the Book: Quote 1
(NBBO): 1 @5.00 x 1 @7.00; Quote 2: 2 @4.00 x 1 @8.00. The System
receives the following orders in the below sequence:
Order 1: Sell 1 @Market, Stop Price = $6.50
Order 2: Sell 1 @Market, Stop Price = $6.55
Order 3: Sell 1 @$3.95, Stop Price $6.60
Order 4: Sell 2 @Market, Stop Price = $4.50
During this time, Quote 2 is updated to: 2 @4.00 x 1 @6.50. Orders
1, 2, and 3 are elected, and the drill-through reference price for all
three orders is set to contra-side NBB of 5.00.
1. Order 1 executes Quote 1 @$5.00.
2. Orders 2 and 3 are posted to sell @$4.10 (drill-through price)
for the Exchange-determined time period.
3. Order 4 is elected due to updated best offer of $4.10, and joins
Orders 2 and 3 at the iterative drill-through price of $4.10. The offer
is updated to 4 @$4.10.
4. Order 5 (Sell 10 @Market (Day)) and Order 6 (Sell 1 @$4.05 Limit
(Day)) enter the Book. Per proposed Rule 5.34(a)(4)(C)(iv), Orders 5
and 6 join the drill-through iteration at the drill-through reference
price of $4.10, and the best offer is updated to 15 @$4.10.
5. The drill-through process continues for orders 2, 3, 4, 5, and 6
until the contracts are canceled or executed.
Because the proposed rule change may result in multiple orders
going through the drill-through process at the same price and at the
same time, the proposed rule change also describes how these orders
will be prioritized and allocated when executing against resting
interest or incoming interest. Specifically, proposed Rule
5.34(a)(4)(C)(v) states the System prioritizes orders that are part of
the same drill-through iteration (A) based on the time the System
enters or reprices them in the Book (i.e., in time priority) when,
after an iteration, the new drill-through price makes the order(s)
marketable against resting orders and (B) in accordance with the
applicable base allocation algorithm when executing against any
incoming interest. The Exchange believes this is appropriate because
incoming marketable orders would ultimately execute in time priority
today. Additionally, having multiple orders execute in accordance with
the applicable base allocation algorithm when executing against
incoming interest is consistent with how resting orders execute against
incoming interest.
Continuing from the above example, assume the drill-through process
iterates to the next drill-through price, which would be $3.20. In
doing so, Order 6 posts at its limit price of $4.05, and the rest of
the orders are eligible to execute in time sequence against the resting
$4.00 bid. Per proposed Rule 5.34(a)(4)(C)(v), the orders will go
through the drill-through process as follows:
1. Order 2 (Sell 1 @Market) will execute against Quote 2 @$4.00
2. Order 3 (Sell 1 @$3.95) will execute against Quote 2 @$4.00
3. The Quote 2 is exhausted, and the next best bid is Quote 1 for 5
@$3.00
4. Remaining drill-through is Order 4 (Sell 2 @Market) and Order 5
(Sell 10 @Market). Market is now 5 @$3.00 x 12 @$3.20, and the drill-
through process continues until these contracts are executed or
cancelled.
If, prior to the next drill-through iteration, Order 7 (buy 5
@$3.25) is entered and executes against Orders 4 and 5 at $3.20, the
allocation will depend on the allocation algorithm for the relevant
class, under the amended Rule.
1. If pro-rata, Order 7 trades 1 contract against Order 4 and 4
contracts against Order 5.
2. If price-time, Order 7 trades 2 contracts against Order 4 and 3
contracts against Order 5.
3. Remaining size on Order 4 (if applicable) and Order 5 will continue
to drill-through as described in previous examples.
The Exchange also proposes to amend Rule 5.34(a)(4)(C)(vi).\19\
Currently, the rule states that an order will continue through the
drill-through process until the earliest of the following to occur: (a)
the order fully executes; (b) the User cancels the order; and (c) the
buy (sell) order's limit price equals or is less (greater) than the
drill-through price at any time during application of the drill-through
mechanism, in which case the orders rests in the Book at its limit
price, subject to a User's instruction. The Exchange proposes to amend
part (c) to remove reference to when the order's limit price equals the
drill-through price, since under the drill-through process, if a buy
(sell) order's limit price equals the drill-through price during the
application of the drill-through mechanism it will remain part of the
drill-through process, until the order's limit price is less (greater)
than the drill-through price, at which point it will rest in the Book
at its limit price. The Exchange also proposes to remove reference to a
User's instruction, as there is no additional instruction that would
allow a User to choose a different order handling option once the buy
(sell) order limit price is less (greater) than the drill-through
price.
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
Finally, the Exchange proposes to add Rule 5.34(a)(4)(C)(vii) to
specify that the drill-through protection mechanism applies during all
trading sessions and to provide clarity as to what happens to orders
that are undergoing the drill-through process at the end of a trading
session. Under the proposed rule change, if an order(s) (or unexecuted
portion(s)) is undergoing the drill-through process at the end of a
Global Trading Hours (``GTH'') \20\ session, then
[[Page 54379]]
the drill-through process concludes and the order(s) (or unexecuted
portions(s)) enters the Regular Trading Hours (``RTH'') \21\ Queuing
Book \22\ as a market order or limit order (at its limits price) on
that same trading day, subject to a User's instructions. If an order(s)
(or unexecuted portion(s)) is undergoing the drill-through process at
the end of its last eligible trading session for that trading day
(i.e., RTH), the drill-through process concludes. Any order (or
unexecuted portion) with a Time-in-Force of (i) Day is canceled, and
(ii) GTC or GTD enters the Queuing Book for the next eligible trading
session (i.e., GTH or RTH) as a market order or limit order (at its
limit price).
---------------------------------------------------------------------------
\20\ The Exchange does not currently operate a GTH session. In
the event the Exchange were to operate a GTH session, it would begin
at 8:30 a.m. and go until 9:15 a.m. ET on Monday through Friday.
\21\ RTH for transactions in equity options (including options
on individual stocks, ETFs, ETNs, and other securities) are the
normal business days and hours set forth in the rules of the primary
market currently trading the securities underlying the options,
except for options on ETFs, ETNs, Index Portfolio Shares, Index
Portfolio Receipts, and Trust Issued Receipts the Exchange
designates to remain open for trading beyond 4:00 p.m. Eastern Time
(ET) but in no case later than 4:15 p.m. ET. RTH for transactions in
index options are from 9:30 a.m. to 4:15 p.m. ET, subject to certain
exceptions.
\22\ See Rule 5.31 for the definition of Queuing Book.
---------------------------------------------------------------------------
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.\23\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \24\ 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) \25\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
\25\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes the proposed rule change to
enhance drill-through protections for simple orders and to make certain
market orders eligible for drill-through protection will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors, because
it will provide these orders with additional and consistent execution
opportunities and protections. The primary purpose of the drill-through
price protection is to prevent orders from executing at prices ``too
far away'' from the market when they enter the Book for potential
execution. The Exchange believes the proposed rule change is consistent
with this purpose, because Users who submit market orders with a Time-
in-Force of Day will receive the same level of drill-through price
protection against execution at potentially erroneous prices that is
currently afforded to supermarketable limit orders while receiving the
same additional execution opportunities. Supermarketable limit orders
currently go through the drill-through process, and market orders with
a Time-in-Force of Day are functionally similar to supermarketable
limit orders. Therefore, the Exchange believes it is appropriate to
provide both types of orders with the same price protection.
Further, the proposed rule change to provide that any new market
and limit orders that would be subject to drill-through protection will
join any in-progress drill-through iterations and display at the then-
current drill-through price (and the corresponding changes regarding
allocation and prioritization) allows new orders to receive the same
level of price protection as other orders undergoing the drill-through
process. The proposed rule change will allow all orders additional
execution opportunities while continuing to protect them against
execution at potentially erroneous prices. Similarly, the Exchange
believes the proposed change to consider changes to the NBO (NBB)
during drill-through and to update the drill-through price to such NBO
(NBB) should it be lower (higher) than the drill-through price will
further provide opportunity for execution at reasonable prices by
capturing any market moves that may result in more aggressive prices.
The Exchange believes the proposal will enhance risk protections,
the individual firm benefits of which flow downstream to counterparties
both at the Exchange and at other options exchanges, which increases
systemic protections as well. The Exchange believes enhancing risk
protections will allow Users to enter orders and quotes with further
reduced fear of inadvertent exposure to excessive risk, which will
benefit investors through increased exposure to liquidity for the
execution of their orders.
Additionally, the Exchange believes changes to specifically exclude
from market order NBBO width and market order in no-bid series
protections certain orders that would be subject to drill-through
protection will remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
protect investors. Specifically, the Exchange believes the changes to
exclude certain orders that would be subject to drill-through
protection from market order NBBO width protections may reduce
inadvertent rejection of such orders which may be purposely priced far
away from the NBBO at the time of entry and may otherwise miss an
opportunity for execution if immediately cancelled. The Exchange also
believes the changes to exclude certain orders that would be subject to
drill-through protection from market order in no-bid series protections
may allow opportunity for execution at a more beneficial price level
than if they were immediately booked at the minimum tick increment.
This proposed rule change may increase execution opportunities for
Users that submit such Stop (Stop-Loss) and Market-on-Close orders (in
the case of market order NBBO width protections) and sell market orders
with an NBB of zero when the NBO in the series is greater than $0.50
(in the case of market orders in no-bid series protections).
The Exchange believes the proposed change to Rule 5.34(a)(4)(E)
will protect investors because it clarifies that if multiple Stop
(Stop-Loss) and Stop-Limit orders are triggered by the same trade price
or NBBO (even if the orders have different stop prices), and would
execute or post to the Book, the System uses the contra-side NBBO that
existed at the time the first order in sequence was entered into the
Book as the drill-through price for all orders. The Exchange believes
that the proposed rule change will bring greater transparency and
clarity to the rulebook, thus benefitting investors.
Finally, the Exchange believes the proposed changes to clarify when
an order ceases to remain a part of the drill-through process and to
specify what happens to orders undergoing drill-through at the end of a
trading session will protect investors by adding transparency to the
rules regarding the drill-through functionality and provide greater
certainty as to the application of the drill-through process.
[[Page 54380]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because the enhanced drill-
through protection will apply to all marketable orders in the same
manner. Additionally, it will provide the same price protection and
execution opportunities to relevant market orders that are currently
provided to supermarketable limit orders, which function in a similar
manner.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The proposed
enhancement to the drill-through protection is consistent with the
current protection and provides relevant market orders with improved
protection against execution at potentially erroneous prices through
drill-through price protection in accordance with User instructions.
Additionally, the proposed rule change relates specifically to a price
protection offered on the Exchange and how the System handles orders as
part of this price protection mechanism.
The Exchange believes the proposed rule change would ultimately
provide all market participants with additional execution opportunities
when appropriate while providing protection from erroneous execution.
The Exchange believes the proposal will enhance risk protections, the
individual firm benefits of which flow downstream to counterparties
both at the Exchange and at other options exchanges, which increases
systemic protections as well. The Exchange believes enhancing risk
protections will allow Users to enter orders and quotes with further
reduced fear of inadvertent exposure to excessive risk, which will
benefit investors through increased exposure to liquidity for the
execution of their orders. Without adequate risk management tools,
Trading Permit Holders could reduce the amount of order flow and
liquidity they provide. Such actions may undermine the quality of the
markets available to customers and other market participants.
Accordingly, the proposed rule change is designed to encourage Trading
Permit Holders to submit additional order flow and liquidity to the
Exchange. Accordingly, the proposed rule change is designed to
encourage Trading Permit Holders to submit additional order flow and
liquidity to the Exchange. The proposed flexibility may similarly
provide additional execution opportunities, which further benefits
liquidity in potentially volatile markets. In addition, providing
Trading Permit Holders with more tools for managing risk will
facilitate transactions in securities because, as noted above, Trading
Permit Holders will have more confidence protections are in place that
reduce the risks from potential system errors and market events.
Finally, the proposed clarifying changes are not intended to have
any impact on competition, but rather codify current functionality to
add transparency to the Rules.
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)(iii) of the Act \26\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\27\
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\26\ 15 U.S.C. 78s(b)(3)(A)(iii).
\27\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
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 shall institute proceedings to
determine whether the proposed rule 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-C2-2023-017 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-C2-2023-017. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-C2-2023-017 and should be
submitted on or before August 31, 2023.
[[Page 54381]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
---------------------------------------------------------------------------
\28\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17107 Filed 8-9-23; 8:45 am]
BILLING CODE 8011-01-P
