Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 3, To Make Permanent the Operation of its Flexible Exchange Options Pilot Program Regarding Permissible Exercise Settlement Values for FLEX Index Options, 89771-89783 [2023-28608]
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Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices
pay the least, and highest bandwidth
consuming members pays the most.
The Exchange’s proposed fee is also
still lower than some fees for similar
connectivity on other exchanges and
therefore may stimulate intermarket
competition by attracting additional
firms to connect to the Exchange or at
least should not deter interested
participants from connecting directly to
the Exchange. Further, if the changes
proposed herein are unattractive to
market participants, the Exchange can,
and likely will, see a decline in
connectivity via 10 Gb physical ports as
a result. The Exchange operates in a
highly competitive market in which
market participants can determine
whether or not to connect directly to the
Exchange based on the value received
compared to the cost of doing so.
Indeed, market participants have
numerous alternative venues that they
may participate on and direct their
order flow, including 12 non-Cboe
affiliated equities markets, as well as
off-exchange venues, where competitive
products are available for trading.
Moreover, the Commission has
repeatedly expressed its preference for
competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. Specifically, in Regulation
NMS, the Commission highlighted the
importance of market forces in
determining prices and SRO revenues
and, also, recognized that current
regulation of the market system ‘‘has
been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 26 The
fact that this market is competitive has
also long been recognized by the courts.
In NetCoalition v. Securities and
Exchange Commission, the D.C. Circuit
stated as follows: ‘‘[n]o one disputes
that competition for order flow is
‘fierce.’ . . . As the SEC explained, ‘[i]n
the U.S. national market system, buyers
and sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’. . . .’’.27 Accordingly, the
Exchange does not believe its proposed
change imposes any burden on
26 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005).
27 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C.
Cir. 2010) (quoting Securities Exchange Act Release
No. 59039 (December 2, 2008), 73 FR 74770, 74782–
83 (December 9, 2008) (SR–NYSEArca–2006–21)).
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competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
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
The foregoing rule change has become
effective pursuant to section 19(b)(3)(A)
of the Act 28 and paragraph (f) of Rule
19b–4 29 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
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–
CboeBZX–2023–103 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–CboeBZX–2023–103. 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–CboeBZX–2023–103 and should be
submitted on or before January 18, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Christina Z. Milnor,
Assistant Secretary.
[FR Doc. 2023–28605 Filed 12–27–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99222; File No. SR–CBOE–
2023–018]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of
Amendment No. 3 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 3, To Make Permanent
the Operation of its Flexible Exchange
Options Pilot Program Regarding
Permissible Exercise Settlement
Values for FLEX Index Options
December 21, 2023.
I. Introduction
On April 10, 2023, Cboe Exchange,
Inc. (‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
30 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
28 15
U.S.C. 78s(b)(3)(A).
29 17 CFR 240.19b–4(f).
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Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices
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make permanent the operation of its
Flexible Exchange Options (‘‘FLEX
Options’’) pilot program that permits
PM-settled Flexible Exchange Index
Options (‘‘FLEX PM Third Friday
Options’’) to expire on or within two
business days of the third-Friday-of-themonth expirations for non-FLEX
Options (‘‘Pilot Program’’).3 The
proposed rule change was published for
comment in the Federal Register on
April 28, 2023.4
On June 8, 2023, pursuant to section
19(b)(2) of the Act,5 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.6 On July 19, 2023, the
Commission instituted proceedings
under section 19(b)(2)(B) of the Act 7 to
determine whether to approve or
disapprove the proposed rule change.8
On September 26, 2023, CBOE filed
Amendment No. 1 to the proposed rule
change.9 On September 27, 2023, the
Commission designated a longer period
for Commission action on the proposed
rule change.10 On November 20, 2023,
CBOE filed Amendment No. 2 to the
proposed rule change.11 On December 7,
2023, CBOE filed Amendment No. 3 to
the proposed rule change.12 The
3 A third-Friday-of-the month expiration is
referred to as ‘‘Expiration Friday’’. Prior to the Pilot
Program, Exchange rules prohibited PM-settled
FLEX Index Options to expire on any business day
that falls on or within two business days of an
Expiration Friday. During the Pilot Program, PMsettled FLEX Index Options are permitted on or
within two business days of an Expiration Friday.
4 See Securities Exchange Act Release No. 97368
(April 24, 2023), 88 FR 26353 (‘‘Notice’’).
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 97672,
88 FR 38930 (June 14, 2023).
7 15 U.S.C. 78s(b)(2)(B).
8 See Securities Exchange Act Release No. 97950,
88 FR 47930 (July 25, 2023).
9 Amendment No. 1 superseded and replaced the
original proposal in its entirety. Amendment No. 1
was subsequently superseded and replaced in its
entirety by Amendment No. 2.
10 See Securities Exchange Act Release No. 98557,
88 FR 68236 (October 3, 2023). The Commission
designated December 24, 2023, as the date by which
the Commission shall approve or disapprove the
proposed rule change.
11 Amendment No. 2 superseded and replaced
Amendment No. 1 in its entirety. Amendment No.
2 was subsequently superseded and replaced in its
entirety by Amendment No. 3.
12 Amendment No. 3, which supersedes and
replaces Amendment No. 2 in its entirety, provides
additional support and data for the Exchange’s
assertion that listing and trading of FLEX PM Third
Friday Index Options under the Pilot Program has
had no negative impact on the market and price
volatility of underlying indexes and their
underlying component stocks or related products or
negatively impacts options market quality.
Amendment No. 3 is available at https://
www.sec.gov/comments/sr-cboe-2023-018/
srcboe2023018-308519-794402.pdf.
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Commission is publishing this notice to
solicit comments on Amendment No. 3
from interested persons, and is
approving the proposed rule change, as
modified by Amendment No. 3, on an
accelerated basis.
II. Self-Regulatory Organization’s
Description of the Proposal, as
Modified by Amendment No. 3 13
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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to make
permanent its Pilot Program that
permits the Exchange to list FLEX
Options overlying indexes (‘‘FLEX
Index Options’’) whose exercise
settlement value is derived from closing
prices on the last trading day prior to
expiration that expire on or within two
business days of a third Friday-of-themonth expiration day for a non-FLEX
Option (other than QIX options) (‘‘FLEX
PM Third Friday Options’’). The
Securities and Exchange Commission
(the ‘‘Commission’’) approved a Cboe
Options rule change that, among other
things, established a pilot program
regarding permissible exercise
settlement values for FLEX Index
Options on January 28, 2010.14 The
Exchange has extended the pilot period
nearly 20 times since the Commission
initially approved the Pilot Program in
2010, with the pilot period currently set
to expire on the earlier of May 6, 2024
or the date on which the pilot program
is approved on a permanent basis.15 The
13 This Section II reproduces Amendment No. 3,
as filed by the Exchange.
14 Securities Exchange Act Release No. 61439
(January 28, 2010), 75 FR 5831 (February 4, 2010)
(SR–CBOE–2009–087) (‘‘Approval Order’’). The
initial pilot period was set to expire on March 28,
2011, which date was added to the rules in 2010.
See Securities Exchange Act Release No. 61676
(March 9, 2010), 75 FR 13191 (March 18, 2010) (SR–
CBOE–2010–026).
15 See Securities Exchange Act Release Nos.
64110 (March 23, 2011), 76 FR 17463 (March 29,
2011) (SR–CBOE–2011–024); 66701 (March 30,
2012), 77 FR 20673 (April 5, 2012) (SR–CBOE–
2012–027); 68145 (November 2, 2012), 77 FR 67044
(November 8, 2012) (SR–CBOE–2012–102); 70752
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Exchange hereby requests that the
Commission approve the Pilot Program
on a permanent basis.
By way of background, when cashsettled 16 index options were first
introduced in the 1980s, settlement was
based on the closing value of the
underlying index on the option’s
expiration date. The Commission later
became concerned about the impact of
P.M.-settled, cash-settled index options
on the markets for the underlying stocks
at the close on expiration Fridays.
Specifically, certain episodes of price
reversals around the close on quarterly
expiration dates attracted the attention
of regulators to the possibility that the
simultaneous expiration of index
futures, futures options, and options
might be inducing abnormal volatility in
the index value around the close.17
Academic research at the time provided
(October 24, 2013), 78 FR 65023 (October 30, 2013)
(SR–CBOE–2013–099); 73460 (October 29, 2014), 79
FR 65464 (November 4, 2014) (SR–CBOE–2014–
080); 77742 (April 29, 2016), 81 FR 26857 (May 4,
2016) (SR–CBOE–2016–032); 80443 (April 12,
2017), 82 FR 18331 (April 18, 2017) (SR–CBOE–
2017–032); 83175 (May 4, 2018), 83 FR 21808 (May
10, 2018) (SR–CBOE–2018–037); 84537 (November
5, 2018), 83 FR 56113 (November 9, 2018) (SR–
CBOE–2018–071); 85707 (April 23, 2019), 84 FR
18100 (April 29, 2019) (SR–CBOE–2019–021);
87515 (November 13, 2020), 84 FR 63945
(November 19, 2019) (SR–CBOE–2019–108); 88782
(April 30, 2020), 85 FR 27004 (May 6, 2020) (SR–
CBOE–2020–039); 90279 (October 28, 2020), 85 FR
69667 (November 3, 2020) (SR–CBOE–2020–103);
91782 (May 5, 2021), 86 FR 25915 (May 11, 2021)
(SR–CBOE–2021–031); 93500 (November 1, 2021),
86 FR 61340 (November 5, 2021) (SR–CBOE–2021–
064); 94812 (April 28, 2022), 87 FR 26381 (May 4,
2022) (SR–CBOE–2022–020); 96239 (November 4,
2022), 87 FR 67985 (November 10, 2022) (SR–
CBOE–2022–053); 97452 (May 8, 2023), 88 FR
30821 (May 12, 2023) (SR–CBOE–2023–025); and
98637 (September 28, 2023), 88 FR 68819 (October
4, 2023) (SR–CBOE–2023–057). At the same time
the permissible exercise settlement values pilot was
established for FLEX Index Options, the Exchange
also established a pilot program eliminating the
minimum value size requirements for all FLEX
Options. See Approval Order, supra note 3. The
pilot program eliminating the minimum value size
requirements was extended twice pursuant to the
same rule filings that extended the permissible
exercise settlement values (for the same extended
periods) and was approved on a permanent basis in
a separate rule change filing. See id.; and Securities
Exchange Act Release No. 67624 (August 8, 2012),
77 FR 48580 (August 14, 2012) (SR–CBOE–2012–
040) (Order Granting Approval of Proposed Rule
Change Related to Permanent Approval of Its Pilot
on FLEX Minimum Value Sizes).
16 The seller of a ‘‘cash-settled’’ index option pays
out the cash value of the applicable index on
expiration or exercise. A ‘‘physically settled’’
option, like equity and ETF options, involves the
transfer of the underlying asset rather than cash.
See Characteristics and Risks of Standardized
Options, available at: https://www.theocc.com/
Company-Information/Documents-and-Archives/
Options-Disclosure-Document.
17 The close of trading on the quarterly expiration
Friday (i.e., the third Friday of March, June,
September and December), when options, index
futures, and options on index futures all expire
simultaneously, became known as the ‘‘triple
witching hour.’’
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at least some evidence suggesting that
futures and options expirations
contributed to excess volatility and
reversals around the close on those
days.18 In light of the concerns with
P.M.-settlement and to help ameliorate
the price effects associated with
expirations of P.M.-settled, cash-settled
index products, in 1987, the Commodity
Futures Trading Commission (‘‘CFTC’’)
approved a rule change by the Chicago
Mercantile Exchange (‘‘CME’’) to
provide for A.M. settlement 19 for index
futures, including futures on the S&P
500 Index.20 The Commission
subsequently approved a rule change by
Cboe Options to list and trade A.M.settled SPX options.21 In 1992, the
Commission approved Cboe Options’
proposal to transition all of its
European-style cash-settled options on
the S&P 500 Index to A.M.-settlement 22;
however, in 1993, the Commission
approved a rule allowing Cboe Options
to list P.M.-settled options on certain
broad-based indices, including the S&P
500 Index, expiring at the end of each
calendar quarter (‘‘Quarterly Index
Expirations’’).23 Starting in 2006, the
Commission noticed or approved
numerous rule changes, on a pilot basis,
permitting the Cboe Options to
introduce other index options with
P.M.-settlement.24 These include the
Pilot Program,25 P.M.-settled index
options expiring weekly (other than the
18 See Securities and Exchange Commission,
Division of Economic Risk and Analysis,
Memorandum, Cornerstone Analysis of PM CashSettled Index Option Pilots (February 2, 2021)
(‘‘DERA Staff PM Pilot Memo’’ or ‘‘Pilot Memo’’) at
5, available at: https://www.sec.gov/files/Analysis_
of_PM_Cash_Settled_Index_Option_Pilots.pdf.
19 The exercise settlement value for an A.M.settled index option is determined by reference to
the reported level of the index as derived from the
opening prices of the component securities on the
business day before expiration.
20 See Securities Exchange Act Release No. 24367
(April 17, 1987), 52 FR 13890 (April 27, 1987) (SR–
CBOE–87–11) (noting that CME moved S&P 500
futures contract’s settlement value to opening prices
on the delivery date).
21 See id.
22 See Securities Exchange Act Release No. 30944
(July 21, 1992), 57 FR 33376 (July 28, 1992) (SR–
CBOE–92–09). Thereafter, the Commission
approved proposals by the options markets to
transfer most of their cash-settled index products to
A.M. settlement.
23 See Securities Exchange Act Release No. 31800
(February 1, 1993), 58 FR 7274 (February 5, 1993)
(SR–CBOE–92–13).
24 Securities Exchange Act Release Nos. 54123
(July 11, 2006), 71 FR 40558 (July 17, 2006) (SR–
CBOE–2006–65) (notice of filing of proposed rule
change to list quarterly option series on up to five
indexes or exchange-traded funds with p.m.settlement); see also Securities Exchange Act
Release No. 60164 (June 23, 2009), 74 FR 31333
(June 30, 2009) (SR–CBOE–2009–029) (order
permanently approving the program to list quarterly
option series on up to five indexes or exchangetraded funds with p.m.-settlement).
25 See Approval Order, supra note 14.
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third Friday of the month) and at the
end of each month (‘‘EOM’’),26 P.M.settled options on the S&P 500 Index
that expire on the third Friday-of-themonth (‘‘SPXPM’’),27 as well as P.M.settled Mini-SPX Index (‘‘XSP’’) options
and Mini-Russell 2000 Index (‘‘MRUT’’)
options expiring on the third Friday of
the month.28 The Commission recently
approved proposed rule changes to
make these other pilot programs to list
P.M.-settled index options permanent.29
FLEX Index Options have traded on
the Exchange since February 1993.30
The Exchange began offering FLEX
Index options in response to the
development of an over-the-counter
(‘‘OTC’’) market in customized index
options, in which participants could
designate basic option features,
including size, expiration date, exercise
style, and certain exercise prices.31
FLEX Index Options provide investors
with the ability to customize these basic
options terms in order to meet their
individual investment needs. The
Exchange understands that participants
in the FLEX market are typically
sophisticated portfolio managers,
26 See Securities Exchange Act Release Nos.
62911 (September 14, 2010), 75 FR 57539
(September 21, 2010) (SR–CBOE–2009–075); 76529
(November 30, 2015), 80 FR 75695 (December 3,
2015) (SR–CBOE–2015–106); 78132 (June 22, 2016),
81 FR 42018 (June 28, 2016) (SR–CBOE–2016–046);
and 78531 (August 10, 2016), 81 FR 54643 (August
16, 2016) (SR–CBOE–2016–046).
27 See Securities Exchange Act Release No. 68888
(February 8, 2013), 78 FR 10668 (February 14, 2013)
(SR–CBOE–2012–120) (the ‘‘SPXPM Approval
Order’’). Pursuant to Securities Exchange Act
Release No. 80060 (February 17, 2017), 82 FR 11673
(February 24, 2017) (SR–CBOE–2016–091), the
Exchange moved third-Friday P.M.-settled options
into the S&P 500 Index options class, and as a
result, the trading symbol for P.M.-settled S&P 500
Index options that have standard third Friday-ofthe-month expirations changed from ‘‘SPXPM’’ to
‘‘SPXW.’’ This change went into effect on May 1,
2017, pursuant to Cboe Options Regulatory Circular
RG17–054.
28 See Securities Exchange Act Release Nos.
70087 (July 31, 2013), 78 FR 47809 (August 6, 2013)
(SR–CBOE–2013–055); and 91067 (February 5,
2021) 86 FR 9108 (February 11, 2021) (SR–CBOE–
2020–116).
29 See Securities Exchange Act Release Nos.
98454 (September 20, 2023) (SR–CBOE–2023–005)
(order approving proposed rule change to make
permanent the operation of a program that allows
the Exchange to list p.m.-settled third Friday-of-themonth SPX options series) (‘‘SPXPM Approval’’);
98455 (September 20, 2023) (SR–CBOE–2023–019)
(order approving proposed rule change to make
permanent the operation of a program that allows
the Exchange to list p.m.-settled third Friday-of-themonth XSP and MRUT options series) (‘‘XSP and
MRUT Approval’’); and 98456 (September 20, 2023)
(SR–CBOE–2023–020) (order approving proposed
rule change to make the nonstandard expirations
pilot program permanent) (‘‘Nonstandard
Approval’’).
30 See Securities Exchange Act Release No. 31920
(February 24, 1993), 58 FR 12280 (March 3, 1993)
(SR–CBOE–92–17).
31 See id. at 12281.
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89773
insurance companies, and other
institutional investors who buy and sell
options in larger-sized transactions. The
Exchange continues to believe that
market participants benefit from the
trading of FLEX Index Options in
several ways, including, but not limited
to the following: (1) enhanced efficiency
in initiating and closing out positions;
(2) increased market transparency; and
(3) heightened contra-party
creditworthiness due to the role of the
Options Clearing Corporation (‘‘OCC’’)
as issuer and guarantor of FLEX Index
Options. Further, the Exchange believes
providing investors—institutional
investors in particular—that require
increased flexibility with respect to the
terms of index options with the ability
to customize basic options terms,
including whether an option is A.M.settled or P.M.-settled, is essential to
meeting the needs of these investors so
they can satisfy particular investment
objectives that cannot otherwise be met
by standard listed options.
In recent years, the Exchange has
heard from numerous institutional
investors—insurance companies, in
particular—who use index options to
hedge their portfolio risk need those
options to provide them with a level of
precision not available in standard
options. They have expressed their
preference to transact on the Exchange
to eliminate the counterparty risk they
must incur by trading in the OTC
market. The Exchange understands that
it is a critical and regular part of an
insurance company’s business to hedge
their risk, which many do with index
options. When insurance companies
issue policies to their customers, those
companies accumulate liabilities for the
payouts they may need to make to their
customers pursuant to those policies.
Insurance companies regularly hedge
the notional amount of these liabilities
to protect against downturns in the
market. Because they are looking to
protect against broad market downturns,
broad-based index options are a tool
insurance companies often use for this
protection. Given the size of insurance
companies’ portfolios, which can be in
the tens of billions of dollars, these
portfolios translate to index options
with an aggregate notional value of
billions of dollars being transacted
annually. The Exchange understands
these companies often have to trade in
the nontransparent, unregulated, and
riskier OTC market (where there is
counterparty risk and no price
protection exists for these customers)
because standard listed options do not
often provide them with the precision
they need to execute their hedges.
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Whether an insurance company is able
to precisely hedge the notional value of
its portfolio ultimately impacts its
customers. If an insurance company, for
example, ‘‘underhedges’’ the notional
value of its portfolio (which, again, is
generally at least tens of billions of
dollars), even 1% of such ‘‘slippage’’
would leave hundreds of millions of
dollars of that portfolio unhedged,32
which creates significant risk for that
company.33 Alternatively, if an
insurance company ‘‘overhedges’’ the
notional value of its portfolio, that
would unnecessarily tie up some of its
financial resources, as the difference in
value of the options and the value of the
portfolio is serving no purpose. Either
case will likely result in higher
premiums or reduced benefits for
customers. Therefore, the Exchange
believes providing insurance companies
with the continued ability to hedge with
p.m.-settled index options on all days,
including the third Friday-of-the-month,
is critical so that insurance companies,
in addition to other institutional
investors, can choose FLEX Index
Options terms that provide them with
the precision they need to implement
their hedging strategies on the Exchange
as opposed to the unregulated, riskier
OTC market.
The benefits of the Exchange’s FLEX
market are demonstrated by the
continued increase volume of FLEX
Options executed on the Exchange. In
2012, just under 9 million FLEX
Options contracts (nearly 1.7 million of
which were FLEX Index Options
contracts) executed on the Exchange,
compared to approximately 38.9 million
FLEX Options contracts (over 2.8
million of which were FLEX Index
Options contracts) that executed on the
Exchange in 2023 (through August). The
Exchange has attributed much of the
growth in the FLEX Options markets in
recent years to the entrance into the
FLEX market of new institutional
investors. Institutional investors often
use FLEX Options to execute their
volatility strategies using exercise
values and expiration dates not
available in the standard market.
Additionally, issuers of exchange-traded
funds (‘‘ETFs’’) have recently increased
their usage of FLEX Options. FLEX
Options are particularly useful in ETFs
as opposed to standardized options
contracts because they enable the
issuers to have more granular control
32 For example, if an insurance company has a
$40,000,000,000 portfolio, 1% of that portfolio
equates to $400,000,000.
33 The Exchange notes the total unhedged risk
across the insurance industry would be multiplied
if each insurance company were unable to hedge
the full notional value of its portfolio.
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over the options exposure within a
portfolio. In particular, ETFs that are
designed to provide a ‘‘defined
outcome’’ (i.e., a defined upside and
downside risk to a particular index or
underlying ETF) use FLEX Options
because they can be used to tailor the
options exposure in the portfolio by
strike and date in such a way that is not
possible with standardized options
contracts.
As stated above, since its inception in
2010, the Exchange has continuously
extended the Pilot Program period and,
during the course of the Pilot Program
and in support of the extensions of the
Pilot Program, the Exchange has
submitted reports to the Commission
regarding the Pilot Program that detail
the Exchange’s experience with the Pilot
Program, pursuant to the Pilot Program
requirements.34 Specifically, the
Exchange provided the Commission
with annual reports analyzing volume
and open interest for each broad-based
FLEX Index Options class overlying a
third Friday-of-the-month expiration
day, P.M.-settled FLEX Index Options
series. The annual reports also
contained certain pilot period and prepilot period analyses of volume and
open interest for third Friday-of-themonth expiration days, A.M.-settled
FLEX Index series and third Friday-ofthe-month expiration day Non-FLEX
Index series overlying the same index as
a third Friday-of-the-month expiration
day, P.M.-settled FLEX Index option.
The annual reports also contained
information and analysis of FLEX Index
Options trading patterns, and index
price volatility and underlying share
trading activity for each broad-based
index class overlying an Expiration
Friday, P.M.-settled FLEX Index Option
that exceeds certain minimum open
interest parameters. The Exchange also
provided the Commission, on a periodic
basis, interim reports of volume and
open interest.
Also, during the course of the Pilot
Program, the Exchange provided the
Commission with any additional data or
analyses the Commission requested if it
deemed such data or analyses necessary
to determine whether the Pilot Program
was consistent with the Exchange Act.
The Exchange has made public on its
website all data and analyses previously
submitted to the Commission under the
Pilot Program,35 and will continue to
make public any data and analyses it
34 See
Approval Order, supra note 14.
at https://www.cboe.com/aboutcboe/
legal-regulatory/national-market-system-plans/pmsettlement-spxpm-data.
35 Available
PO 00000
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submits to the Commission while the
Pilot Program is still in effect.
The Exchange has concluded that
FLEX PM Third Friday Options have
not resulted in increased market and
price volatility in the underlying
component stocks, negatively impacted
market quality, or raised any unique or
prohibitive regulatory concerns. The
Exchange has identified no evidence
from the pilot data indicating that the
trading of FLEX PM Third Friday
Options had any adverse impact on fair
and orderly markets on Expiration
Fridays for broad-based indexes or the
underlying securities comprising those
indexes and has observed no abnormal
market movements attributable to FLEX
PM Third Friday Options from any
market participants that have come to
the attention of the Exchange.36
Based on a study conducted by the
Commission’s Division of Economic and
Risk Analysis (‘‘DERA’’) staff on the
pilot data from 2006 through 2018,37
and the Exchange’s review of the pilot
data from 2019 through 2021, the size of
the market for P.M.-settled SPX options
(including quarterly, weekly, EOM and
third Friday expirations) since 2007 has
grown from a trivial portion of the
overall market to a substantial share
(from around 0.1% of open interest in
2007 to 30% in 2021).38 Notional value
of open interest in P.M.-settled SPX
options increased from approximately a
median of $1.5 billion in 2007 to $1.9
trillion in 2021, approximately 1260
times its value in 2007. Notional open
interest in A.M.-settled SPX options was
already hovering around a median of
$1.4 trillion in 2007, and it has since
increased to approximately $4.4 trillion
in 2021. It is also important to note that
open interest on expiring P.M.-settled
SPX options, as compared to A.M.36 The Exchange also notes it is unaware of any
concerns raised to it by market participants or of
any public comments expressing concerns about the
Pilot Program, including with respect to the current
rule filing (which was noticed for public comment
on April 28, 2023 and for which no public
comments were submitted).
37 See DERA Staff PM Pilot Memo, at 13 (‘‘Option
settlement quantity data for A.M.- and P.M.-settled
options were obtained from the Cboe, including the
number of contracts that settled in-the-money for
each exchange-traded option series on the S&P 500
index . . . on expiration days from January 20,
2006 through December 31, 2018. Daily open
interest and volume data for [SPX] option series
were also obtained from Cboe, including open
interest data from January 3, 2006 through
December 31, 2018 and trading volume data from
January 3, 2006 through December 31, 2018.’’)
38 The DERA staff study reviewed and provided
statistics for market share, median notional value of
open interest and median volume in 2007 and in
2018. The Exchange provides updated statistics for
market share, median notional value of open
interest and median volume in 2021, replacing the
2018 statistics provided in the Commission staff
study.
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settled options, is spread out across a
greater number of expiration dates,
which results in a smaller percentage of
open interest expiring on any one date,
thus mitigating concerns that SPXPM
option expiration may have a disruptive
effect on the market.39 Daily trading
volume in P.M.-settled SPX options has
increased from a median of about 700
contracts in 2007 to nearly 1.9 million
contracts in 2021,40 and now exceeds
trading volume in A.M.-settled SPX
options.
Moreover, the DERA staff study of the
P.M.-settled SPX options pilot data
(2006 through 2018) did not identify
any significant economic impact on S&P
500 futures,41 the S&P 500 Index, or the
underlying component securities of the
S&P 500 Index surrounding the close.
For purposes of the study, volatility was
by and large measured by using the
standard deviation 42 of one-minute
returns of S&P 500 futures values and
the index value during regular hours on
each day reviewed (excluding the first
and last 15 minutes of trading) and then
compared with the standard deviation
of one-minute returns (for S&P 500
futures, the S&P 500 Index, and the
underlying component securities of the
S&P 500 Index) over the last 15 minutes
of a trading day.43 Using this as a
general measure,44 the DERA staff study
then reviewed whether, and to what
extent, the settlement quantity of
SPXPM options and the levels of open
39 See
DERA Staff PM Pilot Memo, at 2.
Exchange notes that the DERA staff study
used two-sided volume data for the median volume
in 2007 and in 2018; therefore, the Exchange
provides two-sided volume data for the median
volume in 2021.
41 Futures on the S&P 500 experience high
volume and liquidity both before and after the close
of the underlying market. Therefore, futures are a
useful measure of abnormal volatility surrounding
the close and the open. See DERA Staff PM Pilot
Memo, at 14. The Exchange agrees with this
approach.
42 Standard deviation applied to a rate of return
(in this case, one-minute) of an instrument can
indicate that instrument’s historical volatility. The
greater the standard deviation, the greater the
variance between price and the mean, which
indicates a larger price range, i.e., higher volatility.
43 For example, if on a particular day the standard
deviation of one-minute returns between 3:45 p.m.
ET and 4:00 p.m. ET is 0.004 and the standard
deviation of returns from 9:45 a.m. ET to 3:45 p.m.
ET is 0.002, this metric would take on a value of
2 for that day, indicating that volatility during the
last 15 minutes of the trading day was twice as high
as it was during the rest of the trading day. See
DERA Staff PM Pilot Memo, at 15; see also DERA
Staff PM Pilot Memo, at Section V, which discusses
in detail the metrics used to measure, for the
purposes of the study, the extent to which the
market may experience abnormal volatility
surrounding SPXPM option settlement.
44 See DERA Staff PM Pilot Memo, at Section V,
which discusses in detail the metrics used to
measure, for the purposes of the study, the extent
to which the market may experience abnormal
volatility surrounding SPXPM option settlement.
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40 The
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interest in SPXPM options on expiration
days (as compared to non-expiration
days) may be associated with general
price volatility and price reversals for
S&P 500 futures, the S&P 500 Index, and
the underlying component securities of
the S&P 500 Index near the close. From
its review of the study, the Exchange
agrees that, although volatility before
the market close is generally higher than
during the rest of the trading day, there
is no evidence of any significant adverse
economic impact to the futures, index,
or underlying index component
securities markets as a result of the
quantity of P.M.-settled SPX options
that settle at the close or the amount of
expiring open interest in P.M.-settled
SPX options. For example, the largest
settlement event that occurred during
the time period of the study (a
settlement of $100.4 billion of notional
on December 29, 2017) had an estimated
impact on the futures price of only
approximately 0.02% (a predicted
impact of $0.54 relative to a closing
futures price of $2,677).
In particular, the DERA staff study
found that an additional P.M.-settled
SPX options settlement quantity equal
to $10 billion in notional value is
associated with a marginal impact on
futures prices during the last 15 minutes
of the trading day of only about $0.06
(where the hypothetical index level is
2,500), additional expiring open interest
in P.M.-settled SPX options equal to $10
billion in notional value is associated
with a marginal impact on futures prices
during the last 15 minutes of the trading
day of only about $0.05 (assumed index
level is 2,500). Also, an additional
increase in settlement quantity or in
expiring open interest, each equal to $20
million in notional value, did not result
in any meaningful futures price
reversals near the close (neither was
found to cause a price reversal of over
one standard deviation.45)
Likewise, the study identified that an
additional total P.M.-settled SPX
options settlement quantity equal to $10
billion in notional value corresponds to
price movement in the S&P 500 of only
about $0.08 (assuming an index level of
2,500) during the last 15 minutes of the
trading day, and that additional expiring
open interest equal to $10 billion in
notional value corresponds to a price
movement in the S&P 500 of only about
$0.06 (assuming an index level of 2,500)
during the last 15 minutes of the trading
day. The study also identified that it
would take an increase of $34 billion in
notional value of total settlement
quantity and of expiring open interest
for one additional S&P 500 price
45 See
PO 00000
supra note 42.
Frm 00122
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Sfmt 4703
89775
reversal of greater than two standard
deviations to occur in the last 15
minutes before the market close. Also,
regarding potential impact to S&P 500
component securities, it would take an
increase in total P.M.-settled SPX
options settlement quantity equal to $20
billion to effect a price movement of
only approximately $0.03 for a $200
stock, an increase in expiring open
interest in P.M.-settled SPX options
equal to $10 billion to effect a price
movement less than half a standard
deviation, and an increase in total P.M.settled SPX settlement quantity equal to
$7 billion to achieve a price reversal
greater two standard deviations.
The study employed the same metrics
to determine whether there is greater
price volatility for S&P 500 futures, the
S&P 500, and the component securities
of the S&P 500 related to SPXPM option
settlements during an environment of
high market volatility (i.e., on days in
which the VIX Index was in the top
10% of closing index values) and did
not identify indicators of any significant
economic impact on these markets near
the close as a result of the P.M.-settled
SPX options settlement.46 In addition to
this, the DERA staff study, applying the
same metrics and analysis as for P.M.settled SPX options to A.M.-settled SPX
options, did not identify any evidence
of a statistically significant relationship
between settlement quantity or expiring
open interest of A.M.-settled options
and volatility near the open.
Upon review of the results of the
DERA staff study, the Exchange agrees
that each of the above-described
marginal price movements in S&P 500
futures, the S&P 500, and the S&P 500
component securities affected by
increases in P.M.-settled SPX options
settlement quantity and expiring open
interest appear to be de minimis pricing
changes from those that occur over
regular trading hours (outside of the last
15 minutes of the trading day). Further,
the Exchange has not observed any
significant economic impact or other
adverse effects on the market from
similar reviews of its pilot reports and
data submitted after 2018.47 In its
review of a sample of the pilot data from
2019 through 2021, the Exchange
similarly measured volatility over the
final fifteen minutes of each trading day
by taking the standard deviation of
46 The Exchange also notes that the study did not
identify any evidence that less liquid S&P 500
constituent securities experienced any greater
impact from the settlement of P.M.-settled SPX
options.
47 Total SPX open interest volumes were
examined for expiration dates over a roughly twoyear period between October 2019 and November
2021.
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rolling one-minute returns of the S&P
500 level (excluding the first and last
fifteen minutes of trading) and
comparing such with the standard
deviation of one-minute returns 48 of the
S&P 500 level, over the last 15 minutes
of a trading day. The Exchange
identified an average standard deviation
ratio of 1.42 for the S&P 500 on nonexpiration days and an average standard
deviation ratio of 1.54 for the S&P 500
on expiration days (a ratio between
expiration days and non-expiration days
of 1.09). The Exchange also notes that,
using the same methodology, it
observed that, from 2015 through
2019,49 the average standard deviation
ratio for the S&P 500 on non-expiration
days was 1.11 and the average standard
deviation ratio for the S&P 500 on
expiration days was 1.22 (a ratio
between expiration days and nonexpiration days of 1.10). While the
average standard deviation ratio on both
expiration and non-expiration days was
higher in 2019 through 2021 due to
overall market volatility, the ratios
between the standard deviation ratios
on expiration days and non-expirations
days remained nearly identical between
the 2015 through 2019 timeframe and
the 2019 through 2021. The Exchange
believes this shows that, in cases where
overall market volatility may increase,
the normalized impact on expiration
days to non-expiration days generally
remains consistent.
In addition to this, the Exchange notes
that the S&P 500 Index is rebalanced
quarterly. The changes resulting from
each rebalancing coincide with the third
Friday of the quarterly rebalancing
month (i.e., March, June, September,
October and December) 50 and generally
drive an increase in trading activity
from investors that seek to track the S&P
500. As such, the Exchange measured
volatility on quarterly rebalancing dates
and found that the average standard
deviation ratio was 1.62, which suggests
more closing volatility on quarterly
rebalance dates compared to nonquarterly expiration dates (for which the
average standard deviation ratio was
1.22), thus indicating that the impact
rebalancing may have on the S&P 500
Index is greater than any impact that
P.M.-settled SPX options may have on
the S&P 500 Index.
The Exchange additionally focused its
study of the post-2018 sample pilot data
on reviewing for potential correlation
48 Calculated
at every tick for the prior minute.
2015 through November 2021.
50 See S&P Dow Jones Indices, Equity Indices
Policies & Practices, Methodology (August 2021), at
15, available at https://www.spglobal.com/spdji/en/
documents/methodologies/methodology-sp-equityindices-policies-practices.pdf.
between excess market volatility and
price reversals and the hedging activity
of liquidity providers. As explained in
the DERA staff study, potential impact
of P.M.-settled SPX options on the
correlated equity markets is thought to
stem from the hedging activity of
liquidity providers in such options.51 To
determine any such potential
correlation, the Exchange studied the
expected action of liquidity providers
that are the primary source of the
hedging on settlement days. These
liquidity providers generally deltahedge their S&P 500 Index exposure via
S&P 500 futures and on settlement day
unwind their futures positions that
correspond with the delta of their inthe-money (ITM) expiring P.M.-settled
SPX options. Assuming such behavior,
the Exchange estimated the Market-OnClose (‘‘MOC’’) 52 volume for the shares
of the S&P 500 component securities
(i.e., ‘‘MOC share volume’’) that could
ultimately result from the unwinding of
the liquidity providers’ futures positions
by equating the notional value of the
futures positions that correspond to
expiring ITM open interest to the
number S&P 500 component security
contracts (based on the weight of each
S&P 500 component security). That is,
the Exchange calculated (an estimate) of
the amount of MOC volume in the S&P
500 component markets attributable
hedging activity as a result of expiring
ITM P.M.-settled SPX options (i.e.,
‘‘hedging MOC’’). The Exchange then:
(1) compared the hedging MOC share
volume to all MOC share volume on
expiration days and non-expiration
trading days; and (2) compared the
notional value of the hedging futures
positions (i.e., that correspond to
expiring ITM P.M.-settled SPX options
open interest) to the notional value of
expiring ITM P.M.-settled SPX options
open interest, the notional value of all
expiring P.M.-settled SPX options open
interest and the notional value of all
P.M.-settled SPX options open interest.
The Exchange observed that, on
average, there were approximately 25%
more MOC shares executed on
expiration days (332 expiration days)
than non-expiration days (209 nonexpiration days). While, at first glance,
the volume of MOC shares executed on
expiration days seems much greater
than the volume executed on nonexpiration days, the Exchange notes that
much of this difference is attributable to
just eight expiration days—the quarterly
49 November
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51 See
DERA Staff PM Pilot Memo, at 10–12.
orders allow a market participant to trade
at the closing price. Market participants generally
utilize MOC orders to ensure they exit positions at
the end of the trading day.
52 MOC
PO 00000
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Fmt 4703
Sfmt 4703
index rebalancing dates captured within
the scope of the post-2018 sample pilot
data. The average MOC share volume on
the eight quarterly rebalancing dates
was approximately 4.8 times the average
MOC share volume on the non-quarterly
rebalancing expiration dates; again,
indicating that the impact rebalancing
may have on the S&P 500 Index is
greater than any impact that P.M.-settled
SPX options may have on the S&P 500
Index. That is, the Exchange observed
that the majority of closing volume on
quarterly rebalance dates is driven by
rebalancing of shares in in the S&P 500,
and not by P.M.-settled SPX options
expiration-related hedging activity.
Notwithstanding the MOC share volume
on quarterly rebalancing dates, the
volume of MOC shares executed on
expiration days (324 expiration days)
was only approximately 13% more than
that on non-expiration days,
substantially less than the increase in
volume over non-expiration days
wherein the eight index rebalancing
dates are included in expiration day
volume. In addition to this, the
Exchange observed that the hedging
MOC share volume (i.e., the expected
MOC share volume resulting from
hedging activity in connection with
expiring ITM P.M.-settled SPX options)
was, on average, less than the MOC
share volume on non-expiration days,
and was only approximately 20% of the
total MOC share volume on expiration
days, indicating that other sources of
MOC share volume generally exceed the
volume resulting from hedging activity
of expiring ITM P.M.-settled SPX
options and would more likely be a
source of any potential market volatility.
The Exchange also observed that,
across all third-Friday expirations, the
notional value of the hedging futures
positions was approximately 25% of the
notional value of expiring ITM P.M.settled SPX options, approximately
3.8% of the notional value of all
expiring P.M.-settled SPX options, and
approximately only 0.5% of the notional
value of all P.M.-settled SPX options. As
such, the estimated hedging activity
from liquidity providers on expiration
days is a fraction of the expiring open
interest in P.M.-settled SPX options,
which, the Exchange notes, is only 14%
of the total open interest in P.M.-settled
SPX options; thus, indicating negligible
capacity for hedging activity to increase
volatility in the underlying markets.
At the request of the Commission in
connection with proposed rule changes
to make other p.m.-settled options pilot
programs permanent, the Exchange
recently completed an analysis intended
to evaluate whether the introduction of
P.M.-settled options impacted the
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quality of the A.M.-settled option
market. Specifically, the Exchange
compared values of key market quality
indicators (specifically, the bid-ask
spread 53 and effective spread 54) in
SPXW options both before and after the
introduction of Tuesday expirations and
Thursday expirations for SPXW options
on April 18 and May 11, 2022,
respectively.55 Options on the Standard
& Poor’s Depositary Receipts S&P 500
ETF (‘‘SPY’’) were used as a control
group to account for any market factors
that might influence key market quality
indicators. The Exchange used data
from January 3, 2022 through March 4,
2022 (the two-month period prior to the
introduction of SPXW options with
Tuesday expirations) and data from May
11, 2022 to July 10, 2022 (the twomonth period following the
introduction of SPXW options with
Thursday expirations).56
As a result of this analysis, the
Exchange believes the introduction of
SPX options with Tuesday and
Thursday options had no significant
impact on the market quality of SPXW
options with Monday, Wednesday, and
Friday expirations. With respect to the
majority of series analyzed, the
Exchange observed no statistically
significant difference in the bid-ask
spread or the effective spread of the
series in the period prior to introduction
of the Tuesday and Thursday
expirations and the period following the
introduction of the Tuesday and
Thursday expirations. While
statistically insignificant, the Exchange
notes that in many series, particularly as
they were closer to expiration, the
Exchange observed that the values of
these spreads decreased during the
period following the introduction of the
Tuesday and Thursday expirations.57
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53 The
Exchange calculated for each of SPXW
options (with Monday, Wednesday, and Friday
expirations) and SPY Weekly options (with
Monday, Wednesday, and Friday expirations) the
daily time-weighted bid-ask spread on the Exchange
during its regular trading hours session, adjusted for
the difference in size between SPXW options and
SPY options (SPXW options are approximately ten
times the value of SPY options).
54 The Exchange calculated the volume-weighted
average daily effective spread for simple trades for
each of SPXW options (with Monday, Wednesday,
and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations)
as twice the amount of the absolute value of the
difference between an order execution price and the
midpoint of the national best bid and offer at the
time of execution, adjusted for the difference in size
between SPXW options and SPY options.
55 For purposes of comparison, the Exchange
paired SPXW options and SPY options with the
same moneyness and same days to expiration.
56 The Exchange observed comparable market
volatility levels during the pre-intervention and
post-intervention time ranges.
57 In any series in which the Exchange observed
an increase in the market quality indicators, the
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The full analysis is included in Exhibit
3 of this Amendment No. 3.58
Given the time that as passed since
the introduction of FLEX PM Third
Friday Options, the Exchange is unable
to analyze whether the introduction of
those options significantly impacted the
market quality of non-FLEX A.M.settled options at the time the FLEX PM
Third Friday Options began trading.
Additionally, the Exchange is unable to
analyze whether the introduction of the
FLEX P.M.-settled options significantly
impacted the market quality of A.M.settled FLEX options, as there is no
book for FLEX options (and thus no
quoted spreads), as FLEX options are
listed only if and when market
participants create them for trading. The
Exchange acknowledges the above
analysis, due to the type of study
performed, may not be used as a direct
substitute to demonstrate that the
introduction of FLEX PM Third Friday
Options did not significantly impact the
market quality of non-FLEX A.M.settled options. However, the Exchange
believes the analysis is relevant. Since
2013, approximately 400,000 contracts
in FLEX PM Third Friday Options have
executed on the Exchange, compared to
156 million total FLEX Options
contracts; 14.2 billion total options
contracts; 5.6 billion index option
contracts; 3.8 billion total SPX options
contracts; and 2.3 billion A.M.-settled
SPX options contracts in the same time
period. This equates to an ADV of under
150 contracts for FLEX PM Third Friday
Options compared to an ADV of over
800,000 contracts for SPX options over
that time. As noted above, the
Exchange’s analysis demonstrated the
introduction of SPXW options with
Tuesday and Thursday expirations did
not significantly impact the market
quality of non-FLEX SPX P.M.-options.
Given that the Exchange determined,
based on its above analysis, that the
introduction of SPXW options with
Tuesday and Thursday expirations had
no significant impact on the market
quality of non-FLEX SPX A.M.-settled
options, the Exchange believes it is
logical and reasonable to conclude that
it is unlikely that the introduction of
FLEX PM Third Friday Options (which
has an ADV of approximately 0.04% the
size of the ADV of SPXW Tuesday and
Thursday expirations) 59 would have
Exchange notes any such increase was also
statistically insignificant.
58 Exhibit 3 begins at page 72 of 85 of Amendment
No. 3 and is available at https://www.sec.gov/
comments/sr-cboe-2023-018/srcboe2023018308519-794402.pdf.
59 The Exchange acknowledges that, while FLEX
PM Third Friday Options has historically
represented a very small percentage of overall
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89777
any impact on the market quality of
non-FLEX SPX A.M.-settled options.
The Exchange believes it is fair to
assume FLEX PM Third Friday Options
likely had no measurable impact on that
market of non-FLEX SPX options with
A.M.-settlement for several reasons: (1)
as noted above, the volume in the FLEX
PM Third Friday Options is a minute
fraction (0.02%) of SPX options with
A.M.-settlement; (2) FLEX Options are
not quoted on a continuous basis, so
Market-Makers do not need to estimate
the risk associated with the potential
trade as they do with options they are
continuously quoting in the non-FLEX
Options market; and (3) the FLEX
market requires either verbal responses
on the trading floor or auction responses
electronically to represented orders,
which provides Market-Makers with
time to decide whether to trade,
something which does not occur for the
thousands of series they continuously
quote in the non-FLEX Options market.
To further support the Exchange’s
view that FLEX PM Third Friday
Options did not materially impact the
market quality of corresponding nonFLEX options, the Exchange evaluated
each FLEX PM Third Friday Options
trade for more than 500 contracts 60 that
occurred on the Exchange during the
last two years 61 and analyzed the
market quality (specifically, the average
time-weighted quote spread and size 30
minutes prior to the trade and the
average time-weighted quote spread and
size 30 minutes after the trade) of series
of non-FLEX a.m.-settled options
overlying the same index with similar
terms as the FLEX PM Third Friday
Option that traded (time to expiration,
type (call or put), and strike price) as set
forth in the table below: 62
volume, it is possible trading in these options may
grow in the future.
60 The Exchange believes it is reasonable to
consider only these large trades, because if large
trades had no significant impact on market quality,
then the Exchange believe it is unlikely that smaller
trades would have had a significant impact on
market quality. As noted below, the vast majority
of FLEX PM Third Friday Options executed as parts
of trades smaller than 500 contracts (which would
have a notional value of 225,000). See Amendment
No. 3, at 29–30.
61 The Exchange believes it is reasonable to use
data from this time period as representative of the
entire pilot period given that volume in FLEX PM
Third Friday Options remained consistently low
throughout the entire pilot period. The Exchange
notes this sampling of data points may not cover
different market conditions, such as volatility levels
(e.g., high volatility days), which may impact quote
spreads and sizes of index options.
62 All of these trades were SPX options. During
the time period reviewed, there were no trades of
more than 500 contracts for FLEX PM Third Friday
Options in any other index class. The Exchange
believes it is reasonable to limit this analysis to SPX
options trades given that the vast majority of FLEX
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Date
Time
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10/25/22 ................................................................................................
3/21/23 ..................................................................................................
12/20/22 ................................................................................................
11/22/22 ................................................................................................
9/20/22 ..................................................................................................
4/25/23 ..................................................................................................
5/23/23 ..................................................................................................
5/24/22 ..................................................................................................
3/22/22 ..................................................................................................
6/27/23 ..................................................................................................
7/25/23 ..................................................................................................
8/23/23 ..................................................................................................
1/24/23 ..................................................................................................
2/21/23 ..................................................................................................
6/21/22 ..................................................................................................
7/26/22 ..................................................................................................
11:57
13:07
12:23
12:49
12:50
13:05
12:24
11:44
12:36
11:58
14:12
13:48
12:16
13:01
12:47
12:23
Number of
contracts
Average timeweighted
quote price
spread prior
to trade
($)
Average timeweighted
quote price
spread after
trade
($)
Average timeweighted
quote size
prior to trade
(contracts)
Average timeweighted
quote
contract size
after to trade
(contracts)
9.89
9.40
10.29
9.85
10.16
11.66
9.65
8.99
10.44
9.57
10.87
11.41
9.54
10.20
11.12
10.66
9.08
9.76
10.28
9.78
10.23
11.54
9.77
8.87
10.39
9.61
10.85
11.44
9.43
10.22
11.08
10.67
16.4
13.8
27.2
25.6
15.4
20.1
18.6
15.1
19.2
13.9
22.1
15.6
21.6
18.61
14.2
16.8
16.7
13.9
27.5
25.8
15.0
19.9
18.7
15.6
19.1
14.3
22.8
15.2
22.0
18.65
14.8
16.8
660
660
655
635
615
610
610
590
575
560
550
535
535
515
510
510
As this table demonstrates, the
average time-weighted quote spread and
size did not materially change after the
FLEX PM Third Friday Options trade.
Specifically, the average time-weighted
quoted spread was never more than 0.36
wider in the time period after the trade
compared to before the trade, and the
average time-weighted size was never
more than 0.7 contracts different in the
time period after the trade compared to
before the trade. Further, given that the
spreads were relatively stable before and
after large trades, the Exchange believes
this demonstrates that large FLEX PM
Third Friday Options trades had no
material negative impact (and the
Exchange believes likely no impact) on
quote quality of non-FLEX a.m.-settled
options overlying the same index with
similar terms as the FLEX PM Third
Friday Option. The Exchange believes
this evaluation effectively demonstrates
it is likely that FLEX PM Third Friday
Options have had no significant
negative impact on the market quality of
non-FLEX Options with A.M.settlement.63
To further note, given the significant
changes in the closing procedures of the
primary markets in recent decades,
including considerable advances in
trading systems and technology, the
Exchange believes that the risks of any
potential impact of FLEX PM Third
Friday Options on the underlying cash
markets are also de minimis.
The Exchange proposes to make the
Pilot Program permanent as P.M.-settled
index products have become an integral
part of the Exchange’s product offerings,
providing investors with greater trading
opportunities and flexibility. As
indicated by the significant growth in
the size of the market for P.M.-settled
options, as well as the significant
growth in FLEX Options, such options
have been, and continue to be, wellreceived and widely used by market
participants. Therefore, the Exchange
wishes to be able to continue to provide
investors with the ability to trade FLEX
PM Third Friday Options on a
permanent basis. The Exchange believes
that the permanent continuation of the
Pilot Program will serve to maintain the
status quo by continuing to offer a
product to which investors have become
accustomed and have incorporated into
their business models and day-to-day
trading methodologies for nearly 14
years. As such, the Exchange also
believes that ceasing to offer FLEX PM
Third Friday Options may result in
market disruption and investor
confusion. The Exchange has not
identified any significant impact on
market quality nor any unique or
prohibitive regulatory concerns as a
result of the Pilot Program, and, as such,
the Exchange believes that the
continuation of the Pilot Program as a
pilot, including the use of time and
resources to compile and analyze
quarterly and annual pilot reports and
pilot data, is no longer necessary and
that making the Pilot Program
permanent will allow the Exchange to
otherwise allocate time and resources to
other industry initiatives.
PM Third Friday Options trade were in SPX
options, and the limited number of trades in
options FLEX PM Third Friday Options
(particularly given the smaller size of such trades)
would have created sampling difficulties for
designing a meaningful analysis of the impact of
such trades on market quality of the corresponding
non-FLEX a.m.-settled options.
63 The Exchange acknowledges that, while FLEX
PM Third Friday Options has historically
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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
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thereunder applicable to the Exchange
and, in particular, the requirements of
section 6(b) of the Act.64 Specifically,
the Exchange believes the proposed rule
change is consistent with the section
6(b)(5) 65 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.
In particular, the Exchange believes
that the making the Pilot Program
permanent will allow the Exchange to
be able to continue to offer FLEX PM
Third Friday Options on a continuous
and permanent basis. These products
have been, and continue to be, wellreceived and widely used by market
participants, providing investors with
greater trading opportunities and
flexibility. The Exchange believes that
the permanent continuation of the Pilot
Program will remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, protect
investors and the public interest by
continuing to offer a product to which
investors have become accustomed and
have incorporated into their business
models and day-to-day trading strategies
represented a very small percentage of overall
volume, it is possible trading in these options may
grow in the future.
64 15 U.S.C. 78f(b).
65 15 U.S.C. 78f(b)(5).
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for nearly 14 years. The Exchange notes
the Commission recently approved
proposals to make other pilots
permitting P.M.-settlement of index
options permanent after finding those
pilots were consistent with the Act and
the options subject to those pilots had
no significant impact on the market.66
The Exchange believes ceasing to offer
the Pilot Program may result in market
disruption and investor confusion, as
P.M.-settled index products, particularly
SPX options, have become an integral
part of the Exchange’s product offerings,
providing investors with greater trading
opportunities and flexibility.
The Exchange further believes that
making the Pilot Program permanent
will remove impediments to and perfect
the mechanism of a free and open
market and a national market system
and protect investors, while maintaining
a fair and orderly market, as the
Exchange believes that previous
concerns (arising in the 1980s) regarding
options expirations potentially
contributing to excess volatility and
reversals around the close have been
adequately diminished. As described in
detail above, the Exchange has observed
no significant adverse market impact or
identified any meaningful regulatory
concerns during the nearly 14-year
operation of the FLEX PM Third Friday
Program as a pilot nor during the 15
years since P.M.-settled index options
(SPX) were reintroduced to the
marketplace.67 Notably, the Exchange
did not identify any significant
economic impact (including on pricing
or volatility or in connection with
reversals) on related futures, the
underlying indexes, or the underlying
component securities of the underlying
indexes surrounding the close as a
result of the quantity of FLEX PM Third
Friday Options or the amount of
expiring open interest in FLEX PM
Third Friday Options, nor any
demonstrated capacity for options
hedging activity to impact volatility in
the underlying markets. While the
DERA staff study and corresponding
Exchange study described above
specifically evaluated SPX options,
FLEX PM Third Friday Options overlay
broad-based indexes (including the S&P
500 Index), the Exchange believes it is
appropriate to extrapolate the data to
apply to FLEX PM Third Friday
Options. This is particularly true given
that the data and reports submitted by
the Exchange during the pilot period
have similarly demonstrated no
significant economic impact on the
respective underlying indexes or other
66 See
67 See
supra note 29.
supra notes 37–51.
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products. As set forth in the data and
reports the Exchange provided to the
Commission during the pilot period and
noted above, since 2013, approximately
400,000 contracts in FLEX PM Third
Friday Options executed on the
Exchange (the vast majority of which
were SPX options). Given that this
represented approximately 0.01% of all
SPX options volume executed on the
exchange during that time, the Exchange
believes the chance that such a small
number of contracts 68 could have
measurably impacted the underlying
index or other products is near zero.
This is consistent with the findings in
the DERA staff study set forth above
regarding the impact of certain notional
amounts of SPX options on the
underlying index and related futures.
For example, if you assume an index
value for the S&P 500 Index of 4500, the
notional value of one SPX option
contract is 450,000. If 400,000 FLEX PM
Third Friday Option contracts executed
since 2013, that results in an average
annual volume of approximately 36,300
FLEX PM Third Friday Options, with
the notional value of this total annual
volume (the vast majority of which
executed as parts of trades smaller than
500 contracts (which would have a
notional value of 225,000), as
demonstrated by the table above) of just
over $16 billion. As discussed above,
the DERA staff study demonstrated that
a similar amount of notional value of
P.M.-settled SPX options had only a
marginal impact on the underlying
index and related futures.
The DERA staff study and
corresponding Exchange study
concluded that a significantly larger
amount of non-FLEX p.m.-settled index
options had no significant adverse
market impact and caused no
meaningful regulatory concerns.
Therefore, the Exchange believes it is
reasonable to conclude that the
relatively small amount of FLEX Index
Option volume subject to the current
Pilot Program would similarly have no
significant adverse market impact or
cause no meaningful regulatory
concerns. Additionally, these studies
measured any impact on related futures,
the underlying indexes, or the
underlying component securities of the
underlying indexes surrounding the
close. Despite FLEX SPX options (which
represent approximately half of the
year-to-date 2023 volume of FLEX Index
Options but only approximately 0.3% of
68 The Exchange acknowledges that, while FLEX
PM Third Friday Options has historically
represented a very small percentage of overall
volume, it is possible trading in these options may
grow in the future.
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89779
total SPX volume) not being included in
the DERA staff study and corresponding
Exchange study, those studies
concluded that during the time periods
covered (which included the period of
time in which the Pilot Program has
been operating), there was no significant
economic impact on the underlying
index or related products. Therefore, the
Exchange believes it is reasonable to
conclude that any FLEX SPX Options
that executed during the timeframes
covered by the studies had no
significant impact on the underlying
index or related products, as neither
DERA staff nor the Exchange observed
any significant economic impact on the
underlying index or related product.
The Exchange also believes the
introduction of FLEX PM options had
no significant impact on the market
quality of corresponding A.M.-settled
options or other options. As discussed
above, the Exchange’s analysis
conducted after the introduction of
SPXW options with Tuesday and
Thursday expirations demonstrated no
statistically significant impact on the
bid-ask or effective spreads of SPXW
options with Monday, Wednesday, and
Friday expirations after trading in the
SPXW options with Tuesday and
Thursday expirations began. As noted
above, the Exchange acknowledges the
above analysis, due to the type of study
performed, may not be used as a direct
substitute to demonstrate that the
introduction of FLEX PM Third Friday
Options did not significantly impact the
market quality of non-FLEX A.M.settled options. However, the Exchange
believes the analysis is relevant. Since
2013, approximately 400,000 contracts
in FLEX PM Third Friday Options have
executed on the Exchange, compared to
156 million total FLEX Options
contracts; 14.2 billion total options
contracts; 5.6 billion index option
contracts; 3.8 billion total SPX options
contracts; and 2.3 billion A.M.-settled
SPX options contracts in the same time
period. This equates to an ADV of under
150 contracts for FLEX PM Third Friday
Options compared to an ADV of over
800,000 contracts for SPX options over
that time. As noted above, the
Exchange’s analysis demonstrated the
introduction of SPXW options with
Tuesday and Thursday expirations did
not significantly impact the market
quality of non-FLEX SPX P.M.-options.
Given that the Exchange determined
that the introduction of SPXW options
with Tuesday and Thursday expirations
had no significant impact on the market
quality of non-FLEX SPX A.M.-settled
options, the Exchange believes it is
logical and reasonable to conclude that
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it is unlikely that the introduction of
FLEX PM Third Friday Options (which
has an ADV of approximately 0.04% the
size of the ADV of SPXW Tuesday and
Thursday expirations) 69 would have
any impact on the market quality of
non-FLEX SPX A.M.-settled options.
The Exchange believes it is fair to
assume there is likely no measurable
impact on that market for several
reasons: (1) as noted above, the volume
in the FLEX PM Third Friday Options
is a minute fraction (0.02%) of SPX
options with A.M.-settlement; (2) FLEX
Options are not quoted on a continuous
basis, so Market-Makers do not need to
estimate the risk associated with the
potential trade as they do with options
they are continuously quoting in the
non-FLEX Options market; and (3) the
FLEX market requires either verbal
responses on the trading floor or auction
responses electronically to represented
orders, which provides Market-Makers
with time to decide whether to trade,
something which does not occur for the
thousands of series they continuously
quote in the non-FLEX Options market.
The Exchange evaluated each FLEX
PM Third Friday Options trade for more
than 500 contracts 70 that occurred on
the Exchange during the last two
years 71 and analyzed the market quality
(specifically, the average time-weighted
quote spread and size 30 minutes prior
to the trade and the average timeweighted quote spread and size 30
minutes after the trade) of series nonFLEX a.m.-settled options overlying the
same index with similar terms as the
FLEX PM Third Friday Option that
traded (time to expiration, type (call or
put), and strike price) as set forth in the
table above. Given that the above-table
shows that the spreads were relatively
stable before and after large trades, the
Exchange believes this demonstrates
that large FLEX PM Third Friday
Options trades had no material negative
impact (and the Exchange believes
likely no impact) on quote quality of
non-FLEX a.m.-settled options overlying
the same index with similar terms as the
FLEX PM Third Friday Option.
Therefore, the Exchange believes this
69 The Exchange acknowledges that, while FLEX
PM Third Friday Options has historically
represented a very small percentage of overall
volume, it is possible trading in these options may
grow in the future.
70 The Exchange believes it is reasonable to
consider only these large trades, because if large
trades had no significant impact on market quality,
then it is unlikely that smaller trades would have
had a significant impact on market quality.
71 The Exchange believes it is reasonable to use
data from this time period as representative of the
entire pilot period given that volume in FLEX PM
Third Friday Options remained consistently low
throughout the entire pilot period.
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evaluation effectively demonstrates it is
likely that FLEX PM Third Friday
Options have had no significant
negative impact on the market quality of
non-FLEX Options with A.M.settlement.72
As discussed above, the Exchange
believes that evaluation effectively
demonstrates that FLEX PM Third
Friday Options have had no significant
negative impact on the market quality of
non-FLEX Options with A.M.settlement.
Additionally, the significant changes
in the closing procedures of the primary
markets in recent decades, including
considerable advances in trading
systems and technology, has
significantly minimized risks of any
potential impact of FLEX PM Third
Friday Options on the underlying cash
markets. As such, the Exchange believes
that a permanent Pilot Program does not
raise any unique or prohibitive
regulatory concerns and that such
trading has not, and will not, adversely
impact fair and orderly markets on
Expiration Fridays for the underlying
indexes or their component securities.
Further, as the Exchange has not
identified any significant impact on
market quality or any unique or
prohibitive regulatory concerns as a
result of offering FLEX PM Third Friday
Options, the Exchange believes that the
continuation of the Pilot Program as a
pilot, including the gathering,
submission and review of the pilot
reports and data, is no longer necessary
and that making the Pilot Program
permanent will allow the Exchange to
otherwise allocate time and resources to
other industry initiatives.
continued investor interest and demand,
warranting a permanent Pilot Program.
The Exchange believes that, for the
period that P.M.-settled FLEX options
have been in operation as pilot
programs, they have provided investors
with a desirable product with which to
trade and wishes to permanently offer
this product to investors. Furthermore,
during the pilot period, the Exchange
has not observed any significant adverse
market effects nor identified any
regulatory concerns as a result of the
Pilot Program, and, as such, the
continuation of the Pilot Program as a
pilot, including the gathering,
submission and review of the pilot
reports and data, is no longer
necessary—a permanent Pilot Program
will allow the Exchange to otherwise
allocate time and resources to other
industry initiatives.
The Exchange further does not believe
that making the Pilot Program
permanent will impose any burden on
intermarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because it
applies to a class of options listed only
for trading on Cboe Options. The
Exchange notes that other exchanges are
free to and do offer competing products.
To the extent that the permanent
offering and continued trading of FLEX
PM Third Friday Options may make
Cboe Options a more attractive
marketplace to market participants at
other exchanges, such market
participants may elect to become Cboe
Options market participants.
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.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Cboe Options 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 making
the Pilot Program permanent will
impose any unnecessary or
inappropriate burden on intramarket
competition because FLEX PM options
will continue to be available to all
market participants who wish to
participate in the FLEX PM options
market. The Exchange believes that the
growth that the P.M.-settled options
market, including FLEX PM options, has
experienced since their reintroduction
through pilot programs indicates strong,
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 3, is
consistent with the Act and the rules
and regulations thereunder applicable to
a national securities exchange.73 In
particular, the Commission finds that
the proposed rule change, as modified
by Amendment No. 3, is consistent with
section 6(b)(5) of the Act,74 which
requires, among other things, that the
Exchange’s rules be designed to prevent
fraudulent and manipulative acts and
72 The Exchange acknowledges that, while FLEX
PM Third Friday Options has historically
represented a very small percentage of overall
volume, it is possible trading in these options may
grow in the future.
73 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
74 15 U.S.C. 78f(b)(5).
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practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. In its proposal to make
the Pilot Program permanent, the
Exchange addressed whether the Pilot
Program negatively impacts markets or
impacted options market quality.75 Each
of these elements is discussed in greater
detail below. As stated above, no
comments were received on the
proposed rule change.
khammond on DSKJM1Z7X2PROD with NOTICES
Market Impact Considerations
The Exchange states it has not
identified any evidence from the pilot
data indicating that the trading of PMsettled FLEX options has any adverse
impact on fair and orderly markets on
Expiration Fridays for broad-based
indexes or the underlying securities
comprising those indexes and has
observed no abnormal market
movements attributable to FLEX PM
Third Friday Options from any market
participants that have come to the
attention of the Exchange.76 In order to
support its overall assessment of the
Program, the Exchange included a
review and analysis of pilot data.77
Among other things, the Exchange’s
analysis includes end of day volatility
as well as a comparison of the impact
of quarterly index rebalancing versus
PM-settled expirations.78
In addition to reviewing the data and
analysis provided by the Exchange, the
Commission reviewed the analysis in
the Pilot Memo, which evaluates
whether higher levels of expiring open
interest in PM-settled index options
results in increased volatility and price
reversals around the close. The Pilot
75 Certain studies cited by the Exchange do not
include, as part of their analysis, FLEX Options. See
Amendment No. 3. However, the Commission
acknowledges that the market for FLEX Options is
small and the products included as part of those
studies, while much larger than the FLEX market,
did not have a disruptive impact on the underlying
indexes or the underlying components. As a result,
the Commission recognizes that it is not
unreasonable for the Exchange to infer that since
the FLEX PM Third Friday Options market is
significantly smaller than the SPX PM market,
FLEX PM Third Friday Options are unlikely to
adversely impact the market.
76 See Amendment No. 3, at 12–13.
77 Id. at 17.
78 Id. at 13. The Exchange states that although its
analysis specifically evaluated SPX options, the
Exchange believes it is appropriate to extrapolate
the data to apply to FLEX PM Third Friday Options.
See Amendment No. 3, at 29. The Commission
agrees it is appropriate to extrapolate the data to
FLEX PM Third Friday Options, as the Exchange’s
analysis examines liquidity and volatility dynamics
around the market close, which may be associated
with typical hedging activities tied to expiring p.m.settled index option.
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Memo shows that the market share for
PM-settled options on the S&P 500 has
grown substantially since 2007.79 The
Exchange’s review of pilot data also
showed this trend continuing from 2019
through 2021.80
The Pilot Memo examines whether
and to what extent expiring open
interest in PM-settled index options is
empirically related with the tendency of
the corresponding index futures, the
underlying index, or index components
to experience increased transitory
volatility and price reversals around the
time of market close on expiration dates.
The Pilot Memo concludes that,
although expiring PM-settled index
option open interest may have a
statistically significant relationship with
volatility and price reversals of the
underlying index, index futures, and
index component securities around the
market close, the magnitude of the effect
is economically very small.81 For
example, the largest settlement event
that occurred during the time period
studied in the Pilot Memo (a settlement
of $100.4 billion of notional on
December 29, 2017) had an estimated
impact on the futures price of only
approximately 0.02% (a predicted
impact of $0.54 relative to a closing
futures price of $2,677).82
The Exchange further reviewed a
sample of pilot data from 2019 through
2021, and measured the volatility of the
S&P 500 over the final fifteen minutes
of each trading day and compared
expiration days to non-expiration
days.83 Generally volatility was slightly
higher on expiration days, but in cases
where overall market volatility
increased, the normalized impact on
expiration days versus non-expiration
days remained consistent.84 The
Exchange further analyzed volatility on
days when the S&P 500 was rebalanced,
and states its results suggest more
closing volatility on rebalance dates
compared to non-rebalance expiration
dates, indicating that rebalancing of the
S&P 500 may have a greater impact on
S&P 500 volatility than p.m.-settled
option expirations.85
The Exchange also reviewed a sample
of post-2018 pilot data for potential
correlation between excess market
volatility and price reversals and the
79 See
Pilot Memo at 2.
Amendment No. 3, at 13. Specifically,
since 2007, PM-settled SPX options grew from 0.1%
of open interest to 30% of open interest in 2021.
Id.
81 See Pilot Memo at 3.
82 See id.
83 See Amendment No. 3, at 17–19.
84 See id.
85 See id.
hedging activity of liquidity providers.86
To determine whether there is a
correlation, the Exchange calculated an
estimate of the amount of MOC volume
in the S&P 500 component markets
attributable to expected hedging activity
as a result of expiring in-the-money
options.87 The Exchange states its
results indicate that other sources of
MOC share volume generally exceed the
volume resulting from hedging activity
for PM-settled SPX options.88 Further,
the Exchange also compared hedging
futures positions that would correspond
to expiring in-the-money PM-settled
SPX options and concludes the data
indicate negligible capacity for hedging
activity to increase volatility in the
underlying markets.89
The Exchange acknowledged in its
proposal that the Commission’s Pilot
Memo and corresponding Exchange
studies discussed above specifically
evaluated SPX options rather than FLEX
PM Third Friday Options.90 To support
its reliance on these studies, the
Exchange states that there have been
approximately 400,000 contracts in
FLEX PM Third Friday Options
executed on the Exchange since 2013,
that vast majority of which were on
SPX, representing approximately 0.01%
of all SPX options volume during that
time.91 The Exchange further states that
given that the Pilot Memo and other
Exchange studies concluded that PM
settlements of a significantly larger
amount of non-FLEX PM-settled index
options had no significant adverse
market impact on the underlying index
or related products, it is reasonable to
conclude that the small amount of
expiring PM settled FLEX index options
under the Pilot Program, ‘‘. . .would
similarly have no significant adverse
market impact.’’ 92
Finally, the Exchange states that the
significant changes in the closing
procedures of the primary markets in
recent decades, including considerable
advances in trading systems and
technology, have significantly
minimized risks of any potential impact
of PM-, cash-settled SPX options on the
underlying cash markets.93
Market Quality Considerations
The Exchange also completed an
analysis intended to evaluate whether
the Pilot Program impacted the quality
of the SPX options market. Specifically,
80 See
PO 00000
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Sfmt 4703
89781
86 See
id.
id.
88 See Amendment No. 3, at 20.
89 See id.
90 See Amendment No. 3, at 29.
91 See id.
92 See Amendment No. 3, at 30.
93 See Amendment No. 3, at 26.
87 See
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Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices
the Exchange compared values of key
market quality indicators (specifically,
the bid-ask spread 94 and effective
spread 95) in PM-settled SPX weekly
(‘‘SPXW’’) options both before and after
the introduction of Tuesday expirations
and Thursday expirations for SPXW
options on April 18 and May 11, 2022,
respectively.96 The Exchange concludes
from this analysis that the introduction
of SPX options with Tuesday and
Thursday options had no significant
impact on the market quality of SPXW
options with Monday, Wednesday, and
Friday expirations. For a majority of the
series analyzed, the Exchange observed
no statistically significant difference in
bid-ask spread or effective spread.97
While the Exchange acknowledges that
this analysis may not be a direct
substitute to demonstrate that the
introduction of FLEX PM Third Friday
Options did not significantly impact the
market quality of non-FLEX AM-settled
options the Exchange believes the
analysis is still relevant.98
Specifically, the Exchange states the
data shows that 400,000 FLEX PM Third
Friday Options have executed on the
Exchange since 2013; compared to 156
million total FLEX Options contracts;
14.2 billion total options contracts; 5.6
billion index option contracts; 3.8
billion total SPX options contracts; and
2.3 billion AM-settled SPX options
contracts in the same time period.99 The
Exchange states that since FLEX PM
Third Friday Options have an averagedaily-volume of approximately 0.04% of
the average-daily-volume of SPXW
Tuesday and Thursday expirations, it is
reasonable to conclude that it is
unlikely that FLEX PM Third Friday
Options would have any impact on the
market quality of non-FLEX SPX AMsettled options.100
khammond on DSKJM1Z7X2PROD with NOTICES
94 The
Exchange calculated for each of SPXW
options (with Monday, Wednesday, and Friday
expirations) and SPY Weekly options (with
Monday, Wednesday, and Friday expirations) the
daily time-weighted bid-ask spread on the Exchange
during its regular trading hours session, adjusted for
the difference in size between SPXW options and
SPY options (SPXW options are approximately ten
times the value of SPY options).
95 The Exchange calculated the volume-weighted
average daily effective spread for simple trades for
each of SPXW options (with Monday, Wednesday,
and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations)
as twice the amount of the absolute value of the
difference between an order execution price and the
midpoint of the national best bid and offer at the
time of execution, adjusted for the difference in size
between SPXW options and SPY options.
96 For purposes of comparison, the Exchange
paired SPXW options and SPY options with the
same moneyness and same days to expiration.
97 See Amendment No. 3, at 56.
98 Id. at 23
99 Id.
100 Id.
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As part of its filing, to further analyze
the impact FLEX PM Third Friday
Options had on market quality, the
Exchange provided additional data and
evaluated each FLEX PM Third Friday
Options trade for more than 500
contracts that occurred on the Exchange
during the last two years and analyzed
the market quality (specifically, the
average time-weighted quote spread and
size 30 minutes prior to the trade and
the average time-weighted quote spread
and size 30 minutes after the trade) of
non-FLEX AM-settled SPX option series
with similar terms as the FLEX PM
Third Friday Option that traded (time to
expiration, type (call or put), and strike
price) as set forth in the table above.
The Exchange’s analysis shows that
the average time-weighted quote spread
and size of non-FLEX AM-settled SPX
option did not materially change after
the FLEX PM Third Friday Options
trade.101 Specifically, the average timeweighted quoted spread was never more
than $0.36 wider in the time period after
the trade compared to before the trade,
and the average time-weighted size was
never more than 0.7 contracts different
in the time period after the trade
compared to before the trade.102 The
Exchange also stated that the observed
spreads were relatively stable before and
after large trades. The Exchange states
that this demonstrates that large FLEX
PM Third Friday Options trades had no
material negative impact on quote
quality of non-FLEX AM-settled SPX
options with similar terms as the FLEX
PM Third Friday Options.103 Therefore,
the Exchange concludes that this
evaluation effectively shows that it is
likely FLEX PM Third Friday Options
have had no significant negative impact
on the market quality of non-FLEX
Options with AM-settlement.104
Conclusion
The Commission believes that the
evidence contained in the Exchange’s
filing, and the Exchange’s pilot data and
reports, demonstrate that the Pilot
Program has benefitted investors and
other market participants by providing
more flexible trading and hedging
opportunities using FLEX options under
the Pilot Program, while also having
observed no evidence of an adverse
impact on the market. The market for
FLEX PM Third Friday Options has
grown in size over the course of the
Pilot Program, but remains relatively
small compared to non-FLEX PM-settled
101 The Exchange acknowledged certain
limitations related to its analysis. See Amendment
No. 3, at notes 47–49.
102 See Amendment No. 3, at 25.
103 Id.
104 Id.
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index options, and analysis of the pilot
data did not identify any significant
economic impact, nor did it indicate a
deterioration in market quality (as
measured by average time weighted
quote spreads and average time
weighted quote size) for series of nonFLEX AM-settled SPX option series
with similar terms as the FLEX PM
Third Friday Options. Additionally, the
Pilot Memo and Exchange studies
analyzing the non-Flex options market
did not identify any adverse market
impact on the underlying indexes,
components of those indexes or related
products or any significant impact on
market quality of AM-settled index
options.105 Further, significant changes
in closing procedures in the decades
since index options moved to AM
settlement may also serve to mitigate the
potential impact of PM-settled index
options on the underlying cash markets.
Accordingly, the Commission finds
that the proposed rule change, as
modified by Amendment No. 3, is
consistent with section 6(b)(5) of the
Act 106 and the rules and regulations
thereunder applicable to a national
securities exchange.
IV. Solicitation of Comments on
Amendment No. 3 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 3 is
consistent with the Act. Comments may
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
CBOE–2023–018 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–CBOE–2023–018. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
105 While the Exchange recognized certain
limitations as to its analysis, given the totality and
scope of the studies described above and the
current size of the FLEX PM Third Friday Options
market it is not unreasonable for the Exchange to
infer from those studies that it is unlikely FLEX PM
Third Friday Options adversely impacted the
options or other markets.
106 15 U.S.C. 78f(b)(5).
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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–CBOE–2023–018 and should be
submitted on or before January 18, 2024.
khammond on DSKJM1Z7X2PROD with NOTICES
V. Accelerated Approval of
Amendment No. 3
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 3, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 3 in the Federal
Register. As noted above, Amendment
No. 3 makes no substantive changes to
the proposal. Amendment No. 3
provides additional analysis and data to
support certain assertions made by the
Exchange and provides greater clarity
to, and justification for, the proposal.107
The additional analysis and information
in Amendment No. 3 assist the
Commission in evaluating the
Exchange’s proposal and in determining
that it is consistent with the Act.
Amendment No. 3 also raises no new
novel issues. Accordingly, the
Commission finds good cause, pursuant
to section 19(b)(2) of the Act,108 to
approve the proposed rule change, as
modified by Amendment No. 3, on an
accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act, that
proposed rule change SR–CBOE–2023–
018, as modified by Amendment No. 3,
be, and hereby is, approved on an
accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.109
Christina Z. Milnor,
Assistant Secretary.
[FR Doc. 2023–28608 Filed 12–27–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99231; File No. SR–
NYSEAMER–2023–66]
Self-Regulatory Organizations; NYSE
American LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Change To Modify Rule 900.3NYP
December 22, 2023.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on December
19, 2023, NYSE American LLC (‘‘NYSE
American’’ or ‘‘Exchange’’) 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 self-regulatory
organization. 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 modify
Rule 900.3NYP (Orders and Modifiers)
to adopt electronic Customer Cross
Order and Complex Customer Cross
Order functionality and to amend Rule
900.2NY (Definitions) to specify the
treatment of certain Professional
Customer interest. The proposed rule
change is available on the Exchange’s
website at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
109 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
107 See
108 15
supra note 12.
U.S.C. 78s(b)(2).
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89783
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
self-regulatory organization 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 those 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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to modify
Rule 900.3NYP (Orders and Modifiers)
to adopt electronically-entered
Customer Cross (‘‘C2C’’) Orders and
Complex Customer Cross (‘‘Complex
C2C’’) Orders (collectively, ‘‘Customer
Cross Orders’’). The Exchange also
proposes to amend the definition of
Professional Customer (Rule 900.2NY)
to specify that, for purposes of proposed
Rule 900.3NYP(g)(2) and Rule
971.1NYP, Professional Customer
interest would be treated in the same
manner as Broker/Dealers (nonCustomers).
Proposed Rule 900.3NYP(g)(2):
Customer Cross Orders
Rule 934NY(a) describes Customer-toCustomer Cross orders on the Trading
Floor wherein ‘‘[a] Floor Broker who
holds a Customer order to buy and a
Customer order to sell the same option
contract may cross such orders,’’
provided that the Floor Broker proceeds
in the manner set forth in paragraphs
(1)–(3) of Rule 934NY(a).4 The Exchange
proposes to adopt rules governing
electronically-entered Customer Cross
Orders, which allow ATP Holders to
conduct this type of crossing transaction
electronically and without having to
utilize a Floor Broker. Although the
proposed Customer Cross Orders are
conceptually the same as the existing
Customer-to-Customer Cross, the latter
order type differs in that it must adhere
4 As discussed infra, Professional Customer
volume is not eligible to be included on a
Customer-to-Customer Cross submitted pursuant to
Rule 934NY(a). See Rule 900.2NY (providing in
relevant part that, for purposes of Rule 934NY
(Crossing), Professional Customers are treated as
Broker/Dealers).
E:\FR\FM\28DEN1.SGM
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]]>Agencies
[Federal Register Volume 88, Number 248 (Thursday, December 28, 2023)]
[Notices]
[Pages 89771-89783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-28608]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99222; File No. SR-CBOE-2023-018]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 3 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 3, To Make Permanent
the Operation of its Flexible Exchange Options Pilot Program Regarding
Permissible Exercise Settlement Values for FLEX Index Options
December 21, 2023.
I. Introduction
On April 10, 2023, Cboe Exchange, Inc. (``Exchange'') filed with
the Securities and Exchange Commission (``Commission''), pursuant to
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to
[[Page 89772]]
make permanent the operation of its Flexible Exchange Options (``FLEX
Options'') pilot program that permits PM-settled Flexible Exchange
Index Options (``FLEX PM Third Friday Options'') to expire on or within
two business days of the third-Friday-of-the-month expirations for non-
FLEX Options (``Pilot Program'').\3\ The proposed rule change was
published for comment in the Federal Register on April 28, 2023.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ A third-Friday-of-the month expiration is referred to as
``Expiration Friday''. Prior to the Pilot Program, Exchange rules
prohibited PM-settled FLEX Index Options to expire on any business
day that falls on or within two business days of an Expiration
Friday. During the Pilot Program, PM-settled FLEX Index Options are
permitted on or within two business days of an Expiration Friday.
\4\ See Securities Exchange Act Release No. 97368 (April 24,
2023), 88 FR 26353 (``Notice'').
---------------------------------------------------------------------------
On June 8, 2023, pursuant to section 19(b)(2) of the Act,\5\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\6\ On July 19, 2023, the Commission instituted proceedings
under section 19(b)(2)(B) of the Act \7\ to determine whether to
approve or disapprove the proposed rule change.\8\ On September 26,
2023, CBOE filed Amendment No. 1 to the proposed rule change.\9\ On
September 27, 2023, the Commission designated a longer period for
Commission action on the proposed rule change.\10\ On November 20,
2023, CBOE filed Amendment No. 2 to the proposed rule change.\11\ On
December 7, 2023, CBOE filed Amendment No. 3 to the proposed rule
change.\12\ The Commission is publishing this notice to solicit
comments on Amendment No. 3 from interested persons, and is approving
the proposed rule change, as modified by Amendment No. 3, on an
accelerated basis.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 97672, 88 FR 38930
(June 14, 2023).
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 97950, 88 FR 47930
(July 25, 2023).
\9\ Amendment No. 1 superseded and replaced the original
proposal in its entirety. Amendment No. 1 was subsequently
superseded and replaced in its entirety by Amendment No. 2.
\10\ See Securities Exchange Act Release No. 98557, 88 FR 68236
(October 3, 2023). The Commission designated December 24, 2023, as
the date by which the Commission shall approve or disapprove the
proposed rule change.
\11\ Amendment No. 2 superseded and replaced Amendment No. 1 in
its entirety. Amendment No. 2 was subsequently superseded and
replaced in its entirety by Amendment No. 3.
\12\ Amendment No. 3, which supersedes and replaces Amendment
No. 2 in its entirety, provides additional support and data for the
Exchange's assertion that listing and trading of FLEX PM Third
Friday Index Options under the Pilot Program has had no negative
impact on the market and price volatility of underlying indexes and
their underlying component stocks or related products or negatively
impacts options market quality. Amendment No. 3 is available at
https://www.sec.gov/comments/sr-cboe-2023-018/srcboe2023018-308519-794402.pdf.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Description of the Proposal, as
Modified by Amendment No. 3 \13\
---------------------------------------------------------------------------
\13\ This Section II reproduces Amendment No. 3, as filed by the
Exchange.
---------------------------------------------------------------------------
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to make permanent its Pilot Program that
permits the Exchange to list FLEX Options overlying indexes (``FLEX
Index Options'') whose exercise settlement value is derived from
closing prices on the last trading day prior to expiration that expire
on or within two business days of a third Friday-of-the-month
expiration day for a non-FLEX Option (other than QIX options) (``FLEX
PM Third Friday Options''). The Securities and Exchange Commission (the
``Commission'') approved a Cboe Options rule change that, among other
things, established a pilot program regarding permissible exercise
settlement values for FLEX Index Options on January 28, 2010.\14\ The
Exchange has extended the pilot period nearly 20 times since the
Commission initially approved the Pilot Program in 2010, with the pilot
period currently set to expire on the earlier of May 6, 2024 or the
date on which the pilot program is approved on a permanent basis.\15\
The Exchange hereby requests that the Commission approve the Pilot
Program on a permanent basis.
---------------------------------------------------------------------------
\14\ Securities Exchange Act Release No. 61439 (January 28,
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (``Approval
Order''). The initial pilot period was set to expire on March 28,
2011, which date was added to the rules in 2010. See Securities
Exchange Act Release No. 61676 (March 9, 2010), 75 FR 13191 (March
18, 2010) (SR-CBOE-2010-026).
\15\ See Securities Exchange Act Release Nos. 64110 (March 23,
2011), 76 FR 17463 (March 29, 2011) (SR-CBOE-2011-024); 66701 (March
30, 2012), 77 FR 20673 (April 5, 2012) (SR-CBOE-2012-027); 68145
(November 2, 2012), 77 FR 67044 (November 8, 2012) (SR-CBOE-2012-
102); 70752 (October 24, 2013), 78 FR 65023 (October 30, 2013) (SR-
CBOE-2013-099); 73460 (October 29, 2014), 79 FR 65464 (November 4,
2014) (SR-CBOE-2014-080); 77742 (April 29, 2016), 81 FR 26857 (May
4, 2016) (SR-CBOE-2016-032); 80443 (April 12, 2017), 82 FR 18331
(April 18, 2017) (SR-CBOE-2017-032); 83175 (May 4, 2018), 83 FR
21808 (May 10, 2018) (SR-CBOE-2018-037); 84537 (November 5, 2018),
83 FR 56113 (November 9, 2018) (SR-CBOE-2018-071); 85707 (April 23,
2019), 84 FR 18100 (April 29, 2019) (SR-CBOE-2019-021); 87515
(November 13, 2020), 84 FR 63945 (November 19, 2019) (SR-CBOE-2019-
108); 88782 (April 30, 2020), 85 FR 27004 (May 6, 2020) (SR-CBOE-
2020-039); 90279 (October 28, 2020), 85 FR 69667 (November 3, 2020)
(SR-CBOE-2020-103); 91782 (May 5, 2021), 86 FR 25915 (May 11, 2021)
(SR-CBOE-2021-031); 93500 (November 1, 2021), 86 FR 61340 (November
5, 2021) (SR-CBOE-2021-064); 94812 (April 28, 2022), 87 FR 26381
(May 4, 2022) (SR-CBOE-2022-020); 96239 (November 4, 2022), 87 FR
67985 (November 10, 2022) (SR-CBOE-2022-053); 97452 (May 8, 2023),
88 FR 30821 (May 12, 2023) (SR-CBOE-2023-025); and 98637 (September
28, 2023), 88 FR 68819 (October 4, 2023) (SR-CBOE-2023-057). At the
same time the permissible exercise settlement values pilot was
established for FLEX Index Options, the Exchange also established a
pilot program eliminating the minimum value size requirements for
all FLEX Options. See Approval Order, supra note 3. The pilot
program eliminating the minimum value size requirements was extended
twice pursuant to the same rule filings that extended the
permissible exercise settlement values (for the same extended
periods) and was approved on a permanent basis in a separate rule
change filing. See id.; and Securities Exchange Act Release No.
67624 (August 8, 2012), 77 FR 48580 (August 14, 2012) (SR-CBOE-2012-
040) (Order Granting Approval of Proposed Rule Change Related to
Permanent Approval of Its Pilot on FLEX Minimum Value Sizes).
---------------------------------------------------------------------------
By way of background, when cash-settled \16\ index options were
first introduced in the 1980s, settlement was based on the closing
value of the underlying index on the option's expiration date. The
Commission later became concerned about the impact of P.M.-settled,
cash-settled index options on the markets for the underlying stocks at
the close on expiration Fridays. Specifically, certain episodes of
price reversals around the close on quarterly expiration dates
attracted the attention of regulators to the possibility that the
simultaneous expiration of index futures, futures options, and options
might be inducing abnormal volatility in the index value around the
close.\17\ Academic research at the time provided
[[Page 89773]]
at least some evidence suggesting that futures and options expirations
contributed to excess volatility and reversals around the close on
those days.\18\ In light of the concerns with P.M.-settlement and to
help ameliorate the price effects associated with expirations of P.M.-
settled, cash-settled index products, in 1987, the Commodity Futures
Trading Commission (``CFTC'') approved a rule change by the Chicago
Mercantile Exchange (``CME'') to provide for A.M. settlement \19\ for
index futures, including futures on the S&P 500 Index.\20\ The
Commission subsequently approved a rule change by Cboe Options to list
and trade A.M.-settled SPX options.\21\ In 1992, the Commission
approved Cboe Options' proposal to transition all of its European-style
cash-settled options on the S&P 500 Index to A.M.-settlement \22\;
however, in 1993, the Commission approved a rule allowing Cboe Options
to list P.M.-settled options on certain broad-based indices, including
the S&P 500 Index, expiring at the end of each calendar quarter
(``Quarterly Index Expirations'').\23\ Starting in 2006, the Commission
noticed or approved numerous rule changes, on a pilot basis, permitting
the Cboe Options to introduce other index options with P.M.-
settlement.\24\ These include the Pilot Program,\25\ P.M.-settled index
options expiring weekly (other than the third Friday of the month) and
at the end of each month (``EOM''),\26\ P.M.-settled options on the S&P
500 Index that expire on the third Friday-of-the-month (``SPXPM''),\27\
as well as P.M.-settled Mini-SPX Index (``XSP'') options and Mini-
Russell 2000 Index (``MRUT'') options expiring on the third Friday of
the month.\28\ The Commission recently approved proposed rule changes
to make these other pilot programs to list P.M.-settled index options
permanent.\29\
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\16\ The seller of a ``cash-settled'' index option pays out the
cash value of the applicable index on expiration or exercise. A
``physically settled'' option, like equity and ETF options, involves
the transfer of the underlying asset rather than cash. See
Characteristics and Risks of Standardized Options, available at:
https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.
\17\ The close of trading on the quarterly expiration Friday
(i.e., the third Friday of March, June, September and December),
when options, index futures, and options on index futures all expire
simultaneously, became known as the ``triple witching hour.''
\18\ See Securities and Exchange Commission, Division of
Economic Risk and Analysis, Memorandum, Cornerstone Analysis of PM
Cash-Settled Index Option Pilots (February 2, 2021) (``DERA Staff PM
Pilot Memo'' or ``Pilot Memo'') at 5, available at: https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
\19\ The exercise settlement value for an A.M.-settled index
option is determined by reference to the reported level of the index
as derived from the opening prices of the component securities on
the business day before expiration.
\20\ See Securities Exchange Act Release No. 24367 (April 17,
1987), 52 FR 13890 (April 27, 1987) (SR-CBOE-87-11) (noting that CME
moved S&P 500 futures contract's settlement value to opening prices
on the delivery date).
\21\ See id.
\22\ See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09). Thereafter, the
Commission approved proposals by the options markets to transfer
most of their cash-settled index products to A.M. settlement.
\23\ See Securities Exchange Act Release No. 31800 (February 1,
1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13).
\24\ Securities Exchange Act Release Nos. 54123 (July 11, 2006),
71 FR 40558 (July 17, 2006) (SR-CBOE-2006-65) (notice of filing of
proposed rule change to list quarterly option series on up to five
indexes or exchange-traded funds with p.m.-settlement); see also
Securities Exchange Act Release No. 60164 (June 23, 2009), 74 FR
31333 (June 30, 2009) (SR-CBOE-2009-029) (order permanently
approving the program to list quarterly option series on up to five
indexes or exchange-traded funds with p.m.-settlement).
\25\ See Approval Order, supra note 14.
\26\ See Securities Exchange Act Release Nos. 62911 (September
14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-2009-075);
76529 (November 30, 2015), 80 FR 75695 (December 3, 2015) (SR-CBOE-
2015-106); 78132 (June 22, 2016), 81 FR 42018 (June 28, 2016) (SR-
CBOE-2016-046); and 78531 (August 10, 2016), 81 FR 54643 (August 16,
2016) (SR-CBOE-2016-046).
\27\ See Securities Exchange Act Release No. 68888 (February 8,
2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-2012-120) (the
``SPXPM Approval Order''). Pursuant to Securities Exchange Act
Release No. 80060 (February 17, 2017), 82 FR 11673 (February 24,
2017) (SR-CBOE-2016-091), the Exchange moved third-Friday P.M.-
settled options into the S&P 500 Index options class, and as a
result, the trading symbol for P.M.-settled S&P 500 Index options
that have standard third Friday-of-the-month expirations changed
from ``SPXPM'' to ``SPXW.'' This change went into effect on May 1,
2017, pursuant to Cboe Options Regulatory Circular RG17-054.
\28\ See Securities Exchange Act Release Nos. 70087 (July 31,
2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055); and 91067
(February 5, 2021) 86 FR 9108 (February 11, 2021) (SR-CBOE-2020-
116).
\29\ See Securities Exchange Act Release Nos. 98454 (September
20, 2023) (SR-CBOE-2023-005) (order approving proposed rule change
to make permanent the operation of a program that allows the
Exchange to list p.m.-settled third Friday-of-the-month SPX options
series) (``SPXPM Approval''); 98455 (September 20, 2023) (SR-CBOE-
2023-019) (order approving proposed rule change to make permanent
the operation of a program that allows the Exchange to list p.m.-
settled third Friday-of-the-month XSP and MRUT options series)
(``XSP and MRUT Approval''); and 98456 (September 20, 2023) (SR-
CBOE-2023-020) (order approving proposed rule change to make the
nonstandard expirations pilot program permanent) (``Nonstandard
Approval'').
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FLEX Index Options have traded on the Exchange since February
1993.\30\ The Exchange began offering FLEX Index options in response to
the development of an over-the-counter (``OTC'') market in customized
index options, in which participants could designate basic option
features, including size, expiration date, exercise style, and certain
exercise prices.\31\ FLEX Index Options provide investors with the
ability to customize these basic options terms in order to meet their
individual investment needs. The Exchange understands that participants
in the FLEX market are typically sophisticated portfolio managers,
insurance companies, and other institutional investors who buy and sell
options in larger-sized transactions. The Exchange continues to believe
that market participants benefit from the trading of FLEX Index Options
in several ways, including, but not limited to the following: (1)
enhanced efficiency in initiating and closing out positions; (2)
increased market transparency; and (3) heightened contra-party
creditworthiness due to the role of the Options Clearing Corporation
(``OCC'') as issuer and guarantor of FLEX Index Options. Further, the
Exchange believes providing investors--institutional investors in
particular--that require increased flexibility with respect to the
terms of index options with the ability to customize basic options
terms, including whether an option is A.M.-settled or P.M.-settled, is
essential to meeting the needs of these investors so they can satisfy
particular investment objectives that cannot otherwise be met by
standard listed options.
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\30\ See Securities Exchange Act Release No. 31920 (February 24,
1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-17).
\31\ See id. at 12281.
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In recent years, the Exchange has heard from numerous institutional
investors--insurance companies, in particular--who use index options to
hedge their portfolio risk need those options to provide them with a
level of precision not available in standard options. They have
expressed their preference to transact on the Exchange to eliminate the
counterparty risk they must incur by trading in the OTC market. The
Exchange understands that it is a critical and regular part of an
insurance company's business to hedge their risk, which many do with
index options. When insurance companies issue policies to their
customers, those companies accumulate liabilities for the payouts they
may need to make to their customers pursuant to those policies.
Insurance companies regularly hedge the notional amount of these
liabilities to protect against downturns in the market. Because they
are looking to protect against broad market downturns, broad-based
index options are a tool insurance companies often use for this
protection. Given the size of insurance companies' portfolios, which
can be in the tens of billions of dollars, these portfolios translate
to index options with an aggregate notional value of billions of
dollars being transacted annually. The Exchange understands these
companies often have to trade in the nontransparent, unregulated, and
riskier OTC market (where there is counterparty risk and no price
protection exists for these customers) because standard listed options
do not often provide them with the precision they need to execute their
hedges.
[[Page 89774]]
Whether an insurance company is able to precisely hedge the notional
value of its portfolio ultimately impacts its customers. If an
insurance company, for example, ``underhedges'' the notional value of
its portfolio (which, again, is generally at least tens of billions of
dollars), even 1% of such ``slippage'' would leave hundreds of millions
of dollars of that portfolio unhedged,\32\ which creates significant
risk for that company.\33\ Alternatively, if an insurance company
``overhedges'' the notional value of its portfolio, that would
unnecessarily tie up some of its financial resources, as the difference
in value of the options and the value of the portfolio is serving no
purpose. Either case will likely result in higher premiums or reduced
benefits for customers. Therefore, the Exchange believes providing
insurance companies with the continued ability to hedge with p.m.-
settled index options on all days, including the third Friday-of-the-
month, is critical so that insurance companies, in addition to other
institutional investors, can choose FLEX Index Options terms that
provide them with the precision they need to implement their hedging
strategies on the Exchange as opposed to the unregulated, riskier OTC
market.
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\32\ For example, if an insurance company has a $40,000,000,000
portfolio, 1% of that portfolio equates to $400,000,000.
\33\ The Exchange notes the total unhedged risk across the
insurance industry would be multiplied if each insurance company
were unable to hedge the full notional value of its portfolio.
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The benefits of the Exchange's FLEX market are demonstrated by the
continued increase volume of FLEX Options executed on the Exchange. In
2012, just under 9 million FLEX Options contracts (nearly 1.7 million
of which were FLEX Index Options contracts) executed on the Exchange,
compared to approximately 38.9 million FLEX Options contracts (over 2.8
million of which were FLEX Index Options contracts) that executed on
the Exchange in 2023 (through August). The Exchange has attributed much
of the growth in the FLEX Options markets in recent years to the
entrance into the FLEX market of new institutional investors.
Institutional investors often use FLEX Options to execute their
volatility strategies using exercise values and expiration dates not
available in the standard market. Additionally, issuers of exchange-
traded funds (``ETFs'') have recently increased their usage of FLEX
Options. FLEX Options are particularly useful in ETFs as opposed to
standardized options contracts because they enable the issuers to have
more granular control over the options exposure within a portfolio. In
particular, ETFs that are designed to provide a ``defined outcome''
(i.e., a defined upside and downside risk to a particular index or
underlying ETF) use FLEX Options because they can be used to tailor the
options exposure in the portfolio by strike and date in such a way that
is not possible with standardized options contracts.
As stated above, since its inception in 2010, the Exchange has
continuously extended the Pilot Program period and, during the course
of the Pilot Program and in support of the extensions of the Pilot
Program, the Exchange has submitted reports to the Commission regarding
the Pilot Program that detail the Exchange's experience with the Pilot
Program, pursuant to the Pilot Program requirements.\34\ Specifically,
the Exchange provided the Commission with annual reports analyzing
volume and open interest for each broad-based FLEX Index Options class
overlying a third Friday-of-the-month expiration day, P.M.-settled FLEX
Index Options series. The annual reports also contained certain pilot
period and pre-pilot period analyses of volume and open interest for
third Friday-of-the-month expiration days, A.M.-settled FLEX Index
series and third Friday-of-the-month expiration day Non-FLEX Index
series overlying the same index as a third Friday-of-the-month
expiration day, P.M.-settled FLEX Index option. The annual reports also
contained information and analysis of FLEX Index Options trading
patterns, and index price volatility and underlying share trading
activity for each broad-based index class overlying an Expiration
Friday, P.M.-settled FLEX Index Option that exceeds certain minimum
open interest parameters. The Exchange also provided the Commission, on
a periodic basis, interim reports of volume and open interest.
---------------------------------------------------------------------------
\34\ See Approval Order, supra note 14.
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Also, during the course of the Pilot Program, the Exchange provided
the Commission with any additional data or analyses the Commission
requested if it deemed such data or analyses necessary to determine
whether the Pilot Program was consistent with the Exchange Act. The
Exchange has made public on its website all data and analyses
previously submitted to the Commission under the Pilot Program,\35\ and
will continue to make public any data and analyses it submits to the
Commission while the Pilot Program is still in effect.
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\35\ Available at https://www.cboe.com/aboutcboe/legal-regulatory/national-market-system-plans/pm-settlement-spxpm-data.
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The Exchange has concluded that FLEX PM Third Friday Options have
not resulted in increased market and price volatility in the underlying
component stocks, negatively impacted market quality, or raised any
unique or prohibitive regulatory concerns. The Exchange has identified
no evidence from the pilot data indicating that the trading of FLEX PM
Third Friday Options had any adverse impact on fair and orderly markets
on Expiration Fridays for broad-based indexes or the underlying
securities comprising those indexes and has observed no abnormal market
movements attributable to FLEX PM Third Friday Options from any market
participants that have come to the attention of the Exchange.\36\
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\36\ The Exchange also notes it is unaware of any concerns
raised to it by market participants or of any public comments
expressing concerns about the Pilot Program, including with respect
to the current rule filing (which was noticed for public comment on
April 28, 2023 and for which no public comments were submitted).
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Based on a study conducted by the Commission's Division of Economic
and Risk Analysis (``DERA'') staff on the pilot data from 2006 through
2018,\37\ and the Exchange's review of the pilot data from 2019 through
2021, the size of the market for P.M.-settled SPX options (including
quarterly, weekly, EOM and third Friday expirations) since 2007 has
grown from a trivial portion of the overall market to a substantial
share (from around 0.1% of open interest in 2007 to 30% in 2021).\38\
Notional value of open interest in P.M.-settled SPX options increased
from approximately a median of $1.5 billion in 2007 to $1.9 trillion in
2021, approximately 1260 times its value in 2007. Notional open
interest in A.M.-settled SPX options was already hovering around a
median of $1.4 trillion in 2007, and it has since increased to
approximately $4.4 trillion in 2021. It is also important to note that
open interest on expiring P.M.-settled SPX options, as compared to
A.M.-
[[Page 89775]]
settled options, is spread out across a greater number of expiration
dates, which results in a smaller percentage of open interest expiring
on any one date, thus mitigating concerns that SPXPM option expiration
may have a disruptive effect on the market.\39\ Daily trading volume in
P.M.-settled SPX options has increased from a median of about 700
contracts in 2007 to nearly 1.9 million contracts in 2021,\40\ and now
exceeds trading volume in A.M.-settled SPX options.
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\37\ See DERA Staff PM Pilot Memo, at 13 (``Option settlement
quantity data for A.M.- and P.M.-settled options were obtained from
the Cboe, including the number of contracts that settled in-the-
money for each exchange-traded option series on the S&P 500 index .
. . on expiration days from January 20, 2006 through December 31,
2018. Daily open interest and volume data for [SPX] option series
were also obtained from Cboe, including open interest data from
January 3, 2006 through December 31, 2018 and trading volume data
from January 3, 2006 through December 31, 2018.'')
\38\ The DERA staff study reviewed and provided statistics for
market share, median notional value of open interest and median
volume in 2007 and in 2018. The Exchange provides updated statistics
for market share, median notional value of open interest and median
volume in 2021, replacing the 2018 statistics provided in the
Commission staff study.
\39\ See DERA Staff PM Pilot Memo, at 2.
\40\ The Exchange notes that the DERA staff study used two-sided
volume data for the median volume in 2007 and in 2018; therefore,
the Exchange provides two-sided volume data for the median volume in
2021.
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Moreover, the DERA staff study of the P.M.-settled SPX options
pilot data (2006 through 2018) did not identify any significant
economic impact on S&P 500 futures,\41\ the S&P 500 Index, or the
underlying component securities of the S&P 500 Index surrounding the
close. For purposes of the study, volatility was by and large measured
by using the standard deviation \42\ of one-minute returns of S&P 500
futures values and the index value during regular hours on each day
reviewed (excluding the first and last 15 minutes of trading) and then
compared with the standard deviation of one-minute returns (for S&P 500
futures, the S&P 500 Index, and the underlying component securities of
the S&P 500 Index) over the last 15 minutes of a trading day.\43\ Using
this as a general measure,\44\ the DERA staff study then reviewed
whether, and to what extent, the settlement quantity of SPXPM options
and the levels of open interest in SPXPM options on expiration days (as
compared to non-expiration days) may be associated with general price
volatility and price reversals for S&P 500 futures, the S&P 500 Index,
and the underlying component securities of the S&P 500 Index near the
close. From its review of the study, the Exchange agrees that, although
volatility before the market close is generally higher than during the
rest of the trading day, there is no evidence of any significant
adverse economic impact to the futures, index, or underlying index
component securities markets as a result of the quantity of P.M.-
settled SPX options that settle at the close or the amount of expiring
open interest in P.M.-settled SPX options. For example, the largest
settlement event that occurred during the time period of the study (a
settlement of $100.4 billion of notional on December 29, 2017) had an
estimated impact on the futures price of only approximately 0.02% (a
predicted impact of $0.54 relative to a closing futures price of
$2,677).
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\41\ Futures on the S&P 500 experience high volume and liquidity
both before and after the close of the underlying market. Therefore,
futures are a useful measure of abnormal volatility surrounding the
close and the open. See DERA Staff PM Pilot Memo, at 14. The
Exchange agrees with this approach.
\42\ Standard deviation applied to a rate of return (in this
case, one-minute) of an instrument can indicate that instrument's
historical volatility. The greater the standard deviation, the
greater the variance between price and the mean, which indicates a
larger price range, i.e., higher volatility.
\43\ For example, if on a particular day the standard deviation
of one-minute returns between 3:45 p.m. ET and 4:00 p.m. ET is 0.004
and the standard deviation of returns from 9:45 a.m. ET to 3:45 p.m.
ET is 0.002, this metric would take on a value of 2 for that day,
indicating that volatility during the last 15 minutes of the trading
day was twice as high as it was during the rest of the trading day.
See DERA Staff PM Pilot Memo, at 15; see also DERA Staff PM Pilot
Memo, at Section V, which discusses in detail the metrics used to
measure, for the purposes of the study, the extent to which the
market may experience abnormal volatility surrounding SPXPM option
settlement.
\44\ See DERA Staff PM Pilot Memo, at Section V, which discusses
in detail the metrics used to measure, for the purposes of the
study, the extent to which the market may experience abnormal
volatility surrounding SPXPM option settlement.
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In particular, the DERA staff study found that an additional P.M.-
settled SPX options settlement quantity equal to $10 billion in
notional value is associated with a marginal impact on futures prices
during the last 15 minutes of the trading day of only about $0.06
(where the hypothetical index level is 2,500), additional expiring open
interest in P.M.-settled SPX options equal to $10 billion in notional
value is associated with a marginal impact on futures prices during the
last 15 minutes of the trading day of only about $0.05 (assumed index
level is 2,500). Also, an additional increase in settlement quantity or
in expiring open interest, each equal to $20 million in notional value,
did not result in any meaningful futures price reversals near the close
(neither was found to cause a price reversal of over one standard
deviation.\45\)
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\45\ See supra note 42.
---------------------------------------------------------------------------
Likewise, the study identified that an additional total P.M.-
settled SPX options settlement quantity equal to $10 billion in
notional value corresponds to price movement in the S&P 500 of only
about $0.08 (assuming an index level of 2,500) during the last 15
minutes of the trading day, and that additional expiring open interest
equal to $10 billion in notional value corresponds to a price movement
in the S&P 500 of only about $0.06 (assuming an index level of 2,500)
during the last 15 minutes of the trading day. The study also
identified that it would take an increase of $34 billion in notional
value of total settlement quantity and of expiring open interest for
one additional S&P 500 price reversal of greater than two standard
deviations to occur in the last 15 minutes before the market close.
Also, regarding potential impact to S&P 500 component securities, it
would take an increase in total P.M.-settled SPX options settlement
quantity equal to $20 billion to effect a price movement of only
approximately $0.03 for a $200 stock, an increase in expiring open
interest in P.M.-settled SPX options equal to $10 billion to effect a
price movement less than half a standard deviation, and an increase in
total P.M.-settled SPX settlement quantity equal to $7 billion to
achieve a price reversal greater two standard deviations.
The study employed the same metrics to determine whether there is
greater price volatility for S&P 500 futures, the S&P 500, and the
component securities of the S&P 500 related to SPXPM option settlements
during an environment of high market volatility (i.e., on days in which
the VIX Index was in the top 10% of closing index values) and did not
identify indicators of any significant economic impact on these markets
near the close as a result of the P.M.-settled SPX options
settlement.\46\ In addition to this, the DERA staff study, applying the
same metrics and analysis as for P.M.-settled SPX options to A.M.-
settled SPX options, did not identify any evidence of a statistically
significant relationship between settlement quantity or expiring open
interest of A.M.-settled options and volatility near the open.
---------------------------------------------------------------------------
\46\ The Exchange also notes that the study did not identify any
evidence that less liquid S&P 500 constituent securities experienced
any greater impact from the settlement of P.M.-settled SPX options.
---------------------------------------------------------------------------
Upon review of the results of the DERA staff study, the Exchange
agrees that each of the above-described marginal price movements in S&P
500 futures, the S&P 500, and the S&P 500 component securities affected
by increases in P.M.-settled SPX options settlement quantity and
expiring open interest appear to be de minimis pricing changes from
those that occur over regular trading hours (outside of the last 15
minutes of the trading day). Further, the Exchange has not observed any
significant economic impact or other adverse effects on the market from
similar reviews of its pilot reports and data submitted after 2018.\47\
In its review of a sample of the pilot data from 2019 through 2021, the
Exchange similarly measured volatility over the final fifteen minutes
of each trading day by taking the standard deviation of
[[Page 89776]]
rolling one-minute returns of the S&P 500 level (excluding the first
and last fifteen minutes of trading) and comparing such with the
standard deviation of one-minute returns \48\ of the S&P 500 level,
over the last 15 minutes of a trading day. The Exchange identified an
average standard deviation ratio of 1.42 for the S&P 500 on non-
expiration days and an average standard deviation ratio of 1.54 for the
S&P 500 on expiration days (a ratio between expiration days and non-
expiration days of 1.09). The Exchange also notes that, using the same
methodology, it observed that, from 2015 through 2019,\49\ the average
standard deviation ratio for the S&P 500 on non-expiration days was
1.11 and the average standard deviation ratio for the S&P 500 on
expiration days was 1.22 (a ratio between expiration days and non-
expiration days of 1.10). While the average standard deviation ratio on
both expiration and non-expiration days was higher in 2019 through 2021
due to overall market volatility, the ratios between the standard
deviation ratios on expiration days and non-expirations days remained
nearly identical between the 2015 through 2019 timeframe and the 2019
through 2021. The Exchange believes this shows that, in cases where
overall market volatility may increase, the normalized impact on
expiration days to non-expiration days generally remains consistent.
---------------------------------------------------------------------------
\47\ Total SPX open interest volumes were examined for
expiration dates over a roughly two-year period between October 2019
and November 2021.
\48\ Calculated at every tick for the prior minute.
\49\ November 2015 through November 2021.
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In addition to this, the Exchange notes that the S&P 500 Index is
rebalanced quarterly. The changes resulting from each rebalancing
coincide with the third Friday of the quarterly rebalancing month
(i.e., March, June, September, October and December) \50\ and generally
drive an increase in trading activity from investors that seek to track
the S&P 500. As such, the Exchange measured volatility on quarterly
rebalancing dates and found that the average standard deviation ratio
was 1.62, which suggests more closing volatility on quarterly rebalance
dates compared to non-quarterly expiration dates (for which the average
standard deviation ratio was 1.22), thus indicating that the impact
rebalancing may have on the S&P 500 Index is greater than any impact
that P.M.-settled SPX options may have on the S&P 500 Index.
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\50\ See S&P Dow Jones Indices, Equity Indices Policies &
Practices, Methodology (August 2021), at 15, available at https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-equity-indices-policies-practices.pdf.
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The Exchange additionally focused its study of the post-2018 sample
pilot data on reviewing for potential correlation between excess market
volatility and price reversals and the hedging activity of liquidity
providers. As explained in the DERA staff study, potential impact of
P.M.-settled SPX options on the correlated equity markets is thought to
stem from the hedging activity of liquidity providers in such
options.\51\ To determine any such potential correlation, the Exchange
studied the expected action of liquidity providers that are the primary
source of the hedging on settlement days. These liquidity providers
generally delta-hedge their S&P 500 Index exposure via S&P 500 futures
and on settlement day unwind their futures positions that correspond
with the delta of their in-the-money (ITM) expiring P.M.-settled SPX
options. Assuming such behavior, the Exchange estimated the Market-On-
Close (``MOC'') \52\ volume for the shares of the S&P 500 component
securities (i.e., ``MOC share volume'') that could ultimately result
from the unwinding of the liquidity providers' futures positions by
equating the notional value of the futures positions that correspond to
expiring ITM open interest to the number S&P 500 component security
contracts (based on the weight of each S&P 500 component security).
That is, the Exchange calculated (an estimate) of the amount of MOC
volume in the S&P 500 component markets attributable hedging activity
as a result of expiring ITM P.M.-settled SPX options (i.e., ``hedging
MOC''). The Exchange then: (1) compared the hedging MOC share volume to
all MOC share volume on expiration days and non-expiration trading
days; and (2) compared the notional value of the hedging futures
positions (i.e., that correspond to expiring ITM P.M.-settled SPX
options open interest) to the notional value of expiring ITM P.M.-
settled SPX options open interest, the notional value of all expiring
P.M.-settled SPX options open interest and the notional value of all
P.M.-settled SPX options open interest.
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\51\ See DERA Staff PM Pilot Memo, at 10-12.
\52\ MOC orders allow a market participant to trade at the
closing price. Market participants generally utilize MOC orders to
ensure they exit positions at the end of the trading day.
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The Exchange observed that, on average, there were approximately
25% more MOC shares executed on expiration days (332 expiration days)
than non-expiration days (209 non-expiration days). While, at first
glance, the volume of MOC shares executed on expiration days seems much
greater than the volume executed on non-expiration days, the Exchange
notes that much of this difference is attributable to just eight
expiration days--the quarterly index rebalancing dates captured within
the scope of the post-2018 sample pilot data. The average MOC share
volume on the eight quarterly rebalancing dates was approximately 4.8
times the average MOC share volume on the non-quarterly rebalancing
expiration dates; again, indicating that the impact rebalancing may
have on the S&P 500 Index is greater than any impact that P.M.-settled
SPX options may have on the S&P 500 Index. That is, the Exchange
observed that the majority of closing volume on quarterly rebalance
dates is driven by rebalancing of shares in in the S&P 500, and not by
P.M.-settled SPX options expiration-related hedging activity.
Notwithstanding the MOC share volume on quarterly rebalancing dates,
the volume of MOC shares executed on expiration days (324 expiration
days) was only approximately 13% more than that on non-expiration days,
substantially less than the increase in volume over non-expiration days
wherein the eight index rebalancing dates are included in expiration
day volume. In addition to this, the Exchange observed that the hedging
MOC share volume (i.e., the expected MOC share volume resulting from
hedging activity in connection with expiring ITM P.M.-settled SPX
options) was, on average, less than the MOC share volume on non-
expiration days, and was only approximately 20% of the total MOC share
volume on expiration days, indicating that other sources of MOC share
volume generally exceed the volume resulting from hedging activity of
expiring ITM P.M.-settled SPX options and would more likely be a source
of any potential market volatility.
The Exchange also observed that, across all third-Friday
expirations, the notional value of the hedging futures positions was
approximately 25% of the notional value of expiring ITM P.M.-settled
SPX options, approximately 3.8% of the notional value of all expiring
P.M.-settled SPX options, and approximately only 0.5% of the notional
value of all P.M.-settled SPX options. As such, the estimated hedging
activity from liquidity providers on expiration days is a fraction of
the expiring open interest in P.M.-settled SPX options, which, the
Exchange notes, is only 14% of the total open interest in P.M.-settled
SPX options; thus, indicating negligible capacity for hedging activity
to increase volatility in the underlying markets.
At the request of the Commission in connection with proposed rule
changes to make other p.m.-settled options pilot programs permanent,
the Exchange recently completed an analysis intended to evaluate
whether the introduction of P.M.-settled options impacted the
[[Page 89777]]
quality of the A.M.-settled option market. Specifically, the Exchange
compared values of key market quality indicators (specifically, the
bid-ask spread \53\ and effective spread \54\) in SPXW options both
before and after the introduction of Tuesday expirations and Thursday
expirations for SPXW options on April 18 and May 11, 2022,
respectively.\55\ Options on the Standard & Poor's Depositary Receipts
S&P 500 ETF (``SPY'') were used as a control group to account for any
market factors that might influence key market quality indicators. The
Exchange used data from January 3, 2022 through March 4, 2022 (the two-
month period prior to the introduction of SPXW options with Tuesday
expirations) and data from May 11, 2022 to July 10, 2022 (the two-month
period following the introduction of SPXW options with Thursday
expirations).\56\
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\53\ The Exchange calculated for each of SPXW options (with
Monday, Wednesday, and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading
hours session, adjusted for the difference in size between SPXW
options and SPY options (SPXW options are approximately ten times
the value of SPY options).
\54\ The Exchange calculated the volume-weighted average daily
effective spread for simple trades for each of SPXW options (with
Monday, Wednesday, and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations) as twice the amount
of the absolute value of the difference between an order execution
price and the midpoint of the national best bid and offer at the
time of execution, adjusted for the difference in size between SPXW
options and SPY options.
\55\ For purposes of comparison, the Exchange paired SPXW
options and SPY options with the same moneyness and same days to
expiration.
\56\ The Exchange observed comparable market volatility levels
during the pre-intervention and post-intervention time ranges.
---------------------------------------------------------------------------
As a result of this analysis, the Exchange believes the
introduction of SPX options with Tuesday and Thursday options had no
significant impact on the market quality of SPXW options with Monday,
Wednesday, and Friday expirations. With respect to the majority of
series analyzed, the Exchange observed no statistically significant
difference in the bid-ask spread or the effective spread of the series
in the period prior to introduction of the Tuesday and Thursday
expirations and the period following the introduction of the Tuesday
and Thursday expirations. While statistically insignificant, the
Exchange notes that in many series, particularly as they were closer to
expiration, the Exchange observed that the values of these spreads
decreased during the period following the introduction of the Tuesday
and Thursday expirations.\57\ The full analysis is included in Exhibit
3 of this Amendment No. 3.\58\
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\57\ In any series in which the Exchange observed an increase in
the market quality indicators, the Exchange notes any such increase
was also statistically insignificant.
\58\ Exhibit 3 begins at page 72 of 85 of Amendment No. 3 and is
available at https://www.sec.gov/comments/sr-cboe-2023-018/srcboe2023018-308519-794402.pdf.
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Given the time that as passed since the introduction of FLEX PM
Third Friday Options, the Exchange is unable to analyze whether the
introduction of those options significantly impacted the market quality
of non-FLEX A.M.-settled options at the time the FLEX PM Third Friday
Options began trading. Additionally, the Exchange is unable to analyze
whether the introduction of the FLEX P.M.-settled options significantly
impacted the market quality of A.M.-settled FLEX options, as there is
no book for FLEX options (and thus no quoted spreads), as FLEX options
are listed only if and when market participants create them for
trading. The Exchange acknowledges the above analysis, due to the type
of study performed, may not be used as a direct substitute to
demonstrate that the introduction of FLEX PM Third Friday Options did
not significantly impact the market quality of non-FLEX A.M.-settled
options. However, the Exchange believes the analysis is relevant. Since
2013, approximately 400,000 contracts in FLEX PM Third Friday Options
have executed on the Exchange, compared to 156 million total FLEX
Options contracts; 14.2 billion total options contracts; 5.6 billion
index option contracts; 3.8 billion total SPX options contracts; and
2.3 billion A.M.-settled SPX options contracts in the same time period.
This equates to an ADV of under 150 contracts for FLEX PM Third Friday
Options compared to an ADV of over 800,000 contracts for SPX options
over that time. As noted above, the Exchange's analysis demonstrated
the introduction of SPXW options with Tuesday and Thursday expirations
did not significantly impact the market quality of non-FLEX SPX P.M.-
options. Given that the Exchange determined, based on its above
analysis, that the introduction of SPXW options with Tuesday and
Thursday expirations had no significant impact on the market quality of
non-FLEX SPX A.M.-settled options, the Exchange believes it is logical
and reasonable to conclude that it is unlikely that the introduction of
FLEX PM Third Friday Options (which has an ADV of approximately 0.04%
the size of the ADV of SPXW Tuesday and Thursday expirations) \59\
would have any impact on the market quality of non-FLEX SPX A.M.-
settled options.
---------------------------------------------------------------------------
\59\ The Exchange acknowledges that, while FLEX PM Third Friday
Options has historically represented a very small percentage of
overall volume, it is possible trading in these options may grow in
the future.
---------------------------------------------------------------------------
The Exchange believes it is fair to assume FLEX PM Third Friday
Options likely had no measurable impact on that market of non-FLEX SPX
options with A.M.-settlement for several reasons: (1) as noted above,
the volume in the FLEX PM Third Friday Options is a minute fraction
(0.02%) of SPX options with A.M.-settlement; (2) FLEX Options are not
quoted on a continuous basis, so Market-Makers do not need to estimate
the risk associated with the potential trade as they do with options
they are continuously quoting in the non-FLEX Options market; and (3)
the FLEX market requires either verbal responses on the trading floor
or auction responses electronically to represented orders, which
provides Market-Makers with time to decide whether to trade, something
which does not occur for the thousands of series they continuously
quote in the non-FLEX Options market.
To further support the Exchange's view that FLEX PM Third Friday
Options did not materially impact the market quality of corresponding
non-FLEX options, the Exchange evaluated each FLEX PM Third Friday
Options trade for more than 500 contracts \60\ that occurred on the
Exchange during the last two years \61\ and analyzed the market quality
(specifically, the average time-weighted quote spread and size 30
minutes prior to the trade and the average time-weighted quote spread
and size 30 minutes after the trade) of series of non-FLEX a.m.-settled
options overlying the same index with similar terms as the FLEX PM
Third Friday Option that traded (time to expiration, type (call or
put), and strike price) as set forth in the table below: \62\
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\60\ The Exchange believes it is reasonable to consider only
these large trades, because if large trades had no significant
impact on market quality, then the Exchange believe it is unlikely
that smaller trades would have had a significant impact on market
quality. As noted below, the vast majority of FLEX PM Third Friday
Options executed as parts of trades smaller than 500 contracts
(which would have a notional value of 225,000). See Amendment No. 3,
at 29-30.
\61\ The Exchange believes it is reasonable to use data from
this time period as representative of the entire pilot period given
that volume in FLEX PM Third Friday Options remained consistently
low throughout the entire pilot period. The Exchange notes this
sampling of data points may not cover different market conditions,
such as volatility levels (e.g., high volatility days), which may
impact quote spreads and sizes of index options.
\62\ All of these trades were SPX options. During the time
period reviewed, there were no trades of more than 500 contracts for
FLEX PM Third Friday Options in any other index class. The Exchange
believes it is reasonable to limit this analysis to SPX options
trades given that the vast majority of FLEX PM Third Friday Options
trade were in SPX options, and the limited number of trades in
options FLEX PM Third Friday Options (particularly given the smaller
size of such trades) would have created sampling difficulties for
designing a meaningful analysis of the impact of such trades on
market quality of the corresponding non-FLEX a.m.-settled options.
[[Page 89778]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average time- Average time- Average time- Average time-
weighted quote weighted quote weighted quote weighted quote
Date Time Number of price spread price spread size prior to contract size
contracts prior to trade after trade trade after to trade
($) ($) (contracts) (contracts)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10/25/22........................................................ 11:57 660 9.89 9.08 16.4 16.7
3/21/23......................................................... 13:07 660 9.40 9.76 13.8 13.9
12/20/22........................................................ 12:23 655 10.29 10.28 27.2 27.5
11/22/22........................................................ 12:49 635 9.85 9.78 25.6 25.8
9/20/22......................................................... 12:50 615 10.16 10.23 15.4 15.0
4/25/23......................................................... 13:05 610 11.66 11.54 20.1 19.9
5/23/23......................................................... 12:24 610 9.65 9.77 18.6 18.7
5/24/22......................................................... 11:44 590 8.99 8.87 15.1 15.6
3/22/22......................................................... 12:36 575 10.44 10.39 19.2 19.1
6/27/23......................................................... 11:58 560 9.57 9.61 13.9 14.3
7/25/23......................................................... 14:12 550 10.87 10.85 22.1 22.8
8/23/23......................................................... 13:48 535 11.41 11.44 15.6 15.2
1/24/23......................................................... 12:16 535 9.54 9.43 21.6 22.0
2/21/23......................................................... 13:01 515 10.20 10.22 18.61 18.65
6/21/22......................................................... 12:47 510 11.12 11.08 14.2 14.8
7/26/22......................................................... 12:23 510 10.66 10.67 16.8 16.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
As this table demonstrates, the average time-weighted quote spread
and size did not materially change after the FLEX PM Third Friday
Options trade. Specifically, the average time-weighted quoted spread
was never more than 0.36 wider in the time period after the trade
compared to before the trade, and the average time-weighted size was
never more than 0.7 contracts different in the time period after the
trade compared to before the trade. Further, given that the spreads
were relatively stable before and after large trades, the Exchange
believes this demonstrates that large FLEX PM Third Friday Options
trades had no material negative impact (and the Exchange believes
likely no impact) on quote quality of non-FLEX a.m.-settled options
overlying the same index with similar terms as the FLEX PM Third Friday
Option. The Exchange believes this evaluation effectively demonstrates
it is likely that FLEX PM Third Friday Options have had no significant
negative impact on the market quality of non-FLEX Options with A.M.-
settlement.\63\
---------------------------------------------------------------------------
\63\ The Exchange acknowledges that, while FLEX PM Third Friday
Options has historically represented a very small percentage of
overall volume, it is possible trading in these options may grow in
the future.
---------------------------------------------------------------------------
To further note, given the significant changes in the closing
procedures of the primary markets in recent decades, including
considerable advances in trading systems and technology, the Exchange
believes that the risks of any potential impact of FLEX PM Third Friday
Options on the underlying cash markets are also de minimis.
The Exchange proposes to make the Pilot Program permanent as P.M.-
settled index products have become an integral part of the Exchange's
product offerings, providing investors with greater trading
opportunities and flexibility. As indicated by the significant growth
in the size of the market for P.M.-settled options, as well as the
significant growth in FLEX Options, such options have been, and
continue to be, well-received and widely used by market participants.
Therefore, the Exchange wishes to be able to continue to provide
investors with the ability to trade FLEX PM Third Friday Options on a
permanent basis. The Exchange believes that the permanent continuation
of the Pilot Program will serve to maintain the status quo by
continuing to offer a product to which investors have become accustomed
and have incorporated into their business models and day-to-day trading
methodologies for nearly 14 years. As such, the Exchange also believes
that ceasing to offer FLEX PM Third Friday Options may result in market
disruption and investor confusion. The Exchange has not identified any
significant impact on market quality nor any unique or prohibitive
regulatory concerns as a result of the Pilot Program, and, as such, the
Exchange believes that the continuation of the Pilot Program as a
pilot, including the use of time and resources to compile and analyze
quarterly and annual pilot reports and pilot data, is no longer
necessary and that making the Pilot Program permanent will allow the
Exchange to otherwise allocate time and resources to other industry
initiatives.
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.\64\ Specifically, the
Exchange believes the proposed rule change is consistent with the
section 6(b)(5) \65\ 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.
---------------------------------------------------------------------------
\64\ 15 U.S.C. 78f(b).
\65\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In particular, the Exchange believes that the making the Pilot
Program permanent will allow the Exchange to be able to continue to
offer FLEX PM Third Friday Options on a continuous and permanent basis.
These products have been, and continue to be, well-received and widely
used by market participants, providing investors with greater trading
opportunities and flexibility. The Exchange believes that the permanent
continuation of the Pilot Program will remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest by
continuing to offer a product to which investors have become accustomed
and have incorporated into their business models and day-to-day trading
strategies
[[Page 89779]]
for nearly 14 years. The Exchange notes the Commission recently
approved proposals to make other pilots permitting P.M.-settlement of
index options permanent after finding those pilots were consistent with
the Act and the options subject to those pilots had no significant
impact on the market.\66\ The Exchange believes ceasing to offer the
Pilot Program may result in market disruption and investor confusion,
as P.M.-settled index products, particularly SPX options, have become
an integral part of the Exchange's product offerings, providing
investors with greater trading opportunities and flexibility.
---------------------------------------------------------------------------
\66\ See supra note 29.
---------------------------------------------------------------------------
The Exchange further believes that making the Pilot Program
permanent will remove impediments to and perfect the mechanism of a
free and open market and a national market system and protect
investors, while maintaining a fair and orderly market, as the Exchange
believes that previous concerns (arising in the 1980s) regarding
options expirations potentially contributing to excess volatility and
reversals around the close have been adequately diminished. As
described in detail above, the Exchange has observed no significant
adverse market impact or identified any meaningful regulatory concerns
during the nearly 14-year operation of the FLEX PM Third Friday Program
as a pilot nor during the 15 years since P.M.-settled index options
(SPX) were reintroduced to the marketplace.\67\ Notably, the Exchange
did not identify any significant economic impact (including on pricing
or volatility or in connection with reversals) on related futures, the
underlying indexes, or the underlying component securities of the
underlying indexes surrounding the close as a result of the quantity of
FLEX PM Third Friday Options or the amount of expiring open interest in
FLEX PM Third Friday Options, nor any demonstrated capacity for options
hedging activity to impact volatility in the underlying markets. While
the DERA staff study and corresponding Exchange study described above
specifically evaluated SPX options, FLEX PM Third Friday Options
overlay broad-based indexes (including the S&P 500 Index), the Exchange
believes it is appropriate to extrapolate the data to apply to FLEX PM
Third Friday Options. This is particularly true given that the data and
reports submitted by the Exchange during the pilot period have
similarly demonstrated no significant economic impact on the respective
underlying indexes or other products. As set forth in the data and
reports the Exchange provided to the Commission during the pilot period
and noted above, since 2013, approximately 400,000 contracts in FLEX PM
Third Friday Options executed on the Exchange (the vast majority of
which were SPX options). Given that this represented approximately
0.01% of all SPX options volume executed on the exchange during that
time, the Exchange believes the chance that such a small number of
contracts \68\ could have measurably impacted the underlying index or
other products is near zero. This is consistent with the findings in
the DERA staff study set forth above regarding the impact of certain
notional amounts of SPX options on the underlying index and related
futures. For example, if you assume an index value for the S&P 500
Index of 4500, the notional value of one SPX option contract is
450,000. If 400,000 FLEX PM Third Friday Option contracts executed
since 2013, that results in an average annual volume of approximately
36,300 FLEX PM Third Friday Options, with the notional value of this
total annual volume (the vast majority of which executed as parts of
trades smaller than 500 contracts (which would have a notional value of
225,000), as demonstrated by the table above) of just over $16 billion.
As discussed above, the DERA staff study demonstrated that a similar
amount of notional value of P.M.-settled SPX options had only a
marginal impact on the underlying index and related futures.
---------------------------------------------------------------------------
\67\ See supra notes 37-51.
\68\ The Exchange acknowledges that, while FLEX PM Third Friday
Options has historically represented a very small percentage of
overall volume, it is possible trading in these options may grow in
the future.
---------------------------------------------------------------------------
The DERA staff study and corresponding Exchange study concluded
that a significantly larger amount of non-FLEX p.m.-settled index
options had no significant adverse market impact and caused no
meaningful regulatory concerns. Therefore, the Exchange believes it is
reasonable to conclude that the relatively small amount of FLEX Index
Option volume subject to the current Pilot Program would similarly have
no significant adverse market impact or cause no meaningful regulatory
concerns. Additionally, these studies measured any impact on related
futures, the underlying indexes, or the underlying component securities
of the underlying indexes surrounding the close. Despite FLEX SPX
options (which represent approximately half of the year-to-date 2023
volume of FLEX Index Options but only approximately 0.3% of total SPX
volume) not being included in the DERA staff study and corresponding
Exchange study, those studies concluded that during the time periods
covered (which included the period of time in which the Pilot Program
has been operating), there was no significant economic impact on the
underlying index or related products. Therefore, the Exchange believes
it is reasonable to conclude that any FLEX SPX Options that executed
during the timeframes covered by the studies had no significant impact
on the underlying index or related products, as neither DERA staff nor
the Exchange observed any significant economic impact on the underlying
index or related product.
The Exchange also believes the introduction of FLEX PM options had
no significant impact on the market quality of corresponding A.M.-
settled options or other options. As discussed above, the Exchange's
analysis conducted after the introduction of SPXW options with Tuesday
and Thursday expirations demonstrated no statistically significant
impact on the bid-ask or effective spreads of SPXW options with Monday,
Wednesday, and Friday expirations after trading in the SPXW options
with Tuesday and Thursday expirations began. As noted above, the
Exchange acknowledges the above analysis, due to the type of study
performed, may not be used as a direct substitute to demonstrate that
the introduction of FLEX PM Third Friday Options did not significantly
impact the market quality of non-FLEX A.M.-settled options. However,
the Exchange believes the analysis is relevant. Since 2013,
approximately 400,000 contracts in FLEX PM Third Friday Options have
executed on the Exchange, compared to 156 million total FLEX Options
contracts; 14.2 billion total options contracts; 5.6 billion index
option contracts; 3.8 billion total SPX options contracts; and 2.3
billion A.M.-settled SPX options contracts in the same time period.
This equates to an ADV of under 150 contracts for FLEX PM Third Friday
Options compared to an ADV of over 800,000 contracts for SPX options
over that time. As noted above, the Exchange's analysis demonstrated
the introduction of SPXW options with Tuesday and Thursday expirations
did not significantly impact the market quality of non-FLEX SPX P.M.-
options. Given that the Exchange determined that the introduction of
SPXW options with Tuesday and Thursday expirations had no significant
impact on the market quality of non-FLEX SPX A.M.-settled options, the
Exchange believes it is logical and reasonable to conclude that
[[Page 89780]]
it is unlikely that the introduction of FLEX PM Third Friday Options
(which has an ADV of approximately 0.04% the size of the ADV of SPXW
Tuesday and Thursday expirations) \69\ would have any impact on the
market quality of non-FLEX SPX A.M.-settled options.
---------------------------------------------------------------------------
\69\ The Exchange acknowledges that, while FLEX PM Third Friday
Options has historically represented a very small percentage of
overall volume, it is possible trading in these options may grow in
the future.
---------------------------------------------------------------------------
The Exchange believes it is fair to assume there is likely no
measurable impact on that market for several reasons: (1) as noted
above, the volume in the FLEX PM Third Friday Options is a minute
fraction (0.02%) of SPX options with A.M.-settlement; (2) FLEX Options
are not quoted on a continuous basis, so Market-Makers do not need to
estimate the risk associated with the potential trade as they do with
options they are continuously quoting in the non-FLEX Options market;
and (3) the FLEX market requires either verbal responses on the trading
floor or auction responses electronically to represented orders, which
provides Market-Makers with time to decide whether to trade, something
which does not occur for the thousands of series they continuously
quote in the non-FLEX Options market.
The Exchange evaluated each FLEX PM Third Friday Options trade for
more than 500 contracts \70\ that occurred on the Exchange during the
last two years \71\ and analyzed the market quality (specifically, the
average time-weighted quote spread and size 30 minutes prior to the
trade and the average time-weighted quote spread and size 30 minutes
after the trade) of series non-FLEX a.m.-settled options overlying the
same index with similar terms as the FLEX PM Third Friday Option that
traded (time to expiration, type (call or put), and strike price) as
set forth in the table above. Given that the above-table shows that the
spreads were relatively stable before and after large trades, the
Exchange believes this demonstrates that large FLEX PM Third Friday
Options trades had no material negative impact (and the Exchange
believes likely no impact) on quote quality of non-FLEX a.m.-settled
options overlying the same index with similar terms as the FLEX PM
Third Friday Option. Therefore, the Exchange believes this evaluation
effectively demonstrates it is likely that FLEX PM Third Friday Options
have had no significant negative impact on the market quality of non-
FLEX Options with A.M.-settlement.\72\
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\70\ The Exchange believes it is reasonable to consider only
these large trades, because if large trades had no significant
impact on market quality, then it is unlikely that smaller trades
would have had a significant impact on market quality.
\71\ The Exchange believes it is reasonable to use data from
this time period as representative of the entire pilot period given
that volume in FLEX PM Third Friday Options remained consistently
low throughout the entire pilot period.
\72\ The Exchange acknowledges that, while FLEX PM Third Friday
Options has historically represented a very small percentage of
overall volume, it is possible trading in these options may grow in
the future.
---------------------------------------------------------------------------
As discussed above, the Exchange believes that evaluation
effectively demonstrates that FLEX PM Third Friday Options have had no
significant negative impact on the market quality of non-FLEX Options
with A.M.-settlement.
Additionally, the significant changes in the closing procedures of
the primary markets in recent decades, including considerable advances
in trading systems and technology, has significantly minimized risks of
any potential impact of FLEX PM Third Friday Options on the underlying
cash markets. As such, the Exchange believes that a permanent Pilot
Program does not raise any unique or prohibitive regulatory concerns
and that such trading has not, and will not, adversely impact fair and
orderly markets on Expiration Fridays for the underlying indexes or
their component securities. Further, as the Exchange has not identified
any significant impact on market quality or any unique or prohibitive
regulatory concerns as a result of offering FLEX PM Third Friday
Options, the Exchange believes that the continuation of the Pilot
Program as a pilot, including the gathering, submission and review of
the pilot reports and data, is no longer necessary and that making the
Pilot Program permanent will allow the Exchange to otherwise allocate
time and resources to other industry initiatives.
B. Self-Regulatory Organization's Statement on Burden on Competition
Cboe Options 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 making the Pilot Program permanent will impose any
unnecessary or inappropriate burden on intramarket competition because
FLEX PM options will continue to be available to all market
participants who wish to participate in the FLEX PM options market. The
Exchange believes that the growth that the P.M.-settled options market,
including FLEX PM options, has experienced since their reintroduction
through pilot programs indicates strong, continued investor interest
and demand, warranting a permanent Pilot Program. The Exchange believes
that, for the period that P.M.-settled FLEX options have been in
operation as pilot programs, they have provided investors with a
desirable product with which to trade and wishes to permanently offer
this product to investors. Furthermore, during the pilot period, the
Exchange has not observed any significant adverse market effects nor
identified any regulatory concerns as a result of the Pilot Program,
and, as such, the continuation of the Pilot Program as a pilot,
including the gathering, submission and review of the pilot reports and
data, is no longer necessary--a permanent Pilot Program will allow the
Exchange to otherwise allocate time and resources to other industry
initiatives.
The Exchange further does not believe that making the Pilot Program
permanent will impose any burden on intermarket competition that is not
necessary or appropriate in furtherance of the purposes of the Act
because it applies to a class of options listed only for trading on
Cboe Options. The Exchange notes that other exchanges are free to and
do offer competing products. To the extent that the permanent offering
and continued trading of FLEX PM Third Friday Options may make Cboe
Options a more attractive marketplace to market participants at other
exchanges, such market participants may elect to become Cboe Options
market participants.
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. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 3, is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\73\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 3, is consistent
with section 6(b)(5) of the Act,\74\ which requires, among other
things, that the Exchange's rules be designed to prevent fraudulent and
manipulative acts and
[[Page 89781]]
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest. In its proposal to make the Pilot Program permanent,
the Exchange addressed whether the Pilot Program negatively impacts
markets or impacted options market quality.\75\ Each of these elements
is discussed in greater detail below. As stated above, no comments were
received on the proposed rule change.
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\73\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\74\ 15 U.S.C. 78f(b)(5).
\75\ Certain studies cited by the Exchange do not include, as
part of their analysis, FLEX Options. See Amendment No. 3. However,
the Commission acknowledges that the market for FLEX Options is
small and the products included as part of those studies, while much
larger than the FLEX market, did not have a disruptive impact on the
underlying indexes or the underlying components. As a result, the
Commission recognizes that it is not unreasonable for the Exchange
to infer that since the FLEX PM Third Friday Options market is
significantly smaller than the SPX PM market, FLEX PM Third Friday
Options are unlikely to adversely impact the market.
---------------------------------------------------------------------------
Market Impact Considerations
The Exchange states it has not identified any evidence from the
pilot data indicating that the trading of PM-settled FLEX options has
any adverse impact on fair and orderly markets on Expiration Fridays
for broad-based indexes or the underlying securities comprising those
indexes and has observed no abnormal market movements attributable to
FLEX PM Third Friday Options from any market participants that have
come to the attention of the Exchange.\76\ In order to support its
overall assessment of the Program, the Exchange included a review and
analysis of pilot data.\77\ Among other things, the Exchange's analysis
includes end of day volatility as well as a comparison of the impact of
quarterly index rebalancing versus PM-settled expirations.\78\
---------------------------------------------------------------------------
\76\ See Amendment No. 3, at 12-13.
\77\ Id. at 17.
\78\ Id. at 13. The Exchange states that although its analysis
specifically evaluated SPX options, the Exchange believes it is
appropriate to extrapolate the data to apply to FLEX PM Third Friday
Options. See Amendment No. 3, at 29. The Commission agrees it is
appropriate to extrapolate the data to FLEX PM Third Friday Options,
as the Exchange's analysis examines liquidity and volatility
dynamics around the market close, which may be associated with
typical hedging activities tied to expiring p.m.-settled index
option.
---------------------------------------------------------------------------
In addition to reviewing the data and analysis provided by the
Exchange, the Commission reviewed the analysis in the Pilot Memo, which
evaluates whether higher levels of expiring open interest in PM-settled
index options results in increased volatility and price reversals
around the close. The Pilot Memo shows that the market share for PM-
settled options on the S&P 500 has grown substantially since 2007.\79\
The Exchange's review of pilot data also showed this trend continuing
from 2019 through 2021.\80\
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\79\ See Pilot Memo at 2.
\80\ See Amendment No. 3, at 13. Specifically, since 2007, PM-
settled SPX options grew from 0.1% of open interest to 30% of open
interest in 2021. Id.
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The Pilot Memo examines whether and to what extent expiring open
interest in PM-settled index options is empirically related with the
tendency of the corresponding index futures, the underlying index, or
index components to experience increased transitory volatility and
price reversals around the time of market close on expiration dates.
The Pilot Memo concludes that, although expiring PM-settled index
option open interest may have a statistically significant relationship
with volatility and price reversals of the underlying index, index
futures, and index component securities around the market close, the
magnitude of the effect is economically very small.\81\ For example,
the largest settlement event that occurred during the time period
studied in the Pilot Memo (a settlement of $100.4 billion of notional
on December 29, 2017) had an estimated impact on the futures price of
only approximately 0.02% (a predicted impact of $0.54 relative to a
closing futures price of $2,677).\82\
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\81\ See Pilot Memo at 3.
\82\ See id.
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The Exchange further reviewed a sample of pilot data from 2019
through 2021, and measured the volatility of the S&P 500 over the final
fifteen minutes of each trading day and compared expiration days to
non-expiration days.\83\ Generally volatility was slightly higher on
expiration days, but in cases where overall market volatility
increased, the normalized impact on expiration days versus non-
expiration days remained consistent.\84\ The Exchange further analyzed
volatility on days when the S&P 500 was rebalanced, and states its
results suggest more closing volatility on rebalance dates compared to
non-rebalance expiration dates, indicating that rebalancing of the S&P
500 may have a greater impact on S&P 500 volatility than p.m.-settled
option expirations.\85\
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\83\ See Amendment No. 3, at 17-19.
\84\ See id.
\85\ See id.
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The Exchange also reviewed a sample of post-2018 pilot data for
potential correlation between excess market volatility and price
reversals and the hedging activity of liquidity providers.\86\ To
determine whether there is a correlation, the Exchange calculated an
estimate of the amount of MOC volume in the S&P 500 component markets
attributable to expected hedging activity as a result of expiring in-
the-money options.\87\ The Exchange states its results indicate that
other sources of MOC share volume generally exceed the volume resulting
from hedging activity for PM-settled SPX options.\88\ Further, the
Exchange also compared hedging futures positions that would correspond
to expiring in-the-money PM-settled SPX options and concludes the data
indicate negligible capacity for hedging activity to increase
volatility in the underlying markets.\89\
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\86\ See id.
\87\ See id.
\88\ See Amendment No. 3, at 20.
\89\ See id.
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The Exchange acknowledged in its proposal that the Commission's
Pilot Memo and corresponding Exchange studies discussed above
specifically evaluated SPX options rather than FLEX PM Third Friday
Options.\90\ To support its reliance on these studies, the Exchange
states that there have been approximately 400,000 contracts in FLEX PM
Third Friday Options executed on the Exchange since 2013, that vast
majority of which were on SPX, representing approximately 0.01% of all
SPX options volume during that time.\91\ The Exchange further states
that given that the Pilot Memo and other Exchange studies concluded
that PM settlements of a significantly larger amount of non-FLEX PM-
settled index options had no significant adverse market impact on the
underlying index or related products, it is reasonable to conclude that
the small amount of expiring PM settled FLEX index options under the
Pilot Program, ``. . .would similarly have no significant adverse
market impact.'' \92\
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\90\ See Amendment No. 3, at 29.
\91\ See id.
\92\ See Amendment No. 3, at 30.
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Finally, the Exchange states that the significant changes in the
closing procedures of the primary markets in recent decades, including
considerable advances in trading systems and technology, have
significantly minimized risks of any potential impact of PM-, cash-
settled SPX options on the underlying cash markets.\93\
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\93\ See Amendment No. 3, at 26.
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Market Quality Considerations
The Exchange also completed an analysis intended to evaluate
whether the Pilot Program impacted the quality of the SPX options
market. Specifically,
[[Page 89782]]
the Exchange compared values of key market quality indicators
(specifically, the bid-ask spread \94\ and effective spread \95\) in
PM-settled SPX weekly (``SPXW'') options both before and after the
introduction of Tuesday expirations and Thursday expirations for SPXW
options on April 18 and May 11, 2022, respectively.\96\ The Exchange
concludes from this analysis that the introduction of SPX options with
Tuesday and Thursday options had no significant impact on the market
quality of SPXW options with Monday, Wednesday, and Friday expirations.
For a majority of the series analyzed, the Exchange observed no
statistically significant difference in bid-ask spread or effective
spread.\97\ While the Exchange acknowledges that this analysis may not
be a direct substitute to demonstrate that the introduction of FLEX PM
Third Friday Options did not significantly impact the market quality of
non-FLEX AM-settled options the Exchange believes the analysis is still
relevant.\98\
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\94\ The Exchange calculated for each of SPXW options (with
Monday, Wednesday, and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading
hours session, adjusted for the difference in size between SPXW
options and SPY options (SPXW options are approximately ten times
the value of SPY options).
\95\ The Exchange calculated the volume-weighted average daily
effective spread for simple trades for each of SPXW options (with
Monday, Wednesday, and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations) as twice the amount
of the absolute value of the difference between an order execution
price and the midpoint of the national best bid and offer at the
time of execution, adjusted for the difference in size between SPXW
options and SPY options.
\96\ For purposes of comparison, the Exchange paired SPXW
options and SPY options with the same moneyness and same days to
expiration.
\97\ See Amendment No. 3, at 56.
\98\ Id. at 23
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Specifically, the Exchange states the data shows that 400,000 FLEX
PM Third Friday Options have executed on the Exchange since 2013;
compared to 156 million total FLEX Options contracts; 14.2 billion
total options contracts; 5.6 billion index option contracts; 3.8
billion total SPX options contracts; and 2.3 billion AM-settled SPX
options contracts in the same time period.\99\ The Exchange states that
since FLEX PM Third Friday Options have an average-daily-volume of
approximately 0.04% of the average-daily-volume of SPXW Tuesday and
Thursday expirations, it is reasonable to conclude that it is unlikely
that FLEX PM Third Friday Options would have any impact on the market
quality of non-FLEX SPX AM-settled options.\100\
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\99\ Id.
\100\ Id.
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As part of its filing, to further analyze the impact FLEX PM Third
Friday Options had on market quality, the Exchange provided additional
data and evaluated each FLEX PM Third Friday Options trade for more
than 500 contracts that occurred on the Exchange during the last two
years and analyzed the market quality (specifically, the average time-
weighted quote spread and size 30 minutes prior to the trade and the
average time-weighted quote spread and size 30 minutes after the trade)
of non-FLEX AM-settled SPX option series with similar terms as the FLEX
PM Third Friday Option that traded (time to expiration, type (call or
put), and strike price) as set forth in the table above.
The Exchange's analysis shows that the average time-weighted quote
spread and size of non-FLEX AM-settled SPX option did not materially
change after the FLEX PM Third Friday Options trade.\101\ Specifically,
the average time-weighted quoted spread was never more than $0.36 wider
in the time period after the trade compared to before the trade, and
the average time-weighted size was never more than 0.7 contracts
different in the time period after the trade compared to before the
trade.\102\ The Exchange also stated that the observed spreads were
relatively stable before and after large trades. The Exchange states
that this demonstrates that large FLEX PM Third Friday Options trades
had no material negative impact on quote quality of non-FLEX AM-settled
SPX options with similar terms as the FLEX PM Third Friday
Options.\103\ Therefore, the Exchange concludes that this evaluation
effectively shows that it is likely FLEX PM Third Friday Options have
had no significant negative impact on the market quality of non-FLEX
Options with AM-settlement.\104\
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\101\ The Exchange acknowledged certain limitations related to
its analysis. See Amendment No. 3, at notes 47-49.
\102\ See Amendment No. 3, at 25.
\103\ Id.
\104\ Id.
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Conclusion
The Commission believes that the evidence contained in the
Exchange's filing, and the Exchange's pilot data and reports,
demonstrate that the Pilot Program has benefitted investors and other
market participants by providing more flexible trading and hedging
opportunities using FLEX options under the Pilot Program, while also
having observed no evidence of an adverse impact on the market. The
market for FLEX PM Third Friday Options has grown in size over the
course of the Pilot Program, but remains relatively small compared to
non-FLEX PM-settled index options, and analysis of the pilot data did
not identify any significant economic impact, nor did it indicate a
deterioration in market quality (as measured by average time weighted
quote spreads and average time weighted quote size) for series of non-
FLEX AM-settled SPX option series with similar terms as the FLEX PM
Third Friday Options. Additionally, the Pilot Memo and Exchange studies
analyzing the non-Flex options market did not identify any adverse
market impact on the underlying indexes, components of those indexes or
related products or any significant impact on market quality of AM-
settled index options.\105\ Further, significant changes in closing
procedures in the decades since index options moved to AM settlement
may also serve to mitigate the potential impact of PM-settled index
options on the underlying cash markets.
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\105\ While the Exchange recognized certain limitations as to
its analysis, given the totality and scope of the studies described
above and the current size of the FLEX PM Third Friday Options
market it is not unreasonable for the Exchange to infer from those
studies that it is unlikely FLEX PM Third Friday Options adversely
impacted the options or other markets.
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Accordingly, the Commission finds that the proposed rule change, as
modified by Amendment No. 3, is consistent with section 6(b)(5) of the
Act \106\ and the rules and regulations thereunder applicable to a
national securities exchange.
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\106\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments on Amendment No. 3 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 3
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CBOE-2023-018 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-CBOE-2023-018. This file
number should be included on the subject line if email is used. To help
the Commission process and review your
[[Page 89783]]
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-CBOE-2023-018 and should be submitted on or before January 18, 2024.
V. Accelerated Approval of Amendment No. 3
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 3, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
3 in the Federal Register. As noted above, Amendment No. 3 makes no
substantive changes to the proposal. Amendment No. 3 provides
additional analysis and data to support certain assertions made by the
Exchange and provides greater clarity to, and justification for, the
proposal.\107\ The additional analysis and information in Amendment No.
3 assist the Commission in evaluating the Exchange's proposal and in
determining that it is consistent with the Act. Amendment No. 3 also
raises no new novel issues. Accordingly, the Commission finds good
cause, pursuant to section 19(b)(2) of the Act,\108\ to approve the
proposed rule change, as modified by Amendment No. 3, on an accelerated
basis.
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\107\ See supra note 12.
\108\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that proposed rule change SR-CBOE-2023-018, as modified by Amendment
No. 3, be, and hereby is, approved on an accelerated basis.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\109\
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\109\ 17 CFR 200.30-3(a)(12).
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Christina Z. Milnor,
Assistant Secretary.
[FR Doc. 2023-28608 Filed 12-27-23; 8:45 am]
BILLING CODE 8011-01-P
