[Federal Register Volume 83, Number 61 (Thursday, March 29, 2018)]
[Notices]
[Pages 13577-13580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06300]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82942; File No. SR-CboeBZX-2018-022]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Paragraph (c)(5) of Exchange Rule 11.9 Describing the Operation of 
Minimum Quantity Orders

March 23, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 16, 2018, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange has designated this proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to amend paragraph (c)(5) of Exchange 
Rule 11.9 describing the operation of Minimum Quantity Orders.\5\
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    \5\ See Exchange Rule 11.9(c)(5) for a complete description of 
the operation of Minimum Quantity Orders.
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    The text of the proposed rule change is available at the Exchange's 
website at www.markets.cboe.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend paragraph (c)(5) of Exchange Rule 
11.9 describing the operation of Minimum Quantity Orders by removing 
language that provided for the re-pricing of incoming Minimum Quantity 
Orders to avoid an internally crossed book. As a result of this change, 
the Exchange proposes to specify within the rule when a Minimum 
Quantity Order would not be eligible to trade to prevent executions 
from occurring that may be inconsistent with intra-market price 
priority or that would cause a non-displayed order to trade ahead of a 
displayed order.
    In sum, a Minimum Quantity Order is a non-displayed order that 
enables a User \6\ to specify a minimum share amount at which the order 
will execute.\7\ A Minimum Quantity Order will not execute unless the 
volume of contra-side liquidity available to execute against the order 
meets or exceeds the designated minimum size. By default, a Minimum 
Quantity Order will execute upon entry against a single order or 
multiple aggregated orders simultaneously. The Exchange recently 
amended the operation of Minimum Quantity Orders to permit a User to 
alternatively specify the order not execute against multiple aggregated 
orders simultaneously and that the minimum quantity condition be 
satisfied by each individual order resting on the BZX Book.\8\
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    \6\ The term ``User'' is defined as ``any Member or Sponsored 
Participant who is authorized to obtain access to the System 
pursuant to Rule 11.3.'' See Exchange Rule 1.5(cc).
    \7\ The Exchange will only honor a specified minimum quantity on 
BZX Only Orders that are non-displayed or Immediate-Or-Cancel and 
will disregard a minimum quantity on any other order. See Exchange 
Rule 11.9(c)(5).
    \8\ See Securities Exchange Act Release No. 81807 (October 3, 
2017), 82 FR 47065 (October 10, 2017) (SR-BatsBZX-2017-62). This 
functionality is pending deployment and the implementation date will 
be announced via a trading notice.
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    The Exchange also recently amended the operation of Minimum 
Quantity Orders to re-price incoming Minimum Quantity Orders where that 
order may cross an order posted on the BZX Book.\9\ Specifically, where 
there is insufficient size to satisfy an incoming order's minimum 
quantity condition and that incoming order, if posted at its limit 
price, would cross an order(s), whether

[[Page 13578]]

displayed or non-displayed, resting on the BZX Book, the order with the 
minimum quantity condition would be re-priced to and ranked at the 
locking price. This functionality has not yet been implemented \10\ and 
the Exchange now proposes to amend paragraph (c)(5) of Rule 11.9 to 
remove this re-pricing requirement.
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    \9\ Id.
    \10\ See supra note 8. Exchange Rule 11.9(c)(5) does not require 
re-pricing where the Minimum Quantity Order is resting on the BZX 
Book. As such, an internally crossed book may occur where the 
incoming order is of insufficient size to satisfy the resting 
order's minimum quantity condition and that incoming order, if 
posted at its limit price, would cross that order with a minimum 
quantity condition resting on the BZX Book.
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    As a result of the above change, the Exchange proposes to amend 
paragraph (c)(5) of Rule 11.9 to describe when a Minimum Quantity Order 
will not be eligible to trade to prevent executions from occurring that 
may be inconsistent with intra-market price priority or would result in 
a non-displayed order trading ahead of a same-priced, same-side 
displayed order.\11\ The Exchange would not permit a Minimum Quantity 
Order that crosses other displayed or non-displayed orders on the BZX 
Book to trade at prices that are worse than the price of such contra-
side orders. The Exchange would also not permit a resting Minimum 
Quantity Order to trade at a price equal to a contra-side displayed 
order. This proposal is based on recently adopted NYSE Arca, Inc. 
(``NYSE Arca'') Rule 7.31-E(i)(3)(C).\12\
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    \11\ Exchange Rule 11.12(a) states that orders on the BZX Book 
are ranked and maintained by the Exchange according to price-time 
priority. Exchange Rule 11.12(a) further prohibits a non-displayed 
order from trading ahead of a same-side, same-priced displayed 
order. This proposed rule change adds language to Exchange Rule 
11.9(c)(5) to clarify this priority scheme during an internally 
crossed market.
    \12\ See Securities Exchange Act Release No. 82504 (January 16, 
2018), 83 FR 3038 (January 22, 2018) (SR-NYSEArca-2018-01) (Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 7.31-E Relating to Mid-Point Liquidity Orders and the 
Minimum Trade Size Modifier and Rule 7.36-E To Add a Definition of 
``Aggressing Order'').
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    Paragraph (c)(5) of Rule 11.9 would state that a Minimum Quantity 
Order to buy (sell) that is ranked in the BZX Book will not be eligible 
to trade: (i) At a price equal to or above (below) any sell (buy) 
orders that are displayed and that have a ranked price equal to or 
below (above) the price of such Minimum Quantity Order; or (ii) at a 
price above (below) any sell (buy) order that is non-displayed and has 
a ranked price below (above) the price of such Minimum Quantity 
Order.\13\ However, a Minimum Quantity Order that crosses an order on 
BZX Book may execute at a price less aggressive than its ranked price 
against an incoming order so long as such execution is consistent with 
the above restrictions.
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    \13\ A Minimum Quantity Order to buy (sell) may execute at a 
price above (below) any sell (buy) order that is Non-Displayed and 
has a ranked price below (above) the price of such Minimum Quantity 
Order if that Non-Displayed order itself included a minimum quantity 
condition that prevented it from executing. See infra note 16.
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    The following examples describe the proposed operation of a Minimum 
Quantity Order during an internally crossed market. This first example 
addresses intra-market priority amongst a Minimum Quantity Order and 
other non-displayed orders in an internally crossed market as well as 
when an execution may occur at prices less aggressive than the resting 
order's ranked price. Assume the NBBO is $10.10 by $10.16. A non-
displayed order to sell 50 shares at $10.12 is resting on the BZX Book 
(``Order A''). A non-displayed order to sell 25 shares at $10.11 is 
also resting on the BZX Book (``Order B''). The Exchange receives a 
Mid-Point Peg \14\ order to buy at $10.14 with a minimum quantity 
condition to execute against a single order of 100 shares (``Order 
C''). Because Order C's minimum quantity condition cannot be met, Order 
C will not trade with Orders A or B and will be posted and ranked on 
the BZX Book at $10.13, the midpoint of the NBBO. The Exchange now has 
a non-displayed order crossing both non-displayed orders on the BZX 
Book. If the Exchange then receives a non-displayed order to sell for 
100 shares at $10.11 (``Order D''),\15\ although Order D would be 
marketable against Order C at $10.13, it would not trade at $10.13 
because it is above the price of all resting sell orders. Order D will 
instead execute against Order C at $10.11, receiving price improvement 
relative to the midpoint of the NBBO.
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    \14\ See Exchange Rule 11.9(c)(9).
    \15\ On NYSE Arca, Order D will be posted to the NYSE Arca book 
at $10.11 and not execute against Order C at $10.13. See supra note 
12.
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    This second example addresses intra-market priority amongst 
displayed orders, Minimum Quantity Orders and other non-displayed 
orders. The Exchange notes that the below behavior is not unique to an 
internally crossed market as the Exchange's priority rule, 11.12(a), 
currently prohibits non-displayed orders, including Minimum Quantity 
Orders, from trading ahead of same-priced, same-side displayed orders. 
Assume the NBBO is $10.00 by $10.04. A non-displayed order to buy 500 
shares at $10.00 is resting on the BZX Book (``Order A''). A displayed 
order to buy 100 shares at $10.00 is then entered and posted to the BZX 
Book (``Order B''). The Exchange receives a non-displayed order to sell 
600 shares at $10.00 with a minimum quantity condition to execute 
against a single order of 500 shares (``Order C''). Although Order A 
satisfies Order C's minimum quantity condition and has time priority 
ahead of Order B, no execution occurs because Order B is a displayed 
order and has execution priority over Order A, a non-displayed order. 
Order C does not execute against Order B because Order B does not 
satisfy Order C's minimum quantity condition. Order C is then posted to 
the BZX Book at $10.00, non-displayed.
    The Exchange also proposes two clarifying changes to paragraph 
(c)(5) of Exchange Rule 11.9. The rule currently states that a Minimum 
Quantity Order cedes execution priority when it would lock an order 
against which it would otherwise execute if it were not for the minimum 
execution size restriction.\16\ The Exchange now proposes to add 
additional language to the rule to clarify when a resting non-displayed 
order may cede execution priority to a subsequent arriving same-side 
order. As amended, paragraph (h) of Rule 11.6 would state that if a 
resting non-displayed sell (buy) order did not meet the minimum 
quantity condition of a same-priced resting Minimum Quantity Order to 
buy (sell), a subsequently arriving sell (buy) order that meets the 
minimum quantity condition will trade ahead of such resting non-
displayed sell (buy) order at that price. For example, assume the NBBO 
is $10.00 by $10.10 and no orders are resting on the BZX Book. A non-
displayed order to buy 700 shares at $10.10 with a minimum quantity 
condition to execute against a single order of 500 shares is resting on 
the BZX Book (Order A). A non-displayed order to sell 100 shares at 
$10.10 is then entered and posted to the BZX Book (Order B). Order B 
does not execute against Order A because Order B does not satisfy Order 
A's single minimum quantity condition of 500 shares. As a result, Order 
B is posted to the BZX Book at $10.10, creating an internally locked 
book. An order to sell 500 shares at $10.10 is then entered and 
executes against Order A at $10.10 for 500 shares because the incoming 
order is of sufficient size to satisfy Order A's minimum quantity 
condition of 500 shares. This clarification is also based on recently 
adopted NYSE Arca Rule 7.31-E(i)(3)(E)(ii).\17\
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    \16\ The Exchange proposes to amend this provision to clarify 
that a Minimum Quantity Order would cede execution priority when it 
would also cross an order against which it would otherwise execute 
if it were not for the minimum execution size restriction.
    \17\ Supra note 12.

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[[Page 13579]]

    Lastly, the Exchange proposes to clarify that an incoming Minimum 
Quantity Order would be canceled where, if posted, it would cross the 
displayed price of an order on the BZX Book.\18\ Conversely, an 
incoming Minimum Quantity Order would be posted to the BZX Book where 
it would not cross the displayed price of a resting contra-side order. 
For example, an order to buy at $11.00 with a minimum quantity 
condition of 500 shares is entered (Order A) and there is a displayed 
order resting on the BZX Book to sell 200 shares at $10.99 (Order B). 
Order A would be cancelled because it crosses the displayed price of 
Order B and Order B does not contain sufficient size to satisfy Order 
A's minimum quantity condition of 500 shares. However, should Order A 
be priced at $10.99, it would not be cancelled and would be posted to 
the BZX Book, resulting in an internally locked market. Order A would 
not be executable at that price because it is priced equal to a contra-
side displayed order. An internally crossed market may subsequently 
occur should an order to sell priced more aggressively than Order A be 
entered but not be of sufficient size to satisfy Order A's minimum 
quantity condition of 500 shares (e.g., an order to sell 100 shares at 
$10.98) and posted to the BZX Book.
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    \18\ A Minimum Quantity Order will be repriced in accordance 
with Exchange Rule 11.9(g)(4) where it would cross a protected quote 
displayed on an away market center.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \20\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in 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. The proposed rule change 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system because it would ensure that 
Minimum Quantity Orders do not trade through displayed orders or 
violate intra-market price priority. Specifically, the proposed rule 
change would protect displayed orders by preventing a Minimum Quantity 
Order from executing where it is locked by a contra-side Displayed 
order. The proposed rule change protects intra-market price priority by 
preventing a resting Minimum Quantity Order from executing where it is 
crossed by either a displayed or non-displayed order on the BZX Book. 
The proposed clarifications remove impediments to and perfect the 
mechanism of a free and open market and a national market system 
because they provide additional specificity regarding the operation of 
a Minimum Quantity Order, thereby avoiding potential investor 
confusion. In particular, the Exchange believes it is reasonable for a 
resting non-displayed order to cede execution priority to a subsequent 
arriving same-side order where that order is of sufficient size to 
satisfy a resting contra-side order's minimum quantity condition 
because doing so facilitates executions in accordance with the terms 
and conditions of each order. The proposed rule change is also 
substantially similar to a proposed rule change recently submitted by 
NYSE Arca for immediate effectiveness and published by the 
Commission.\21\ The only differences between the proposed rule change 
and that of NYSE Arca is that: (i) NYSE Arca does not cancel a minimum 
quantity order that would cross a displayed order on the NYSE Arca 
book; and (ii) NYSE Arca will not execute resting orders at prices less 
aggressive than their limit prices in crossed markets. The Exchange 
believes that these differences are immaterial because they are 
designed to reduce the occurrences of internally crossed markets and 
facilitate executions that may not otherwise occur. These differences 
will also continue to ensure that executions occur in accordance with 
intra-market price priority on the Exchange while accounting for the 
differences in functionality and order types.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ See supra notes 12 and 15.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. On 
the contrary, the proposed rule change is not designed to address any 
competitive issues because it is intended to provide clarity regarding 
the operation of Minimum Quantity Orders and when such orders are 
eligible to trade and not trade through displayed orders or violate 
intra-market price priority.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No comments were solicited or received on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (A) 
Significantly affect the protection of investors or the public 
interest; (B) impose any significant burden on competition; and (C) by 
its terms, become operative for 30 days from the date on which it was 
filed or such shorter time as the Commission may designate it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \22\ and 
paragraph (f)(6) of Rule 19b-4 thereunder,\23\ the Exchange has 
designated this rule filing as non-controversial. The Exchange has 
given the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (1) 
Necessary or appropriate in the public interest; (2) for the protection 
of investors; or (3) otherwise in furtherance of the purposes of the 
Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule should be 
approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2018-022 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange

[[Page 13580]]

Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBZX-2018-022. 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 (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2018-022, and should be 
submitted on or before April 19, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-06300 Filed 3-28-18; 8:45 am]
 BILLING CODE 8011-01-P


