
[Federal Register Volume 84, Number 26 (Thursday, February 7, 2019)]
[Notices]
[Pages 2598-2605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01392]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85038; File No. SR-C2-2018-025]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Discontinue Bulk Order Functionality and Implement Bulk Message 
Functionality

February 1, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 19, 2018, Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 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

    Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') proposes to 
discontinue bulk order functionality and implement bulk message 
functionality, and make other nonsubstantive changes. The text of the 
proposed rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

[[Page 2599]]

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

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

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

1. Purpose
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc. 
(``Cboe Global''), which is also the parent company of Cboe Exchange, 
Inc. (``Cboe Options''), acquired Cboe EDGX Exchange, Inc. (``EDGX''), 
Cboe EDGA Exchange, Inc. (``EDGA''), Cboe BZX Exchange, Inc. (``BZX or 
BZX Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with 
C2, Cboe Options, EDGX, EDGA, and BZX, the ``Cboe Affiliated 
Exchanges''). The Cboe Affiliated Exchanges are working to align 
certain system functionality, retaining only intended differences 
between the Cboe Affiliated Exchanges, in the context of a technology 
migration. Cboe Options intends to migrate its technology to the same 
trading platform used by the Exchange, C2, and EDGX Options in the 
fourth quarter of 2019. The proposal set forth below is intended to add 
certain functionality to the Exchange's System that is more similar to 
functionality offered by Cboe Options in order to ultimately provide a 
consistent technology offering for market participants who interact 
with the Cboe Affiliated Exchanges. Although the Exchange intentionally 
offers certain features that differ from those offered by its 
affiliates and will continue to do so, the Exchange believes that 
offering similar functionality to the extent practicable will reduce 
potential confusion for Users.
    Cboe Options currently offers quoting functionality to Market-
Makers, which permits Market-Makers to update their electronic quotes 
in block quantities.\5\ Quotes on Cboe Options do not route to other 
exchanges,\6\ and Market-Makers generally enter new quotes at the 
beginning of the trading day based on-then current market 
conditions.\7\ The Exchange currently offers bulk order functionality, 
which is intended to provide Users, and Market-Makers in particular, 
with a way to submit orders that simulate quoting functionality.\8\ 
However, while bulk order functionality simulates quoting 
functionality, bulk order functionality provides Users with a less 
efficient way to update multiple bids and offers. To update multiple 
bids and offers, a User must submit multiple messages at the same time, 
compared to quoting functionality, which generally permits a market 
participant to update multiple bids and offers in a single quote 
message. Specifically, a bulk order port is a dedicated logical port 
that provides Users with the ability to submit single and bulk order 
messages to enter, modify, or cancel orders designated as Post Only 
Orders \9\ with a Time-in-Force of Day \10\ or Good-til-Date (``GTD'') 
\11\ with an expiration time on that trading day.\12\ Like quotes, bulk 
order messages do not route to other exchanges because they include a 
Post Only instruction.\13\ Use of the Day or GTD Time-in-Force is 
consistent with Market-Maker's entry of new quotes at the beginning of 
each trading day.\14\ Unlike current Cboe Options quoting 
functionality, bulk order ports on the Exchange are available to all 
Users, not just Market-Makers. The Exchange makes bulk order ports 
available to all Users to encourage them to provide liquidity to the 
Exchange's market.
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    \5\ See Cboe Options Rule 1.1(ppp).
    \6\ See Cboe Options Rule 6.14B (which describes how the 
Exchange routes orders (specifically intermarket sweep orders) but 
not quotes route to other exchanges); see also Nyse Arca, LLC 
(``Arca'') Rule 6.37-O(a)(3)(D) (which states quotes do not route).
    \7\ The Exchange understands this is common practice by Market-
Makers throughout the industry, and is consistent with Cboe Options 
functionality, which cancels all unexecuted resting Market-Maker 
quotes at the close of each trading day. Additionally, it is 
consistent with Market-Makers' obligation to update market 
quotations in response to changed market conditions. See Rule 
8.5(a)(4); see also Cboe Options Rule 8.7(b)(iii).
    \8\ See Securities Exchange Act Release No. 83214 (May 11, 
2018), 83 FR 22796 (May 16, 2018) (SR-C2-2018-005). Prior to the 
migration of the C2 trading platform to the same technology platform 
as EDGX and BZX, C2 quoting functionality (substantially similar to 
the quoting functionality being proposed in this rule filing) was 
limited to Market-Makers.
    \9\ See current Rule 1.1 (definition of Order Instructions) and 
proposed Rule 6.10(c) for the definition of ``Post Only.'' The 
proposed rule change moves the definitions of order types, Order 
Instructions, and Times-in-Force to Rule 6.10(b), (c), and (d), 
respectively.
    \10\ See current Rule 1.1 and proposed Rule 6.10(d) for the 
definition of the Time-in-Force of ``Day.''
    \11\ See current Rule 1.1 and proposed Rule 6.10(d) for the 
definition of the Time-in-Force of ``GTD.''
    \12\ See current Rule 1.1 for the current definition of ``bulk 
order ports.'' Pursuant to current Rule 1.1, Users may submit 
auction responses through bulk order ports, and will continue to be 
able to submit auction response through bulk ports. The proposed 
rule change moves the definition of port to Rule 6.8(c).
    \13\ See current Rule 1.1 (definition of Order Instructions) and 
proposed Rule 6.10(c), which provides that an order with a Post Only 
instruction may not route away to another exchange.
    \14\ See supra note 7.
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    The Exchange proposes to replace bulk order message functionality 
with bulk message functionality substantially similar to the quoting 
functionality available on Cboe Options. The proposed bulk message 
functionality is similar to but more efficient than currently available 
bulk order functionality.\15\ A ``bulk port'' is a dedicated logical 
port that, as proposed, would provide Users with the ability to submit:
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    \15\ See supra note 8 (the Exchange adopted bulk order 
functionality to simulate quoting functionality).
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    (1) bulk messages,\16\ subject to the following:
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    \16\ Proposed Rule 1.1 defines a bulk message as a bid or offer 
included in a single electronic message a User submits to the 
Exchange in which the User may enter, modify, or cancel up to an 
Exchange-specified number of bids and offers. Pursuant to Rule 1.2, 
the Exchange will announce this number via Exchange notice or 
publicly available technical specifications. This is similar to Cboe 
Options Rule 1.1(ppp), which provides that electronic quotes may be 
updated in block quantities. The limit on bids and offers per 
message is a reasonable measure for the Exchange to use to manage 
message traffic and activity to protect the integrity of the System. 
Proposed Rule 1.1 also states that a User may submit a bulk message 
through a bulk port as set forth in proposed Rule 6.8(c)(3), and 
that the System handles a bulk messages in the same manner as it 
handles an order or quote, unless the Rules specify otherwise. In 
other words, a bulk message will be treated as an order (or quote if 
submitted by a Market-Maker) pursuant to the Rules, including with 
respect to priority and allocation. The proposed rule change 
identifies the rule provisions pursuant to which bulk messages will 
be handled in a different manner.
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    (a) a bulk message has a Time-in-Force of Day;
    (b) a Market-Maker with an appointment in a class may designate a 
bulk message for that class as Post Only or Book Only (which Post Only 
or Book Only designation, as applicable, applies to all bulk message 
bids and offers within a single message), \17\ and other Users must 
designate a bulk message for that class as Post Only; and
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    \17\ In other words, a Market-Maker cannot designate one bulk 
message bid within a single message as Post Only and designate 
another bulk message bid within the same message as Book Only.
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    (c) a User may establish a default Match Trade Prevention (``MTP'') 
Modifier of MTP Cancel Newest (``MCN''), MTP Cancel Oldest (``MCO''), 
or MTP Cancel Both (``MCB''), and a default value of Attributable or 
Non-Attributable, for a bulk port, each of which applies to all bulk 
messages submitted to the Exchange through that bulk port;

[[Page 2600]]

    (2) single orders in the same manner as Users may submit orders to 
the Exchange through any other type of port,\18\ including designated 
with any Order Instruction and any Time-in-Force in Rule 6.10(c) and 
(d),\19\ respectively, except a Market-Maker with an appointment in a 
class may designate an order for that class submitted through a bulk 
port as Post Only or Book Only, and other Users must designate a bulk 
message for that class submitted through a bulk port as Post Only; and
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    \18\ The proposed rule change also specifies that, subject to 
the restrictions in the proposed rule, Users may submit single 
orders through bulk ports in the same manner as they may submit 
single orders through any other type port, which is consistent with 
how Users may submit single orders to the Exchange through bulk 
order ports today.
    \19\ The proposed rule change moves the definitions of Order 
Instructions and Times-in-Force from Rule 1.1 to Rule 6.10.
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    (3) auction responses (using auction response messages) in the same 
manner as Users may submit auction responses to the Exchange through 
any other type of port.\20\
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    \20\ See proposed Rule 6.8(c)(3)(C). The proposed rule change 
has no impact on the ability of Users to submit auction responses 
through bulk ports, and clarifies that Users may submit auction 
responses through bulk ports in the same manner as they may submit 
auction responses through any other type of port.
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    Proposed Rule 6.8(c)(3)(A)(i) states that bulk messages have a 
Time-in-Force of Day. As discussed above, this is consistent with 
current Cboe Options quoting functionality, which cancels all resting 
quotes at the close of the trading day. This is also consistent with a 
Market-Maker's obligation to update its quotations in response to 
changed market conditions in its appointed classes.\21\ Unlike current 
bulk orders, the GTD Time-in-Force with an expiration time on that 
trading day will not be available for bulk messages. Users will 
continue to have the ability to manually cancel bulk messages at any 
time during the trading day, they will just not be able to have bulk 
messages automatically cancel at a specific time on that trading day. 
Additionally, Users may apply the GTD Order Instruction to orders 
submitted through a bulk port (as further discussed below) or other 
type of port.
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    \21\ See Rule 8.5(a)(3).
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    Unlike Cboe Options quoting functionality, which is only available 
to Cboe Options market-makers, the proposed bulk messages will be 
available to all Users (as bulk orders are today). While all Users will 
be able to use bulk messages (and may currently use bulk orders), the 
primary purpose of bulk orders and the proposed bulk messages has 
always been to encourage market-maker quoting on exchanges.\22\ The 
proposed rule change provides that a Market-Maker with an appointment 
in a class may designate a bulk message for that class as ``Post Only'' 
or ``Book Only.'' This will provide Exchange Market-Makers with 
functionality substantially similar to Cboe Options quoting 
functionality currently available to Cboe Options market-makers, which 
permits Market-Makers' incoming quotes to execute against resting 
orders and quotes, except against the resting quote of another Market-
Maker (see discussion below).\23\ The Exchange believes permitting 
Market-Makers to use bulk messages to remove liquidity from the Book 
(if they so elect) will put Exchange Market-Makers on an even playing 
field as market-makers on other exchanges that offer quoting 
functionality. Additionally, Market-Makers are subject to various 
obligations, including obligations to provide two-sided quotes, to 
provide continuous quotes, and to trade at least 75% of its contracts 
each quarter in appointed classes. The Exchange believes providing 
Market-Makers with flexibility to use the Post Only or Book Only 
instruction with respect to bulk messages will provide Market-Makers 
with additional tools to meet their obligations in a manner they deem 
appropriate. The Exchange further believes this may encourage liquidity 
providers to register as Market-Makers. The proposed rule change 
provides that other Users (i.e., non-Market-Makers or Market-Makers 
without an appointment in a class) must designate a quote for that 
class as ``Post Only.'' This is consistent with current bulk orders 
available to these Users, and will continue to provide Users with 
flexibility to avoid incurring a take fee if their intent is to add 
liquidity to the Book. The Exchange notes these Users may apply the 
Book Only instruction to orders submitted to the Exchange through other 
ports. The proposed rule change also amends Rule 6.15 to make clear 
that bulk messages (like current bulk orders) are not eligible for 
routing (which is consistent with the Order Instructions of Post Only 
and Book Only, which do not route to other options markets).\24\
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    \22\ See supra notes 8 and 15.
    \23\ Incoming market-maker quotes on some options exchanges may 
execute against interest resting in the book (see, e.g., Arca Rule 
6.37A-O(a)(3)), while on other options exchanges they may not (see, 
e.g., Box Options Exchange, LLC (``BOX'') Rule 8050, IM-8050-3).
    \24\ See also Cboe Options Rule 6.14B; and Arca Rule 6.37A-
O(a)(3)(D).
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    The proposed rule change also permits Users to establish a default 
MTP Modifier of MCN, MCO, or MCB that would apply to all bulk messages 
submitted through a bulk port. Cboe Options currently offers a Market-
Maker Trade Prevention Order, which would be cancelled if it would 
trade against a resting quote or order for the same Market-Maker, and 
also cancel the resting order or quote.\25\ This is equivalent to the 
MCB Modifier (except the MCB Modifier may be used by all Users rather 
than just Market-Makers). The proposed rule change provides Users with 
the ability to apply same trade prevention designation that is 
available for quotes on Cboe Options to bulk messages (MCB), as well as 
two additional MTP options (MCN and MCO) (the Exchange notes there is 
currently no trade prevention functionality equivalent to MCN or MCO 
available on Cboe Options for quotes). Allowing three MTP designations 
for bulk messages will provide Users with additional control over the 
circumstances in which their bulk messages (and resting orders 
(including bulk messages)) will interact with each other. The Exchange 
does not believe there is demand by Users for the MDC and MCS modifies 
(which are available on the Exchange for orders) for bulk messages (the 
Exchange notes there is currently no trade prevention functionality 
equivalent to MDC or MCS available on Cboe Options for quotes). The 
Exchange notes all Users may continue to apply all MTP Modifiers to 
orders submitted through a bulk port (as further discussed below) or 
any other type of port.
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    \25\ See Cboe Options Rule 6.53(v).
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    Generally, the System will handle bulk messages in the same manner 
as it handles orders with the same Order Instructions and Times-in-
Force that will be available for bulk messages, including prioritizing, 
displaying, and executing them pursuant to Rule 6.12. Proposed Rule 
6.12(c)(6) adds detail regarding how the System will handle bulk 
messages and orders submitted through bulk ports. Specifically, 
proposed subparagraph (c)(6)(A) states the System will cancel or reject 
a Post Only bulk message bid (offer) with a price that locks or crosses 
the Exchange best offer (bid) or the ABO (ABB).\26\ This is consistent 
with how the System would handle a Post Only order not subject to the 
Price Adjust process.\27\

[[Page 2601]]

Pursuant to the Post Only instruction, an order (or bulk message as 
proposed) may not remove liquidity from the Book or route away to 
another Exchange. If a Post Only bulk message locked or crossed the 
best contra-side interest on the Exchange, the System would cancel it 
to prevent execution of the bulk message against the interest on the 
Exchange in accordance with the User's instructions and to prevent the 
Exchange from displaying a locked or crossed market.\28\ Similarly, if 
a Post Only bulk message locked or crossed an away market, the System 
would cancel it since it cannot route in accordance with the User's 
instructions and to prevent the Exchange's dissemination of a locked or 
crossed market.\29\
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    \26\ The ABBO means the best bid (offer) disseminated by other 
exchanges.
    \27\ See Rule 6.12(b). Pursuant to the Price Adjust process, the 
System ranks and displays a buy (sell) order that, at the time of 
entry, would lock a Protected Quotation of the Exchange or another 
Exchange at one minimum price increment below (above) the current 
NBO (NBB). The System executes a Book Only order against orders and 
quotes and cancels any unexecuted portion if displaying the order on 
the Book would create a violation of Rule 6.82, and the System 
rejects a Post Only order that locks or crosses the opposite side 
Exchange best bid or offer (``BBO'') or if displaying the order on 
the Book would create a violation of Rule 6.82). Bulk messages will 
not be eligible for the Price Adjust process, and thus will be 
handled similar to an order not subject to the Price Adjust process. 
See proposed Rules 6.10(c) and 6.12(b) (which clarify that the Price 
Adjust Process will not apply to bulk messages).
    \28\ See Chapter XXVII of the Rules; see also Options Order 
Protection and Locked/Crossed Market Plan (the ``Linkage Plan'').
    \29\ See id.
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    Similarly, proposed subparagraph (c)(6)(B) states the System will 
execute a Book Only bulk message bid (offer) that locks or crosses the 
ABO (ABB) against offers (bids) resting in the Book at prices the same 
as or better than the ABO (ABB) and then cancels the unexecuted 
portion. This is consistent with how the System would handle a Book 
Only order not subject to the Price Adjust process. Pursuant to the 
Book Only instruction, an order (or bulk message as proposed) may not 
route away to another Exchange. If a Book Only bulk message locked or 
crossed an away market, the System would execute it to the extent it 
could against contra-side interest on the Exchange and then cancel it 
since it cannot route in accordance with the User's instructions and to 
prevent the Exchange's dissemination of a locked or crossed market.\30\ 
In addition to being similar to current Exchange Rules regarding the 
handling of Post Only and Book Only Orders not subject to the Price 
Adjust process, the Exchange notes that proposed subparagraphs 
(c)(6)(A) and (B) are substantially the same as another exchange's 
handling rules applicable to quotes.\31\
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    \30\ See id.
    \31\ See Cboe Options Rule 6.14(b) (if Cboe Options is not at 
the NBBO, the System rejects a quote back to a Market-Maker if the 
quote locks or crosses the NBBO, which is the ABBO) and (c) (if the 
Cboe Options System accepts a quote that locks or crosses the NBBO, 
it executes the quote against quotes and orders in the Cboe Options 
Book at the price(s) that is the same or better than the best price 
disseminated by an away exchange(s) up to the size available on the 
Exchange and cancels the remaining size if the quote's price locks 
or crosses the ABBO or books any remaining size); see also Rule 
6.37A-O(a)(3).
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    Proposed subparagraph (c)(6)(C) states the System will cancel or 
reject a Book Only bulk message bid (offer) or order bid (offer) (or 
unexecuted portion) submitted by a Market-Maker with an appointment in 
the class through a bulk port if it would execute against a resting 
offer (bid) with a Capacity of M (Market-Maker). The options market is 
driven by Market-Maker quotes, and thus Market-Maker quotes are 
critical to provide liquidity to the market and contribute to price 
discovery for investors. The Exchange expects Market-Makers regularly 
to use bulk messages to input and update prices on multiple series of 
options at the same time. Market-Maker quotes are generally based on 
pricing models that rely on various factors, including the price of the 
underlying security and that security's volatility. As these variables 
change, a Market-Maker's pricing model automatically will enter updates 
to its bids and offers with bulk messages for some or all of an 
option's series. Because Market-Makers may update bids and offers using 
bulk messages in multiple series at the same time, there can be a 
multitude of instances in which their bids and offers inadvertently 
interact with each other, which can lead to significant risk and 
exposure. This may occur, for example, when one Market-Maker's price 
update system is faster than systems used by other Market-Makers. In 
this respect, a Market-Maker's system that updates options prices 
microseconds faster than another Market-Maker's system may lock or 
cross its bids (offers) against the other Market-Maker's offers (bids) 
every time its bid (offer) adjusts to the offer (bid) of the second 
Market-Maker even if the second Market-Maker's system was also in the 
process of updating that offer (bid). For example, assume Market-Makers 
A and B are both quoting $1.10-1.20 when the underlying moves, causing 
both each Market-Maker's system to update its quotes to $1.20-1.30. By 
being microseconds faster, Market-Maker A's system will send a bid of 
$1.20, which locks Market-Maker B's offer prior to Market-Maker B's 
offer updating, even though its system was also in the process of 
updating its offer. This could happen contemporaneously in a large 
number of series within the class, such that instead of locking one 
quote, Market-Maker A may lock 20 of Market-Maker B's quotes. This may 
expose each Market-Maker to significant risk due to these unintended 
executions.
    The proposed rule change will protect Market-Makers from executions 
that occur due to technology disparities rather than the intention of 
Market-Makers to trade with one another at a particular price. As a 
result, Market-Maker quotes will continue to provide liquidity on the 
Book. This proposed functionality is similar to the quote-lock 
functionality available on Cboe Options.\32\ While that functionality 
permits locked quotes to execute against each other after a specified 
amount of time, it also provides market-makers with an opportunity to 
update their resting quotes, which would prevent execution of an 
incoming market-maker quote against a resting market-maker quote. As 
proposed, a Market-Maker bulk message (or order) will be rejected if it 
would execute against resting Market-Maker interest. The Market-Maker 
may resubmit its bulk message (or order) after being rejected, which 
would be able to rest in the Book if the Market-Maker repriced its 
resting bid or offer in the interim. Additionally, a Market-Maker may 
interact with resting Market-Maker interest by submitting an order to 
the Exchange through a different type of port.
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    \32\ See Cboe Options Rule 6.45(c).
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    Proposed Rule 6.9(a) provides that a User may only enter one bid 
and one offer for a series per EFID \33\ per bulk port. The Exchange 
believes this will encourage Users to submit their best bids and offers 
in series, and thus provide displayed liquidity to the market and 
contribute to public price discovery. Note firms may have multiple 
EFIDs and multiple bulk ports, and thus will have the ability through 
separate ports or EFIDs to submit additional bids and offers using bulk 
messages in the same series if they choose. This provision is 
consistent with the rule interpretation of another exchange.\34\
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    \33\ An ``EFID'' is an Executing Firm ID. See Rule 1.1.
    \34\ See Cboe Options Regulatory Circular RG18-008 (March 6, 
2018), which provides that each market-maker acronym may only have 
one quote (which is considered to be a two-sided quote) in each 
series at a time. An EFID is comparable to an acronym. Under Cboe 
Options rules, the term Market-Maker generally refers to an 
individual (and thus a person with a specific acronym), except as 
otherwise provided in the Rules. See, e.g., Cboe Options Rule 
8.7(d)(ii)(B) (which provides that market-maker continuous 
electronic quoting obligations may be satisfied by market-makers 
either individually or collectively with market-makers of the same 
TPH organization). The interpretation in the circular referenced 
above is consistent with this term and a Market-Maker's obligations 
set forth in Rule 8.7 (e.g. market-Makers must contribute to the 
maintenance of a fair and orderly market, including by competing to 
improve markets, update quotes in response to changed market 
conditions, and price options contracts fairly).

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[[Page 2602]]

    In addition to permitting Users to submit bulk orders (which 
functionality the Exchange will discontinue and replace with bulk 
message functionality), current bulk order ports permit Users to submit 
single orders to the Exchange. To encourage Users that may not have 
quoting systems to provide liquidity to the Exchange, the proposed rule 
change will permit Users to continue to submit single orders to the 
Exchange through these ports, which are proposed to be renamed as bulk 
ports. Proposed Rule 6.8(c)(3)(B) will permit Users to designate these 
orders with any Order Instruction and any Time-in-Force in proposed 
Rule 6.10(c) and (d), respectively, subject to the Book Only and Post 
Only restrictions described above for Market-Makers with appointments 
in a class and other Users. This will provide Users with additional 
functionality that is available for single orders submitted through 
bulk ports today, and allow their liquidity to rest on the Exchange for 
multiple trading days, if Users so choose. This will also provide Users 
with additional control over the orders they use to provide liquidity 
to the Exchange through bulk ports. Additionally, proposed Rule 
6.12(c)(6)(A) imposes the same prohibition on Market-Maker orders 
submitted through bulk ports from removing resting Market-Maker 
interest that applies to bulk messages, as described above. The 
Exchange believes it is appropriate for orders submitted through bulk 
ports be subject to the same restrictions on adding and removing 
liquidity as bulk messages submitted through bulk ports, so that orders 
submitted through bulk ports do not have an advantage over bulk 
messages, and vice versa.
    While liquidity providers are most commonly registered market-
makers, other professional traders also provide liquidity to the 
options market, which contributes to price discovery. As a result, 
unlike other exchanges that restrict quoting functionality to market-
makers, the Exchange believes it is appropriate to make bulk messages 
available to all Users to encourage them to provide liquidity, which is 
critical to the Exchange's market. Additionally, permitting orders to 
be submitted through bulk ports will continue to provide all liquidity 
providers with this functionality that is available today, as well as 
additional flexibility with respect to this functionality they may use 
to provide liquidity to the Exchange.
    The proposed rule change adds a price protection mechanism for bulk 
messages that is similar to the fat finger check the Exchange currently 
provides for orders.\35\ Proposed Rule 6.14(a)(5) states the System 
cancels or rejects any bulk message bid (offer) above (below) the NBO 
(NBB) by more than a specified amount determined by the Exchange. This 
is similar to the fat finger check currently applicable to limit 
orders.\36\ Quotes that cross the NBBO by more than a specified amount 
are rejected as presumptively erroneous. This proposed check will not 
apply to bulk messages submitted prior to the conclusion of the Opening 
Process or when no NBBO is available. The Exchange believes it is 
appropriate to have the ability to not apply this check during the pre-
open or opening rotation so that the check does not impact the 
determination of the opening price. The Exchange also believes it is 
appropriate to not apply this check when there is no NBBO, as the 
Exchange believes that is the most reliable measure against which to 
compare the price of the bulk message to determine its reasonability. 
The proposed change is similar to a quote price protection mechanism 
available at other options exchanges.\37\
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    \35\ The proposed rule change also amends Rule 6.14(a) and (c) 
(and the introductory language to that rule) to make clear which 
price protections and risk controls in those paragraphs will not 
apply to bulk messages.
    \36\ See Rule 6.14(c)(1). Orders submitted through bulk ports 
will be subject to the current order price protection mechanisms, 
such as limit fat finger check in Rule 6.14.
    \37\ See, e.g., Cboe Options Rule 6.14(a) and (b); Arca Rule 
6.37A-O(a)(3).
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    Proposed Rule 6.14(c)(6)(B) states if, pursuant to the Rules, the 
System cancels or rejects a bulk message bid (offer) to update a 
resting bulk message bid (offer) submitted for the same EFID and bulk 
port, the System also cancels the resting bulk message bid (offer). The 
Exchange currently offers Users similar functionality for orders and 
quotes (as currently defined as bids and offers from Market-Makers), 
which is optional.\38\ Pursuant to the proposed rule change, the System 
will always apply this protection to bulk messages. The Exchange 
believes this will operate as an additional safeguard that causes 
liquidity providers to re-evaluate their bids and offers in a series 
before attempting to update them again. Additionally, when a User 
submits a new bulk message, it is implicitly instructing the Exchange 
to cancel any resting bulk message in the same series. Thus, even if 
the new bulk message is rejected as a result of this proposed check, 
the implicit instruction to cancel the resting bulk message remains 
valid nonetheless. The proposed rule change is substantially similar to 
a risk control applicable to quotes available at another options 
exchange.\39\
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    \38\ See current Rule 6.14(c)(6) and proposed Rule 
6.14(c)(6)(A).
    \39\ See, e.g., Cboe Options Rule 6.14(b); Arca Rule 6.37A-
O(a)(3)(C).
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    The proposed rule change amends proposed Rules 6.10(c) and (d) to 
provide that eligible Order Instructions and Times-in-Force, 
respectively, are subject to the proposed restrictions in Rule 6.8(c) 
with respect to orders and bulk messages submitted through bulk ports, 
and clarify which Order Instructions, and Times-in-Force are available 
and not available for bulk messages, as described above. The proposed 
rule change also amends the definitions of order types, Order 
Instructions, and Times-in-Force in Rule 6.10(b), (c), and (d), 
respectively, in accordance with proposed Rule 6.8(c)(3). Additionally, 
Rule 6.13 to make clear that Users may not submit complex orders 
through bulk ports.\40\
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    \40\ The Exchange notes that Market-Makers are not required to 
quote on the COB, and that complex quoting functionality is not 
currently available on Cboe Options.
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    The proposed rule change also makes nonsubstantive changes to move 
the definitions of order types, Order Instructions, and Times-in-Force 
(as amended to accommodate bulk messages as discussed above) to Rule 
6.10 and add cross-references to that Rule in the definitions of those 
terms in Rule 1.1. The proposed rule change also moves the definitions 
of physical port and logical port (and the proposed definition of bulk 
port) to Rule 6.8(c).
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.\41\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \42\ 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

[[Page 2603]]

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) \43\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \41\ 15 U.S.C. 78f(b).
    \42\ 15 U.S.C. 78f(b)(5).
    \43\ Id.
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    In particular, the proposed rule change will remove impediments to 
and perfect the mechanism of a free and open market because it provides 
Users, including Market-Makers and other liquidity providers, with 
enhanced functionality to allow them to provide liquidity to the market 
and update bids and offers in response to changed market conditions. 
While current bulk orders simulate quotes, Users must submit multiple 
messages in bulk to update bids and offers in multiple series. The 
proposed bulk messages will permit Users to update multiple bids and 
offers in block quantities in a single message, which will permit them 
to update bids and offers (for example, in response to changing market 
conditions) in a more efficient manner. The proposed ability to update 
bids and offers in block quantities is similar to that available on 
another options exchange.\44\
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    \44\ See Cboe Options Rule 1.1(ppp), which provides that 
electronic quotes may be updated in block quantities.
---------------------------------------------------------------------------

    With respect to all Users, the proposed bulk messages are 
substantially similar to the current bulk orders available through bulk 
order ports--Users will be able to submit bulk messages that are Day 
and Post Only. However, the proposed rule change will permit them to do 
so in a single bulk message rather than in multiple messages. While the 
use of the GTD Time-in-Force will not be permitted for bulk messages as 
it currently is for bulk orders, Users may achieve the same result as 
GTD for their bulk messages by manually cancelling a bulk message at a 
specified time during the trading day--the proposed rule change merely 
does not provide a means for automatic cancellation of bulk messages at 
a specific time during the trading day. Additionally, Users may 
continue to apply GTD to orders submitted to the Exchange through bulk 
ports and other ports.
    The Exchange believes the proposed rule change will permit 
liquidity providers to more efficiently update their resting bids and 
offers, which may help them manage their risk exposure when, for 
example, updating their bids and offers in response to changing market 
conditions. The Exchange believes this will continue to encourage all 
Users to provide liquidity on the Exchange and avoid incurring a taker 
fee if their intent is to submit bids and offers to add liquidity to 
the Book. As a result, this may increase liquidity, resulting in more 
trading opportunities and tighter spreads, which benefits all 
investors. The Exchange notes the proposed rule change provides Users 
with additional flexibility by permitting certain MTP Modifiers to be 
applied to bulk messages to prevent their orders and bulk messages from 
trading against each other. The MTP Modifiers not available for bulk 
messages will continue to be available for Users on orders submitted 
through bulk ports and other ports. Unlike other options exchanges that 
limit the use of quoting functionality to market-makers, the proposed 
rule change will permit all Users to submit bulk messages. 
Additionally, the proposed rule change to permit Users to continue to 
submit orders (subject to restrictions on the Post Only and Book Only 
instructions, as discussed above) through bulk ports will encourage 
Users that may not have quoting systems to provide liquidity to the 
Exchange by submitting single orders through bulk ports. This is also 
consistent with current bulk orders, which permits Users to submit both 
single and bulk orders through bulk order ports.
    The proposed rule change further removes impediments to and 
perfects the mechanism of a free and open market and a national market 
system by providing appointed Market-Makers with the ability to submit 
Book Only bulk messages, because it will align functionality available 
to appointed Market-Makers on the Exchange with the quoting 
functionality available to market-makers on other options exchanges, 
including Cboe Options, which permit quotes to both add and remove 
liquidity.\45\ Market-Makers are critical to providing liquidity and 
price discovery on the Exchange, and are subject to various 
obligations, as discussed above. The Exchange notes all other Users may 
continue to use the Book Only instruction (or other instructions that 
permit execution against resting orders on the Book) on orders 
submitted through other ports, as they may do today. The Exchange 
believes providing Market-Makers with flexibility to use the Post Only 
or Book Only instruction with respect to bulk messages will provide 
them with additional tools to meet their obligations in a manner they 
deem appropriate and is reasonable given the critical role Market-
Makers plan in the options market. The Exchange believes this may also 
encourage liquidity providers to register as Market-Makers.
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    \45\ Other options exchanges only permit market-makers to submit 
quotes. See, e.g., Cboe Options Rules 1.1(ppp) and 8.3(c); Arca Rule 
6.37A-O(a)(1).
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    The proposed rule change provides Market-Makers with a combination 
of functionality available to market-makers on other exchanges, as some 
exchanges permit market-makers to remove liquidity and others only 
permit market-makers to post liquidity using quotes.\46\ As a result, 
the Exchange believes the proposed rule change will provide Market-
Makers with greater control over their interactions with contra-side 
liquidity and would increase opportunities for such interaction. The 
Exchange believes this will provide Market-Makers with a greater level 
of determinism, in terms of managing their exposure, which may 
encourage them to be more aggressive when providing liquidity. The 
Exchange believes this may result in more trading opportunities and 
tighter spreads, which contributes to price discovery. Ultimately, this 
may improve overall market quality and enhance competition on the 
Exchange, which benefits all investors.
---------------------------------------------------------------------------

    \46\ See id. and Box Options Exchange, LLC (``BOX'') Rule 8050, 
IM-8050-3.
---------------------------------------------------------------------------

    Similarly, the proposed rule change to prevent Market-Maker bulk 
messages from removing Market-Maker orders or bulk messages resting on 
the Book removes impediments to and perfects the mechanism of a 
national market system by eliminating trades that may be unintended 
(potentially the result of technological disparities between Market-
Makers) and thus not beneficial to customers, and that may impede 
certain liquidity providers' ability to competitively price their bids 
and offers. The Exchange believes the proposed rule change will 
increase availability of liquidity in the market and will enhance 
competition, because Market-Makers will be better able to quote 
aggressively with fewer concerns over technological disparities in 
their quoting systems, which ultimately benefits all investors. The 
Exchange notes this proposed rule change is similar to functionality 
available on another options exchange.\47\
---------------------------------------------------------------------------

    \47\ See Cboe Options Rule 6.45(c).
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    The proposed handling of bulk messages to prevent the display of a 
locked or crossed market will perfect the mechanism of a free and open 
market and national market system, as it is consistent with the Linkage 
Plan

[[Page 2604]]

and the Exchange's handling of orders with similar instructions. This 
proposed handling of bulk messages is also consistent with handling of 
quotes on other options exchanges.\48\ The proposed risk controls and 
price protection mechanisms that will apply to bulk messages promote 
just and equitable principles of trade and will protect investors by 
mitigating potential risks associated with Users submitting bulk 
messages at clearly unintended prices and trading at extreme and 
potentially erroneous prices. Additionally, the proposed rule change to 
cancel a User's resting bulk message when the System rejects a bulk 
message intended to update that resting bulk message provides Users 
with an additional safeguard that causes Users to reevaluate their bids 
and offers in the series before attempting to update them again. 
Additionally, when a User submits a new bulk message, it is implicitly 
instructing the Exchange to cancel any resting bulk message. Thus, even 
if the new bulk message is rejected, the Market-Maker's implicit 
instruction to cancel the resting bulk message remains valid 
nonetheless.
---------------------------------------------------------------------------

    \48\ See Cboe Options Rule 6.14(b) and (c); see also Rule 6.37A-
O(a)(3).
---------------------------------------------------------------------------

    The options markets are quote driven markets and thus dependent on 
liquidity providers, which are most commonly registered market-makers 
but also other professional traders, for liquidity and price discovery. 
The Exchange believes the proposed enhanced functionality, including 
the additional flexibility for Market-Makers to manage their risk 
exposure and provide additional control over interactions with contra-
side liquidity, for these liquidity providers to more efficiently enter 
and update bids and offers. This may encourage the provision of more 
aggressive liquidity, which may result in more trading opportunities 
and tighter spreads, which contributes to price discovery. This may 
improve overall market quality and enhance competition on the Exchange, 
which benefits all investors.
    The proposed rule change is generally intended to align system 
functionality currently offered by the Exchange with Cboe Options 
functionality in order to provide a consistent technology offering for 
the Cboe Affiliated Exchanges. A consistent technology offering, in 
turn, will simplify the technology implementation, changes, and 
maintenance by Users of the Exchange that are also participants on Cboe 
Affiliated Exchanges. The proposed rule change would also provide Users 
with access to functionality that is generally available on markets 
other than the Cboe Affiliated Exchanges, which may result in the 
efficient execution of quotes and orders and provide Users with 
additional flexibility and increased functionality on the Exchange's 
System.
    When Cboe Options migrates to the same technology as that of the 
Exchange and other Cboe Affiliated Exchanges, Users of the Exchange and 
other Cboe Affiliated Exchanges will have access to similar 
functionality on all Cboe Affiliated Exchanges. As such, the proposed 
rule change would foster cooperation and coordination with persons 
engaged in facilitating transactions in securities and would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act, as the proposed bulk messages, like the current 
bulk orders, are optional for all Users. While only Market-Makers may 
submit Book Only bulk messages, the Exchange believes this is 
appropriate given the various obligations Market-Makers must satisfy 
under the Rules and the unique and critical role Market-Makers play in 
the options market, as discussed above. The Exchange believes providing 
Market-Makers with flexibility to use the Post Only or Book Only 
instruction with respect to bulk messages will provide Market-Makers 
with additional tools to meet their obligations in a manner they deem 
appropriate. The Exchange believes the proposed functionality for 
Market-Makers adds value to market-making on the Exchange and provides 
them with greater control over how their quotes interact with contra-
side liquidity both on the Exchange. The Exchange notes all other Users 
may continue to use the Book Only instruction on orders submitted to 
the Exchange through other types of ports. The Post Only instruction 
for bulk messages will be available to all Users, and is substantially 
similar to the bulk orders currently available to all Users. 
Additionally, all Users may submit single orders with all other Times-
in-Force and Order Instructions (subject to the same Post Only and Book 
Only restrictions applicable to bulk messages) not available for bulk 
messages through bulk ports, which may encourage Users that may not 
have quoting systems to provide liquidity to the Exchange.
    The proposed rule change to prevent Market-Maker bulk message 
executions against other resting Market-Maker interest is intended to 
protect Market-Makers from executions due to technology disparities 
rather than the intention of Market-Makers to trade with one another at 
that price. The Exchange believes this functionality and protection for 
Market-Makers may encourage Market-Makers to quote tighter and deeper 
markets, which will increase liquidity and enhance competition. The 
proposed price protection mechanisms and risk controls applicable to 
bulk messages will apply in the same manner to all bulk messages 
submitted by market participants. The Exchange believes this protection 
for bulk messages provides liquidity providers with additional 
protection from anomalous or erroneous executions. Generally, once bulk 
messages are resting on the Book, the System will handle them no 
differently than resting orders--this includes how the System 
prioritizes orders and quotes when executing them against incoming 
orders or quotes. Bulk messages that are available to all Users will 
work in the same manner for all Users, and the additional bulk message 
functionality available to appointed Market-Makers will work in the 
same manner for all such Market-Makers. The Exchange believes it is 
reasonable to provide additional functionality to Market-Makers given 
their unique and critical role in the options market and the various 
obligations that Market-Makers must satisfy.
    The Exchange does not believe the propose rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, because it will 
provide Market-Makers with bulk message functionality that is similar 
to that quoting available to market-makers on other options exchanges. 
The Exchange believes the proposed functionality will permit the 
Exchange to operate on an even playing field relative to other 
exchanges that have similar functionality. As discussed above, the 
options markets are quote driven markets and thus dependent on 
liquidity providers, which are most commonly registered market-makers 
but also other professional traders, for liquidity and price discovery. 
The Exchange believes the proposed enhanced functionality, including 
the additional flexibility for Market-Makers to manage their risk 
exposure and

[[Page 2605]]

provide additional control over interactions with contra-side 
liquidity, for these liquidity providers to more efficiently enter and 
update bids and offers. This may encourage the provision of more 
aggressive liquidity, which may result in more trading opportunities 
and tighter spreads, which contributes to price discovery. This may 
improve overall market quality and enhance competition on the Exchange, 
which benefits all investors.
    The Exchange reiterates that the proposed rule change is being 
proposed in the context of the technology integration of the Cboe 
Affiliated Exchanges. Thus, the Exchange believes this proposed rule 
change permits fair competition among national securities exchanges. In 
addition, the Exchange believes the proposed rule change will benefit 
Exchange participants in that it will provide a consistent technology 
offering for Users by the Cboe Affiliated Exchanges.

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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \49\ and Rule 19b-4(f)(6) \50\ 
thereunder.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78s(b)(3)(A).
    \50\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:
    Electronic Comments:
     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-C2-2018-025 on the subject line.
    Paper Comments:
     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
    All submissions should refer to File Number SR-C2-2018-025. 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-C2-2018-025 and should be submitted on 
or before February 22, 2019.
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    \51\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-01392 Filed 2-6-19; 8:45 am]
 BILLING CODE 8011-01-P


