[Federal Register Volume 84, Number 112 (Tuesday, June 11, 2019)]
[Notices]
[Pages 27178-27181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12187]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86033; File No. SR-C2-2019-012]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Update 
Its Price Adjust Process To Allow for the Process To Apply to Bulk 
Messages

June 5, 2019.
    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 May 23, 2019, Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III 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 
update its Price Adjust process to allow for the process to apply to 
bulk messages. 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://markets.cboe.com/us/options/regulation/rule_filings/ctwo/), 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 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 to allow for the Price 
Adjust process to apply to bulk messages and make corresponding changes 
where applicable. The Exchange is proposing these amendments in order 
to provide Options Members that submit bulk messages with functionality 
that is currently available to them for orders.
    In February 2019, the Exchange adopted bulk messaging 
functionality, in which a User may enter, modify or cancel up to an 
Exchange-specified number of bids and offers. A User may submit a bulk 
message through a bulk port.\5\ The System \6\ handles bulk messages in 
the same manner as it handles an order, or quote if submitted by a 
Market-Maker, unless the Rules specify otherwise. Currently, Rule 6.10 
allows a User to designate an order to be subject to the Price Adjust 
process pursuant to Rule 6.12.\7\ Pursuant to current Rule 6.12(b), the 
System ranks and displays a buy (sell) order that, at the time of 
entry, would lock or cross a Protected Quotation of the Exchange or 
another exchange at one minimum price increment below (above) the 
current National Best Offer (``NBO'') or National Best Bid (``NBB''), 
as applicable. The Price Adjust process applies to orders (subject to 
the User's instructions or the Rules) that do not execute upon entry 
and go to rest in the C2 Book (for example, because an order is not 
marketable upon entry, is not eligible to route, etc.). It ensures 
these orders rest at executable prices in accordance with linkage 
rules.\8\ Current Rules 6.10(c) and 6.12(b) state that the Price Adjust 
process does not apply to bulk messages.\9\
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    \5\ See Rule 6.8(c)(3).
    \6\ The ``System'' is the automated trading system the Exchange 
uses for the trading of option contracts. See Rule 1.1.
    \7\ An order that is not designated as Cancel Back is also 
subject to the Price Adjust process (i.e., orders default to be 
subject to the Price Adjust process).
    \8\ See Section E of Chapter VI of the Rules. See also Options 
Order Protection and Locked/Crossed Market Plan (the ``Linkage 
Plan'').
    \9\ Specifically, the multiple bids (offers) submitted through a 
bulk message. Therefore, as proposed, a Price Adjust or Cancel Back 
designation, as applicable, applies to all bulk message bids and 
offers within a single message.
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    Current Rule 6.10(c) also provides for a Cancel Back order, in 
which a User may designate an order not to be subject to the Price 
Adjust process and the System cancels or rejects such order if 
displaying the order on the C2 Book would create a violation of Rule 
6.82 (Locked and Crossed Markets), or if the order cannot otherwise be 
executed or displayed in the C2 Book at its limit price. The System 
executes a Book Only--Cancel Back order marketable against resting 
orders, and cancels or rejects a Post Only--Cancel Back order that 
locks or crosses the opposite side of the BBO.
    Furthermore, current Rule 6.12(c) provides for additional System 
order handling provisions regarding bulk messages submitted through 
bulk quoting ports. Specifically, Rule 6.12(c)(6)(A) provides that 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 ABO 
(ABB).\10\ The Exchange notes that bulk messages that include a Post 
Only instruction do not remove liquidity from the Exchange or route 
away to other exchanges.\11\ Current Rule 6.12(c)(6)(A) is consistent 
with how the System handles a Post Only--Cancel Back order.\12\ 
Additionally, current Rule 6.12(c)(6)(B) provides that the System 
cancels or rejects a Book Only bulk message bid (offer) that locks or 
crosses the ABO (ABB) against offers (bids) resting in the C2 Book at 
prices the same as or better than the ABO (ABO) and then cancels the 
unexecuted portion of that bid (offer). Book Only orders do not route 
away to other exchanges.\13\

[[Page 27179]]

Current Rule 6.12(c)(6)(B) is consistent with how the System handles 
Book Only--Cancel Back orders.\14\ The Exchange also notes that 
pursuant to Rule 6.8(c), a Market-Maker with an appointment in a class 
may designate a bulk message for that class as Post Only or Book Only, 
and other Users (i.e., non-Market-Makers or Market-Makers without an 
appointment in a class) must designate a bulk message for that class as 
Post Only.\15\
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    \10\ The ABBO means the best bid (offer) disseminated by other 
exchanges.
    \11\ See Rule 6.10, which defines a ``Post Only'' order as an 
order the System ranks and executes pursuant to Rule 6.12, subjects 
to the Price Adjust process pursuant to Rule 6.12, or cancels or 
rejects (including if it is not subject to the Price Adjust process 
and locks or crosses a Protected Quotation of another exchange), as 
applicable (in accordance with User instructions), except the order 
may not remove liquidity from the Book or route away to another 
Exchange. Users may designate bulk messages as Post Only as set 
forth in Rule 6.8(c).
    \12\ See supra note 8.
    \13\ See Rule 6.10, which defines a ``Book Only'' order as an 
order the System ranks and executes pursuant to Rule 6.12, subjects 
to the Price Adjust process pursuant to Rule 6.12, or cancels, as 
applicable (in accordance with User instructions), without routing 
away to another exchange. Users may designate bulk messages as Book 
Only as set forth in Rule 6.8(c).
    \14\ See supra note 8.
    \15\ Pursuant to the current Rules, a bulk message must be 
designated as Post Only or Book Only. Additionally, because bulk 
messages must include bids and offers, and may not be market orders, 
all bulk messages are limit orders. See Rules 1.1 and 6.10(b).
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    The Exchange now proposes to amend Rule 6.10(c) and Rule 6.12(b) to 
permit Users to designate bulk messages to be subject to the Price 
Adjust process, and permit Users to opt-out of such process for bulk 
messages by designating bulk messages as Cancel Back. The Price Adjust 
and Cancel Back designations, as applicable, will apply to all bulk 
message bids and offers within a single message. The Exchange notes 
that Users have noted the regularity with which their bulk messages are 
rejected because Price Adjust does not apply to them. As a result, some 
Users find this inefficient when submitting bulk messages. The Exchange 
believes that allowing bulk messages to be subject to the Price Adjust 
process will provide market participants with additional opportunities 
for execution and price improvement, as well as additional flexibility 
and control over their submission of bulk messages. If a User does not 
want a bulk message to be subject to the Price Adjust process, it may 
designate the bulk message as Cancel Back, as noted above. A Cancel 
Back bulk message will be handled in the same manner as a bulk message 
is handled today.\16\
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    \16\ The Exchange also proposes to make a non-substantive change 
to Rule 6.12(b) to amend the capitalization of ``exchange'' in the 
phrase ``or another exchange'', which is consistent with the format 
of this phrase throughout the Rules.
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    As proposed, all bulk messages would now be subject to the Price 
Adjust process if it locks or crosses the BBO or ABBO and rest in the 
C2 Book pursuant to the process, thus avoiding display of a locked or 
crossed market in accordance with the linkage rules.\17\ Therefore, the 
Exchange now proposes to remove Rules 6.12(c)(6)(A) and 6.12(c)(6)(B) 
(and amend the subsequent lettering as a result) because Post Only and 
Bulk Only bulk messages will now be included in the Price Adjust 
process, the handling of which would now be consistent with the current 
order handing of Post Only and Book Only orders under the Price Adjust 
process.\18\ The Exchange also notes that all bulk messages not subject 
to the Price Adjust process (because the User has designated a bulk 
message as Cancel Back) would be handled in the same manner as the 
proposed deleted subparagraphs (c)(6)(A) and (c)(6)(B) pursuant to the 
Cancel Back instruction under Rule 6.10(c).
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    \17\ See supra note 8.
    \18\ See supra notes 11 and 13.
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    The Exchange notes that allowing bulk messages to be subject to a 
repricing process is consistent with the handling of similar order (and 
quote) types on other exchanges.\19\ A similar repricing (display-price 
sliding) process for bulk messages currently exists under Rule 
21.1(h)(1) of the Exchange's affiliated exchange, Cboe BZX Exchange, 
Inc. (``BZX Options''). The Exchange also notes that other exchanges 
subject orders (quotes) similar to Post Only and Book Only bulk 
messages to a repricing process like the Price Adjust process. For 
example, NYSE Arca, Inc. (``Arca'') recently adopted order types called 
the Market Maker Add Liquidity Only quotation (``MMALO''), which like a 
Post Only instruction may not remove liquidity from the Exchange, and 
the Market Maker Repricing quotation (``MMRP'').\20\ Pursuant to Arca's 
repricing process, if these quotes would not be able to trade upon 
entry (for example, because the MMALO would take liquidity or display 
at a price that locks or crosses any interest on the Exchange or the 
NBBO), it would be displayed at one minimum price variation below 
(above) such sell (buy) interest.
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    \19\ See Securities Exchange Act Release No. 84737 (December 6, 
2018), 83 FR 63919 (December 12, 2018) (SR-NYSEArca-2018-74) (order 
approving the proposed order types). See also BZX Options Rule 
21.1(h)(1).
    \20\ See Arca Rule 6.37A-O(a)(3)(A) and Rule 6.37A-O(a)(3)(C).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\21\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \22\ 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) \23\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ Id.
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    In particular, the Exchange believes that the proposed rule change 
subjecting bulk messages to the Price Adjust process will remove 
impediments to and perfect the mechanism of a free and open market 
because it provides Users with the flexibility to apply to bulk 
messages the same functionality they may apply to their orders. The 
Exchange believes that repricing bulk messages for Users (that do not 
opt out of the Price Adjust process), as opposed to automatically 
rejecting messages that lock or cross protected quotes when posted to 
the C2 Book, will permit Users to use bulk messages to respond to 
continuously changing market conditions in a more efficient manner, as 
well as provide additional opportunity for execution and price 
improvement. The proposed repricing of bulk messages prevents the 
display of a locked or crossed market and is consistent with the 
Linkage Plan,\24\ thereby perfecting the mechanism of a free and open 
market and national market system and protecting investors.
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    \24\ See supra note 8.
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    The Exchange also believes that by providing Users with the ability 
to designate bulk messages as subject to the Price Adjust process 
instead of cancelling or rejecting these messages under certain 
circumstances, will give Users greater flexibility and control over the 
circumstances under which their orders are able to interact with contra 
side-interest on the Exchange. The Exchange believes this may increase 
the opportunities for execution at multiple price points and encourage 
the provision of more liquidity to the market, and therefore believes 
that it is reasonably designed to facilitate the mechanism of price 
discovery.
    The Exchange notes that the options markets are quote driven 
markets and thus dependent on liquidity providers,

[[Page 27180]]

which are most commonly registered market-makers but also other Users, 
such as professional traders, for liquidity and price discovery. The 
Exchange believes that subjecting bulk messages to the Price Adjust 
process will provide liquidity providers with greater flexibility with 
respect to their submission of bulk messages, the primary purpose of 
which is to provide liquidity to the market. The Exchange believes that 
the reduction in the number of rejected bulk messages will promote 
efficacy in bulk messaging and may encourage the provision of more 
liquidity. This may result in more trading opportunities and tighter 
spreads and contribute to price discovery. As a result, this proposed 
change intends to improve overall market quality and enhance 
competition on the Exchange to the benefit of all investors.\25\
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    \25\ The Exchange also believes that its proposed change to 
amend the capitalization of ``exchange'' when referring to ``another 
exchange'' in Rule 6.12(b) is a clarifying change that will 
alleviate potential investor confusion because it is consistent with 
the format of this phrase throughout the Rules. See supra note 14.
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B. Self-Regulatory Organization's Statement on Burden on Competition
    The Exchange does not believe that the proposed rule change will 
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 application of the Price Adjust 
and the Cancel Back process to bulk messages will be available to all 
applicable Users (e.g. Market-Makers may submit Book Only bulk 
messages, therefore, the option to apply the Price Adjust or Cancel 
Back process to Book Only bulk messages is available to all Market-
Makers). While bulk messages will by default be subject to the Price 
Adjust process, all Users may apply the Cancel Back instruction to bulk 
messages in order to opt out of that process for its bulk messages (and 
continue to have their bulk messages be handled in the same manner as 
they are today). The Exchange also notes that the Price Adjust and 
Cancel Back instructions are already available to all Users for orders, 
including Post Only and Book Only orders, and will apply to bulk 
messages in the same manner as they apply to orders.
    The Exchange does not believe the proposed 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 Users with bulk message repricing functionality that is similar 
to other order and quote repricing available 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 various Users as liquidity providers and for 
price discovery. The Exchange believes the proposed amendment to 
subject bulk messages to the Price Adjust process will provide 
liquidity providers with additional flexibility and control over 
interactions of their bulk messages with contra-side liquidity, as well 
as additional opportunity for execution at multiple price points and 
price improvement. This may encourage the provision of more liquidity, 
which may result in more trading opportunities and tighter spreads, and 
contribute to price discovery. This may improve overall market quality 
and enhance competition on the Exchange, to the benefit of all 
investors.

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 \26\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\27\
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    \26\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \27\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml;) or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-C2-2019-012 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-C2-2019-012. 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

[[Page 27181]]

to make available publicly. All submissions should refer to File Number 
SR-C2-2019-012 and should be submitted on or before July 2, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12187 Filed 6-10-19; 8:45 am]
 BILLING CODE 8011-01-P


