[Federal Register Volume 84, Number 145 (Monday, July 29, 2019)]
[Notices]
[Pages 36650-36652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15972]


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SECURITIES AND EXCHANGE COMMISSION

[Release No: 34-86432; File No. SR-CBOE-2019-030]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Granting Accelerated Approval of a Proposed Rule Change To Adopt Rules 
To Permit Cboe Trading, Inc. To Become a Trading Permit Holder and an 
Inbound and Outbound Router of the Exchange

July 23, 2019.

I. Introduction

    On June 25, 2019, the Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission''), pursuant to Section 19(b)(1) of the Securities 
and Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to adopt rules related to outbound routing 
and limited inbound routing by an affiliated Trading Permit Holder, as 
well as seek approval from the Commission for that affiliate, Cboe 
Trading, Inc. (``Cboe Trading''), to become a Trading Permit Holder of 
the Exchange. The proposed rule change was published for comment in the 
Federal Register on July 3, 2019.\3\ The Commission did not receive any 
comment letters on the proposed rule change. This order provides 
accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86224 (June 27, 
2019), 84 FR 31940 (July 3, 2019) (``Notice'').
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II. Description of the Proposed Rule Change

    As described in more detail in the Notice, the Exchange proposes 
to: (1) Seek approval from the Commission pursuant to Cboe Options Rule 
3.32(b) for its affiliate, Cboe Trading, to become a Trading Permit 
Holder of the Exchange; (2) amend Rule 3.32(b) to conform it to the 
rules of the Exchange's affiliate options exchanges (Cboe EDGX 
Exchange, Inc. (``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX 
Options'') and Cboe C2 Exchange, Inc. (``C2'') (collectively, the 
``Affiliated Cboe Exchanges'') and relocate it to Rule 3.11; (3) adopt 
Rule 3.12 to govern the Exchange's use of Cboe Trading as an outbound 
router; (4) adopt Rule 3.13 to govern the Exchange's receipt of inbound 
orders from the Affiliated Cboe Exchanges; and (5) amend Rule 6.14B to 
specify that it applies to the Exchange's non-affiliated routing 
brokers.\4\ The

[[Page 36651]]

Exchange notes that proposed Rules 3.11, 3.12 and 3.13 and current Rule 
6.14B are substantively identical in all material respects to EDGX 
Options Rules 2.10, 2.11, 2.12, and 21.9(e), as well as C2 Rules 3.16, 
3.17, 3.18 and 6.15(e).\5\
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    \4\ See id. at 31941. The Exchange proposes to amend Rule 6.14B 
to account for its use of affiliate Cboe Trading as an outbound 
router, as proposed, by specifying that the rule applies to the 
Exchange's non-affiliated routing brokers. The Exchange also 
proposes to specify in the introductory rule text under Rule 6.14B 
that the conditions in the following subparagraphs apply to non-
affiliated routing brokers, as well as update the rule heading 
accordingly. The Exchange noted in its filing that the proposed 
changes to Rule 6.14B do not substantively alter the conditions in 
that rule, which currently are applicable to non-affiliated routing 
brokers. See id. at 31943. The Exchange further noted that C2 Rule 
6.15(e) and EDGX Options Rule 21.9(e) provide the same conditions 
for their non-affiliated routing brokers. See id. The Exchange is 
not proposing to treat its non-affiliated routing brokers as back-up 
routing brokers for its affiliate. See id. at note 6.
    \5\ See id. at 31941.
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    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange to and from which it is 
routing orders, the Exchange has proposed limitations and conditions on 
Cboe Trading's affiliation with the Exchange as part of its proposal to 
use Cboe Trading as an outbound router and limited inbound router.
    Limited Inbound Routing. Specifically, as detailed above, the 
Exchange committed to the following limitations and conditions 
concerning limited inbound routing of transactions to Cboe Options from 
the Affiliated Cboe Exchanges: \6\
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    \6\ See Notice, supra note 3 at 31942.
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     The Exchange must enter into a plan pursuant to Rule 17d-2 
under the Exchange Act with a non-affiliated self-regulatory 
organization (``SRO'') and a regulatory services agreement with a non-
affiliated SRO to perform regulatory responsibilities for Cboe Trading 
for unique Exchange rules.
     The regulatory services agreement must require the 
Exchange to provide the non-affiliated SRO with information, in an 
easily accessible manner, regarding all exception reports, alerts, 
complaints, trading errors, cancellations, investigations, and 
enforcement matters (collectively, ``Exceptions'') in which Cboe 
Trading is identified as a participant that has potentially violated 
Exchange or Commission rules, and shall require that the non-affiliated 
SRO provide a report to the Exchange quantifying all such exception 
reports, alerts, complaints, trading errors, cancellations, 
investigations and enforcement matters on not less than a quarterly 
basis.
     The Exchange, on behalf of its parent company, Cboe Global 
Markets, must establish and maintain procedures and internal controls 
reasonably designed to ensure that Cboe Trading does not develop or 
implement changes to its systems on the basis of nonpublic information 
obtained as a result of its affiliation with the Exchange until such 
information is available generally to similarly situated Trading Permit 
Holders of the Exchange.
    As proposed, if the Exchange complies with the above-listed 
conditions, then Cboe Trading would be permitted to operate as a 
limited inbound router for orders sent to Cboe Options from the 
Affiliated Cboe Exchanges, which would entail Cboe Trading acting as an 
outbound router on behalf of each Affiliated Cboe Exchange in 
accordance with their respective rules.
    Outbound Routing. Further, the Exchange committed to the following 
limitations and conditions concerning outbound routing transactions: 
\7\
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    \7\ See id. at 31941.
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     Cboe Options will regulate the outbound router function of 
Cboe Trading as a facility (subject to Section 6 of the Act), and will, 
among other things, be responsible for filing with the Commission rule 
changes and fees relating to the Cboe Trading outbound router function 
and Cboe Trading will be subject to exchange nondiscrimination 
requirements.
     FINRA, an SRO unaffiliated with the Exchange or any of its 
affiliates, will carry out oversight and enforcement responsibilities 
as the designated examining authority designated by the Commission 
pursuant to Rule 17d-1 of the Act with the responsibility for examining 
Cboe Trading for compliance with applicable financial responsibility 
rules.
     A Trading Permit Holder's use of Cboe Trading to route 
orders to another trading center will be optional. Any Trading Permit 
Holder that does not want to use Cboe Trading may use other routers to 
route orders to other trading centers.
     Cboe Trading will not engage in any business other than 
(i) its outbound router function, (ii) its inbound router function as 
described in Rule 3.13, (iii) its usage of an error account in 
compliance with proposed Rule 3.12(a)(7) (regarding Cboe Trading's 
maintenance of an error account described below), and (iv) any other 
activities it may engage in as approved by the Commission.
     The Exchange will establish and maintain procedures and 
internal controls reasonably designed to adequately restrict the flow 
of confidential and proprietary information between the Exchange and 
its facilities (including Cboe Trading), and any other entity, 
including any affiliate of Cboe Trading, and, if Cboe Trading or any of 
its affiliates engages in any other business activities other than 
providing routing services to the Exchange, between the segment of Cboe 
Trading or its affiliate that provides the other business activities 
and the routing services.
     The Exchange or Cboe Trading may cancel orders as either 
deems to be necessary to maintain fair and orderly markets if a 
technical or systems issue occurs at the Exchange, Cboe Trading, or a 
routing destination. The Exchange or Cboe Trading will provide notice 
of the cancellation to affected Trading Permit Holders as soon as 
practicable.
     Proposed Rule 3.12(a)(7) provides that Cboe Trading will 
maintain an error account for the purpose of addressing positions that 
are the result of an execution or executions that are not clearly 
erroneous under Rule 6.25 and result from a technical or systems issue 
at Cboe Trading, the Exchange, a routing destination, or a non-
affiliate third-party Routing Broker that affects one or more orders 
(``Error Positions'').\8\
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    \8\ See Notice, supra note 3, at 31941-42.
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     The books, records, premises, officers, agents, directors, 
and employees of Cboe Trading as a facility of the Exchange are deemed 
to be the books, records, premises, officers, agents, directors, and 
employees of the Exchange for purposes of, and subject to oversight 
pursuant to, the Exchange Act. The books and records of Cboe Trading as 
a facility of the Exchange are subject at all times to inspection and 
copying by the Exchange and the Commission. Nothing in the Rules 
precludes officers, agents, directors, or employees of the Exchange 
from also serving as officers, agents, directors, and employees of Cboe 
Trading.
    The Exchange proposed the above conditions for both inbound and 
outbound routing to protect the independence of the Exchange's 
regulatory responsibility with respect to Cboe Trading, as well as 
ensure that Cboe Trading cannot use any information that it may have 
because of its affiliation with the Exchange to its advantage.\9\
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    \9\ See Notice, supra note 3, at 31943.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is

[[Page 36652]]

consistent with the requirements of the Act,\10\ and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(1) of the Act,\12\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulation thereunder, and the rules of the Exchange. Further, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\13\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to 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. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(1).
    \13\ 15 U.S.C. 78f(b)(5).
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\14\ To address these concerns, the Exchange has proposed the 
ongoing conditions summarized above, and also discussed further in the 
Notice, that will be applicable to Cboe Trading's routing activities in 
its capacity as a facility of the Exchange. The Commission believes 
that these conditions are designed to mitigate concerns about potential 
conflicts of interest and unfair competitive advantage. In particular, 
the Commission believes that a non-affiliated SRO's oversight of Cboe 
Trading, combined with a non-affiliated SRO's monitoring of Cboe 
Trading's compliance with applicable rules and regulations, will help 
ensure appropriate and independent regulatory oversight of Cboe 
Trading. The Commission also believes that the Exchange's proposal is 
designed to ensure that the Exchange will not permit Cboe Trading to 
have any information advantage on account of its affiliation with the 
Exchange.
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    \14\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 3, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60) (order 
approving the combination of NYSE Euronext and the American Stock 
Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30, 
2008) (SR-ISE-2009-85) (order approving the purchase by ISE Holdings 
of an ownership interest in DirectEdge Holdings LLC); 59281 (January 
22, 2009), 74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order 
approving a joint venture between NYSE and BIDS Holdings L.P.); 
58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-
182) (order granting the exchange registration of BATS Exchange, 
Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (File 
Nos. 10-194 and 10-196) (order granting the exchange registration of 
EDGX Exchange, Inc. and EDGA Exchange, Inc.); 62716 (August 13, 
2010), 75 FR 51295 (August 19, 2010) (File No. 10-198) (order 
granting the exchange registration of BATS-Y Exchange, Inc.); 66808 
(April 13, 2012), 77 FR 23294 (April 18, 2012) (SR-BATS-2012-013) 
(order approving rules change to make permanent a pilot program 
allowing inbound routing); 69870 (June 27, 2013), 78 FR 40225 (July 
3, 2013) (SR-EDGX-2013-17) (same); and 82952 (March 27, 2018), 83 FR 
14096 (April 2, 2018) (C2-2018-004) (order approving inbound 
router).
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    Finally, Exchange Rule 3.32(b) provides that, without prior 
Commission approval, no Trading Permit Holder may be or become 
affiliated with the Exchange. The Exchange now seeks Commission 
approval for its affiliate, Cboe Trading, to become a Trading Permit 
Holder of the Exchange pursuant to Rule 3.32(b) so that its affiliate 
may provide routing services as a facility of the Exchange. Although 
the Commission continues to be concerned about potential unfair 
competition and conflicts of interest between an exchange's self-
regulatory obligations and its commercial interest when the exchange is 
affiliated with one of its members, for the reasons discussed above, 
the Commission believes that it is consistent with the Act to permit 
Cboe Trading to become affiliated with the Exchange, in the capacity of 
a facility of the Exchange, for the purposes of providing the proposed 
routing services for the Exchange subject to the conditions described 
above.
    The Commission notes that Cboe Trading currently serves as the 
outbound, and limited inbound, routing facility for the Affiliated Cboe 
Exchanges, and is subject to the same conditions and limitations by 
those exchanges.\15\ The Exchange's current proposal is intended to 
allow Cboe Trading to perform an identical role for the Exchange as to 
which it currently performs for EDGX Options, BZX Options, and C2, 
including acting as an outbound router and as a limited inbound router 
to receive options orders from other Affiliated Cboe Exchanges.
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    \15\ See EDGX Options Rule 2.12 (Cboe Trading, Inc. as Inbound 
Router), BZX Options Rule 2.12 (Cboe Trading, Inc. as Inbound 
Router), and C2 Options Rule 3.18 (Cboe Trading, Inc. as Inbound 
Router). See also EDGX Options Rule 2.11 (Cboe Trading, Inc. as 
Outbound Router), BZX Options Rule 2.11 (Cboe Trading, Inc. as 
Outbound Router), and C2 Rule 3.18 (Cboe Trading, Inc. as Outbound 
Router).
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    The Commission believes that good cause exists for accelerated 
approval of the proposed rule change because the proposed rule change 
raises no novel issues, as the Exchange is adopting the same conditions 
and limitations that EDGX Options, BZX Options, and C2 have adopted for 
Cboe Trading.\16\ Furthermore, the Commission did not receive any 
comments during the comment period on this filing. For those reasons, 
the Commission finds good cause, pursuant to Section 19(b)(2) of the 
Act,\17\ to approve the proposed rule change prior to the 30th day 
after the date of publication of the notice of filing thereof in the 
Federal Register.
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    \16\ The Commission notes that it did not receive any comments 
on substantively identical proposals from EDGX Options, BZX Options, 
and C2 with respect to inbound routing from Cboe Trading. See 
Securities Exchange Act Release Nos. 66808 (April 13, 2012), 77 FR 
23294 (April 18, 2012) (SR-BATS-2012-013); 69870 (June 27, 2013), 78 
FR 40225 (July 3, 2013) (SR-EDGX-2013-17); and 82952 (March 27, 
2019), 83 FR 14097 (April 2, 2018) (SR-C2-2018-004).
    \17\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CBOE-2019-030) be, and 
hereby is, granted accelerated approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15972 Filed 7-26-19; 8:45 am]
BILLING CODE 8011-01-P


