[Federal Register Volume 83, Number 82 (Friday, April 27, 2018)]
[Notices]
[Pages 18605-18612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08848]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83089; File No. SR-CBOE-2018-029]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change in 
Connection With the Migration of SPX Options From the Hybrid 3.0 System 
to the Hybrid Trading System

April 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 April 12, 2018, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and 
II, below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules related to listing the SPX 
class on a group basis and amend other rules in connection with the 
Exchange's planned migration of standard third-Friday options on the 
S&P 500 Index (``SPX options'') to the Hybrid Trading System from the 
Hybrid 3.0 System.
(additions are italicized; deletions are [bracketed])
* * * * *

Cboe Exchange, Inc. Rules

* * * * *

Rule 6.2. Hybrid Opening (and Sometimes Closing) System (``HOSS'')

    (a)-(h) (No change).

[[Page 18606]]

    . . . Interpretations and Policies:
    .01 (No change).
    .02 Market-Maker Quotes.
    (a) Minimum Size. The Exchange determines on a class-by-class 
basis [(a)] the minimum number of contracts for the initial size of 
a Market-Maker's opening quote, which minimum must be at least one 
contract. For SPX, the Exchange may also determine minimum initial 
quote size on a premium basis and an expiration basis for series 
with expirations of (1) 7 or fewer days, (2) 8 to 91 days, (3) 92 to 
188 days, (4) 189 to 461 days, and (5) 462 or more days.
    (b) Bid/Ask Differentials. The Exchange determines on a class-
by-class and premium basis the bid/ask differential requirements 
with which Market-Makers' opening quotes must comply, which minimum 
and differential requirements may be different for the opening than 
those applicable intraday. For SPX, the Exchange may determine bid/
ask differential requirements for series with expirations of (1) 
fewer than 462 days and (2) 462 or more days, and for all other 
classes, the Exchange may determine bid/ask differential 
requirements for series with expiration of (1) less than nine months 
and (2) nine months or more.
    .03-.07 (No change).
* * * * *

Rule 6.53C. Complex Orders on the Hybrid System

    (a)-(d) (No change).
    . . . Interpretations and Policies:
    .01 (No change).
    .02 [Reserved.] If the Exchange determines to list SPX on a 
group basis pursuant to Rule 8.14, a marketable complex order 
consisting of legs in different groups of series in the class does 
not automatically execute against individual orders residing in the 
EBook pursuant to Rule 6.53C(c)(ii)(1) or (d)(v)(1) and 
automatically executes against complex orders (or COA responses) in 
accordance with Rules 6.53C(c)(ii)(2) or (d)(v)(2) through (4). A 
marketable complex order consisting of legs in the same group of 
series in SPX executes against individual orders in the EBook in 
accordance with Rule 6.53C(c)(ii) and (d)(v). Complex orders 
consisting of legs in different groups of series that are marketable 
against each other may only execute at a net price that has priority 
over the individual orders and quotes resting in the EBook.
    .03-.12 (No change).
* * * * *

Rule 8.3. Appointment of Market-Makers

    (a)-(b) (No change).
    (c) Market-Maker Appointments. Absent an exemption by the 
Exchange, an appointment of a Market-Maker confers the right to 
quote electronically and in open outcry in the Market-Maker's 
appointed classes during Regular Trading Hours as described below. 
Subject to paragraph (e) below, a Market-Maker may change its 
appointed classes upon advance notification to the Exchange in a 
form and manner prescribed by the Exchange.
    (i) Hybrid Classes. Subject to paragraphs (c)(iv) and (e) below, 
a Market-Maker can create a Virtual Trading Crowd (``VTC'') 
appointment, which confers the right to quote electronically during 
Regular Trading Hours in an appropriate number of Hybrid classes (as 
defined in Rule 1.1(aaa)) selected from ``tiers'' that have been 
structured according to trading volume statistics, except for the AA 
tier. All classes within a specific tier will be assigned an 
``appointment cost'' depending upon its tier location. The following 
table sets forth the tiers and related appointment costs.

II.

------------------------------------------------------------------------
                                                            Appointment
              Tier                Hybrid options classes       cost
------------------------------------------------------------------------
AA.............................  Options on the Cboe                .499
                                  Volatility Index (VIX).
                                 Options on the Standard          ** 1.0
                                  & Poor's 500 Index
                                  (SPX).
 
                              * * * * * * *
------------------------------------------------------------------------
* Excludes Tier AA.
** If the Exchange determines to list SPX on a group basis pursuant to
  Rule 8.14, the SPX appointment cost confers the right to trade in all
  SPX groups.

    (ii) (No change).
    (iii) Hybrid 3.0 Class. In addition to paragraphs (i) and (ii) 
above, and subject to paragraphs (c)(iv) and (e) below, a Market-
Maker can select as the Market-Maker's appointment a Hybrid 3.0 
class traded on the Exchange, which confers the right to trade in 
open outcry in the Hybrid 3.0 class during Regular Trading Hours as 
described below. Each Hybrid 3.0 class is assigned an ``appointment 
cost'', which is set forth below.

------------------------------------------------------------------------
                                                            Appointment
                    Hybrid 3.0 class                           cost
------------------------------------------------------------------------
[Options on the Standard & Poor's 500 Index (SPX)]......          [*1.0]
None....................................................  ..............
------------------------------------------------------------------------
[* This appointment cost also confers the right to trade any group of
  series of SPX that the Exchange has authorized for trading on the
  Hybrid Trading System pursuant to Rule 8.14.]

    (iv)-(v) (No change).
    (d)-(e) (No change).
* * * * *

Rule 8.7. Obligations of Market-Makers

    (a)-(c) (No change).
    (d) Market-Making Obligations in Applicable Hybrid Classes
    The following obligations in this paragraph (d) are only 
applicable to Market-Makers trading classes on the Cboe Options 
Hybrid System and only in those Hybrid classes. Unless otherwise 
provided in this Rule, Market-Makers trading classes on the Hybrid 
System remain subject to all obligations imposed by Cboe Options 
Rule 8.7. To the extent another obligation contained elsewhere in 
Rule 8.7 is inconsistent with an obligation contained in paragraph 
(d) of Rule 8.7 with respect to a class trading on Hybrid, this 
paragraph (d) shall govern trading in the Hybrid class.
    For Regular Trading Hours, these requirements are applicable on 
a per class basis, except as set forth in paragraph (ii)(B) below, 
depending upon the percentage of volume a Market-Maker transacts in 
an appointed class during Regular Trading Hours electronically 
versus in open outcry. With respect to making this determination, 
the Exchange will monitor a Market-Maker's trading activity in each 
appointed class during Regular Trading Hours every calendar quarter 
to determine whether it exceeds the threshold established in 
paragraph (d)(i). If a Market-Maker exceeds the threshold 
established below, the obligations contained in (d)(ii) will be 
effective the next calendar quarter.
    For a period of ninety (90) days commencing immediately after a 
class begins trading on the Hybrid system, the provisions of 
paragraph (d)(i) shall govern trading in that class.
    (i) Market-Maker Trades 20% or Less Contract Volume in an 
Appointed Class Electronically:
    If a Market-Maker on the Cboe Options Hybrid System never 
transacts more than 20% (i.e., trades 20% or less) of the Market-
Maker's contract volume electronically in an appointed Hybrid class 
during Regular Trading Hours during any calendar quarter, the 
following provisions shall apply to that Market-Maker with respect 
to that class:
    (A) Quote Widths: With respect to electronic quoting, Market-
Makers must comply with the bid/ask differential requirements 
determined by the Exchange on a class-by-class and premium basis 
[the Market-Maker will not be required to comply with the bid/ask 
differential requirements determined by the Exchange in that class. 
The effectiveness of this subparagraph (i)(A) shall be in effect in 
each Hybrid for a period of one year commencing with the date the 
class begins trading on the Hybrid System]. For SPX, the Exchange 
may determine bid/ask differential requirements for series with 
expirations of (1) fewer than 462 days and (2) 462 or more days, and 
for all other classes, the Exchange may determine bid/ask 
differential requirements for series with

[[Page 18607]]

expiration of (1) less than nine months and (2) nine months or more.
    (B) Continuous Electronic Quoting Obligation: The Market-Maker 
will not be obligated to quote electronically in any designated 
percentage of series within that class. If a Market-Maker quotes 
electronically, its undecremented quote must be for the minimum 
number of contracts determined by the Exchange on a class[ ]-by[ ]-
class basis, which minimum shall be at least one contract. For SPX, 
the Exchange may also determine minimum initial quote size on a 
premium basis and an expiration basis for series with expirations of 
(1) 7 or fewer days, (2) 8 to 91 days, (3) 92 to 188 days, (4) 189 
to 461 days, and (5) 462 or more days.
    (C) (No change).
    (ii) Market-Maker Trades More Than 20% Contract Volume in an 
Appointed Class Electronically:
    If a Market-Maker on the Cboe Options Hybrid System transacts 
more than 20% of the Market-Maker's contract volume electronically 
in an appointed Hybrid class during Regular Trading Hours during any 
calendar quarter, commencing the next calendar quarter the Market-
Maker will be subject to the following quoting obligations in that 
class for as long as the Market-Maker maintains an appointment in 
that class:
    (A) Quote Widths: Market-Makers must comply with the bid/ask 
differential requirements determined by the Exchange on a class[ ]-
by[ ]-class and premium basis. For SPX, the Exchange may determine 
bid/ask differential requirements for series with expirations of (1) 
fewer than 462 days and (2) 462 or more days, and for all other 
classes, the Exchange may determine bid/ask differential 
requirements for series with expiration of (1) less than nine months 
and (2) nine months or more.
    (B) Continuous Electronic Quoting Obligation: A Market-Maker 
will be required to maintain continuous electronic quotes (as 
defined in Rule 1.1 (ccc)) in 60% of the non-adjusted option series 
of the Market-Maker's appointed classes that have a time to 
expiration of less than nine months. Compliance with this quoting 
obligation applies to all of a Market-Maker's appointed classes 
collectively (for which it must maintain continuous electronic 
quotes pursuant to this paragraph (ii)(B)). The Exchange will 
determine compliance by a Market-Maker with this quoting obligation 
on a monthly basis. However, determining compliance with this 
quoting obligation on a monthly basis does not relieve a Market-
Maker from meeting this obligation on a daily basis, nor does it 
prohibit the Exchange from taking disciplinary action against a 
Market-Maker for failing to meet this obligation each trading day. 
The initial size of a Market-Maker's quote must be for the minimum 
number of contracts determined by the Exchange on a class[ ]-by[ ]-
class basis, which minimum shall be at least one contract. For SPX, 
the Exchange may also determine minimum initial quote size on a 
premium basis and an expiration basis for series with expirations of 
(1) 7 or fewer days, (2) 8 to 91 days, (3) 92 to 188 days, (4) 189 
to 461 days, and (5) 462 or more days. This obligation does not 
apply to intra-day add-on series on the day during which such series 
are added for trading. Market-Maker continuous electronic quoting 
obligations may be satisfied by Market-Makers either individually or 
collectively with Market-Makers of the same TPH organization.
    (C) (No change).
    (iii) The obligations and duties of Market-Makers set forth in 
paragraphs (d)(i) and (d)(ii) apply to a Market-Maker per trading 
session (e.g., if a Market-Maker has an appointment in a class 
during Regular Trading Hours and Extended Trading Hours, the 
Exchange will determine a Market-Maker's compliance with the 
continuous electronic quoting requirement during Regular Trading 
Hours separately from compliance with the electronic quoting 
requirement during Extended Trading Hours). Except as set forth in 
paragraph (d)(ii)(B), the obligations and duties of Market-Makers 
set forth in paragraphs (d)(i) and (d)(ii) apply to a Market-Maker 
on a per class basis, except for SPX if the Exchange lists SPX on a 
group basis pursuant to Rule 8.14 and determines to apply 
obligations and duties of SPX Market-Makers on a group basis, and 
only when the Market-Maker is quoting in a particular class during 
the applicable trading session on a given trading day. For example, 
if during a trading session on a given trading day a Market-Maker is 
quoting in 1 of its 10 appointed classes, the Market-Maker has quote 
width, continuous electronic quoting and, to the extent the Market-
Maker is present in the trading crowd, continuous open outcry 
quoting obligations in that class, and the continuous electronic 
quoting obligation in subparagraph (d)(ii)(B) applies to 60% of the 
non-adjusted option series of that class that have a time to 
expiration of less than nine months while the Market-Maker is 
quoting. If during a trading session on a given trading day a 
Market-Maker is quoting in 3 of its 10 appointed classes, the 
Market-Maker has quote width and, to the extent the Market-Maker is 
present in the trading crowd, continuous open outcry quoting 
obligations in each of the 3 classes, and the continuous electronic 
quoting obligation in subparagraph (d)(ii)(B) applies to 60% of the 
non-adjusted option series of those three classes, collectively, 
that have a time to expiration of less than nine months while the 
Market-Maker is quoting. The obligations and duties are not 
applicable to an appointed class if a Market-Maker is not quoting in 
that appointed class.
    (iv) (No change).
    . . . Interpretations and Policies:
    .01-.13 (No change).
* * * * *

Rule 8.13. Preferred Market-Maker Program

    (a)-(d) (No change).
    . . . Interpretations and Policies:
    .01-.03 (No change).
    .04 If the Exchange determines to list SPX on a group basis 
pursuant to Rule 8.14, obligations of an SPX Market-Maker designated 
as a Preferred Market-Maker, as set forth in Rule 8.13, apply on a 
class basis, unless the Exchange determines to apply obligations on 
a group basis.

Rule 8.14. Hybrid Trading System Platforms & Market-Maker Participants

    (a)-(b) (No change).
    . . . Interpretations and Policies:
    .01 For each Hybrid 3.0 class, the Exchange may determine to 
authorize a group of series of the class for trading on the Hybrid 
Trading System and, if that authorization is granted, shall 
determine the eligible categories of Market-Maker participants for 
that group of series. The Exchange will also have the authority to 
determine whether to change the trading platform on which the group 
of series trades [and to change the eligible categories of Market-
Maker participants for the group]. If the Exchange lists SPX on the 
Hybrid Trading System, the Exchange may determine to list the class 
on a group basis, with both groups trading on the Hybrid Trading 
System. The Exchange will also have the authority to change the 
eligible categories of Market-Makers participants for each group. In 
addition, the following shall apply:
    (a)-(b) (No change).
    (c) The Hybrid Trading System or Hybrid 3.0 Platform, as 
applicable, trading parameters will be established by the Exchange 
on a group basis to the extent the Exchange Rules otherwise provide 
for such parameters to be established on a class basis.

Rule 8.15. Lead Market-Makers

    (a)-(d) (No change).
    . . . Interpretations and Policies:
    .01-.04 (No change).
    .05 If the Exchange determines to list SPX on a group basis 
pursuant to Rule 8.14, obligations of an SPX Market-Maker designated 
as a Lead Market-Maker, as set forth in Rule 8.15, apply on a class 
basis, unless the Exchange determines to apply obligations on a 
group basis.
* * * * *

Rule 8.85. DPM Obligations

    (a)-(e) (No change).
    . . . Interpretations and Policies:
    .01-.02 (No change).
    .03 If the Exchange determines to list SPX on a group basis 
pursuant to Rule 8.14, obligations of a Designated Primary Market-
Maker with an SPX appointment, as set forth in Rule 8.85, apply on a 
class basis, except if the Exchange determines to apply obligations 
on a group basis.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these

[[Page 18608]]

statements may be examined at the places specified in Item IV below. 
The Exchange has prepared summaries, set forth in sections A, B, and C 
below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to amend its rules related to listing the SPX 
class on a group basis and amend other rules in connection with the 
Exchange's planned migration of SPX options to the Hybrid Trading 
System from the Hybrid 3.0 System. Rule 8.14, Interpretation and Policy 
.01 currently permits the Exchange to authorize a group of series of a 
Hybrid 3.0 \5\ class for trading on the Hybrid Trading System. If the 
Exchange authorizes this, it determines the eligible categories of 
Market-Maker participants for the group (Designated Primary Market-
Makers (``DPMs''), Lead Market-Makers (``LMMs''), or Market-Makers). 
The Exchange assigns a DPM or LMM to the group (or no DPM or LMM if the 
conditions in Rule 8.14(b) are satisfied with respect to the group). 
Market-Maker appointments apply on a class basis, except DPM and LMM 
appointments apply only to the group of series to which the respective 
DPM or LMM is assigned. The Exchange establishes Hybrid Trading System 
trading parameters (e.g. minimum trading increment, allocation 
algorithm) on a group basis to the extent the Rules otherwise provide 
for such parameters to be established on a class basis.
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    \5\ ``Hybrid Trading System'' refers to (a) the Exchange's 
trading platform that allows Market-Makers to submit electronic 
quotes in their appointed classes and (b) any connectivity to the 
foregoing trading platform that is administered by or on behalf of 
the Exchange, such as a communications hub. ``Hybrid 3.0 Platform'' 
is an electronic trading platform on the Hybrid Trading System that 
allows one or more quoters to submit electronic quotes which 
represent the aggregate Market-Maker quoting interest in a series 
for the trading crowd. Classes authorized by the Exchange for 
trading on the Hybrid Trading System are referred to as Hybrid 
classes. Classes authorized by the Exchange for trading on the 
Hybrid 3.0 Platform are referred to as Hybrid 3.0 classes. See Rule 
1.1(aaa). Currently, SPX is the only Hybrid 3.0 class and the only 
class the Exchange lists on a group basis.
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    The proposed rule change amends Rule 8.14, Interpretation and 
Policy .01 to permit the Exchange to list the SPX class on a group 
basis, even if SPX trades on the Hybrid Trading System.\6\ The 
remaining provisions of Interpretation and Policy .01 would apply. 
Thus, if the Exchange lists SPX as a Hybrid class in two groups, both 
groups may trade on the Hybrid Trading System (as the Exchange plans to 
do). In addition, the Exchange may determine the eligible categories of 
Market-Maker participants for each group. Similarly, the Exchange could 
assign a DPM or LMM to each group, which appointments would apply to 
the group of series to which the respective DPM or LMM is assigned 
(Market-Maker appointments would continue to apply to the entire SPX 
class, as further discussed below).\7\
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    \6\ The proposed rule change makes a conforming change in 
Interpretation and Policy .01(c).
    \7\ The Exchange does not currently (and does not intend to 
following conversion of SPX options to Hybrid) appoint Preferred 
Market-Makers (``PMMs'') or DPMs to SPX or SPXW options pursuant to 
Rules 8.13 or 8.95, respectively. The Exchange currently appoints 
LMMs to SPX options; however, it does not intend to do so following 
conversion of SPX options to Hybrid.
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    As it does today, when determining whether to list the SPX class on 
a group basis, the Exchange intends to generally select series with 
common expirations or classifications (e.g., end-of-week series or end-
of-month series, short-term option series, long-term option series, or 
series that expire on a particular expiration date) and trade them 
under individual listing symbols. For example, the Exchange currently 
lists the SPX class in two groups: (1) One group consists of series 
with standard third-Friday expirations that are a.m.-settled, which 
group trades on the Hybrid 3.0 Platform (``SPX options''); and (2) the 
second group consists of series with all other expirations, including 
weekly, monthly, and p.m.-settled (``SPXW options''), which group 
trades on the Hybrid Trading System. In the second quarter of 2018, the 
Exchange plans to begin listing SPX options on the Hybrid Trading 
System (and no longer on the Hybrid 3.0 platform). SPXW options would 
continue to trade on the Hybrid Trading System. Pursuant to the 
proposed rule change, the Exchange may determine to continue to list 
SPX options and SPXW options as groups on the Hybrid Trading System.
    The Exchange would establish trading parameters (e.g., applicable 
matching algorithm under Rule 6.45, opening rotation parameters under 
Rule 6.2, automatic execution parameters under Rule 6.13, simple 
auction liaison parameters under Rule 6.13A, hybrid agency liaison 
parameters under Rule 6.14A, complex order parameters under Rule 6.53C, 
and automated improvement mechanism parameters under Rule 6.74A) on a 
group basis, as it does today for SPX options and SPXW options.\8\ For 
example, currently, the Exchange applies customer priority allocation 
to SPX options while the Exchange applies price-time allocation to SPXW 
options. Pursuant to the proposed rule change, the Exchange could 
continue to apply a different allocation algorithm to each group even 
if both groups are trading on the same platform.
---------------------------------------------------------------------------

    \8\ See Rule 8.14(c).
---------------------------------------------------------------------------

    The Exchange believes for SPX, groups of series may exhibit 
different trading characteristics, including appeal to different 
categories of market participants. For example, SPXW options are 
commonly traded by retail customers while SPX options are commonly 
traded by institutional investors. The Exchange generally establishes 
market models for classes based on these characteristics that most fit 
the product, which the Exchange believes benefits investors. This is 
true for SPX and SPXW options, which is why the Exchange believes it is 
appropriate to continue to list the SPX class in groups once all SPX 
series are trading on Hybrid.
    The Exchange proposes to amend Rule 6.53C, Interpretation and 
Policy .02 to state if the Exchange determines to list the SPX class on 
a group basis pursuant to Rule 8.14, if a marketable complex order 
consists of legs in different groups of series in the class, it will 
not automatically execute against individual orders residing in the 
EBook pursuant to Rule 6.53C(c)(ii)(1) or (d)(v)(1). A marketable 
complex order consisting of legs in the same group of series in the 
class executes against individual orders in the EBook in accordance 
with Rule 6.53C(c)(ii) and (d)(v). This is consistent with current 
functionality today applicable to SPX and SPXW pursuant to Rule 6.53C, 
Interpretation and Policy .10, which only applies to Hybrid 3.0 
classes. The proposed rule change extends this functionality to SPX as 
a Hybrid class.
    As discussed above, if the Exchange lists SPX as a Hybrid class on 
a group basis, it may apply different trading parameters (including 
different allocation algorithms) to each group. Due to system 
limitations that based on the Exchange's experience are prohibitively 
expensive to modify, complex orders consisting of different groups of 
series will not automatically execute against individual orders 
residing in the Ebook, even if they trade on the same platform. 
Pursuant to Rule 6.53C, complex orders may only consist of legs from 
the same class. While SPX and SPXW series are part of the same class, 
and thus permissible for electronic handling under the Rules, the 
System treats SPX and SPXW series as different classes and is unable to

[[Page 18609]]

process complex orders with components in different classes. Many 
classes trade on their own trade server. Despite being the same class, 
SPX options and SPXW options trade on separate trade servers due to the 
number of series in each group and due to the fact that they trade as 
different classes (as discussed above). Currently trading is not 
possible ``across'' trade servers. If the System receives a complex 
order with one SPX leg and one SPXW leg, it would need to trade the SPX 
leg against the appropriate leg in the first trade server. After that 
leg execution, it would then need to trade the SPXW leg against the 
appropriate leg in the second trade server. Given the time these 
executions would take, it would not result in the near simultaneous 
execution of legs that is sought by the entry of complex orders. 
Additionally, after the first leg execution, because the complex order 
has not fully executed, the System would not be able to execute any 
other orders within the series of the first leg, which may prevent 
execution opportunities of those other orders.
    Currently, this only applies to SPX/SPXW orders, and the proposed 
rule change would treat these orders as they are today. SPX/SPXW orders 
may execute against other SPX/SPXW orders in the COB upon entry or 
against orders and COA responses following a COA in accordance with the 
allocation and priority rules set forth in Rule 6.53C(c)(ii)(2) and 
(d)(v)(2) through (4), respectively.\9\ The proposed rule change states 
marketable SPX/SPXW orders will be eligible to automatically execute 
against other SPX/SPXW orders resting in the COB provided the execution 
is at a net price that has priority over the individual orders and 
quotes residing in the EBook (which is consistent with the manner in 
which the Exchange currently handles [sic] these complex orders are 
handled, as provided in Rule 6.53C, Interpretation and Policy .10(b)). 
An SPX/SPXW order that is marketable against individual orders resting 
in the Ebook but not marketable against any complex orders resting in 
the COB or COA responses will enter the COB or instead be routed to a 
PAR workstation during Regular Trading Hours and rejected back to the 
Trading Permit Holder during Extended Trading Hours if not eligible for 
COB entry due to the terms of the order (for example, if the order is 
for an origin code the Exchange does not permit to rest in the COB), 
which is how those orders are treated today.\10\
---------------------------------------------------------------------------

    \9\ Rule 6.53C(c)(ii)(2) states the allocation of a complex 
order within the COB will be pursuant to the rules of trading 
priority otherwise applicable to incoming electronic orders in the 
individual component legs or another electronic matching algorithm 
from Rule 6.45, as determined by the Exchange on a class-by-class 
basis. Therefore, pursuant to that provision and the proposed rule 
change, the Exchange will determine for SPX/SPXW complex orders 
which electronic matching algorithm will apply to those orders when 
executing against other orders in the COB. Rules 6.53(d)(v)(2) 
through (4) specify the matching algorithm applicable to complex 
orders that execute following a COA, and those provisions will apply 
to SPX/SPXW complex orders pursuant to the proposed rule change.
    \10\ See Rules 6.12(a)(1) (which states orders initially routed 
for electronic processing that are not eligible for automatic 
execution or book entry will route to PAR, an order management 
terminal, or back to the Trading Permit Holder); 6.53C(d)(vi) (which 
states a COA-eligible order that cannot be filled in whole or in a 
permissible ratio will route to the COB or back to PAR, as 
applicable); and 6.1A(b) (which states if in accordance with the 
Rules, an order would route to PAR, the order entry firm's booth, or 
otherwise for manual handling, the System will return the order to 
the Trading Permit Holder during Extended Trading Hours).
---------------------------------------------------------------------------

    In connection with the planned migration of SPX options to Hybrid, 
the Exchange proposes to amend Rule 8.3 regarding appointment costs. 
The proposed rule change moves the SPX class from the Hybrid 3.0 
appointment cost table to the Hybrid appointment cost table. The 
Exchange would maintain the 1.0 appointment cost for SPX (which 
includes SPXW). The proposed rule change notes if the Exchange 
determines to list SPX as a Hybrid class on a group basis pursuant to 
Rule 8.14, the appointment cost for the class confers the right to 
trade in all SPX groups. This is consistent with how appointment costs 
currently work, as currently, the SPX appointment cost of 1.0 applies 
to any group of series of SPX authorized to trade on the Hybrid Trading 
System.\11\ The proposed rule change merely applies this same concept 
to SPX if listed on the Hybrid Trading System on a group basis pursuant 
to the proposed rule change.
---------------------------------------------------------------------------

    \11\ See Rule 8.3(c)(iii).
---------------------------------------------------------------------------

    The proposed rule change amends Rule 8.7(d)(iii) to provide if the 
Exchange lists SPX on a group basis pursuant to Rule 8.14, it may 
determine to apply obligations and duties of Market-Makers with an 
appointment to SPX on a group basis rather than a class basis. 
Currently, Market-Maker obligations for Hybrid classes apply on a class 
basis (e.g., the Exchange determines a Market-Maker's compliance with 
the continuous electronic quoting obligations set forth in Rule 8.7(d) 
for a class based all series in that class).\12\ If the Exchange 
determined to list SPX as a Hybrid class on a group basis, the Exchange 
may determine it lists a significantly larger number of SPX series in 
which it may be burdensome for Market-Makers to quote. For example, 
currently, the Exchange lists over 3,000 SPX series and almost 8,000 
SPXW series (compared to, for example, over 400 VIX series and almost 
200 VIX weekly series). With SPX options listed on Hybrid 3.0, Market-
Makers may not submit quotes in those series. Therefore, Market-Makers 
with SPX appointments that are subject to electronic quoting 
obligations under Rule 8.7(d) must satisfy those obligations based on 
the number of SPXW series. However, when the SPX class moves to Hybrid, 
Market-Makers will be able to submit electronic quotes in SPX options 
as well as SPXW options. Applying obligations on a class basis would 
significantly increase the number of series in which Market-Makers 
would have to submit electronic quotes due to the large number of 
series. Permitting the Exchange to determine compliance with these 
obligations on a group basis would permit Market-Maker obligations to 
apply to SPX in a similar manner as they do today based on a more 
reasonable number of series.
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    \12\ The proposed rule change makes corresponding changes to 
proposed Rules 8.13, Interpretation and Policy .04; 8.15, 
Interpretation and Policy .05; and 8.85, Interpretation and Policy 
.03 regarding obligations of Preferred Market-Makers, Lead Market-
Makers, and Designated Primary Market-Makers, respectively.
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    The Exchange proposes to amend Rules 6.2, Interpretation and Policy 
.02(b) \13\ and 8.7(d)(i)(A) and (ii)(A) to permit the Exchange to 
establish bid-ask differentials for Market-Makers (for opening and 
intraday quotes, respectively) on a premium basis and for SPX, for 
series with expirations of (1) fewer than 462 days and (2) 462 or more 
days, and for all other classes, for series with expiration of (1) less 
than nine months and (2) nine months or more, in addition to a class-
by-class basis (as currently permitted by the Rules). Similarly, the 
Exchange proposes to amend Rules 6.2, Interpretation and Policy .02(a) 
and 8.7(d)(i)(B) and (ii)(B) to permit the Exchange to establish 
minimum quote size requirements (for opening and intraday quotes, 
respectively) for SPX on a premium basis and expiration basis for 
series with expirations of (1) 7 or fewer days, (2) 8 to 91 days, (3) 
92 to 188 days, (4) 189 to 461 days, and (5) 462 or more days, in 
addition to a class-by-class basis (as currently permitted by the 
Rules).\14\ While different classes may

[[Page 18610]]

exhibit different trading characteristics, which make different minimum 
quote sizes and differentials on a class-by-class basis appropriate as 
permitted by the current Rule, the same may be true of series with 
different premiums and expirations within a class to ensure the quote 
size is not burdensome on Market-Makers. For example, series with 
higher premiums or farther expirations generally have wider spreads and 
lower trading volumes, and positions in those series carry additional 
risk. These characteristics make wider bid-ask differential and smaller 
minimum quote size (with respect to SPX) requirements more appropriate 
and less burdensome on Market-Makers.\15\ The proposed expiration 
groupings for minimum quote size and bid-ask differential requirements 
in SPX are based on the Exchange's review of various information, 
including SPX transaction data, sizes of LMM quotes in SPX, and 
feedback received from Market-Makers and Exchange advisory groups.
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    \13\ As set forth in Rule 6.2, Interpretation and Policy .02(b), 
the Exchange may set different minimum size and differential 
requirements for the opening than those applicable intraday.
    \14\ For classes other than SPX, the Exchange will continue to 
be permitted to establish minimum size requirements on a class-by-
class basis only (and not by premium or expiration). The current 
minimum quote size is one contract in all classes. See Regulatory 
Circular RG16-073 (April 7, 2016).
    \15\ The Exchange currently may set certain parameters on a 
class and premium basis. See, e.g., Rules 6.2(d)(ii)(E) (opening 
quote condition), 6.12(a)(3) (acceptable tick distance for limit 
order price parameter). Currently, the Exchange sets bid-ask 
differentials on a premium basis and for expirations of less than 
nine months and nine months or more; the proposed rule change 
codifies this practice for classes other than SPX in the Rules. See 
Regulatory Circular RG16-073 (April 7, 2016) (wider requirements in 
series with expirations of nine months or more and lower premiums).
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    Additionally, the proposed rule change amends Rule 8.7(d)(i)(A). 
That provision currently states Market-Makers that do not transact more 
than 20% of their contract volume electronically in an appointed Hybrid 
class during any calendar quarter will not be required to comply with 
bid/ask differential requirements with respect to electronic quoting 
for the first year a class begins trading on the Hybrid System. After 
the first year of Hybrid trading, a Market-Maker would need to then 
comply with bid/ask differential requirements when quoting 
electronically. The Exchange proposes to delete that requirement and 
instead require Market-Makers to comply with bid/ask differential 
requirements when quoting electronically as soon as a class begins 
trading on the Hybrid System. The Exchange no longer believes the one-
year delay in imposing these requirements is necessary. Requiring all 
electronic quotes to comply with bid/ask differential requirements will 
increase liquidity and tighter markets in these classes as soon as they 
begin trading. Market-Makers ultimately have to comply with these 
requirements; the proposed rule change merely change [sic] when they 
must start to comply with them. For example, under the current rule, 
Market-Makers not subject to continuous electronic quote obligations 
would not be required to comply with bid/ask differential requirements 
with respect to any electronic quotes they submit until one year after 
SPX begins trading on the Hybrid System. Under the proposed rule 
change, these Market-Makers will need to comply with bid/ask 
differential requirements when submitted electronic quotes as soon as 
SPX begins trading on the Hybrid System.
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.\16\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule change to 
permit the Exchange to list the SPX class on Hybrid on a group basis 
will benefit investors and promote just and equitable principles of 
trade, as it provides the Exchange with flexibility to establish a more 
appropriate market model for a group of SPX series that may exhibit 
different trading characteristics than other series in the class, even 
when both groups trade on the same platform. Currently, the Exchange 
may list a class on a group basis if the groups of a class trade on 
different trading platforms, and as noted above, the Exchange currently 
only does so for SPX, the only Hybrid 3.0 class. The proposed rule 
change merely permits the Exchange to similarly list the SPX class on a 
group basis on the same trading platform when SPX options migrate to 
the Hybrid Trading System. This will permit the Exchange to migrate SPX 
options to the Hybrid Trading System without interruption to how SPX 
and SPXW options currently trade.
    Similarly, the proposed rule change to provide that SPX/SPXW 
complex orders will not execute against individual orders in the Ebook 
will permit these orders to be handled in the same manner on the Hybrid 
Trading System as they are today on the Hybrid 3.0 System. These orders 
will continue to be eligible for electronic processing, including 
electronic execution, in the same manner as complex orders consisting 
of SPX series only or SPXW series only, except they will not 
automatically against [sic] individual orders in the Ebook for the 
legs, which will result in those SPX/SPXW orders being treated in the 
same manner as they are today. This will provide these orders with the 
same electronic execution opportunities they have today, which will 
continue to not be eligible for automatic execution against the 
individual leg markets due to system limitations described above and 
would instead rest in the COB (if eligible) or route to PAR, an order 
management terminal, or the Trading Permit Holder during Regular 
Trading Hours, or be rejected back to the Trading Permit Holder during 
Extended Trading Hours.
    The Exchange believes the proposed rule change to permit the 
Exchange to establish minimum quote size for SPX, and bid-ask 
differential requirements for all classes, on a premium basis and for 
specific expirations, in addition to class basis, will ensure Market-
Maker obligations maintain an appropriate balance of obligations and 
benefits. As discussed above, the Exchange currently establishes bid-
ask differential requirements on a class and premium basis and for 
series with expirations of less than nine months and nine months or 
more. The proposed rule change merely codifies this practice in the 
Rules for classes other than SPX, so this will result in no change to 
Market-Makers. The Exchange believes it is appropriate to establish 
minimum quote sizes in SPX on an expiration and premium basis to 
reflect the different trading characteristics of those series within 
the SPX class. For example, series with higher premiums or farther 
expirations generally have wider spreads and lower trading volumes, and 
positions in those series carry additional risk. These characteristics 
make wider bid-ask differential and smaller

[[Page 18611]]

minimum quote size (with respect to SPX) requirements more appropriate 
and less burdensome on Market-Makers. The proposed expiration groupings 
for minimum quote size and bid-ask differential requirements in SPX are 
based on the Exchange's review of various information, including SPX 
transaction data, sizes of LMM quotes in SPX, and feedback received 
from Market-Makers and Exchange advisory groups. The Exchange believes 
this proposed rule change will promote just and equitable principles of 
trade by ensuring bid/ask differential requirements and minimum size 
requirements for SPX are effective and not overly burdensome on Market-
Makers, which will ensure continued liquidity on the Exchange, 
including in SPX options once they convert to Hybrid, which ultimately 
benefits investors.
    The proposed rule change to move the appointment cost for the SPX 
class from the Hybrid 3.0 table to the Hybrid table in Rule 8.3(c)(i) 
reflects the Exchange's planned migration of SPX options from the 
Hybrid 3.0 platform to the Hybrid Trading System. The Exchange proposes 
no change to the appointment cost, and thus Market-Makers with SPX 
appointments will not need to purchase any additional trading permits 
to quote SPX options once the migrate trading platforms.
    The Exchange believes the proposed rule change to permit the 
Exchange to apply Market-Maker (including PMMs and DPMs, as applicable) 
\19\ obligations on a group basis rather than class basis for SPX will 
promote just and equitable principles of trade, as it will ensure a 
continued balance of an SPX Market-Maker's obligations with benefits 
given the significantly large number of SPX series. Requiring a Market-
Maker to satisfy quoting obligations in multiple groups of SPX that, in 
the aggregate, represent a significantly large number of series, may be 
burdensome for Market-Makers to quote, which may disincentive Market-
Makers from selecting appointments in such a class and thus reduce 
liquidity. The proposed rule change incentivizes Market-Makers to 
retain SPX appointments. Additionally, permitting the Exchange to 
determine compliance with these obligations on a group basis would 
permit Market-Maker obligations to apply to SPX options when it 
migrates to the Hybrid Trading System in a similar manner as they do 
today. For example, SPX Market-Makers that currently quote in SPXW 
options may elect to continue to only quote in those options without 
having to quote in SPX options.
---------------------------------------------------------------------------

    \19\ The Exchange notes there are not currently any PMMs or DPMs 
for SPX or SPXW, and there will be none at the time of conversion of 
SPX to Hybrid.
---------------------------------------------------------------------------

    The proposed rule change to require Market-Makers to comply with 
bid/ask differential requirements with respect to electronic quotes 
upon a class beginning to trade on the Hybrid System will increase 
liquidity and tighter markets in these classes as soon as they begin 
trading. The proposed rule change maintains a balance of obligations 
and benefits, as Market-Makers ultimately have to comply with these 
requirements; the proposed rule change merely change when they must 
start to comply with them.

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 proposed rule change has 
no impact on intramarket competition, as it will apply to all market 
participants that trade in SPX when listed on a group basis on the 
Hybrid Trading System. When SPX options move to trade on the Hybrid 
Trading System, the SPX class will continue to trade in two groups as 
it does today (SPX options and SPXW options), and SPX/SPXW complex 
orders will continue to be handled in the same manner as they are 
today. The proposed rule change has no impact on intermarket 
competition, as the proposed rule change relates to a product 
exclusively listed on the Exchange, and permits that product to 
continue trading in a similar manner as it does today.
    The proposed rule change to permit the Exchange to determine a 
Market-Maker's compliance with obligations on a group basis rather than 
a class basis, as well as to establish minimum quote sizes on an 
expiration and premium basis, in addition to class basis, for the SPX 
class ensures a continued balance of a Market-Maker's obligations with 
benefits. The proposed change will apply in the same manner to Market-
Makers that select SPX appointments. As set forth in Rule 8.3(c), 
Market-Makers select which classes in which they have appointments, and 
thus become subject to these obligations when they choose such 
appointments in their discretion. Permitting the Exchange to determine 
compliance with these obligations on a group basis would permit Market-
Maker obligations to apply to SPX options when they migrates [sic] to 
the Hybrid Trading System, and apply to SPXW options in a similar 
manner as they do today. Additionally, the proposed rule change ensures 
the Exchange may apply these obligations to reasonable number of series 
and not be overly burdensome on Market-Makers.
    The proposed rule change to permit the Exchange to establish 
minimum quote size (for SPX) and bid-ask differential requirements on 
an expiration and premium basis will ensure the Exchange can 
effectively set these requirements without being overly burdensome on 
Market-Makers given the differing trade characteristics applicable to 
series with different expirations and premiums. These proposed changes 
overall will continue to incentive Market-Makers to have appointments 
in SPX, which increases liquidity and ultimately benefits investors. As 
noted above, the rules permit the Exchange to establish other trading 
parameters on a premium and class basis, and the proposed rule change 
codifies a current Exchange practice to set bid-ask differential 
requirements on a class and premium basis and for expirations of less 
than nine months and nine months or more for all classes other than 
SPX. The proposed expiration groupings for minimum quote size and bid-
ask differential requirements in SPX are based on the Exchange's review 
of various information, including SPX transaction data, sizes of LMM 
quotes in SPX, and feedback received from Market-Makers and Exchange 
advisory groups. The proposed rule change has no impact on intermarket 
competition, as the proposed rule change relates to obligations 
applicable to Cboe Options Market-Makers.
    The proposed rule change regarding SPX appointment cost will have 
no impact on competition, as the appointment cost will stay the same, 
and thus Market-Makers will not need to obtain any additional trading 
permits to quote in SPX options following their migration to the Hybrid 
Trading System.
    The proposed rule change related to bid/ask differentials will not 
impose any burden on intramarket competition, because it will apply in 
the same manner to all Market-Makers subject to that requirement. It 
will not impose any burden on intermarket competition, because it 
relates to quoting requirements imposed by Cboe Options. Additionally, 
requiring Market-Makers to comply with bid/ask differential 
requirements with respect to electronic quotes as soon as a class 
begins trading will increase liquidity and tighter markets in these 
classes when the class starts trading. Market-Makers ultimately have to 
comply with these

[[Page 18612]]

requirements; the proposed rule change merely change [sic] when they 
must start to comply with them.

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \20\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of the filing. However, 
Rule 19b-4(f)(6)(iii) \22\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. In its filing, Cboe Options 
requested that the Commission waive the 30-day operative delay. The 
Exchange represented that it would like to migrate SPX options from the 
Hybrid 3.0 System to the Hybrid Trading System on April 30, 2018. The 
Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because the proposal is designed to modify the Hybrid Trading System 
rules to accommodate SPX options in a manner substantively similar to 
how they currently are listed and traded on Hybrid 3.0. In so doing, 
the proposal permits the Exchange to migrate the one product currently 
trading on Hybrid 3.0 onto the system it uses for all other options, 
and to do so in a way that minimizes disruption for traders that 
currently trade SPX on Hybrid 3.0 without raising novel issues. 
Accordingly, the Commission waives the 30-day operative delay and 
designates the proposed rule change operative upon filing.\23\
---------------------------------------------------------------------------

    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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-CBOE-2018-029 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-2018-029. 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-CBOE-2018-029, and should be submitted 
on or before May 18, 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) and (59).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08848 Filed 4-26-18; 8:45 am]
 BILLING CODE 8011-01-P


