[Federal Register Volume 84, Number 169 (Friday, August 30, 2019)]
[Notices]
[Pages 45812-45816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18752]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86765; File No. SR-CBOE-2019-047]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Amending 
Its Fees Schedule

August 26, 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 August 13, 2019, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') 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 Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend its fees schedule. The text of the proposed rule change is 
provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at

[[Page 45813]]

the Exchange's Office of the Secretary, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend its Fees Schedule in connection with 
the Volume Incentive Program (``VIP''). The Exchange intends to 
implement the proposed change on August 1, 2019.\3\
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    \3\ The Exchange initially filed the proposed fee change 
pursuant to SR-CBOE-2019-041 and has withdrawn that filing and 
submitted this filing.
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    The Exchange first notes that it operates in a highly competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. More specifically, the 
Exchange is only one of 16 options venues to which market participants 
may direct their order flow. Based on publicly available information, 
no single options exchange has more than 20% of the market share.\4\ 
The Exchange notes that a similar statistic is also true for exchange 
market share in connection with customer volume; no single options 
exchange has more than 19% of customer volume.\5\ Thus, in such a low-
concentrated and highly competitive market, no single options exchange 
possesses significant pricing power in the execution of option order 
flow. The Exchange believes that the ever-shifting market share among 
the exchanges from month to month demonstrates that market participants 
can shift order flow, or discontinue to reduce use of certain 
categories of products, in response to fee changes. Accordingly, 
competitive forces constrain the Exchange's transaction fees, and 
market participants can readily trade on competing venues if they deem 
pricing levels at those other venues to be more favorable. In response 
to the competitive environment, the Exchange offers tiered pricing in 
it Fees Schedule, like that of other options exchanges fees 
schedules,\6\ which provides Trading Permit Holders (``TPHs'') 
opportunities to qualify for higher rebates or reduced fees where 
certain volume criteria and thresholds are met. Tiered pricing provides 
an incremental incentive for TPHs to strive for higher tier levels, 
which provides increasingly higher benefits or discounts for satisfying 
increasingly more stringent criteria.
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    \4\ See Cboe Global Markets U.S. Options Market Volume Summary 
(July 31, 2019), available at https://markets.cboe.com/us/options/market_statistics/.
    \5\ Options Clearing Corporation (``OCC'') cleared customer 
volume, available at https://www.theocc.com/market-data/volume/default.jsp.
    \6\ See e.g., NASDAQ Stock Market Rules, Options Rules, Options 
7 Pricing Schedule, Sec. 2 Options Market--Fees and Rebates, Tiers 
1-6; see also NYSE Arca Options, Fees and Charges, Customer Posting 
Credit Tiers in Non-Penny Pilot Issues.
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    For example, under VIP, the Exchange credits each TPH the per 
contract amount set forth in the VIP table for Public Customer (origin 
code ``C'') orders transmitted by TPHs (with certain exceptions) \7\ 
and executed electronically on the Exchange, provided the TPH meets 
certain volume thresholds, in which volume for Professional Customers 
and Voluntary Professionals (``Professional Customers'') (origin code 
``W''), Broker-Dealers (origin code ``B''), and Joint Back-Offices 
(``JBO'') (origin code ``J'') orders are counted toward reaching such 
thresholds. Specifically, the percentage thresholds are calculated per 
month based on the percentage of national customer volume in all 
underlying symbols entered and executed, excluding those in Underlying 
Symbol List A,\8\ Sector Indexes,\9\ the MSCI EAFE Index (``MXEA''), 
the MSCI Emerging Market Index (``MXEF''), Mini-NDX Index (``MNX''), 
the NASDAQ-100 Index (``NDX''), the Dow Jones Industrial Average Index 
(``DJX''), Mini-SPX Index (``XSP'') and Mini-XSP Index (AM Settlement) 
(``XSPAM''). VIP offers rates for both Complex and Simple orders (both 
in AIM and Non-AIM orders, respectively). The Exchange notes that its 
market share in customer volume (which includes Customer, Professional 
Customers, Broker-Dealer, and JBO order flow) \10\ has historically 
been between 16.5% and 18.3%. In recent months, the Exchange's 
percentage of such market share has hovered closer to the lower end of 
this scale. As stated, the Exchange operates in a highly competitive 
market where no single options exchange possesses significant pricing 
power in the execution of option order flow, and the ever-shifting 
market share among the exchanges from month to month demonstrates that 
market participants can shift order flow. Therefore, in light of the 
declination of the Exchange's market share in customer volume and 
competitive forces, the Exchange now proposes to amend the volume 
thresholds for Tiers 4 and 5. Currently, a TPH may meet the criteria 
under Tier 4 if its qualifying volume in the qualifying classes is 
above 3.00% and up to 3.75% of national customer volume, and may meet 
criteria under Tier 5 if their qualifying volume is above 3.75% of 
national customer volume. The Exchange now proposes to increase the 
volume threshold percentage in Tier 4 to above 3.00% and up to 4.00% 
and to increase the threshold percentage in Tier 5 to above 4.00%. The 
purpose of these changes is to adjust for current volume trends by 
encouraging more volume as the Exchange's market share in customer 
volume has declined over recent months and the proposed increased 
threshold is designed to incentivize more volume to earn the same 
credits while also maintaining an incremental incentive for TPHs to 
strive for the highest tier level. The Exchange notes that the credits 
offered under VIP are not changing. The proposed change is designed to 
increase the amount of volume TPHs provide on the Exchange and further 
encourage them to contribute to a deeper, more liquid market, as well 
as to increase transactions and take such execution opportunities 
provided by such increased liquidity. The Exchange believes that this, 
in turn, benefits all market participants by contributing towards a 
robust and well-balanced market ecosystem. The Exchange notes the 
proposed tiers are competitively achievable for all TPHs that submit 
significant customer order flow, in that all firms that submit the 
requisite significant customer order flow could compete to meet the 
tiers.
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    \7\ See Cboe Options Fees Schedule, Footnote 36.
    \8\ See Cboe Options Fees Schedule, Footnote 34. Underlying 
Symbol List A includes Underlying Symbol List A: OEX, XEO, RUT, RLG, 
RLV, RUI, AWDE, FTEM, FXTM, UKXM, SPX (includes SPXw), VIX, 
VOLATILITY INDEXES and binary options.
    \9\ See Cboe Options Fees Schedule, Footnote 47.
    \10\ See supra note 5.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Act, in general, and furthers 
the objectives of Section 6(b)(4), in particular, as it is designed to 
provide for the equitable

[[Page 45814]]

allocation of reasonable dues, fees and other charges among its Members 
and issuers and other persons using its facilities. The Exchange also 
believes that the proposed rule change is consistent with the 
objectives of Section 6(b)(5) 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, 
and, particularly, is not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
    The Exchange operates in a highly competitive market in which 
market participants can readily direct order flow to competing venues 
if they deem fee levels at a particular venue to be excessive or 
incentives to be insufficient. The proposed rule change reflects a 
competitive pricing structure designed to incentivize market 
participants to direct their order flow to the Exchange, which the 
Exchange believes would enhance market quality to the benefit of all 
TPHs.
    In particular, the Exchange believes the proposed tier is 
reasonable because it continues to encourage TPHs to take the 
opportunity to receive credits on Customer orders by reaching the 
proposed volume thresholds. The Exchange notes that relative volume-
based incentives and discounts have been widely adopted by exchanges 
\11\ and are reasonable, equitable and non-discriminatory because they 
are open to all members on an equal basis and provide additional 
benefits or discounts that are reasonably related to (i) the value to 
an exchange's market quality and (ii) associated higher levels of 
market activity, such as higher levels of liquidity provision and/or 
growth patterns. Additionally, as noted above, the Exchange operates in 
a highly competitive market. The Exchange is only one of several 
options venues to which market participants may direct their order 
flow. Competing options exchanges offer similar tiered pricing 
structures to that of the Exchange, including schedules of rebates/
credits and fees that apply based upon members achieving certain volume 
and/or growth thresholds. These competing pricing schedules, moreover, 
are presently comparable to those that the Exchange provides, including 
the pricing of comparable tiers.\12\
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    \11\ See supra note 6.
    \12\ Id.
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    The Exchange believes adjusting the VIP volume thresholds for Tiers 
4 and 5 is reasonable because it adjusts for the current volume trends 
and is a reasonable means to continue to encourage TPHs to increase 
their overall order flow to the Exchange based on increasing their 
Customer, Professional Customer, Broker-Dealer, and JBO executed orders 
as a percentage of national customer volume. Particularly, the Exchange 
believes the proposed threshold change is reasonable because it will 
encourage increased volume, thus a deeper, more liquid market, and an 
increase in transaction opportunities provided by the increased 
liquidity. In turn, these increases benefit all TPHs by contributing 
towards a robust and well-balanced market ecosystem. Increased overall 
order flow benefits all investors by deepening the Exchange's liquidity 
pool, providing greater execution incentives and opportunities, 
offering additional flexibility for all investors to enjoy cost 
savings, supporting the quality of price discovery, promoting market 
transparency, and improving investor protection.
    The proposed volume thresholds also do not represent a significant 
departure from the current required criteria under the Exchange's 
existing tiers and is therefore still reasonable based on the 
difficulty of satisfying the tiers' criteria and ensures the existing 
credit and proposed thresholds appropriately reflect the incremental 
difficulty to achieve the existing VIP tiers. For example, the volume 
threshold amount under existing Tier 3 is currently set as a range 
within a whole percentage point, between 2.00% up to 3.00%. The 
Exchange believes the proposed tiers are in line with this existing 
tier, as the natural next highest tier, both in required criteria and 
credits, is reasonable to also set as a range within a whole percentage 
point, between 3.00% and 4.00%, and then over 4.00%, as proposed. The 
Exchange also believes that a volume threshold increase of .25 
percentage points is a reasonable increment to encourage overall order 
flow to the Exchange without so significantly increasing the difficulty 
in reach the tiers' criteria.
    The Exchange believes that the proposal represents an equitable 
allocation of rebates and is not unfairly discriminatory because all 
TPHs have the opportunity to meet the proposed tier thresholds. Given 
that TPHs change their trading strategies and patterns month-to-month 
to align with changing market trends and conditions, as well as pricing 
and functionality changes across other exchanges, and without having a 
view of activity on other markets and off-exchange venues, the Exchange 
has no way of knowing whether this proposed rule change would 
definitively result in a shift of TPHs qualifying for the proposed 
tiers. While the Exchange has no way of predicting with certainty how 
the rule change will impact Trading Permit Holders, the Exchange 
anticipates the impact of the proposed change to be minimal in at least 
one TPH will be able to reach proposed Tier 5. The Exchange notes that 
typically five or six firms compete to qualify across all of the VIP 
tiers and at least two such firms typically compete to qualify for the 
top two tiers. As stated, the Exchange believes that the proposed 
threshold increases do not represent a significant departure from the 
current required criteria, is still reasonable based on the difficulty 
of satisfying each tier's criteria, and is appropriately aligned with 
the incremental difficulty to achieve the existing VIP tiers. As such, 
the Exchange does not anticipate the proposed threshold change to 
impact the number of firms that compete across all tiers, including 
those that regularly compete across the top two tiers, but instead 
encourages competition by encouraging increase in order flow to meet 
the proposed tiers. Therefore, the Exchange does not believe that the 
proposed tiers are unfairly discriminatory as it would not impact the 
range of typical competition across such tiers.
    The Exchange also notes that the proposed tier will not adversely 
impact any TPH's pricing or ability to qualify for other credit tiers. 
Rather, should a TPH not meet the proposed criteria, the TPH will 
merely not receive the proffered credit.
    The Exchange also notes that, while only certain orders would count 
towards the qualifying thresholds, specifically, Customer, Professional 
Customer, Broker-Dealer and JBO order, these market participants' 
orders are primarily executed by an agent and VIP is an incentive 
program for agency trading, whose order flow would bring greater volume 
and liquidity, which benefits all market participants by providing more 
trading opportunities and tighter spreads. The Exchange notes that 
incentive programs based on aggregate volume of certain agency

[[Page 45815]]

trading market participants also exist on other options exchanges.\13\
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    \13\ See NASDAQ Stock Market Rules, Options Rules, Options 7 
Pricing Schedule, Sec. 2 Options Market--Fees and Rebates, Tiers 1-
6.
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    Additionally, the Exchange believes that it is equitable and not 
unfairly discriminatory to continue to only apply credits to Customer 
orders (i.e., ``C'' origin code) because Customer order flow enhances 
liquidity on the Exchange for the benefit of all market participants. 
Specifically, Customer volume is important because it continues to 
attract liquidity to the Exchange, which benefits all market 
participants by providing more trading opportunities, which attracts 
Market-Makers. An increase in Market-Maker activity, in turn, 
facilitates tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. 
Moreover, the options industry has a long history of providing 
preferential pricing to Customers orders and the Exchange's current 
Fees Schedule currently does so in many places, as do the fees 
structures of multiple other exchanges.\14\
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    \14\ See id, specifically, Tier 6.
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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 
not impose any burden on intramarket or intermarket competition that is 
not necessary or appropriate in furtherance of the purposes of the Act. 
Rather, as discussed above, the Exchange believes that the proposed 
change would encourage the submission of additional liquidity to a 
public exchange, thereby promoting market depth, price discovery and 
transparency and enhancing order execution opportunities for all TPHs. 
As a result, the Exchange believes that the proposed change furthers 
the Commission's goal in adopting Regulation NMS of fostering 
competition among orders, which promotes ``more efficient pricing of 
individual stocks for all types of orders, large and small.'' \15\
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    \15\ See Securities Exchange Act Release No. 51808, 70 FR 37495, 
37498-99 (June 29, 2005) (S7-10-04) (Final Rule).
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    The Exchange believes the proposed rule change does not impose any 
burden on intramarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Particularly, the proposed 
change applies to all TPHs submitting qualified orders equally, in that 
all TPHs submitting such orders are eligible for the proposed tiers, 
have a reasonable opportunity to meet the tiers' criteria and will all 
receive the existing credit if such criteria is met. As described 
above, while only certain orders would count towards the qualifying 
thresholds, specifically, Customers, Professionals, Broker-Dealers and 
JBOs, these market participants' orders are primarily executed as 
agency orders, whose order flow would bring greater volume and 
liquidity, which benefits all market participants by providing more 
trading opportunities and tighter spreads. Moreover, the Exchange does 
not believe the current application of the credit to Customer orders 
imposes any burden on intermarket competition because, as stated, 
preferential pricing to Customers is a long-standing options industry 
practice which serves to enhance Customer order flow, thereby 
attracting Marker-Makers to facilitate tight spreads and trading 
opportunities to the benefit of all market participants. Overall, the 
proposed change is designed to encourage additional order flow to the 
Exchange, which the Exchange believes benefits all market participants 
on the Exchange by providing more liquidity, thus trading 
opportunities, encouraging even more TPHs to send orders, thereby 
contributing towards a robust and well-balanced market ecosystem to the 
benefit of all market participants.
    Next, the Exchange believes the proposed rule change does not 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As previously 
discussed, the Exchange operates in a highly competitive market. 
Members have numerous alternative venues that they may participate on 
and direct their order flow, including 15 other options exchanges. 
Based on publicly available information, no single options exchange has 
more than 20% of the market share.\16\ Therefore, no exchange possesses 
significant pricing power in the execution of option order flow. 
Indeed, participants can readily choose to send their orders to other 
exchange, and, additionally off-exchange venues, if they deem fee 
levels at those other venues to be more favorable. Moreover, the 
Commission has repeatedly expressed its preference for competition over 
regulatory intervention in determining prices, products, and services 
in the securities markets. Specifically, in Regulation NMS, the 
Commission highlighted the importance of market forces in determining 
prices and SRO revenues and, also, recognized that current regulation 
of the market system ``has been remarkably successful in promoting 
market competition in its broader forms that are most important to 
investors and listed companies.'' \17\ The fact that this market is 
competitive has also long been recognized by the courts. In 
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit 
stated as follows: ``[n]o one disputes that competition for order flow 
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .''.\18\ Accordingly, the Exchange 
does not believe its proposed fee change imposes any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \16\ See supra note 4.
    \17\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
    \18\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \19\ and paragraph (f) of Rule 19b-4 \20\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

[[Page 45816]]

change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-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-CBOE-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 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-CBOE-2019-047 and should be submitted on 
or before September 20, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18752 Filed 8-29-19; 8:45 am]
 BILLING CODE 8011-01-P


