[Federal Register Volume 84, Number 158 (Thursday, August 15, 2019)]
[Notices]
[Pages 41779-41788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17488]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86621; File No. SR-CboeEDGX-2019-047]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing of a Proposed Rule Change To Adopt Rule 21.21 (Solicitation 
Auction Mechanism)

August 9, 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 July 31, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') 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 
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.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') proposes to 
adopt Rule 21.21. 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/edgx/), 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
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc. 
(``Cboe Global''), which is the parent company of Cboe Exchange, Inc. 
(``Cboe Options'') and Cboe C2 Exchange, Inc. (``C2''), acquired the 
Exchange, 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, the Exchange, 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 BZX 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 available on 
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.
    The purpose of the proposed rule change is to adopt the 
Solicitation Auction Mechanism (``SAM''), which is a solicited order 
mechanism for larger-sized orders. SAM will provide an additional 
method for market participants to effect orders in a price improvement 
auction. The proposed rule change is similar to the solicited order 
mechanism of Cboe Options and other options exchanges. Many aspects of 
the proposed rule change are similar to the corresponding aspects of 
the Automated Improvement Mechanism (``AIM''), which is the Exchange's 
current electronic crossing mechanism. The Exchange believes the 
similarity of SAM to the Exchange's AIM mechanism and the mechanisms of 
other exchanges will allow the Exchange's proposed price improvement 
functionality to fit seamlessly into the options market and benefit 
market participants who are already familiar with this similar 
functionality. The Exchange also believes this will encourage Users to 
compete vigorously to provide the opportunity for price improvement for 
larger-sized customer orders in a competitive auction process.
    An Options Member (the ``Initiating Member'') may electronically 
submit for execution an order it represents as agent (``Agency Order'') 
against a solicited order(s) \3\ if it submits the Agency Order for 
electronic execution into a SAM Auction pursuant to proposed Rule 
21.21.\4\
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    \3\ The solicited order(s) cannot be for the same EFID as the 
Agency Order or for the account of any Options Market Maker with an 
appointment in the applicable class on the Exchange. Cboe Options 
Rule 6.74B is silent on how it determines whether both orders 
submitted to a SAM Auction are solicited for different accounts. The 
Agency Order and Solicited Order cannot both be for the accounts of 
a customer. Cboe Options Rule 6.74B does not contain a similar 
prohibition. The Exchange believes it is appropriate for such 
customer-to-customer crosses to be submitted to an AIM Auction 
pursuant to Rule 6.74A [sic], as that rule contains a provision for 
Customer-to-Customer Immediate AIM Crosses.
    \4\ For purposes of proposed Rule 21.21, the term ``NBBO'' means 
the national best bid or national best offer at the particular point 
in time applicable to the reference, and the term ``Initial NBBO'' 
means the national best bid or national best offer at the time a SAM 
Auction is initiated.
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    The Initiating Member may initiate a SAM Auction if all of the 
following conditions are met:
     The Agency Order may be in any class traded on the 
Exchange.\5\
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    \5\ See proposed Rule 21.21(a)(1). Cboe Options Rule 6.74B(a)(1) 
permits Cboe Options to make SAM available on a class-by-class 
basis. The Exchange does not believe it currently needs this 
flexibility.
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     The Initiating Member must mark an Agency Order for SAM 
Auction processing.\6\
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    \6\ See proposed Rule 21.21(a)(2); see also Cboe Options Rule 
6.74B(b)(1)(A).
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     The Agency Order must be for at least the minimum size 
designated by the Exchange (which may not be less than 500 standard 
option contracts or 5,000 mini-option contracts). The Solicited Order 
must be for (or must total, if the Solicited Order is comprised of 
multiple solicited orders) \7\ the same size as the Agency Order. The 
Initiating Member must designate each of the Agency Order and Solicited 
Order as all-or-none (``AON'').\8\
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    \7\ Cboe Options Rule 6.74B does not permit the solicited order 
to consist of multiple contras. See additional discussion below 
regarding the provision to permit multiple contra-parties to be 
solicited to trade against an Agency Order.
    \8\ See proposed Rule 21.21(a)(3); see also Cboe Options Rule 
6.74B(a)(1) and (2).
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     The price of the Agency Order and Solicited Order must be 
in an increment of $0.01.\9\
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    \9\ See proposed Rule 21.21(a)(4). Cboe Options Rule 6.74B(a)(3) 
permits Cboe Options to determine the minimum price increment for 
the Agency Order and Solicited Order, which may not be smaller than 
$0.01. The Exchange does not believe it needs this flexibility, and 
thus the proposed rule change applies the $0.01 increment to all 
classes.

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[[Page 41780]]

     An Initiating Member may not designate an Agency Order or 
Solicited Order as Post Only.\10\
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    \10\ See proposed Rule 21.21(a)(5). The Post Only designation is 
not currently available on Cboe Options. The Exchange believes this 
is appropriate, as the purpose of a Post Only order is to not 
execute upon entry and instead rest in the EDGX Options Book, while 
the purpose of orders submitted into a SAM Auction is to receive an 
execution following the auction but prior to entering the EDGX 
Options Book. See also Rule 21.19(a)(5).
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     An Initiating Member may only submit an Agency Order to a 
SAM Auction after the market open.\11\
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    \11\ See proposed Rule 21.21(a)(6). Cboe Options Rule 6.74B is 
silent on when a SAM Auction may be initiated. However, the Exchange 
understands that the proposed rule change is consistent with Cboe 
Options functionality. See also Rule 21.19(a)(6).
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     An Initiating Member may not submit an Agency Order if the 
NBBO is crossed (unless the Agency Order is a SAM ISO).\12\
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    \12\ See proposed Rule 21.21(a)(7). Cboe Options Rule 6.74B is 
silent on whether a SAM Auction may be initiated when the NBBO is 
crossed. However, the proposed rule change is consistent with the 
proposed requirement (and Cboe Options Rule 6.74B(b)(1)(A) and 
(2)(A)(1)) that the stop price and execution price be at or better 
than the initial NBBO (as discussed below), as well as linkage rules 
that do not permit executions at prices that trade through the NBBO 
(see Rule 27.2).
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    The System rejects or cancels both an Agency Order and Solicited 
Order submitted to a SAM Auction that do not meet these conditions.\13\
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    \13\ See proposed Rule 21.21(a). Cboe Options Rule 6.74B does 
not specify whether an Agency Order and Solicited Order will be 
rejected or cancelled if they do not meet the SAM eligibility 
requirements. However, the Exchange understands that the proposed 
rule change is consistent with Cboe Options functionality. The 
proposed SAM Auction eligibility requirements (other than the 
minimum size) are the same as the AIM Auction eligibility 
requirements. See Rule 21.19(a).
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    As defined, the Solicited Order may be comprised of multiple 
solicited orders, in which case they must total the same size as the 
Agency Order (and thus be for a total of at least 500 contracts). This 
will accommodate multiple contra-parties and increase the opportunities 
for customer orders to be submitted into a SAM Auction with the 
potential for price improvement, since the Initiating Order must stop 
the full size of the Agency Order. This will have no impact on the 
execution of the Agency Order, which may trade against multiple contra-
parties depending on the final auction price, as set forth in proposed 
paragraph (e). The Exchange notes that with regard to order entry, the 
first order submitted into the system is marked as the initiating/
agency side and the second order is marked as the contra-side. 
Additionally, the Solicited Order will always be entered as a single 
order, even if that order consists of multiple contra-parties who are 
allocated their portion of the trade in a post-trade allocation.\14\
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    \14\ The Exchange notes that while other exchange rules do not 
specify whether the contra-side order in a solicitation auction 
mechanism may consist of multiple orders, the contra-side order for 
Qualified Contingent Cross Orders (see Rule 21.1(d)(10)), which 
similarly have a minimum quantity requirement and are fully crossed 
against an initiating order that must be for a minimum number of 
contracts, may consist of multiple contra-side orders. However, ISE 
Regulatory Information Circular 2014-013 states that the contra-side 
order submitted into a crossing mechanism (including the ISE 
solicited order mechanism) may consist of one or more parties.
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    The Solicited Order must stop the entire Agency Order at a price 
that satisfies the following conditions:
     The stop price for a buy (sell) Agency Order must be at or 
better than the then-current NBO (NBB).\15\
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    \15\ See proposed Rule 21.21(b)(1); see also Cboe Options Rule 
6.74B(b)(1)(A).
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     If the Agency Order is to buy (sell), the stop price must 
be at least $0.01 better than the Exchange best bid (offer), 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 Exchange best bid (offer).\16\ The Exchange believes 
this condition protects orders on the same side as the Agency Order 
resting on the EDGX Options Book, including Priority Customer orders. 
By permitting a Priority Customer Agency Order to be entered at the 
same price as a resting non-Priority Customer order, the proposed rule 
change also protects Priority Customer orders submitted into an AIM 
[sic] Auction. The proposed rule change is consistent with general 
customer priority principles.
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    \16\ See proposed Rule 21.21(b)(2). These conditions regarding 
orders on the same side as the Agency Order are the same as those 
applicable to AIM for orders of 50 contracts or more. See Rule 
21.19(b). Cboe Options Rule 6.74B is silent regarding whether the 
stop price must be at or better than the same-side Cboe Options best 
bid or offer; however, the execution price must be at or better than 
the Cboe Options best bid or offer.
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     If the Agency Order is to buy (sell) and the Exchange best 
offer (bid) represents (a) a Priority Customer order on the EDGX 
Options Book, the stop price must be at least $0.01 better than the 
Exchange best offer (bid); or (b) a quote or order that is not a 
Priority Customer order on the EDGX Options Book, the stop price must 
be at or better than the Exchange best offer (bid).\17\ The Exchange 
believes this condition protects orders on the opposite side of the 
Agency Order resting on the EDGX Options Book, including Priority 
Customer orders.
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    \17\ See proposed Rule 21.21(b)(3). Cboe Options Rule 6.74B is 
silent regarding whether the stop price must be at or better than 
the opposite-side Cboe Options best bid or offer; however, the 
execution price may not be at the same price as priority customer 
orders resting on the book on the opposite side of the Agency Order 
(unless the priority customer orders execute against the Agency 
Order).
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     If the Initiating Member submits a SAM sweep order to a 
SAM Auction, the stop price, SAM responses, and executions are 
permitted at a price inferior to the Initial NBBO. A ``SAM sweep 
order'' or ``SAM ISO'' is the submission of two orders for crossing in 
a SAM Auction without regard for better-priced Protected Quotes (as 
defined in Rule 27.1) because the submitting Options Member routed an 
ISO(s) simultaneously with the routing of the SAM ISO to execute 
against the full displayed size of any Protected Quote that is better 
than the stop price and has swept all interest in the EDGX Options Book 
with a price better than the stop price. Any execution(s) resulting 
from these sweeps accrue to the AIM [sic] Agency Order.\18\
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    \18\ See proposed Rule 21.21(b)(4). Cboe Options Rule 6.74B is 
silent on whether ISOs are permitted with respect to SAM auctions. 
However, ISOs are similarly permitted for AIM Auctions, and the 
proposed definition of a SAM ISO is consistent with linkage rules. 
See Rules 21.19(b)(3)(A) and 27.1.
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    The System rejects or cancels both an Agency Order and Solicited 
Order submitted to a SAM Auction that do not meet these conditions.\19\
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    \19\ See proposed Rule 21.21(b).
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    Upon receipt of an Agency Order that meets the above conditions, 
the SAM Auction process commences.\20\ One or more SAM Auctions in the 
same series may occur at the same time. To the extent there is more 
than one SAM Auction in a series underway at a time, the SAM Auctions 
conclude sequentially based on the exact time each SAM Auction 
commenced, unless terminated early pursuant to proposed paragraph (d). 
At the time each SAM Auction concludes, the System allocates the Agency 
Order pursuant to proposed paragraph (e) and takes into account all SAM 
Auction responses and unrelated orders in place at the exact time of 
conclusion. In the event there are multiple SAM Auctions underway that 
are each terminated early pursuant to proposed paragraph (d), the 
System processes the SAM Auctions sequentially based on the exact time 
each SAM Auction commenced.\21\
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    \20\ See proposed Rule 21.21(c).
    \21\ See proposed Rule 21.21(c)(1). This provision regarding 
concurrent SAM Auctions is similar to the AIM provision that permits 
concurrent AIM Auctions for Agency Orders of 50 contracts or more. 
See Rule 21.19(c)(1). Cboe Options Rule 6.74B does not permit 
concurrent SAM Auctions.

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[[Page 41781]]

    The Exchange notes it is also possible for various types of 
auctions (such as an AIM Auction or a complex order auction (``COA'')) 
to occur concurrently in the same series, and at the end of each 
auction, it is possible for interest resting in the EDGX Options Book 
to trade against any of the auctioned orders in the series. While these 
auctions may be occurring at the same time, they will be processed in 
the order in which they are terminated (similar to how the System 
processes SAM Auctions as discussed above). In other words, suppose 
there is an AIM Auction, a SAM Auction, and a COA all occurring in the 
same series, which began and will terminate in that order, and each of 
which last 100 milliseconds. While it is possible for all three 
auctions to terminate nearly simultaneously, the System will still 
process them in the order in which they terminate. When the AIM Auction 
terminates, the System will process it in accordance with Rule 21.19, 
and the auctioned order may trade against any resting interest (in 
addition to the contra-side order and responses submitted to that AIM 
Auction, which may only trade against the order auctioned in that AIM 
pursuant to Rule 21.19). The System will then process the SAM Auction 
when it terminates, and the auctioned order may trade against any 
resting interest that did not execute against the AIM order (in 
addition to the contra-side order and responses submitted to that SAM 
Auction, which may only trade against the order auctioned in that SAM 
pursuant to proposed Rule 21.21). Finally, the System will then process 
the COA Auction when it terminates, and the COA order may leg into the 
EDGX Options Book and trade against any resting interest that did not 
execute against the AIM order or SAM order (in addition to any interest 
resting on the complex order book and COA responses pursuant to Rule 
21.20).
    The Exchange System initiates the SAM Auction process by sending a 
SAM Auction notification message detailing the side, size, price, 
origin code, Auction ID, and options series of the Agency Order to all 
Options Members that elect to receive SAM Auction notification 
messages. SAM Auction notification messages are not included in the 
disseminated BBO or OPRA.\22\ The ``SAM Auction period'' is a period of 
time determined by the Exchange, which may be no less than 100 
milliseconds and no more than one second.\23\ An Initiating Member may 
not modify or cancel an Agency Order or Solicited Order after 
submission to a SAM Auction.\24\
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    \22\ See proposed Rule 21.21(c)(2); see also Cboe Options Rule 
6.74B(b)(1)(B).
    \23\ See proposed Rule 21.21(c)(3); see also Cboe Options Rule 
6.74B(b)(1)(C). Pursuant to Rule 16.3, the Exchange will announce 
the length of the SAM Auction period via specification, Exchange 
Notice, or Regulatory Circular.
    \24\ See proposed Rule 21.21(c)(4); see also Rule 21.19(c)(4) 
(corresponding provision in AIM). Cboe Options Rule 6.74B does not 
contain this detail; however, the Exchange understands this is 
consistent with current Cboe Options functionality.
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    Any User other than the Initiating Member (determined by EFID) may 
submit responses to a SAM Auction that are properly marked specifying 
size, side of the market, and the Auction ID for the SAM Auction to 
which the User is submitting the response.\25\ A SAM response may 
specify a limit price or be treated as market. A SAM response may only 
participate in the SAM Auction with the Auction ID specified in the 
response.\26\
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    \25\ The System disregards any Post Only instruction applied to 
a SAM response, as that instruction is inconsistent with the purpose 
of a SAM response, which is to execute against the Agency Order at 
the conclusion of a SAM Auction (and thus not post to the EDGX 
Options Book). As a result, the System handles a SAM response with a 
Post Only instruction in the same manner as all other SAM responses, 
which is as providers of liquidity (i.e., makers).
    \26\ See proposed Rule 21.21(c)(5); see also Rule 21.19(c)(5) 
(corresponding provision in AIM). Cboe Options Rule 6.74B does not 
specify that a response may be market as well as limit or that a 
response may only participate in the auction specific in the 
response.
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     The minimum price increment for SAM responses is $0.01. 
The System rejects a SAM response that is not in a $0.01 increment.\27\
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    \27\ See proposed Rule 21.21(c)(5)(A). Cboe Options permits it 
to determine the minimum increment of SAM responses, which may not 
be less than $0.01. See Cboe Options Rule 6.74B(b)(1)(E). The 
Exchange does not believe it needs that flexibility.
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     SAM buy (sell) responses are capped at the Exchange best 
offer (bid), or $0.01 better than the Exchange best offer (bid) if it 
is represented by a Priority Customer order resting on the EDGX Options 
Book (unless the Agency Order is a SAM ISO) that exists at the 
conclusion of the SAM Auction. The System executes SAM responses, if 
possible, at the most aggressive permissible price not outside the BBO 
at the conclusion of the SAM Auction or the Initial NBBO.\28\ Capping 
the prices of these responses based on prices at the conclusion of the 
SAM Auction will ensure any changes to the BBO or prices of orders 
resting in the Book that occur during the SAM Auction will be 
considered. This will ensure responses are able to execute at the most 
aggressive permissible prices. This will ensure the execution price 
does not cross the Initial NBBO in accordance with linkage rules. 
Additionally, proposed subparagraph (e) requires the execution price to 
be at or between the BBO at the conclusion of the SAM Auction. 
Therefore, as proposed, the price at which any response may execute 
will ultimately not be through the Initial NBBO or the BBO at the 
conclusion of the AIM [sic] Auction.
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    \28\ See proposed Rule 21.21(c)(5)(B). Cboe Options does not 
have a corresponding provision; however, this is the same as the 
corresponding provision for the Exchange's AIM Auction. The Exchange 
notes it intends to similarly cap AIM responses in the corresponding 
rule provision in Rule 21.19(c)(5)(B) in a separate rule filing.
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     A User may submit multiple SAM responses at the same or 
multiple prices to a SAM Auction. For purposes of the SAM Auction, the 
System aggregates all of a User's orders and quotes resting on the EDGX 
Options Book and SAM responses for the same EFID at the same price.\29\ 
The Exchange believes this is appropriate since all interest at a 
single price is considered for execution against the Agency Order at 
that price, and can then together be subject to the size cap, as 
discussed below. This (combined with the proposed size cap) will 
prevent an Options Member from submitting multiple orders, quotes, or 
responses at the same price to obtain a larger pro-rata share of the 
Agency Order.
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    \29\ See proposed Rule 21.21(c)(5)(C). Cboe Options does not 
specify whether a participant may submit multiple responses at the 
same price or whether the size of all of a participant's interest at 
the same price will be aggregated; however, this is the same as the 
corresponding provision for the Exchange's AIM Auction. See Rule 
21.19(c)(5)(C).
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     The System caps the size of a SAM response, or the 
aggregate size of a User's orders and quotes resting on the EDGX 
Options Book and SAM 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 SAM Auction).\30\ 
This Exchange believes this is reasonable to prevent an Options Member 
from submitting an order, quote, or response with an extremely large 
size in order to obtain a larger pro-rata share of the Agency Order.
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    \30\ See proposed Rule 21.21(c)(5)(D). This is in contrast to 
Cboe Options, which requires responses to not exceed the size of the 
Agency Order. See Cboe Options Rule 6.74B(b)(1)(F). However, this is 
the same as the corresponding provision for the Exchange's AIM 
Auction. See Rule 21.19(c)(5)(D).
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     SAM responses must be on the opposite side of the market 
as the Agency Order. The System rejects a SAM response on the same side 
of the market as the Agency Order.\31\
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    \31\ See proposed Rule 21.21(c)(5)(E). Cboe Options does not 
specify whether a response will be rejected if it is not on the 
opposite side of the Agency Order; however, the Exchange understands 
this is consistent with Cboe Options functionality and the same as 
the corresponding provision for the Exchange's AIM Auction. 
Additionally, it is reasonable given that the purpose of a response 
is to trade against the Agency Order. See Rule 21.19(c)(5)(E).

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[[Page 41782]]

     SAM responses are not visible to SAM Auction participants 
or disseminated to OPRA.\32\
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    \32\ See proposed Rule 21.21(c)(5)(F); see also Cboe Options 
Rule 6.74B(b)(1)(D).
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     A User may modify or cancel its SAM responses during the 
SAM Auction.\33\
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    \33\ See proposed Rule 21.21(c)(5)(G). Cboe Options does not 
specify whether responses may be cancelled during the auction; 
however, this is the same as the corresponding provision for the 
Exchange's AIM Auction. See Rule 21.19(c)(5)(I). Unlike Cboe Options 
Rule 6.74B, the proposed rule change permits responses for the 
account of an options market-maker from another options exchange. 
Other options exchanges similarly permit such responses in solicited 
auction mechanisms. See, e.g., ISE Rule 716(e); and MIAX Rule 
515A(b).
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    A SAM Auction concludes at the earliest to occur of the following 
times:
     the end of the SAM Auction period;
     upon receipt by the System of a Priority Customer order on 
the same side of the market with a price the same as or better than the 
stop price that would post to the EDGX Options Book;
     upon receipt by the System of an unrelated order or quote 
that is not a Priority Customer order on the same side of the market as 
the Agency Order that would cause the stop price to be outside of the 
EDGX BBO;
     the market close; and
     any time the Exchange halts trading in the affected 
series, provided, however, that in such instance the SAM Auction 
concludes without execution.
    An unrelated market or marketable limit order (against the EDGX 
BBO), including a Post Only Order,\34\ on the opposite side of the 
Agency Order received during the SAM Auction does not cause the SAM 
Auction to end early and executes against interest outside of the SAM 
Auction. If contracts remain from such unrelated order at the time the 
SAM Auction ends, they may be allocated for execution against the 
Agency Order pursuant to proposed paragraph (e).\35\ Because these 
orders may have the opportunity to trade against the Agency Order 
following the conclusion of the SAM Auction, which execution must still 
be at or better than the Initial NBBO and EDGX Options BBO existing at 
the conclusion of the SAM Auction, the Exchange does not believe it is 
necessary to cause a SAM Auction to conclude early in the event the 
Exchange receives such orders. This will provide more time for 
potential price improvement, and the unrelated order will have the 
opportunity to trade against the Agency Order in the same manner as all 
other contra-side interest.
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    \34\ Any Post Only order resting on the EDGX Options Book at the 
conclusion of the SAM Auction that executes against the Agency Order 
pursuant to proposed paragraph (e) executes in the same manner as 
any other order type of order resting on the EDGX Options Book, 
which is as providers of liquidity (i.e., makers).
    \35\ See proposed Rule 21.21(d). The proposed reasons why a SAM 
Auction may conclude early differ from the reasons why a Cboe 
Options SAM Auction may conclude early, but the proposed reasons are 
the same as those that will cause an AIM Auction to conclude early. 
See Rule 21.19(d). Similarly, a Cboe Options SAM Auction will 
conclude early for the same reasons that cause a Cboe Options AIM 
Auction to terminate early. See Cboe Options Rule 6.74B(b)(2).
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    At the conclusion of the SAM Auction, the System executes the 
Agency Order against the Solicited Order or contra-side interest (which 
includes orders and quotes resting in the EDGX Options Book and SAM 
responses) at the best price(s) as follows. Any execution price(s) must 
be at or between the BBO existing at the conclusion of the SAM Auction 
and at or between the Initial NBBO:\36\
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    \36\ See proposed Rule 21.21(e); see also Cboe Options Rule 
6.74B(b)(2)(A) (which provides the execution price must be at or 
better than the initial auction NBBO and that an execution will 
occur at prices equal to or better than the Cboe Options BBO).
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     The System executes the Agency Order against the Solicited 
Order at the stop price if there are no Priority Customer Orders 
(including Priority Customer AON Orders) on the opposite side of the 
Agency Order resting in the EDGX Options Book at the stop price and the 
aggregate size of contra-side interest at an improved price(s) is 
insufficient to satisfy the Agency Order.
     The System executes the Agency Order against contra-side 
interest (and cancels the Solicited Order) if (A) there is a Priority 
Customer order (including a Priority Customer AON order) on the 
opposite side of the Agency Order resting on the EDGX Options Book at 
the stop price and the aggregate size of the Priority Customer order 
and other contra-side interest at the stop price or an improved 
price(s) is sufficient to satisfy the Agency Order or (B) the aggregate 
size of contra-side interest at an improved price(s) is sufficient to 
satisfy the Agency Order. The Agency Order against such contra-side 
interest occurs at each price level, to the price at which the balance 
of the Agency Order can be fully executed, in the following order:
    [cir] Priority Customer orders (including Priority Customer AON 
orders) on the EDGX Options Book (non-AON orders before AON orders, 
each in time priority);
    [cir] remaining contra-side trading interest (including non-
Priority Customer orders and quotes on the EDGX Options Book and SAM 
responses) pursuant to Rule 21.8(c);
    [cir] any nondisplayed Reserve Quantity (Priority Customer before 
non-Priority Customer, each in time priority); and
    [cir] any non-Priority Customer AON orders, if there is sufficient 
size to satisfy the AON order.
     The System cancels the Agency Order and Solicited Order 
with no execution if:
    [cir] execution of the Agency Order against the Solicited Order at 
the stop price would not be at or between the EDGX BBO at the 
conclusion of the SAM Auction or at or between the Initial NBBO; or
    [cir] there is a Priority Customer order (including a Priority 
Customer AON order) resting on the opposite side of the Agency Order at 
the stop price on the EDGX Options Book, and the aggregate size of the 
Priority Customer order and any other contra-side interest is 
insufficient to satisfy the Agency Order.\37\
---------------------------------------------------------------------------

    \37\ See proposed Rule 21.21(e); see also Rule 21.19(e).
---------------------------------------------------------------------------

     The System cancels or rejects any unexecuted SAM responses 
(or unexecuted portions) at the conclusion of the SAM Auction.\38\
---------------------------------------------------------------------------

    \38\ See id.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change is consistent with 
the AON nature of solicitation mechanisms and the priority order 
applicable to executions following a SAM Auction at the stop price, as 
well as general priority provisions.\39\ The proposed provisions 
regarding the execution of the Agency Order at the conclusion of a SAM 
Auction is similar to the corresponding provisions for a Cboe Options 
SAM, as well as current Rules regarding priority and allocation of 
resting orders and

[[Page 41783]]

quotes.\40\ The proposed priority will ensure execution of the Agency 
Order at the stop price if there is sufficient interest while 
protecting Priority Customer orders (except AON orders) resting on the 
EDGX Options Book in accordance with the general principle of customer 
priority. This will ensure the Agency Order is allocated in a manner 
consistent with the standard priority of allocation on the Exchange 
rules that distinguish between Priority Customers and displayed and 
non-displayed interest in a manner that will help ensure a fair and 
orderly market by maintaining priority of orders and quotes while still 
affording the opportunity for price improvement in each SAM Auction 
commenced on the Exchange.
---------------------------------------------------------------------------

    \39\ See Rule 21.8, which provides that at a single price level: 
(a) Priority Customer orders have priority over non-Priority 
Customer orders, and Priority Customer orders at the same price are 
allocated in time priority; (b) non-customer orders have next 
priority and are allocated in a pro-rata manner; (c) displayed 
orders have priority over nondisplayed orders, and nondisplayed 
portions of Reserve Orders are allocated in a pro-rata manner, 
except nondisplayed portions of Priority Customer Reserve Orders 
trade ahead of non-customer Reserve Orders; and AON orders have last 
priority (including after nondisplayed Reserve Quantity). The 
Exchange notes it may apply an entitlement for Designated Primary 
Market Makers or Preferred market Makers, which entitlement would 
apply after Priority Customer orders. This entitlement is 
inapplicable in the setting of an auction; however, it is comparable 
to order when a Solicited Order receives priority. The Exchange 
notes, unlike the allocation following other executions, the 
proposed rule change prioritizes Priority Customer AON orders in the 
same manner as all other Priority Customer orders in executions 
following SAM Auctions.
    \40\ See Cboe Options Rule 6.74B(b)(2)(A) (which states if there 
are priority customer orders and there is sufficient size 
(considering all resting orders, electronic quotes and responses) to 
execute the Agency Order, the Agency Order will be executed against 
these interests and the solicited order will be cancelled, and if 
there are priority customer orders and there is not sufficient size 
(considering all resting orders, electronic quotes and responses), 
both the Agency Order and the solicited order will be cancelled).
---------------------------------------------------------------------------

    Proposed Rule 21.21, Interpretation and Policy .01 provides that 
prior to entering Agency Orders into a SAM Auction on behalf of 
customers, Initiating Members must deliver to the customer a written 
notification informing the customer that his order may be executed 
using the SAM Auction. The written notification must disclose the terms 
and conditions contained in this Rule 21.21 and be in a form approved 
by the Exchange.\41\
---------------------------------------------------------------------------

    \41\ See also Cboe Options Rule 6.74B, Interpretation and Policy 
.02.
---------------------------------------------------------------------------

    Rule 22.12 prevents an Options Member from executing agency orders 
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. 
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. Under Rule 21.21, Initiating 
Members may enter contra-side orders that are solicited. SAM provides a 
facility for Options Members that locate liquidity for their customer 
orders. Options Members may not use the SAM Auction to circumvent Rule 
21.19 or 22.12 limiting principal transactions. This may include, but 
is not limited to, Options Members entering contra-side orders that are 
solicited from (a) affiliated broker-dealers or (b) broker-dealers with 
which the Options Member has an arrangement that allows the Options 
Member to realize similar economic benefits from the solicited 
transaction as it would achieve by executing the customer order in 
whole or in part as principal.\42\
---------------------------------------------------------------------------

    \42\ See proposed Interpretation and Policy .02; see also Cboe 
Options Rule 6.74B, Interpretation and Policy .03.
---------------------------------------------------------------------------

    The following examples demonstrate how orders will be executed in a 
SAM Auction:

Example #1
    XYZ Jan 50 Calls
    NBBO: 1.10--1.25
    BBO: 1.10--1.30 (no Priority Customer orders)
    Paired order to execute 2000 contracts AON (Agency Order to sell) 
at 1.10

    A SAM Auction notification message is sent to all Options Members 
that elect to receive SAM Auction notification messages, which shows 
the option, size, side, and price. The SAM Auction timer begins, and 
the System starts the SAM Auction to sell at 1.10.
    During the SAM Auction, the System receives the following responses 
in the following order:

 Response 1 to buy 2000 at 1.10
 Response 2 to buy 2000 at 1.10
 Response 3 to buy 5000 at 1.10
 Response 4 to buy 1000 at 1.20

    The aggregate responses did not improve the price of the entire 
Agency Order, and there are no Priority Customer orders at the stop 
price, so at the conclusion of the SAM Auction, the System executes the 
Solicited Order against the Agency Order at a price of 1.10 and cancels 
the SAM responses.

Example #2
    XYZ Jan 50 Calls
    NBBO: 1.10--1.25
    BBO: 1.10--1.30 (no Priority Customer orders)
    Paired order to execute 2000 contracts AON (Agency Order to sell) 
at 1.10

    A SAM Auction notification message is sent to all Options Members 
that elect to receive SAM Auction notification messages, which shows 
the option, size, side, and price. The SAM Auction timer begins, and 
the System starts the SAM Auction to sell at 1.10.
    During the SAM Auction, the System receives the following responses 
in the following order:

 Response 1 to buy 2000 at 1.10
 Response 2 to buy 2000 at 1.10
 Response 3 to buy 5000 at 1.10
 Response 4 to buy 1000 at 1.20
 Response 5 to buy 2000 at 1.15

    There is sufficient size among the SAM responses to improve the 
price of the entire Agency Order, so at the conclusion of the SAM 
Auction, the System executes 1000 contracts of the Agency Order at a 
price of 1.20 against Response 4 and 1000 contracts of the Agency Order 
at a price of 1.15 against Response 5, and cancels the Solicited Order 
and Responses 1, 2, 3, and 5 (the remaining 1000).

Example #3
    XYZ Jan 50 Calls
    NBBO: 1.10--1.25
    BBO: 1.10 (200)--1.30 (no Priority Customer orders)
    Paired order to execute 2000 contracts AON (Agency Order to sell) 
at 1.11

    A SAM Auction notification message is sent to all Options members 
that elect to receive SAM Auction notification messages, which shows 
the option, size, side, and price. The SAM Auction timer begins, and 
the System starts the SAM Auction to sell at 1.11.
    During the SAM Auction, the System receives the following responses 
in the following order:

 Response 1 to buy 2000 at 1.11
 Response 2 to buy 2000 at 1.11
 Response 3 to buy 5000 at 1.11
 Response 4 to buy 1000 at 1.12
 Unrelated Order A to sell 500 at 1.10

    The SAM Auction terminates when the System receives Unrelated Order 
A, because it is marketable against the EDGX best bid of 1.10, and 
would cause the stop price to be outside of the EDGX BBO if it 
immediately executed. The aggregate responses did not improve the price 
of the entire Agency Order, and there are no Priority Customer orders 
at the stop price, so at the conclusion of the SAM Auction, the System 
executes the Solicited Order against the Agency Order at a price of 
1.11 and cancels the SAM responses. The System then executes 200 
contracts of Unrelated Order A against the resting order at a 1.10 at 
that price, and then enters 300 contracts of Unrelated Order A onto the 
Book. The EDGX BBO then becomes 1.08--1.10 (which, as noted above, 
would have caused the stop price to be outside of the EDGX BBO).

Example #4
    XYZ Jan 50 Calls
    NBBO: 1.10--1.25
    BBO: 1.10--1.30 (Priority Customer order for 20 included in the 
bid, and no Priority Customer order included in the offer)
    Paired order to execute 2000 contracts AON (Agency Order to sell) 
at 1.11 (one increment better than a resting Priority Customer order on 
the

[[Page 41784]]

opposite side of the EDGX Options Book).

    A SAM Auction notification message is sent to all Options Members 
that elect to receive SAM Auction notification messages, which shows 
the option, size, side, and price. The SAM Auction timer begins, and 
the System starts the SAM Auction to sell at 1.11.
    During the SAM Auction, the System receives the following responses 
in the following order:

 Response 1 to buy 2000 at 1.11
 Response 2 to buy 2000 at 1.11
 Response 3 to buy 1000 at 1.15
 Response 4 to buy 900 at 1.12
 Priority Customer order to buy 100 at 1.11

    There is sufficient size among the SAM responses at prices better 
than the stop price and the Priority Customer order at the stop price, 
so at the conclusion of the SAM Auction, the System executes 1000 
contracts of the Agency Order at a price of 1.15 against Response 3, 
900 contracts of the Agency Order at a price of 1.12 against Response 
4, and 100 contracts of the Agency Order at a price of 1.11 against the 
Priority Customer order, and cancels the Solicited Order and Responses 
1 and 2.
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.\43\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \44\ 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) \45\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78f(b).
    \44\ 115 U.S.C. 78f(b)(5).
    \45\ Id.
---------------------------------------------------------------------------

    The proposed rule change is generally intended to add certain 
system functionality currently offered by Cboe Options to the 
Exchange's System 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. This will provide Users with greater 
harmonization of price improvement auction mechanisms available among 
the Cboe Affiliated Exchanges.
    The proposed rule change will provide market participants with an 
additional auction mechanism that will provide them with greater 
flexibility in pricing larger-sized orders and may provide more 
opportunities for price improvement.\46\ SAM as proposed will function 
in a substantially similar manner as AIM, the Exchange's current price 
improvement mechanism--the differences relating primarily to the 
minimum size requirement and all-or-none nature of SAM. Additionally, 
the proposed auction mechanism provides equal access to the exposed 
Agency Orders for all market participants, as all Options Members that 
subscribe to the Exchange's data feeds with the opportunity to interact 
with orders submitted into SAM Auctions.\47\ SAM is intended to benefit 
investors, because it is designed to provide investors seeking to 
execute large option orders with opportunities to access additional 
liquidity and receive price improvement. It will provide Options 
Members that locate liquidity for their customers' larger-sized orders 
a facility in which to execute those orders, potentially at improved 
prices. The proposed rule change may result in increased liquidity 
available at improved prices for larger-sized orders, with competitive 
final pricing out of the Initiating Member's control. The Exchange 
believes SAM will promote and foster competition and provide more 
options contracts with the opportunity for price improvement.
---------------------------------------------------------------------------

    \46\ See Securities Exchange Act Release Nos. 49141 (January 28, 
2004), 69 FR 5625 (February 5, 2004) (SR-ISE-2001-22); 57610 (April 
3, 2008), 73 FR 19535 (April 10, 2008) (SR-CBOE-2008-14); and 72009 
(April 23, 2014), 79 FR 24032 (April 29, 2014) (SR-MIAX-2014-09).
    \47\ Any Options Member can subscribe to the options data 
disseminated through the Exchange's data feeds.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, because the proposed SAM Auction is similar 
to other solicitation auction mechanisms currently available at other 
options exchanges.\48\ The general framework of the proposed SAM 
Auction process (such as the eligibility requirements, the auction 
response period, the same-side stop price requirements, response 
requirements, and auction notification process),\49\ is substantively 
the same as the framework for the AIM price improvement auction the 
Exchange's current price improvement auction. The primary features of 
the proposed SAM Auction process are similar to the solicitation 
auction mechanisms of other options exchanges, including Cboe Options 
SAM, as discussed above and below. The clarity in how the proposed 
price improvement auction will function and its consistency with 
similar auctions at other exchanges will help promote a fair and 
orderly national options market system.
---------------------------------------------------------------------------

    \48\ See, e.g., Cboe Options Rule 6.74B; ISE Rule 716(e); and 
MIAX Rule 515A(b).
    \49\ See Rule 21.19.
---------------------------------------------------------------------------

    Further, the new functionality may lead to an increase in Exchange 
volume and should allow the Exchange to better compete against other 
markets that already offer an electronic solicitation mechanism, while 
providing an opportunity for price improvement for Agency Orders. The 
Exchange believes that its proposal will allow the Exchange to better 
compete for solicited transactions, while providing an opportunity for 
price improvement for Agency Orders and assuring that Priority 
Customers (including Priority Customer AON orders) on the EDGX Options 
Book are protected. The new solicitation mechanism should promote and 
foster competition and provide more options contracts with the 
opportunity for price improvement, which should benefit market 
participants.
    The Exchange believes the proposed rule change will result in 
efficient trading and reduce the risk for investors that seek access to 
additional liquidity and price improvement for larger-sized orders by 
providing additional opportunities to do so. The proposed priority and 
allocation rules in the SAM Auction are similar to the Exchange's 
current priority and allocation rules that give priority to displayed 
Priority Customer orders,\50\ while also providing priority to Priority 
Customer AON orders. The Exchange believes this will ensure a fair and 
orderly market by maintaining priority of orders and

[[Page 41785]]

quotes and protecting Priority Customer orders, while still affording 
the opportunity for price improvement during each SAM Auction commenced 
on the Exchange. The proposed allocation ensures that the Agency Order 
will be filled if there is a Priority Customer order on the EDGX 
Options Book at the stop price and sufficient other contra-side 
interest to satisfy the Agency Order.
---------------------------------------------------------------------------

    \50\ Pursuant to Rule 21.8, at a single price level, Priority 
Customer orders have priority over non-Priority Customer orders, 
which have priority over all nondisplayed orders (i.e., the Reserve 
Portion of Priority Customer and non-Priority Customer Reserve 
Orders).
---------------------------------------------------------------------------

    By keeping the priority and allocation rules for a SAM Auction 
similar to the standard allocation used on the Exchange, the proposed 
rule change reduces the ability of market participants to misuse the 
SAM Auction to circumvent standard priority rules in a manner that is 
designed to prevent fraudulent and manipulative acts and practices, and 
to promote just and equitable principles of trade on the Exchange. The 
proposed execution and priority rules will allow orders to interact 
with interest in the EDGX Options Book, and will allow interest on the 
EDGX Options Book to interact with option orders in the price 
improvement mechanisms in an efficient and orderly manner. The Exchange 
believes this interaction of orders will benefit investors by 
increasing the opportunity for option orders to receive executions, 
while also enhancing the execution quality for orders resting on the 
Book. The proposed priority is also substantially similar to that of 
corresponding solicitation auction mechanisms of other options 
exchanges.\51\
---------------------------------------------------------------------------

    \51\ See, e.g., Cboe Options Rule 6.74B; ISE Rule 716(e); and 
MIAX Rule 515A(b).
---------------------------------------------------------------------------

    The proposed SAM Auction eligibility requirements are reasonable 
and promote a fair and orderly market and national market system, 
because they are substantially similar to the eligibility requirements 
for other exchanges' solicited order mechanisms,\52\ and benefit 
investors by providing clarity regarding how they may initiate a SAM 
Auction. Additionally, other than the minimum size requirement and AON 
requirement (which are standard for solicited order mechanisms), the 
eligibility requirements are virtually the same as those for AIM, the 
Exchange's other price improvement mechanism.\53\ This will further 
benefit investors by providing consistency across the Exchange's price 
improvement mechanisms.
---------------------------------------------------------------------------

    \52\ See Cboe Options Rule 6.74B(a) and (b)(1) and 
Interpretation and Policy .03; and MIAX Rule 515A(b)(1) and (2) and 
Interpretation and Policy .04 (which permit applicability to any 
class, prohibit appointed market-makers from being solicited, impose 
the same minimum size and all-or-none requirement, has the same 
minimum increment, and requires Agency Orders to be marked for SAM 
processing). The proposed rule change that states a SAM Auction may 
not commence until after the market open is reasonable, as execution 
following a SAM Auction would not be possible until after the market 
open and when there is a BBO and NBBO.
    \53\ See Rule 21.19(a).
---------------------------------------------------------------------------

    The proposed rule that an Initiating Member may not designate an 
Agency Order or Initiating Order as Post Only protects investors, 
because it provides transparency regarding functionality that will not 
be available for SAM. The Exchange believes this is appropriate, as the 
purpose of a Post Only order is to not execute upon entry and instead 
rest in the EDGX Options Book, while the purpose of submitting orders 
to a SAM Auction is to receive an execution following the auction and 
not enter the EDGX Options Book. Pursuant to current and proposed Rule 
21.21, an Agency Order will fully execute against contra-side interest 
(possibly against the Solicited Order, which must be for the same size 
as the Agency Order), or will be cancelled in the event there is no 
execution following a SAM Auction, and thus there cannot be remaining 
contracts in an Agency Order or Solicited Order to enter the EDGX 
Options Book.
    The proposed rule change to state that the minimum size requirement 
of 500 or more standard option contracts applies to the equivalent 
number of mini-option contracts (i.e., 5,000 mini-option contracts) 
promotes just and equitable principles of trade. Rule 19.6, 
Interpretation and Policy .07 permits the listing of mini-options, 
which is an option with a 10 share deliverable of the underlying 
security rather than 100 share deliverable of the underlying security 
(which is the standard deliverable for a standard option contract). The 
proposed change to state that 500 standard option contracts is 
consistent with 5,000 mini-option contracts is consistent with this 
definition of mini-options. This provides transparency to investors 
that SAM functionality and the potential for price improvement is 
available to Agency Orders for large orders of mini-options as well as 
standard options.
    The proposed rule change to prohibit an Agency Order and Solicited 
Order from both being for the accounts of Priority Customers is 
reasonable, because the Exchange believes it would be in the interests 
of such pairs of orders to be submitted to a Customer-to-Customer AIM 
Immediate Cross pursuant to Rule 21.19(f) pursuant to which they can be 
executed immediately. The Exchange believes there will be minimal 
demand to submit pairs of Priority Customer orders into SAM Auctions 
given its offering of immediate cross functionality via AIM.
    The Exchange believes the proposed rule change to permit the 
Solicited Order to be comprised of multiple orders that total the size 
of the Agency Order may increase liquidity and opportunity for Agency 
Orders to participate in SAM Auctions, and therefore provide Agency 
Orders with additional opportunities for price improvement, which is 
consistent with the principles behind the SAM Auction. The Exchange 
believes that this will be beneficial to participants because allowing 
multiple contra-parties should foster competition for filling the 
contra-side order and thereby result in potentially better prices, as 
opposed to only allowing one contra-party and, thereby requiring that 
contra-party to do a larger size order which could result in a worse 
price for the trade. Another exchange permits the contra-side in a 
solicited auction mechanism to be comprised of multiple contra-
parties.\54\ The Exchange notes the contra-side of a Qualified 
Contingent Cross order may be comprised of multiple orders.\55\
---------------------------------------------------------------------------

    \54\ See ISE Rule 716(e) and ISE Regulatory Information Circular 
2014-013.
    \55\ Unlike orders submitted to a SAM Auction, Qualified 
Contingent Cross orders may immediately execute and are not exposed 
to the market for possible price improvement.
---------------------------------------------------------------------------

    As discussed above, the Exchange has proposed to allow SAM Auctions 
to occur concurrently with other SAM Auctions. Although SAM Auctions 
for Agency Orders will be allowed to overlap, the Exchange does not 
believe this raises any issues that are not addressed through the 
proposed rule change described above. For example, although 
overlapping, each SAM Auction will be started in a sequence and with a 
time that will determine its processing. Thus, even if there are two 
SAM Auctions that commence and conclude, at nearly the same time, each 
SAM Auction will have a distinct conclusion at which time the SAM 
Auction will be allocated. In turn, when the first Auction concludes, 
unrelated orders that then exist will be considered for participation 
in the SAM Auction. If unrelated orders are fully executed in such SAM 
Auction, then there will be no unrelated orders for consideration when 
the subsequent SAM Auction is processed (unless new unrelated order 
interest has arrived). If instead there is remaining unrelated order 
interest after the first SAM Auction has been allocated, then such 
unrelated order interest will be considered for allocation when the 
subsequent SAM Auction is processed. As another example, each SAM 
response is required to specifically

[[Page 41786]]

identify the Auction for which it is targeted and if not fully executed 
will be cancelled back at the conclusion of the Auction. Thus, SAM 
responses will be specifically considered only in the specified SAM 
Auction.
    The Exchange does not believe that allowing multiple auctions to 
overlap for Agency Orders presents any unique issues that differ from 
functionality already in place on the Exchange or other exchanges. 
Pursuant to Rule 21.19(c)(1), multiple AIM Auctions for Agency Orders 
for 50 or more contracts may overlap. Additionally, other options 
exchanges permit other auctions to overlap.\56\
---------------------------------------------------------------------------

    \56\ See, e.g., ISE Rule 716(d), which governs ISE's 
facilitation mechanism and does not restrict such auctions to one 
auction at a time; and Boston Options Exchange (``BOX'') Rule 7270.
---------------------------------------------------------------------------

    The proposed auction process will promote a free and open market, 
because it ensures equal access to information regarding SAM Auctions 
and the exposed Agency Orders for all market participants, as all 
Options Members that subscribe to the Exchange's data feeds with the 
opportunity to interact with orders submitted into SAM Auctions.\57\ 
The Exchange has proposed a range between no less than 100 milliseconds 
and no more than one second for the duration of a SAM Auction.\58\ This 
will provide investors with more timely execution of their options 
orders than a mechanism that has a one second auction, while ensuring 
there is an adequate exposure of orders in EDGX SAM. This proposed 
auction response time should provide investors with the opportunity to 
receive price improvement for larger-sized orders through SAM while 
reducing market risk. The Exchange believes a briefer time period 
reduces the market risk for the Initiating Member, versus an auction 
with a longer period, as well as for any Options Member providing 
responses to a broadcast. As such, the Exchange believes the proposed 
rule change would help perfect the mechanism for a free and open 
national market system, and generally help protect investors and the 
public interest. All Options Members will have an equal opportunity to 
respond with their best prices during the SAM Auction. Since the 
Exchange considers all interest present in the System, and not solely 
SAM response, for execution against the Agency Order, those 
participants who are not explicit responders to a SAM Auction may 
receive executions via SAM as well.
---------------------------------------------------------------------------

    \57\ Any Options Member can subscribe to the options data 
disseminated through the Exchange's data feeds.
    \58\ See also Cboe Options Rule 6.74B(b)(1)(C); ISE Rule 716, 
Supplementary Material .04; and MIAX Rule 515A(b)(2)(1)(C).
---------------------------------------------------------------------------

    The proposed SAM Auction response requirements are reasonable and 
promote a fair and orderly market and national market system, because 
they are substantially similar to the response requirements for other 
exchanges' solicited order mechanisms,\59\ and benefit investors by 
providing clarity regarding how they may respond to a SAM Auction. 
Additionally, other than not restricting Times in Force or MTP 
Modifiers available for responses (which restrictions the Exchange does 
not currently believe are necessary for SAM responses), the eligibility 
requirements are virtually the same as those for AIM responses, the 
Exchange's other price improvement mechanism.\60\ This will further 
benefit investors by providing consistency across the Exchange's price 
improvement mechanisms.
---------------------------------------------------------------------------

    \59\ See Cboe Options Rule 6.74B(a) and (b)(1) and 
Interpretation and Policy .03; and MIAX Rule 515A(b)(1) and (2) and 
Interpretation and Policy .04 (which permit applicability to any 
class, prohibit appointed market-makers from being solicited, impose 
the same minimum size and all-or-none requirement, has the same 
minimum increment, and requires Agency Orders to be marked for SAM 
processing). The proposed rule change that states a SAM Auction may 
not commence until after the market open is reasonable, as execution 
following a SAM Auction would not be possible until after the market 
open and when there is a BBO and NBBO.
    \60\ See Rule 21.19(a).
---------------------------------------------------------------------------

    The proposed rule change will also perfect the mechanism of a free 
and open market and a national market system, as it is consistent with 
linkage rules. Proposed Rule 21.21 does not permit Agency Orders to be 
submitted when the NBBO is crossed and requires Agency Order execution 
prices at the end of SAM Auctions to be at or between the Initial NBBO 
and the EDGX BBO at the conclusion of the SAM Auction. The proposed 
stop price requirements and the events to terminate a SAM Auction early 
further ensure execution prices at or better than the NBBO and EDGX 
BBO. Additionally, the proposed SAM ISO order type (which is similar to 
current AIM ISO functionality) will provide Options Members with an 
efficient method to initiate a SAM Auction while preventing trade-
throughs.
    Unlike the rules of other exchanges, the Exchange will not conclude 
a SAM Auction early due to the receipt of an opposite side order. The 
Exchange believes this promotes just and equitable principles of trade, 
because these orders may have the opportunity to trade against the 
Agency Order following the conclusion of the SAM Auction, which 
execution must still be at or better than the Initial NBBO and EDGX 
Options BBO existing at the conclusion of the SAM Auction. The Exchange 
believes this will protect investors, because it will provide more time 
for price improvement, and the unrelated order will have the 
opportunity to trade against the Agency Order in the same manner as all 
other contra-side interest.
    With respect to trading halts, as described herein, in the case of 
a trading halt on the Exchange in the affected series, the Auction will 
be cancelled without execution. Cancelling Auctions without execution 
in this circumstance is consistent with Exchange handling of trading 
halts in the context of continuous trading on EDGX Options and promotes 
just and equitable principles of trade and, in general, protects 
investors and the public interest.\61\
---------------------------------------------------------------------------

    \61\ The Exchange notes that trading on the Exchange in any 
option contract will be halted whenever trading in the underlying 
security has been paused or halted by the primary listing market and 
other circumstances. See Rule 20.3.
---------------------------------------------------------------------------

    The proposed rule change is also consistent with Section 11(a)(1) 
of the Act \62\ and the rules promulgated thereunder. Generally, 
Section 11(a)(1) of the Act restricts any member of a national 
securities exchange from effecting any transaction on such exchange for 
(i) the member's own account, (ii) the account of a person associated 
with the member, or (iii) an account over which the member or a person 
associated with the member exercises discretion (collectively referred 
to as ``covered accounts''), unless a specific exemption is available. 
Examples of common exemptions include the exemption for transactions by 
broker dealers acting in the capacity of a market maker under Section 
11(a)(1)(A),\63\ the ``G'' exemption for yielding priority to non-
members under Section 11(a)(1)(G) of the Act and Rule 11a1-1(T) 
thereunder,\64\ and ``Effect vs. Execute'' exemption under Rule 11a2-
2(T) under the Act.\65\ The ``Effect vs. Execute'' exemption 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

[[Page 41787]]

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; \66\ may not be affiliated with the executing 
member; and (iv) with respect to an account over which the member 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 
Exchange believes that Exchange Members entering orders into SAM would 
satisfy the requirements of Rule 11a2-2(T).
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    \62\ 15 U.S.C. 78k(a). Section 11(a)(1) 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 
discretion unless an exception applies.
    \63\ 15 U.S.C. 78k(a)(1)(A).
    \64\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
    \65\ 17 CFR 240.11a2-2(T).
    \66\ The member may, however, participate in clearing and 
settling the transaction.
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    The Exchange does not operate a physical trading 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.\67\ The Exchange represents that the System and the 
proposed SAM Auction receive all orders electronically through remote 
terminals or computer-to-computer interfaces. The Exchange represents 
that orders for covered accounts from Options Members will be 
transmitted from a remote location directly to the proposed SAM 
mechanism by electronic means.
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    \67\ 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) (SRBSE-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'').
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    The second condition of Rule 11a2-2(T) requires that neither a 
member nor an associated person participate in the execution of its 
order once the order is transmitted to the floor for execution. The 
Exchange represents that, upon submission to the SAM Auction, an order 
or SAM response will be executed automatically pursuant to the rules 
set forth for SAM. In particular, execution of an order (including the 
Agency and the Soliciting [sic] Order) or a SAM response sent to the 
mechanism depends not on the Options Member entering the order or 
response, but rather on what other orders and responses are present and 
the priority of those orders and responses. Thus, at no time following 
the submission of an order or response is a Member able to acquire 
control or influence over the result or timing of order or response 
execution.\68\ Once the Agency Order and Solicited Order has [sic] been 
transmitted, the Initiating Member that transmitted the orders will not 
participate in the execution of the Agency Order or Solicited Order. 
Initiating Members submitting Agency Orders and Solicited Orders will 
relinquish control to modify or cancel their Agency Orders and 
Solicited Orders upon transmission to the System. Further, no Member, 
including the Initiating Member, will see a SAM response submitted into 
SAM, and therefore and will not be able to influence or guide the 
execution of their Agency Orders, Solicited Orders, or SAM responses, 
as applicable.
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    \68\ An Initiating Member may not cancel or modify an Agency 
Order or Solicited Order after it has been submitted into SAM. See 
proposed Rule 21.21(c)(4). Options Members may modify or cancel 
their responses after being submitted to into a SAM. See proposed 
Rule 21.21(c)(5)(G); see also Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542, 11547 (the ``1978 Release'').
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    Rule 11a2-2(T)'s third condition requires that the order be 
executed by an exchange member who is unaffiliated with the member 
initiating the order. The Commission has stated that the requirement is 
satisfied when automated exchange facilities, such as the SAM Auction 
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.\69\ The Exchange 
represents that the SAM Auction 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.
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    \69\ 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.
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    Rule 11a2-2(T)'s fourth condition requires that, 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 recognizes that Options Members relying on Rule 11a2-2(T) for 
transactions effected through the SAM Auction must comply with this 
condition of the Rule and 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.
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    \70\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). 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 in connection with effecting 
transactions for the account during the period covered by the 
statement which amount must be exclusive of all amounts paid to 
others during that period for services rendered to effect such 
transactions. See also 1978 Release, 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'').
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    The Exchange believes that the instant proposal is consistent with 
Rule 11a2-2(T), and that therefore the exception should apply in this 
case.
    The Exchange also believes that the proposed rule changes would 
further the objectives of the Act to protect investors by promoting the 
intermarket price protection goals of the Options Intermarket Linkage 
Plan.\71\ The Exchange believes its proposal would help ensure inter-
market competition across all exchanges and facilitate compliance with 
best execution practices.
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    \71\ See Rule 27.3 regarding Locked and Crossed Markets.
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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 proposed SAM Auction is 
voluntary for Options Members to use and will be available to all 
Options Members. As discussed above, the Exchange believes the proposed 
rule change should encourage Options Members to compete amongst each 
other by responding with their best price and size for a particular 
auction.

[[Page 41788]]

    The Exchange does not believe the proposed rule change will impose 
any burden on intramarket competition, as the proposed rule change will 
apply in the same manner to all orders submitted to a SAM Auction. With 
respect to the restriction on appointed market-makers being solicited, 
the Exchange believes market-makers will still have opportunities to 
provide liquidity to trade against Agency Orders by submitting quotes 
to rest on the EDGX Options Book or responses to a SAM Auction. With 
respect to the restriction on permitting a pair of Priority Customer 
orders to a SAM Auction, the Exchange believes this is appropriate 
given the immediate cross functionality available to pairs of Priority 
Customer orders. Options Members will continue to be able to 
immediately cross these pairs of orders via AIM.\72\
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    \72\ See Rule 21.19(f).
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    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition, because the proposed changes, as 
described above and below, are based on rules for similar price 
improvement auction mechanisms at other options exchanges.\73\ The 
general framework and primary features of the proposed SAM Auction 
process (such as the eligibility requirements, auction response period, 
same-side stop price requirements, response requirements, and auction 
notification process),\74\ are substantively the same as the framework 
for the AIM price improvement auction the Exchange's current price 
improvement auction.
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    \73\ See, e.g., Cboe Options Rule 6.74B; ISE Rule 716(e); and 
MIAX Rule 515A(b).
    \74\ See Rule 21.19.
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    The Exchange believes that the proposed rule change will relieve 
any burden on, or otherwise promote, competition. The Exchange believes 
this proposed rule change is necessary to permit fair competition among 
the options exchanges and to establish more uniform price improvement 
auction rules on the various options exchanges. The Exchange 
anticipates that this auction proposal will create new opportunities 
for the Exchange to attract new business and compete on equal footing 
with those options exchanges with auctions and for this reason the 
proposal does not create an undue burden on intermarket competition. 
Rather, the Exchange believes that the proposed rule would bolster 
intermarket competition by promoting fair competition among individual 
markets, while at the same time assuring that market participants 
receive the benefits of markets that are linked together, through 
facilities and rules, in a unified system, which promotes interaction 
among the orders of buyers and sellers. The Exchange believes its 
proposal would help ensure intermarket competition across all exchanges 
and facilitate compliance with best execution practices. In addition, 
the Exchange believes that the proposed rule change would help promote 
fair and orderly markets by helping ensure compliance with Options 
Order Protection and Locked and Crossed Market Rules. Thus, the 
Exchange does not believe the proposal creates a significant impact on 
competition.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGX-2019-047 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-2019-047. 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 such 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-2019-047, and should be 
submitted on or before September 5, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\75\
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    \75\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-17488 Filed 8-14-19; 8:45 am]
 BILLING CODE 8011-01-P


