[Federal Register Volume 83, Number 63 (Monday, April 2, 2018)]
[Notices]
[Pages 14066-14068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06569]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82949; File No. SR-CBOE-2018-016]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving a Proposed Rule Change To Amend Rules Related to the Complex 
Order Book

March 27, 2018

I. Introduction

    On February 2, 2018, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to allow market makers and option specialists to 
rest orders in the Complex Order Book (``COB'') under certain 
circumstances. The proposed rule change was published for comment in 
the Federal Register on February 16, 2018.\3\ The Commission received 
no comments regarding the proposal. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82689 (February 12, 
2018), 83 FR 7092 (``Notice'').
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II. Description of the Proposed Rule Change

    CBOE Options Rule 6.53C(c)(i) allows the Exchange to determine 
which classes and which complex order origin types (i.e., non-broker-
dealer public customer, broker-dealers that are not market-makers or 
specialists on an options exchange, and/or market-makers or specialists 
on an options exchange) are eligible for entry into the COB and whether 
such complex orders can route directly to the COB and/or from PAR to 
the COB. Cboe Options has determined that the complex orders of market-
makers (origin code ``M'') and market-makers or specialists on an 
options exchange (``away market-makers'') (origin code ``N'') in 
options on the S&P 500 (``SPX'' and ``SPXW'') and the Cboe Volatility 
Index (``VIX'') are not eligible for entry into the COB.\4\ The 
Exchange proposes to amend Cboe Options Rule 6.53C(c)(i) to provide 
that in a class in which the Exchange determines that the complex 
orders of market-makers and

[[Page 14067]]

specialists on an options exchange are not eligible for entry into the 
COB, the Exchange may determine that market-makers and specialists may 
enter their complex orders into the COB under two circumstances. First, 
market-makers and specialists will be permitted to enter their complex 
orders in the COB if their orders are on the opposite side of a 
priority customer complex order(s) resting in the COB with a price not 
outside the national spread market (``NSM'').\5\ Cboe Options notes 
that, unlike the leg markets in which market-makers provide liquidity 
through quotes, market-makers are unable to submit quotes in the COB 
that indicate to customers the price at which they are willing to 
trade.\6\ Cboe Options believes that allowing market makers to enter 
their orders in the COB will provide priority customers with 
information about where market makers are willing to trade, thus 
creating potential execution opportunities for priority customers whose 
orders are not satisfied by the leg markets or other complex orders.\7\
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    \4\ See Notice, 83 FR at 7092. See also Cboe Options Regulatory 
Circular RG15-195. To the extent an origin type is not eligible for 
entry into the COB, complex orders with that origin type may be 
entered into the Exchange's System as opening-only or immediate-or-
cancel because these orders would not rest in the COB when the 
Exchange is open for trading.
    \5\ See Cboe Options Rules 6.53C(c)(i)(A)(1) and 1.1(bbbb) 
(defining ``national spread market'').
    \6\ See Notice, 83 FR at 7093.
    \7\ See id. See also Notice, 83 FR at 7094, Examples 1 and 2.
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    Second, the proposal will allow market-makers and options 
specialists to enter their complex orders in the COB if their orders 
are on the opposite side of order(s) for the same strategy on the same 
side that initiated a Complex Order Auction (``COA'') if there are 
``x'' number of COAs within ``y'' milliseconds, counted on a rolling 
basis (the Exchange will determine the number ``x'' (which must be at 
least two) and time period ``y'' (which may be no more than 2,000)).\8\ 
Cboe Options believes that it may be difficult for market-makers to 
respond to multiple auctions that occur within a short time period 
while managing risk related to the amount executed during those 
auctions.\9\ In this regard, the Exchange states that market-makers 
have complicated risk modeling associated with their trading activity, 
which factors in the size, price, and frequency at which they trade 
with orders.\10\ To help ensure that a market-maker does not trade with 
potentially erroneous orders and become overexposed to risk, the 
Exchange states that a market-maker may set its risk controls to stop 
responding to COAs when multiple COAs in a strategy occur within a 
short timeframe (e.g., a market-maker may program its system to respond 
only to a specific number of auctions within a time period), which 
reduces auction liquidity and potential price improvement for COA 
orders.\11\ The Exchange notes, however, that multiple non-erroneous 
auctions in a strategy may occur within a short time period if, for 
example, a market participant's algorithmic trading breaks up a large 
order into a number of smaller orders.\12\ Accordingly, the proposal 
will allow a market-maker that determines that it is appropriate to 
trade with COA orders under these circumstances to submit an order to 
the COB that would be available to trade against multiple COA orders up 
to the amount the market-maker is willing to trade for the strategy 
within its risk controls.\13\
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    \8\ See Cboe Options Rule 6.53C(c)(i)(A)(2).
    \9\ See Notice, 83 FR at 7093.
    \10\ See id.
    \11\ See id.
    \12\ See id.
    \13\ See id. Cboe Options notes that pursuant to Cboe Options 
Rule 6.53C(d), the order of a market-maker or options specialist 
resting in the COB on the opposite side of an auctioned order may be 
available for execution against any contracts of the auctioned order 
that did not execute during the auction. See id.
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    The rule will require market-makers and specialists to cancel any 
unexecuted complex orders in the COB no later than a specified time 
(which the Exchange will determine and may be no more than five 
minutes) after the time the COB receives the order.\14\ Cboe Options 
states that it intends to set these parameters at levels that it 
believes will permit market-makers to have sufficient time to submit 
orders into the COB to participate in COAs, a determination that the 
Exchange will make based on market-maker feedback, business conditions, 
and data (including trading volume data and information regarding the 
number of executions of market-maker orders against complex 
orders).\15\ In addition, Cboe Options states the time period within 
which a market-maker must cancel its complex order will provide the 
market-maker with sufficient time for the opposing customer to 
potentially re-price its order for execution against the market-maker's 
order or for the market-maker's order to execute against an order 
following a COA.\16\
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    \14\ See Cboe Options Rule 6.53C(c)(i)(B). The Exchange will 
announce to Trading Permit Holders all determinations it makes 
pursuant to Cboe Options Rule 6.53C via Regulatory Circular. See 
Cboe Options Rule 6.53C, Interpretation and Policy .01. The Exchange 
states that it will provide Trading Permit Holders with sufficient 
advanced notice prior to changing any parameters its sets under the 
proposal. See Notice, 83 FR at 7093 n.5.
    \15\ See Notice, 83 FR at 7093.
    \16\ See id. at 7094.
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    The Exchange states that it will have surveillance to enforce the 
proposed rule change, which will monitor whether market-maker and away 
market-maker orders have been entered only in the circumstances 
permitted under the proposal, and whether any unexecuted orders have 
been cancelled by the deadline imposed by the proposal.\17\
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    \17\ See id. at 7094.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\18\ In particular, for the reasons discussed below, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\19\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \18\ 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).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that allowing market-makers and specialists 
to enter orders in the COB on the opposite side of the market from 
priority customer orders resting in the COB, or on the opposite side of 
the market when orders on the same side of the market for a particular 
strategy have initiated a number of COAs within a short time period, as 
described more fully above, is designed to result in the provision of 
additional liquidity to trade with customer orders, potentially 
providing additional execution and price improvement opportunities for 
those customer orders. As noted above, CBOE believes that allowing 
market-makers and specialists to rest orders in the COB opposite 
priority customer interest in the COB that is not outside the NSM could 
provide an execution opportunity for a priority customer order that has 
not executed against other complex order or leg market interest by 
providing the customer with information concerning the price at which a 
market maker is willing to trade with the customer's order; this 
information currently is not available because the COB has no market 
maker quotes indicating the price at which liquidity providers are 
willing to trade against

[[Page 14068]]

customer orders.\20\ Allowing market-makers and specialists to place 
orders in the COB following a number of COAs for the same strategy on 
the same side of the market could allow a market maker to determine to 
provide additional liquidity for customer orders, within the market-
maker's risk controls, in circumstances where the market-maker's system 
has stopped responding to COAs.\21\ The Commission notes that Cboe 
Options has represented that it will have surveillance to monitor 
compliance with the requirements of the rule.\22\
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    \20\ See Notice, 83 FR at 7093.
    \21\ See id.
    \22\ See id. at 7094.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-CBOE-2018-016) is approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    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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Jill Peterson,
Assistant Secretary.
[FR Doc. 2018-06569 Filed 3-30-18; 8:45 am]
 BILLING CODE 8011-01-P


