[Federal Register Volume 84, Number 148 (Thursday, August 1, 2019)]
[Notices]
[Pages 37697-37701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16364]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86493; File No. SR-CboeEDGX-2019-028]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rule 
21.22 (Complex Automated Improvement Mechanism)

July 26, 2019.

I. Introduction

    On April 26, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt Exchange Rule 21.22, Complex Automated 
Improvement Mechanism (``C-AIM'' or ``C-AIM Auction''), to permit the 
use of the Exchange's Automated Improvement Mechanism (``AIM'' or ``AIM 
Auction'') for complex orders. The proposed rule change was published 
for comment in the Federal Register on May 16, 2019.\3\ On June 14, 
2019, the Exchange filed Amendment No. 1 to the proposed rule 
change.\4\ On June 26, 2019, pursuant to Section 19(b)(2) of the 
Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\6\ The Commission has received no comments 
regarding the proposal. The Commission is publishing this notice to 
solicit comment on Amendment No. 1 and is approving the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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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. 85831 (May 10, 
2019), 84 FR 22178 (the ``Notice'').
    \4\ Amendment No. 1 revises the proposal to (1) cap the prices 
of C-AIM responses based on the Synthetic Best Bid or Offer and the 
prices of orders resting on the top of the Complex Order Book at the 
conclusion of the C-AIM Auction, rather than at the beginning of the 
C-AIM Auction; (2) incorporate the new defined terms ``C-AIM Auction 
period'' and ``final auction price'' into the proposed rule text; 
(3) provide additional justification for the proposal to allow an 
Options Market Maker registered in the applicable series on the 
Exchange to be solicited to participate in a C-AIM Auction for a 
complex order that includes those series; (4) provide additional 
justification for the proposal to allow Agency Orders to execute 
only against complex interest at the conclusion of a C-AIM Auction; 
(5) make non-substantive simplifying, clarifying, and correcting 
changes to the proposed rule text; and (6) make non-substantive 
clarifications and corrections to the Form 19b-4 discussion of the 
proposed rule change. Amendment No. 1 is available at https://www.sec.gov/comments/sr-cboeedgx-2019-028/srcboeedgx2019028-5679914-185869.pdf.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 86202, 84 FR 31646 
(July 2, 2019). The Commission designated August 14, 2019, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
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II. Description of the Proposed Rule Change

A. Background

    As described more fully in the Notice,\7\ the Exchange proposes to 
adopt Exchange Rule 21.22 to establish the C-AIM Auction for complex 
orders. The Exchange notes that the C-AIM Auction will operate in a 
manner that is substantially similar to the Exchange's AIM Auction for 
single leg orders, with differences to, among other things, ensure that 
execution prices in the C-AIM Auction are consistent with complex order 
priority principles.\8\ The Exchange states that the proposed C-AIM 
Auction is similar to the complex order price improvement mechanisms of 
Cboe Exchange, Inc. (``Cboe Options'') and other options exchanges and 
will provide market participants with an opportunity to receive price 
improvement for their complex orders.\9\
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    \7\ See Notice, supra note 3.
    \8\ See Notice, 84 FR at 22184.
    \9\ See Notice, 84 FR at 22178-79.
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B. C-AIM Auction Eligibility

    The proposal will allow an Options Member (the ``Initiating 
Member'') to electronically submit for execution a complex order it 
represents as agent (the ``Agency Order'') against principal interest 
or a solicited complex order(s), provided the Initiating Member submits 
the Agency Order for electronic execution in a C-AIM Auction.\10\ The 
Agency Order may be in any class of options traded on the Exchange, and 
there is no minimum size for Agency Orders.\11\ The Initiating Member 
must stop the entire Agency Order at a stop price that: (1) is at least 
$0.01 better than the same-side Synthetic Best Bid (``SBB'') or 
Synthetic Best Offer (``SBO'') \12\ if the BBO on any component of the 
complex strategy represents a Priority Customer order on the Simple 
Book, or is at or better than the same-side SBB (SBO) if each component 
of the complex strategy represents a non-Priority Customer order or 
quote on the Simple Book; (2) is at least $0.01 better than a same-side 
complex order resting in the Complex Order Book (``COB''),\13\ unless 
the Agency Order is a Priority Customer Order and the resting order is 
a non-Priority Customer order, in which case the stop price must be at 
or better than the bid (offer) of the resting complex order; and (3) is 
at least $0.01 better than the opposite side SBO (SBB) if the BBO of 
any component of the complex strategy represents a Priority Customer 
quote or order on the Simple Book, or is at or better than the opposite 
side SBO (SBB) if the BBO of each component of the complex strategy 
represents a non-Priority Customer order or quote on the Simple 
Book.\14\ The Initiating Member must specify (A) a single price at 
which it seeks to execute the Agency Order against the Initiating Order 
(``single-price submission''), including whether it elects to have last 
priority in allocation; or (B) an initial stop price and instruction to 
automatically match the price and size of all C-AIM responses and other 
trading interest (``auto-match'') up to a designated limit price or at 
all prices that improve the stop price.\15\
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    \10\ See proposed Exchange Rule 21.22.
    \11\ See proposed Exchange Rule 21.22(a)(1) and (3). In 
addition, proposed Exchange Rule 21.22(a) provides that: the 
Initiating Member must mark an Agency Order for C-AIM Auction 
processing; the Initiating Order must be for the same size as the 
Agency Order; the price of the Agency Order and Initiating Order 
must be in an increment of $0.01; the Initiating Member may not 
designate an Agency Order or Initiating Order as Post Only; and an 
Initiating Member may only submit an Agency Order to a C-AIM Auction 
after the Complex Order Book opens. The System rejects or cancels 
both an Agency Order and an Initiating Order submitted to a C-AIM 
Auction that do not meet these conditions.
    \12\ The Synthetic Best Bid or Offer (``SBBO'') is calculated 
using the best displayed price for each component of a complex 
strategy from the Simple Book. The Simple Book is the Exchange's 
regular electronic book of orders. See Exchange Rules 21.20(a)(10) 
and (11). For purposes of proposed Rule 21.22, the SBBO means the 
SBBO at the particular point in time applicable to the reference. 
See proposed Exchange Rule 21.22.
    \13\ The COB is the Exchange's electronic book of complex orders 
and used for all trading sessions. See Exchange Rule 21.20(a)(6).
    \14\ See proposed Exchange Rule 21.22(b)(1)-(3) and Amendment 
No. 1.
    \15\ See proposed Exchange Rule 21.22(b)(4). The System rejects 
or cancels both an Agency Order and an Initiating Order submitted to 
a C-AIM Auction that do not meet the conditions of proposed Exchange 
Rule 21.22(b).
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    One or more C-AIM Auctions in the same complex strategy for Agency

[[Page 37698]]

Orders for which the smallest leg is 50 standard option contracts (or 
500 mini-option contracts) or more may occur at the same time.\16\ C-
AIM Auctions in different complex strategies may be ongoing at any 
given time, even if the complex strategies have overlapping 
components.\17\ In addition, a C-AIM Auction may be ongoing at the same 
time as an AIM Auction in any component of the complex strategy.\18\ To 
the extent there is more than one C-AIM Auction in a complex strategy 
underway at a time, the C-AIM Auctions conclude sequentially based on 
the exact time each C-AIM Auction commenced, unless terminated early 
pursuant to proposed Exchange Rule 21.22(d).\19\ In the event there are 
multiple C-AIM Auctions underway that are each terminated early, the 
System processes the C-AIM Auctions sequentially based on the exact 
time each C-AIM Auction commenced.\20\ If the System receives a simple 
order that causes an AIM and C-AIM (or multiple AIM and/or C-AIM) 
Auctions to conclude early, the System first processes AIM Auctions (in 
price-time priority) and then processes C-AIM Auctions (in price-time 
priority).\21\
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    \16\ See proposed Exchange Rule 21.22(c)(1)(A). With respect to 
Agency Orders for which the smallest leg is less than 50 standard 
option contracts (or 500 mini-option contracts), only one C-AIM 
Auction may be ongoing at any given time in a complex strategy, and 
C-AIM Auctions in the same complex strategy may not queue or overlap 
in any manner. See id.
    \17\ See proposed Exchange Rule 21.22(c)(1)(A).
    \18\ See id.
    \19\ See proposed Exchange Rule 21.22(c)(1)(B).
    \20\ See id.
    \21\ See id.
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C. C-AIM Auction Process

    Upon receipt of an Agency Order that meets the conditions in 
proposed Exchange Rules 21.22(a) and (b), the System \22\ initiates a 
C-AIM Auction by sending a C-AIM notification message detailing the 
side, size, price, origin code, Auction ID, and complex strategy of the 
Agency Order to all Options Members that elect to receive C-AIM Auction 
notification messages.\23\ The Exchange will determine the C-AIM 
Auction period, which may be no less than 100 milliseconds and no more 
than one second.\24\ An Initiating Member may not modify or cancel an 
Agency Order or Initiating Order after submitting them to a C-AIM 
Auction.\25\
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    \22\ The System is the electronic communications and trading 
facility designated by the Board through which securities orders of 
Users are consolidated for ranking, execution and, when applicable, 
routing away. See EDGX Rule 1.5(cc).
    \23\ C-AIM Auction messages will not be included in OPRA. See 
proposed Exchange Rule 21.22(c)(2) and Amendment No. 1.
    \24\ See proposed Exchange Rule 21.22(c)(3) and Amendment No. 1.
    \25\ See proposed Exchange Rule 21.22(c)(4).
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    Any User other than the Initiating Member, determined by Executing 
Firm ID (``EFID''), may submit responses to a C-AIM Auction that are 
properly marked specifying size, side of the market, and the Auction ID 
for the C-AIM Auction to which the User is submitting the response.\26\ 
The minimum price increment for C-AIM responses is $0.01, and C-AIM 
responses must be on the opposite side of the market as the Agency 
Order.\27\ C-AIM responses will not be visible to C-AIM Auction 
participants or disseminated to OPRA.\28\ A User may submit multiple C-
AIM responses to the Auction at the same or multiple prices, and the 
System will aggregate all of a User's complex orders on the COB and C-
AIM responses for the same EFID at the same price.\29\ The System will 
cap the size of a C-AIM response, or the aggregate size of a User's 
complex orders on the COB and C-AIM responses for the same EFID at the 
same price, at the size of the Agency Order (i.e., the System ignores 
size in excess of the size of the Agency Order when processing the C-
AIM Auction).\30\ In addition, the C-AIM responses are capped at 
specified prices that exist at the conclusion of the C-AIM Auction.\31\
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    \26\ A C-AIM Auction response may only participate in the C-AIM 
Auction with the Auction ID specified in the response and may not be 
designated as Immediate-or-Cancel (``IOC''). C-AIM responses may be 
designated with the Match Trade Prevention (``MTP'') modifier of MTP 
Cancel Newest, but no other MTP modifiers. A User may modify or 
cancel its C-AIM responses during the Auction. See proposed Exchange 
Rules 21.22(c)(5)(F), (G), and (I).
    \27\ See proposed Exchange Rules 21.22(c)(5)(A) and (E).
    \28\ See proposed Exchange Rule 21.22(c)(5)(H).
    \29\ See proposed Exchange Rules 21.22(c)(5)(C).
    \30\ See proposed Exchange Rules 21.22(c)(5)(D).
    \31\ C-AIM buy (sell) responses are capped at the following 
prices that exist at the conclusion of the C-AIM Auction: (i) the 
better of the SBO (SBB) or the offer (bid) of a resting complex 
order at the top of the COB; or (ii) $0.01 lower (higher) than the 
better of the SBO (SBB) or the offer (bid) of a resting complex 
order at the top of the COB if the BBO of any component of the 
complex strategy or the resting complex order, respectively, is a 
Priority Customer order. The System executes these C-AIM responses, 
if possible, at the most aggressive permissible price not outside 
the SBBO at the conclusion of the C-AIM Auction or the price of the 
resting complex order. See proposed Exchange Rules 21.22(c)(5)(B) 
and Amendment No. 1.
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D. Conclusion of a C-AIM Auction

    A C-AIM Auction will conclude at the earliest to occur of several 
circumstances, including the end of the C-AIM Auction period, the 
market close, or when the Exchange halts trading in the complex 
strategy or in any component of the complex strategy.\32\ In addition, 
a C-AIM Auction will conclude upon receipt by the System of certain 
unrelated orders.\33\ A C-AIM Auction will not conclude early if the 
System receives an unrelated market or marketable limit complex order 
(against the SBBO or the best price of a complex order resting in the 
COB), including a Post Only complex order, on the opposite side of the 
market during a C-AIM Auction, and the System will execute the order 
against interest outside the C-AIM Auction or post the complex order to 
the COB.\34\ Any contracts remaining from the unrelated complex order 
at the time the C-AIM Auction ends may be allocated for execution 
against the Agency Order pursuant to proposed Exchange Rule 
21.22(e).\35\
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    \32\ See proposed Exchange Rules 21.22(d)(1)(a), (g), and (h). 
If the Exchange halts trading in the complex strategy or a component 
of the complex strategy, the C-AIM Auction concludes without 
execution. See proposed Exchange Rule 21.22(d)(1)(h).
    \33\ A C-AIM Auction will conclude upon receipt by the System of 
the following unrelated orders: An unrelated non-Priority Customer 
complex order on the same side as the Agency Order that would post 
to the COB at a price better than the stop price; an unrelated 
Priority Customer complex order on the same side as the Agency Order 
that would post to the COB at a price equal to or better than the 
stop price; an unrelated non-Priority Customer order or quote that 
would post to the Simple Book and cause the SBBO on the same side as 
the Agency Order to be better than the stop price; an unrelated 
Priority Customer order in any component of the complex strategy 
that would post to the Simple Book and cause the SBBO on the same 
side as the Agency Order to be equal to or better than the stop 
price; a simple non-Priority Customer order that would cause the 
SBBO on the opposite side of the Agency Order to be better than the 
stop price, or a Priority Customer order that would cause the SBBO 
on the opposite side of the Agency Order to be equal to or better 
than the stop price. See proposed Exchange Rules 21.22(d)(1)(b)-(f).
    \34\ See proposed Exchange Rule 21.22(d)(2).
    \35\ See id.
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E. Allocations at the Conclusion of a C-AIM Auction

    At the conclusion of a C-AIM Auction, the System executes the 
Agency Order against the Initiating Order or contra-side complex 
interest, including complex orders on the COB and C-AIM responses, at 
the best price(s), to the price at which the balance of the Agency 
Order can be fully executed (the ``final auction price'').\36\ Any 
execution price(s) must be at or between the SBBO and the best prices 
of any complex orders resting on each side of the COB at the conclusion 
of the C-AIM Auction.\37\ Executions of a complex Agency Order at the 
conclusion of a C-AIM Auction are

[[Page 37699]]

subject to the complex order priority in Exchange Rule 21.20(c)(3).\38\ 
Allocations at the conclusion of the C-AIM Auction will vary depending 
on whether the Auction results in price improvement for the Agency 
Order \39\ and, if there is price improvement, whether the Initiating 
Member has selected single-price submission (with or without a last 
priority election) \40\ or auto-match.\41\
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    \36\ See proposed Exchange Rule 21.22(e) and Amendment No. 1.
    \37\ See proposed Exchange Rule 21.22(e).
    \38\ See proposed Exchange Rule 21.22(e)(5).
    \39\ If the C-AIM Auction results in no price improvement, the 
System executes the Agency Order at the final auction price (which 
equals the stop price) against contra-side interest in the following 
order: (A) Priority Customer complex orders on the COB (in time 
priority); (B) the Initiating Order for the greater of (i) one 
contract or (ii) up to 50% of the Agency Order if there is contra-
side complex interest from one other User at the final auction price 
or 40% of the Agency Order if there is contra-side complex interest 
from two or more other Users at the final auction price (which 
percentages are based on the number of contracts remaining after 
execution against Priority Customer complex orders); (C) all other 
contra-side complex interest in a pro-rata manner; and (D) the 
Initiating Order to the extent there are any remaining contracts. 
See proposed Exchange Rule 21.22(e)(1).
    \40\ If the C-AIM Auction results in price improvement for the 
Agency Order and the Initiating Member selected a single-price 
submission, the System executes the Agency Order at each price level 
better than the stop price against contra-side complex interest in 
the following order: (A) Priority Customer complex orders on the COB 
(in time priority); and (B) all other contra-side complex interest 
in a pro-rata manner. If the final auction price equals the stop 
price, the System executes any remaining contracts from the Agency 
Order at that price in the order set forth in proposed Exchange Rule 
21.22(e)(1). See proposed Exchange Rule 21.22(e)(2). If the 
Initiating Member elects last priority, then notwithstanding 
proposed Exchange Rules 21.22(e)(1) and (2), the System only 
executes the Initiating Order against any remaining Agency Order 
contracts at the stop price after the Agency Order is allocated to 
all other contra-side interest (in the order set forth in proposed 
Exchange Rule 21.22(e)(2)) at all prices equal to or better than the 
stop price. Last priority information is not available to other 
market participants and may not be modified after it is submitted. 
See proposed Exchange Rule 21.22(e)(4).
    \41\ If the C-AIM Auction results in price improvement for the 
Agency Order and the Initiating Member selected auto-match, at each 
price level better than the final auction price (or at each price 
level better than the final auction price up to the limit price if 
the Initiating Member specified one), the System executes the Agency 
Order against the Initiating Order for the number of contracts equal 
to the aggregate size of all other contra-side complex interest and 
then executes the Agency Order against that contra-side complex 
interest in the order set forth in proposed Exchange Rule 
21.22(e)(2). At the final auction price, the System executes those 
contracts at that price in the order set forth in proposed Exchange 
Rule 21.22(e)(1).
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F. Customer-to-Customer Immediate Crosses

    In lieu of the C-AIM Auction process described above, an Initiating 
Member may enter an Agency Order for the account of a Priority Customer 
paired with a solicited order(s) for the account of a Priority 
Customer.\42\ The System will automatically execute these paired orders 
without a C-AIM Auction (``Customer-to-Customer C-AIM Immediate 
Cross''), subject to certain conditions. Customer-to-Customer C-AIM 
Immediate Crosses are subject to the following conditions: (1) The 
transaction price must be at or between the SBBO and may not equal 
either side of the SBBO if the BBO of any component of the complex 
strategy represents a Priority Customer order on the Simple Book; (2) 
the transaction price must be at or between the best-priced complex 
orders in the complex strategy resting on the COB and may not equal the 
price of a Priority Customer complex order resting on either side of 
the COB; and (3) the System will not initiate a Customer-to-Customer 
Complex C-AIM Immediate Cross if the transaction price equals (A) 
either side of the SBBO and the BBO of any component of the complex 
strategy represents a Priority Customer order on the Simple Book, or 
(B) the price of a Priority Customer complex order resting on either 
side of the COB. Instead, the System cancels the Agency Order and 
Initiating Order.\43\ Thus, Customer-to-Customer C-AIM Crosses will 
trade at a price that is at least as good as the price at which the 
orders would have executed had they been submitted separately to the 
COB.\44\ The Exchange believes that Customer-to-Customer C-AIM 
Immediate Crosses will provide Options Members with a more efficient 
means of executing their customer complex orders, subject to the 
Exchange's existing requirements limiting principal transactions.\45\
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    \42\ See proposed Exchange Rule 21.22(f).
    \43\ See proposed Exchange Rule 21.22(f).
    \44\ See id.
    \45\ See id.
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G. Additional Requirements and Order Exposure Rule

    An Options Member may only use a C-AIM Auction where there is a 
genuine intention to execute a bona fide transaction.\46\ A pattern or 
practice of submitting orders or quotes for the purpose of disrupting 
or manipulating C-AIM Auctions, including to cause a C-AIM Auction to 
conclude before the end of the C-AIM Auction period, will be deemed 
conduct inconsistent with just and equitable principles of trade and a 
violation of Exchange Rule 3.1.\47\ It will also be deemed conduct 
inconsistent with just and equitable principles of trade and a 
violation of Exchange Rule 3.1 to engage in a pattern of conduct where 
the Initiating Member breaks up an Agency Order into separate orders 
for the purpose of gaining a higher allocation percentage than the 
Initiating Member would have otherwise received in accordance with the 
allocation procedures contained in proposed Exchange Rule 21.22(e).\48\
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    \46\ See proposed Exchange Rule 21.22, Interpretation and Policy 
.01.
    \47\ See proposed Exchange Rule 21.22, Interpretation and Policy 
.02.
    \48\ See id.
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    Exchange Rule 22.12 prevents an Options Member from executing an 
agency order to increase its economic gain from trading against the 
order without first giving other trading interests on the Exchange an 
opportunity to either trade with the agency order or to trade at the 
execution price when the Options Member was already bidding or offering 
on the book.\49\ However, the Exchange recognizes that it may be 
possible for an Options Member to establish a relationship with a 
Priority Customer or other person to deny agency orders the opportunity 
to interact on the Exchange and to realize similar economic benefits as 
it would achieve by executing agency order as principal.\50\ It would 
be a violation of Exchange Rule 22.12 for an Options Member to 
circumvent such rule by providing an opportunity for (a) a Priority 
Customer affiliated with the Options Member, or (b) a Priority Customer 
with whom the Options Member has an arrangement that allows the Options 
Member to realize similar economic benefits from the transaction as the 
Options Member would achieve by executing agency orders as principal, 
to regularly execute against agency orders handled by the firm 
immediately upon their entry as Customer-to-Customer C-AIM Immediate 
Crosses pursuant to proposed Rule 21.22(f).\51\
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    \49\ See proposed Exchange Rule 21.22, Interpretation and Policy 
.03.
    \50\ See id.
    \51\ See id.
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    The Exchange proposes to amend Exchange Rule 22.12(c) to add a 
reference to the C-AIM Auction as an exception to the general 
restriction on Options Members executing as principal orders they 
represent as agent.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, with 
Section 6(b) of the Act.\52\ In

[[Page 37700]]

particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\53\ 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.
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    \52\ 15 U.S.C. 78f(b). 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).
    \53\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that allowing Options Members to enter 
complex orders into the C-AIM Auction could provide opportunities for 
complex orders to receive price improvement. Under the proposal, an 
Initiating Member that submits an Agency Order to the C-AIM Auction 
also submits an Initiating Order, representing principal or solicited 
interest, that stops the entire Agency Order at a price that is at 
least $0.01 better than the same- and opposite-side SBBO if the BBO for 
any component of the complex strategy represents a Priority Customer 
order on the Simple Book, and is at or better than the same- and 
opposite-side SBBO if each component of the complex strategy represents 
a non-Priority Customer order or quote on the Simple Book.\54\ In 
addition, the stop price must be at least $0.01 better than the price 
of any same-side complex order resting in the COB, unless the Agency 
Order is a Priority Customer order and the resting complex order is a 
non-Priority Customer Order, in which case the stop price must be at or 
better than the bid or offer of the resting complex order.\55\ An 
Initiating Member may not modify or cancel an Agency Order or 
Initiating Order after submitting them to a C-AIM Auction.\56\ At the 
conclusion of the C-AIM Auction, the Agency Order is executed in full 
at the best price(s) available, taking into consideration the 
Initiating Order, complex orders in the COB, and C-AIM responses.\57\ 
Thus, a complex order entered into a C-AIM Auction will be guaranteed 
an execution in full at its stop price and will be given an opportunity 
for price improvement by being exposed to Users during a C-AIM Auction. 
The Commission notes that other exchanges have previously adopted 
similar rules to permit the entry of complex orders into a price 
improvement mechanism.\58\ In addition, with respect to Customer-to-
Customer C-AIM Immediate Crosses, the Commission notes that another 
exchange has adopted a similar rule.\59\
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    \54\ See proposed Exchange Rules 21.22(b)(1) and (3).
    \55\ See proposed Exchange Rule 21.22(b)(2).
    \56\ See proposed Exchange Rule 21.22(c)(4).
    \57\ See proposed Exchange Rule 21.22(e). Any execution price(s) 
must be at or between the SBBO and the best prices of any complex 
orders resting on each side of the COB at the conclusion of the C-
AIM Auction. See id.
    \58\ See, e.g., BOX Rule 7245.
    \59\ See ISE Options 3, Section 12(b).
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    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with 
Sections 6(b)(5) of the Act.\60\
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    \60\ 15 U.S.C. 78f(b)(5).
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IV. Section 11(a) of the Act

    Section 11(a)(1) of the Act \61\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\62\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\63\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member or an associated 
person has investment discretion, neither the member nor its associated 
person may retain any compensation in connection with effecting the 
transaction except as provided in the Rule. For the reasons set forth 
below, the Commission believes that Exchange members entering orders 
into the C-AIM Auction would satisfy the requirements of Rule 11a2-
2(T).
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    \61\ 15 U.S.C. 78k(a)(1).
    \62\ 17 CFR 240.11a2-2(T).
    \63\ This prohibition also applies to associated persons. The 
member may, however, participate in clearing and settling the 
transaction.
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    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\64\ The Exchange represents that the System and the 
proposed C-AIM Auction receive all orders electronically through remote 
terminals or computer-to-computer interfaces.\65\ The Exchange also 
represents that orders for covered accounts from Options Members will 
be transmitted from a remote location directly to the proposed C-AIM 
mechanism by electronic means. Because no Exchange members may submit 
orders into the C-AIM Auction from on the floor of the Exchange, the 
Commission believes that the C-AIM Auction satisfies the off-floor 
transmission requirement.
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    \64\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \65\ See Notice, 84 FR at 22188.
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    Second, the Rule requires that the member and any associated person 
not participate in the execution of its order after the order has been 
transmitted. The Exchange represents that at no time following the 
submission to the C-AIM Auction of an order or C-AIM response is an 
Options Member able to acquire control or influence over the result or 
timing of the order's or response's execution.\66\ According to the 
Exchange, the execution of an order (including the Agency and the 
Initiating Order) or a C-AIM response sent to the C-AIM mechanism is 
determined by what other orders and responses are present and the 
priority of those orders and

[[Page 37701]]

responses.\67\ Accordingly, the Commission believes that a member does 
not participate in the execution of an order or response submitted to 
the C-AIM mechanism.
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    \66\ See id. (also representing, among other things, that: (1) 
No Options Member, including the Initiating Member, will see a C-AIM 
response submitted into a C-AIM Auction and therefore will not be 
able to influence or guide the execution of their Agency Orders, 
Initiating Orders, or C-AIM responses, as applicable; and (2) the 
last priority feature will not permit an Options Member to have any 
control over an order, and the election to last priority is 
available prior to the submission of the order, will not be 
broadcast and further, the last priority option may not be modified 
by the Initiating Member during the C-AIM Auction).
    \67\ See id. The Exchange notes that an Initiating Member may 
not cancel or modify an Agency Order or Initiating Order after it 
has been submitted into a C-AIM Auction, but that Options Members 
may modify or cancel their responses after being submitted to a C-
AIM Auction. See id. at 22188, n.64. As the Exchange notes, the 
Commission has stated that the non-participation requirement does 
not preclude members from cancelling or modifying orders, or from 
modifying instructions for executing orders, after they have been 
transmitted so long as such modifications or cancellations are also 
transmitted from off the floor. See Securities Exchange Act Release 
No. 14563 (March 14, 1978), 43 FR 11542, 11547 (the ``1978 
Release'').
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities, such as the C-AIM mechanism, are 
used, as long as the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange.\68\ The Exchange 
represents that the C-AIM is designed so that no Options Member has any 
special or unique trading advantage in the handling of its orders after 
transmitting its orders to the mechanism.\69\ Based on the Exchange's 
representation, the Commission believes that the C-AIM mechanism 
satisfies this requirement.
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    \68\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 71.
    \69\ See Notice, 84 FR at 22188.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\70\ The Exchange represents that Options Members 
relying on Rule 11a2-2(T) for transactions effected through the C-AIM 
Auction must comply with this condition of the Rule and that the 
Exchange will enforce this requirement pursuant to its obligations 
under Section 6(b)(1) of the Act to enforce compliance with federal 
securities laws.\71\
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    \70\ In addition, Rule 11a2-2(T)(d) requires a member or 
associated person authorized by written contract to retain 
compensation, in connection with effecting transactions for covered 
accounts over which such member or associated persons thereof 
exercises investment discretion, to furnish at least annually to the 
person authorized to transact business for the account a statement 
setting forth the total amount of compensation retained by the 
member or any associated person thereof in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 74, at 11548 (stating ``[t]he contractual and disclosure 
requirements are designed to assure that accounts electing to permit 
transaction-related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \71\ See Notice, 84 FR at 22188.
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V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 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-CboeEDGX-2019-028 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-CboeEDGX-2019-028. 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-CboeEDGX-2019-028, and should be 
submitted on or before August 22, 2019.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. The Commission believes that Amendment No. 1 
provides additional clarity to the rule text and additional analysis of 
aspects of the proposal, thereby facilitating the Commission's ability 
to make the findings set forth above to approve the proposal. In 
addition, the Commission believes that Amendment No. 1 does not raise 
novel regulatory issues or make significant substantive changes to the 
original proposal, which was published for notice and comment and which 
received no comments. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\72\ to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \72\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\73\ that the proposed rule change (SR-CboeEDGX-2019-028), as 
modified by Amendment No. 1, is approved on an accelerated basis.
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    \73\ 15 U.S.C. 78s(b)(2).
    \74\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\74\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16364 Filed 7-31-19; 8:45 am]
 BILLING CODE 8011-01-P


