[Federal Register Volume 84, Number 176 (Wednesday, September 11, 2019)]
[Notices]
[Pages 47984-47989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19611]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86879; File No. SR-CBOE-2019-034]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment Nos. 1, 2, and 3 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, 
and 3, To Amend the Exchange's Opening Process, Including on VIX 
Settlement Days

September 5, 2019.

I. Introduction

    On July 2, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the Exchange's opening auction process 
for options as well as the modified opening auction process used to 
calculate the exercise or final settlement value of expiring volatility 
index derivatives. The proposed rule change was published for comment 
in the Federal Register on July 22, 2019.\3\ On August 15, 2019, the 
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The 
Exchange filed Amendment Nos. 2 and 3 to the proposal on August 20, 
2019, and August 28, 2019, respectively.\5\ The Commission has received 
no comments regarding the proposal. The Commission is publishing this 
notice to solicit comment on Amendment Nos. 1, 2, and 3 and is 
approving the proposed rule change, as modified by Amendment Nos. 1, 2, 
and 3, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86387 (July 22, 
2019), 84 FR 35147 (``Notice'').
    \4\ In Amendment No. 1, the Exchange: Revised the proposal to 
make clear that a series is ineligible to open if the Composite 
Market of the series is crossed; modified the application of the 
Maximum Composite Width Check for constituent series on exercise 
settlement value determination days to provide additional price 
protection to the opening prices of constituent option series; 
provided additional detail regarding the proposed settlement strip; 
clarified the timing and frequency for the Exchange's dissemination 
of opening auction updates, including for constituent option series 
on exercise settlement value determination days; correct a 
typographical error in proposed Exchange Rule 5.31(c); indicated 
that the Exchange maintains and reviews records of any 
determinations made pursuant to proposed Exchange Rule 5.31(j)(2) 
with respect to the modified opening process in accordance with 
proposed Exchange Rule 5.31; clarified that All Sessions orders will 
rest on the GTH Queuing Book starting at 2:00 a.m., rather than 7:30 
a.m., to participate in the GTH opening auction process; indicated 
that the term ``primary market'' means the primary exchange on which 
an underlying security is listed, and that the term ``equity 
option'' includes options on exchange-traded products; and indicated 
that the VIX methodology is available on the Exchange's website. 
Amendment No. 1 replaced and superseded the original filing in its 
entirety. When it filed Amendment No. 1 with the Commission, the 
Exchange simultaneously submitted it as a comment letter on the 
proposal and the Commission publicly posted it here: https://www.sec.gov/comments/sr-cboe-2019-034/srcboe2019034-5977238-190214.pdf.
    \5\ In Amendment No. 2, the Exchange revised the definition of 
Maximum Composite Width in proposed Exchange Rules 5.31(a) and 
5.31(j)(1) to replace references to ``Market Composite Widths'' with 
references to ``Maximum Composite Widths.'' When it filed Amendment 
No. 2 with the Commission, the Exchange simultaneously submitted it 
as a comment letter on the proposal and the Commission publicly 
posted it here: https://www.sec.gov/comments/sr-cboe-2019-034/srcboe2019034-5994750-190368.pdf. In Amendment No. 3, the Exchange 
deleted two sentences that were erroneously retained in proposed 
Exchange Rule 5.31(j)(5) following modifications to that paragraph 
by Amendment No. 1. The deletion of the sentences makes clear that 
on exercise settlement value determination days, the System performs 
the Maximum Composite Width check and determines the opening trade 
price pursuant to proposed Exchange Rule 5.31(j)(5) in lieu of 
propose Exchange Rules 5.31(e)(1) and (2). When it filed Amendment 
No. 3 with the Commission, the Exchange simultaneously submitted it 
as a comment letter on the proposal and the Commission publicly 
posted it here: https://www.sec.gov/comments/sr-cboe-2019-034/srcboe2019034-6034336-191248.pdf.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    As described more fully in the Notice,\6\ the Exchange proposes to 
amend (1) the opening auction process used to open options on the 
Exchange; and (2) the modified opening auction process used to 
calculate the exercise or final settlement value of expiring Cboe 
Volatility Index (``VIX'') derivatives.\7\ The Exchange states that the 
proposed opening auction process, other than the modified opening 
auction process for expiring VIX derivatives, is ``virtually 
identical'' to the opening auction process used on two of the 
Exchange's affiliated exchanges.\8\ The Exchange states that the 
proposed modified opening auction process for expiring VIX derivatives 
``will function in substantially similar manner as the current modified 
opening auction process'' for expiring VIX derivatives.\9\
---------------------------------------------------------------------------

    \6\ See note 3, supra.
    \7\ See proposed Exchange Rule 5.31(j) (defining ``VIX 
derivatives''). The Exchange notes that options expire on an 
expiration date and settle to an exercise settlement value, and 
futures settle on a final settlement date to a final settlement 
value. See Notice, supra note 3, 84 FR at 35152, n. 51.
    \8\ Id. at 35164 (citing C2 Rule 6.11 and EDGX Options Rule 
21.7).
    \9\ Id. at 35163. See also Exchange Rule 6.2, Interpretation and 
Policy .01.
---------------------------------------------------------------------------

A. Standard Opening Auction Process

    Under the proposed opening auction process, the Queuing Period \10\ 
will begin at 2:00 a.m. for All Sessions Classes \11\ and at 7:30 a.m. 
for Regular Trading Hours (``Regular Trading Hours'' or ``RTH'') 
classes.\12\ During the Queuing Period, the System will accept orders 
and quotes pursuant to Exchange Rule 5.30, and they will be eligible 
for execution during the opening rotation, with certain 
limitations.\13\ Orders and

[[Page 47985]]

quotes on the Queuing Book will not be eligible for execution until the 
opening rotation, as provided in proposed Exchange Rule 5.31(e).\14\ 
Beginning at 2:00 a.m. for the GTH trading session and at 8:30 a.m. for 
the RTH trading session, and until the conclusion of the opening 
rotation for a series, the Exchange will disseminate opening auction 
updates for the series.\15\ The Exchange will disseminate opening 
auction updates every five seconds, unless there are no updates to the 
opening information since the previously disseminated update, in which 
case the Exchange will disseminate updates every minute.\16\ The 
Exchange believes that these messages will provide market participants 
with information that may contribute to enhanced liquidity and price 
discovery during the opening auction process.\17\
---------------------------------------------------------------------------

    \10\ The Queuing Period is the time period prior to the 
initiation of an opening rotation during which the System accepts 
orders and quotes in the Queuing Book for participation in the 
opening rotation for the applicable trading session. The Queuing 
Book is the book into which Users may submit orders and quotes (and 
onto which Good-til-Cancelled and Good-til-Date orders remaining on 
the Book from the previous trading session or trading day, as 
applicable, are entered) during the Queuing Period for participation 
in the applicable opening rotation. Orders and quotes on the Queuing 
Book may not execute until the applicable opening rotation 
commences. The Queuing Book for the Global Trading Hours (``Global 
Trading Hours'' or ``GTH'') opening auction process is distinguished 
from the Queuing Book for the RTH opening auction process. See 
proposed Exchange Rule 5.31(a).
    \11\ An All Sessions Class is an options class that the Exchange 
lists for trading during both Global Trading Hours and Regular 
Trading Hours. See Exchange Rule 1.1. At the time of this order, 
Cboe only trades certain SPX and VIX options during GTH. See http://www.cboe.com/micro/eth/pdf/global-trading-hours.pdf. Regular Trading 
Hours and Global Trading Hours are set forth in Exchange Rule 5.1.
    \12\ See proposed Exchange Rule 5.31(b)(1). At 2:00 a.m., All 
Sessions Orders will rest on the GTH Queuing Book and will be 
eligible to participate in the GTH opening auction process. In 
addition, Users may enter orders into the RTH Queuing Book beginning 
at 2:00 a.m., and these orders will rest on the RTH Queuing Book and 
be eligible to participate in the RTH opening auction process once 
it begins. See Amendment No. 1.
    \13\ See proposed Exchange Rule 5.31(b)(2). The following 
limitations apply to orders and quotes entered during the Queuing 
Period: (1) The System rejects Immediate-or-Cancel and Fill-or-Kill 
orders during the Queuing Period; (2) the System accepts orders and 
quotes with Match Trade Prevention (``MTP'') Modifiers during the 
Queuing Period, but does not enforce them during the opening 
rotation; (3) the System accepts all-or-none, stop, and stop-limit 
orders during the Queuing Period, but they do not participate in the 
opening rotation. The System enters any of these orders it receives 
during the Queuing Period into the Book following completion of the 
opening rotation (in time priority); (4) the System converts all 
intermarket sweep orders (``ISOs'') received prior to the completion 
of the opening rotation into non-ISOs; and (5) complex orders do not 
participate in the opening auction process described in proposed 
Exchange Rule 5.31 and instead may participate in the Complex Order 
Book Opening Process pursuant to Exchange Rule 5.33(c). See id. The 
``System'' refers to the Exchange's hybrid trading platform that 
integrates electronic and open outcry trading of option contracts on 
the Exchange, and includes any connectivity to the foregoing trading 
platform that is administered by or on behalf of the Exchange, such 
as a communications hub. See Exchange Rule 1.1.
    \14\ See proposed Exchange Rule 5.31(b)(2).
    \15\ See proposed Exchange Rule 5.31(c) and Amendment No. 1.
    \16\ See id.
    \17\ See Notice, supra note 3, 84 FR at 35149.
---------------------------------------------------------------------------

    For Regular Trading Hours, the System will initiate the opening 
rotation for the series in a class after 9:30 a.m. following the first 
disseminated (A) transaction on the primary market in the security 
underlying an equity option; or (B) index value for the index 
underlying an index option.\18\ For Global Trading Hours, the System 
will initiate the opening rotation at 3:00 a.m.\19\ The Exchange will 
disseminate a message to market participants indicating the initiation 
of the opening rotation.\20\
---------------------------------------------------------------------------

    \18\ The primary market is the primary exchange on which an 
underlying security is listed. The Exchange notes that equity 
options include options on exchange-traded products. See Exchange 
Rule 1.1, proposed Exchange Rule 5.31(d)(1), and Amendment No. 1.
    \19\ See proposed Exchange Rule 5.31(d)(2).
    \20\ See proposed Exchange Rule 5.31(d)(1).
---------------------------------------------------------------------------

    As part of the opening rotation, the System will conduct a Maximum 
Composite Width check for a series.\21\ If the Composite Market of a 
series is not crossed, and the Composite Width of the series is less 
than or equal to the Maximum Composite Width, the series is eligible to 
open and the System will determine the Opening Trade Price pursuant to 
proposed Exchange Rule 5.31(e)(2).\22\ If the Composite Market of a 
series is not crossed, and the Composite Width of the series is greater 
than the Maximum Composite Width, but there are (i) no non-M Capacity 
\23\ (a) market orders or (b) buy (sell) limit orders with prices 
higher (lower) than the Composite Bid (Offer) and (ii) no orders or 
quotes marketable against each other, the series is eligible to open, 
and the System will determine the Opening Trade Price pursuant to 
proposed Exchange Rule 5.31(e)(2).\24\ If the conditions in neither 
proposed Exchange Rule 5.31(e)(1)(A) or (B) are satisfied for a series, 
or if the Composite Market of a series is crossed, the series will be 
ineligible to open and the Queuing Period for the series will continue 
(including the dissemination of opening auction updates) until one of 
the conditions in proposed Exchange Rule 5.31(e)(1)(A) or (B) for the 
series is satisfied, or the Exchange opens the series pursuant to 
proposed Exchange Rule 5.31(h).\25\
---------------------------------------------------------------------------

    \21\ See proposed Exchange Rule 5.31(e)(1). The Maximum 
Composite Width, as set forth in proposed Exchange Rule 5.31(a)(1), 
is the amount that the Composite Width of a series may generally not 
be greater than before the Exchange will open the series (subject to 
certain exceptions set forth in proposed Exchange Rule 5.31(e)(1)). 
The Composite Width is the width of the Composite Market (i.e., the 
width between the Composite Bid and the Composite Offer) of a 
series. The Composite Market is the market for a series comprised of 
(1) the higher of the then-current best appointed Market-Maker bid 
on the Exchange and the Away Best Bid (``ABB'') (if there is an ABB) 
and (2) the lower of the then-current best appointed Market-Maker 
offer on the Exchange and the Away Best Offer (``ABO'') (if there is 
an ABO). See proposed Cboe Rule 5.31(a).
    \22\ See proposed Exchange Rule 5.31(e)(1)(A).
    \23\ An M Capacity order is an order for the account of a Market 
Maker. See Cboe Rule 1.1.
    \24\ See proposed Exchange Rule 5.31(e)(1)(B).
    \25\ See proposed Exchange Rule 5.31(e)(1)(C) and Amendment No. 
1. See Notice, supra note 3, 84 FR at 53510, for examples of the 
application of the Maximum Composite Width Check.
---------------------------------------------------------------------------

    After a series satisfies the Maximum Composite Width Check, if 
there are orders and quotes marketable against each other at a price 
not outside the Opening Collar, the System will determine the Opening 
Trade Price for the series.\26\ If there are no such orders or quotes, 
there is no Opening Trade Price.\27\ The Opening Trade Price is the 
volume-maximizing, imbalance minimizing price (``VMIM price'') that is 
not outside the Opening Collar.\28\ The Exchange states that the 
Maximum Composite Width Check and Opening Collar are intended to 
facilitate the opening of a series in a fair and orderly manner and at 
prices consistent with the current market conditions at the Exchange 
and other exchanges.\29\
---------------------------------------------------------------------------

    \26\ See proposed Exchange Rule 5.31(e)(2). The Opening Collar 
is the price range that establishes limits at or inside of which the 
System will determine the Opening Trade Price for a series. The 
Exchange sets the Opening Collar by determining the midpoint of the 
Composite Market and adding and subtracting half of the applicable 
width amount above and below, respectively, that midpoint. The 
Opening Collar widths for all classes are set forth in proposed 
Exchange Rule 5.31(a)(1) and are based on the Composite Bid for a 
series. See proposed Exchange Rule 5.31(a)(1).
    \27\ See proposed Exchange Rule 5.31(e)(2).
    \28\ The VMIM price is: (1) The price at which the largest 
number of contracts can execute (i.e., the volume-maximizing price); 
(2) if there are multiple volume-maximizing prices, the price at 
which the fewest number of contracts remain unexecuted (i.e., the 
imbalance-minimizing price); or (3) if there are multiple volume-
maximizing, imbalance-minimizing prices, (i) the highest (lowest) 
price, if there is a buy (sell) imbalance, or (ii) the price at or 
nearest to the midpoint of the Opening Collar, if there is no 
imbalance. See id.
    \29\ See Notice, supra note 3, 84 FR at 35150.
---------------------------------------------------------------------------

    If the System establishes an Opening Trade Price, the System will 
execute orders and quotes in the Queuing Book at the Opening Trade 
Price, prioritizing orders and quotes in the following order: Market 
orders, limit orders, and quotes with prices better than the Opening 
Trade Price, and orders and quotes at the Opening Trade Price.\30\ The 
System will allocate orders and quotes at the same price on a pro-rata 
basis pursuant to Exchange Rule 5.32., and will apply a Priority 
Customer overlay to all classes, except for SPX (including SPXW) and 
VIX (excluding VIXW).\31\ If there is no Opening Trade Price, the 
System will open a series without a trade.\32\ Following the conclusion 
of the opening rotation, the System will enter any unexecuted orders 
and quotes, or remaining portions, from the Queuing Book into the Book 
in time sequence, subject to a User's instructions, where they will be 
processed in accordance with Exchange Rule 5.32.\33\ The System will 
cancel any unexecuted OPG orders, or remaining portions thereof, 
following the conclusion of the opening rotation.\34\
---------------------------------------------------------------------------

    \30\ See proposed Exchange Rule 5.31(e)(3)(A).
    \31\ See proposed Exchange Rule 5.31(e)(3)(A)(ii).
    \32\ See proposed Exchange Rule 5.31(e)(3)(B).
    \33\ See proposed Exchange Rule 5.31(f). The Book is the 
electronic book of simple orders and quotes maintained by the 
System, which single book is used during both the RTH and GTH 
trading sessions. See Exchange Rule 1.1.
    \34\ See proposed Exchange Rule 5.31(f). An OPG order is an 
order that may only participate in the Opening Process on the 
Exchange.
---------------------------------------------------------------------------

    Following a trading halt in a class, the Exchange will open series 
using the same auction process described in proposed Exchange Rule 
5.31, except that: (1) The Queuing Period will begin immediately when 
the Exchange halts trading in the class; (2) the system will queue 
orders or quotes resting on the Book at the time of a trading halt for 
participation in the opening rotation following the trading halt, 
unless the User has entered instructions to cancel

[[Page 47986]]

its resting orders and quotes; and (3) the System will initiate the 
opening rotation for a class upon the Exchange's determination to 
resume trading.\35\
---------------------------------------------------------------------------

    \35\ See proposed Exchange Rule 5.31(g).
---------------------------------------------------------------------------

    The proposal deletes current Exchange Rule 6.2(g) regarding the use 
of the opening auction process to conduct a closing rotation upon 
determination by the Exchange. The Exchange states that it does not 
currently conduct closing rotations, and does not intend to do so in 
the future.\36\
---------------------------------------------------------------------------

    \36\ See Notice, supra note 3, 84 FR at 35152.
---------------------------------------------------------------------------

B. Modified Opening Process for Expiring VIX Derivatives

1. Background
    Currently, the exercise settlement value for expiring VIX 
derivatives is determined on the morning of their expiration date using 
the opening prices of a portfolio of SPX options--the settlement 
strip--that expire approximately 30 days later.\37\ These opening 
prices are determined through a modified version of the Exchange's 
standard opening auction process.\38\ The Exchange proposes several 
changes to its modified opening auction process, including changes to 
its methodology for determining the settlement strip and the 
elimination of the concepts of ``strategy orders'' \39\ and ``non-
strategy orders.'' \40\
---------------------------------------------------------------------------

    \37\ See id. at 35152. The proposal defines the ``settlement 
strip'' as the constituent option series used to calculate the 
exercise or final settlement value, as applicable, of expiring VIX 
derivatives. The ``constituent option series'' are all SPX 
(including SPXW) option series listed on the Exchange with the 
expirations the Exchange uses to calculate the exercise or final 
settlement value of the expiring VIX derivative on exercise 
settlement value determination days. See proposed Exchange Rule 
5.31(j)(1).
    \38\ See Notice, supra note 3, 84 FR at 35152.
    \39\ See Exchange Rule 6.2, Interpretation and Policy .01(c). 
Currently, the Exchange deems individual orders (considered 
collectively) that a market participant submits for participation in 
the modified opening auction process to be a ``strategy order,'' 
based on related facts and circumstances considered by the Exchange, 
if the orders: (1) Relate to the market participant's positions in 
expiring VIX derivatives; (2) are for option series with the 
expiration that the Exchange will use to calculate the exercise or 
final settlement value, as applicable, of the applicable VIX 
derivative; (3) are for option series with strike prices 
approximating the range of series that are later determined to 
constitute the constituent option series for the applicable 
expiration; (4) are for put (call) options with strike prices equal 
to or less (greater) than the ``at-the-money'' strike price; and (5) 
have quantities approximating the weighting formula used to 
determine the exercise or final settlement value, as applicable, in 
accordance with the VIX methodology. See Notice, supra note 3, 84 FR 
at 35153, n. 54, and current Exchange Rule 6.2, Interpretation and 
Policy .01(a) (definition of ``strategy order'').
    \40\ A ``non-strategy order'' is any order (including an order 
in a constituent option series) a market participant submits for 
participation in the modified opening procedure that is not a 
strategy order (or a change to or cancellation of a strategy order). 
Examples of non-strategy orders include, but are not limited to: (1) 
A buy (sell) order in a constituent options series if an expected 
opening information message (``EOI'') disseminated no more than two 
minutes prior to the time a market participant submitted the order 
included a sell (buy) imbalance and the size of the order is no 
larger than the size of the imbalance in the EOI, regardless of 
whether the market participant previously submitted a strategy order 
or has positions in expiring volatility index derivatives; or (2) a 
Market-Maker bid or offer in a constituent option series, as set 
forth in Exchange Rule 6.2, Interpretation and Policy .01(e).
---------------------------------------------------------------------------

2. Determination of the Settlement Strip
    Currently, the Exchange uses the opening trade prices of SPX series 
that comprise the settlement strip (or the average of a series' opening 
bid and ask if there is no opening trade in that series) established by 
the modified opening auction process to calculate the exercise or final 
settlement value of expiring VIX derivatives.\41\ In doing so, the 
Exchange excludes from consideration out-of-the-money SPX put and call 
options in any SPX series that have a zero bid price.\42\ The 
methodology then truncates the SPX series used to calculate the VIX 
settlement value after encountering two consecutive series having 
``zero-bid'' prices, even if further out-of-the-money series have an 
opening trade price and are ``non-zero'' bid.\43\
---------------------------------------------------------------------------

    \41\ See Notice, supra note 3, 84 FR at 35157.
    \42\ See id.
    \43\ See id.
---------------------------------------------------------------------------

    As proposed, the Exchange will no longer use the non-zero bid 
provision and the two consecutive zero-bid provisions.\44\ Instead, the 
Exchange proposes to determine the settlement strip as follows:
---------------------------------------------------------------------------

    \44\ See id. at 35159.
---------------------------------------------------------------------------

    (A) The Exchange determines the highest call strike and lowest put 
strike that establish the ``strike range'' for the settlement strip 
pursuant to an algorithm.
    (B) The at-the-money strike price is determined in accordance with 
the VIX methodology, using opening bid and offer information of each 
constituent option series.
    (C) The Exchange disseminates the highest call strike and lowest 
put strike of the strike range to all subscribers through the 
Exchange's data feeds that deliver opening auction update messages, no 
later than 8:45 a.m. on exercise settlement value determination days.
    (D) Each call (put) constituent option series with a strike price 
not outside the strike range (i.e., a strike price equal to or greater 
(less) than the at-the-money strike price up (down) to the highest call 
(lowest put) strike of the strike range) is included in the settlement 
strip.
    (E) The Exchange may update the strike range until 9:15 a.m. 
pursuant to an algorithm due to changes to the value of VIX, prices of 
related futures, or other algorithmic inputs. The Exchange will 
disseminate any such updates.\45\
---------------------------------------------------------------------------

    \45\ See proposed Exchange Rule 5.31(j)(1) and Amendment No. 1.
---------------------------------------------------------------------------

    The Exchange believes that the proposed settlement methodology may 
provide additional protection against manipulation because the Exchange 
will be solely responsible for determining the strike range of the 
settlement strip, making it impossible for anyone to attempt to 
manipulate the VIX settlement process by attempting to artificially 
affect which SPX series will have zero bids at the opening and thus 
potentially be included in the settlement strip.\46\ The Exchange notes 
that the algorithm that will determine the strike range of the 
settlement strip will employ numerous market inputs, including prices 
(both on the exercise settlement value determination day (including 
during the GTH trading day) and the previous trading day) of SPX 
options, SPY options, and e-mini S&P 500 options.\47\ The Exchange 
believes that it is therefore unlikely that one of these inputs of the 
Exchange's algorithm will have a material impact on the determination 
of the strike range.\48\ The Exchange designed the proposed methodology 
for determining the settlement strip to approximate the same settlement 
strip that would be used pursuant to the Exchange's current 
methodology.\49\
---------------------------------------------------------------------------

    \46\ See Notice, supra note 3, 84 FR at 35164.
    \47\ See id. at 35159.
    \48\ See id.
    \49\ See id. at 35157.
---------------------------------------------------------------------------

3. Entry of Orders and Quotes During the Queuing Period
    The Exchange's current rules generally require strategy orders to 
be entered prior to the strategy order cut-off time.\50\ The proposal 
eliminates the concept of both strategy orders and non-strategy orders. 
Instead, during the Queuing Period prior to 9:20 a.m., the System will 
continue to accept all orders and quotes (except Settlement Liquidity 
Opening Orders, or SLOOs, which the System rejects), and any changes to 
or cancellations of those orders and quotes. After the 9:20 a.m. cut-
off time (until the opening of trading in a series), the System will 
only accept SLOOs (including changes to and cancellations of SLOOs) and 
bulk message bids and offers (including

[[Page 47987]]

changes to and cancellations of bulk message bids and offers submitted 
before and after the cut-off time) from Market-Makers with an SPX 
appointment. After that cut-off, the System will reject all other 
orders and quotes (and all other changes to and cancellations of orders 
and quotes submitted prior to the cut-off time).\51\ The Exchange 
states that SLOOs will provide market participants with a definitive 
order type that they may use to participate in a competitive auction 
without creating an imbalance condition that would prevent a series 
from opening.\52\
---------------------------------------------------------------------------

    \50\ See Exchange Rule 6.2, Interpretation and Policy .01(c) and 
(d).
    \51\ See proposed Exchange Rule 5.31(j)(3). A SLOO is a limit 
order in a constituent option series designated with an OPG Time-in-
Force that Users may only submit to the Exchange on exercise 
settlement value determination days following the cut-off time 
described in proposed Exchange Rule 5.31(j)(3). The System cancels a 
SLOO (or remaining portion thereof) that does not execute during the 
modified opening auction process, and Users may not designate bulk 
messages as SLOOs. If the limit price of a buy (sell) SLOO crosses 
the midpoint of the then-current Opening Collar upon entry, the 
System adjusts its price to equal the midpoint of the Opening Collar 
(rounded up (down) to the nearest minimum increment), except for a 
sell SLOO when the midpoint is less than or equal to 0.175. If the 
midpoint of the Opening Collar changes during the Queuing Period, 
the System re-adjusts the SLOO's price to equal to the new Opening 
Collar midpoint (rounded as provided above), up to its limit price. 
The Exchange does not disseminate the prices of SLOOs in the Queuing 
Book. See proposed Exchange Rule 5.31(j)(1).
    \52\ The Exchange notes that the proposed SLOO repricing 
functionality, as described in note 51, supra, will prevent the 
entry of a SLOO from creating or adding to an imbalance that would 
prevent a constituent option series from opening. See id. at 35156.
---------------------------------------------------------------------------

    Under the proposal, Market-Makers with an SPX appointment will 
continue to be able to submit bulk message bids and offers (including 
changes to and cancellations of bulk message bids and offers submitted 
before and after the cut-off time) following the cut-off time, as they 
do today.\53\ The Exchange notes that a Market-Maker has obligations 
to, among other things, engage in dealings for the Market-Maker's own 
account when there exists a lack of price continuity or a temporary 
disparity between the supply of and demand for an option (i.e., an 
imbalance), to compete with other Market-Makers to improve markets in 
its appointed classes, and to update market quotations in response to 
changed market conditions in its appointed classes.\54\ The Exchange 
believes that Market-Maker participation throughout the entire modified 
opening auction process may add liquidity to the process and promote a 
fair and orderly opening and settlement process.\55\ In addition, the 
Exchange states that it will continue to review all Trading Permit 
Holder activity in constituent series on exercise settlement value 
determination days for compliance with all applicable Rules.\56\
---------------------------------------------------------------------------

    \53\ See id.
    \54\ See id.
    \55\ See id. The Exchange notes that Market-Maker quoting 
activity on exercise settlement value determination days will 
continue to be subject to all applicable Exchange rules. These rules 
include, among others: current Exchange Rule 4.1, which prohibits a 
Trading Permit Holder from engaging in acts or practices 
inconsistent with just and equitable principles of trade; current 
Exchange Rule 4.7, which prohibits (among other things) a Trading 
Permit Holder from effecting or inducing the purchase, sale, or 
exercise of any security for the purpose of creating or inducing a 
false, misleading, or artificial appearance of activity in such 
security or in the underlying security, or for the purpose of unduly 
or improperly influencing the market price of such security or of 
the underlying security or for the purpose of making a price that 
does not reflect the true state of the market in such security or in 
the underlying security; current Exchange Rule 4.18, which requires 
a Trading Permit Holder to establish, maintain, and enforce written 
policies and procedures reasonably designed, taking into 
consideration the nature of such Trading Permit Holder's business, 
to prevent the misuse, in violation of the Exchange Act and the 
Rules, of material, nonpublic information by the Trading Permit 
Holder or persons associated with the Trading Permit Holder; and 
current Exchange Rule 8.7, which requires Market-Makers to, among 
other things, enter into transactions in their market making 
capacity that constitute a course of dealings reasonably calculated 
to contribute to the maintenance of a fair and orderly market, and 
not to make bids or offers or enter into transactions that are 
inconsistent with such course of dealings. See id. at 335156-7.
    \56\ See id. at 335157.
---------------------------------------------------------------------------

4. Auction Updates, Opening Rotation, and Opening Trade Price 
Determination
    On exercise settlement value determination days, the Exchange will 
disseminate opening auction updates for constituent series every five 
seconds, regardless of whether there are updates to the opening 
information since the previously disseminated update.\57\ The opening 
rotation process will occur as set forth in proposed Exchange Rule 
5.31(e), except that the System will perform the Maximum Composite 
Width Check and determine the Opening Trade Price pursuant to proposed 
Exchange Rule 5.31(j)(5).\58\ The Maximum Composite Width Check for 
constituent series on exercise settlement value determination days 
differs from the Maximum Composite Width Check used on other days in 
that a constituent series will not open, without exception, if the 
Composite Width is greater than the Maximum Composite Width.\59\ In 
that case, the Queuing Period for the series will continue, including 
the dissemination of opening auction updates, until the Composite Width 
is less than or equal to the Maximum Composite Width or until the 
Composite Market is not crossed (as applicable), or the Exchange opens 
the series pursuant to proposed Exchange Rule 5.31(h).\60\ The Exchange 
states that this proposed process is similar to the current opening 
auction process in classes in which the Hybrid Agency Liaison (``HAL'') 
is not activated at the open.\61\
---------------------------------------------------------------------------

    \57\ See proposed Exchange Rule 5.31(j)(4) and Amendment No. 1. 
The Exchange believes providing frequent, regular updates in 
constituent series will further enhance transparency in the modified 
opening auction process. In addition, because the opening trading 
prices that will be used to determine the settlement values of 
expiring VIX derivatives will be determined by prices of the 
constituent option series, the Exchange believes that regular 
auction updates, and thus additional transparency, will contribute 
to a fair and orderly auction and settlement process. See Amendment 
No. 1.
    \58\ See proposed Exchange Rule 5.31(j)(5) and Amendment No. 3.
    \59\ See proposed Exchange Rule 5.31(j)(5)(B) and Amendment No. 
1.
    \60\ See id.
    \61\ See Amendment No. 1.
---------------------------------------------------------------------------

    After a series satisfies the Maximum Composite Width Check, the 
System determines the Opening Trade Price for the series if there are 
orders and quotes marketable against each other at a price not outside 
the Opening Collar.\62\ If there are no such orders or quotes, there is 
no Opening Trade Price.\63\ The Exchange notes that during the opening 
rotation on non-exercise settlement value determination days, the 
Opening Trade Price is the VMIM price that is not outside the Opening 
Collar.\64\ Thus, if the System determines that the VMIM price is 
outside of the Opening Collar, rather than not open, the System will 
use the collar limit as the opening price.\65\ On exercise settlement 
value determination days for constituent series, however, if (1) the 
VMIM price is outside the Opening Collar, or (2) there would be 
unexecuted market orders (or remaining portions), the series will not 
open.\66\ In either case, the Queuing Period for the series will 
continue (including the dissemination of opening auction updates) until 
the VMIM price is not outside the Opening Collar, or the Exchange opens 
the series pursuant to proposed paragraph (h).\67\ The Exchange notes 
that this is consistent with the current opening

[[Page 47988]]

auction process in classes in which HAL is not activated at the 
open.\68\
---------------------------------------------------------------------------

    \62\ See proposed Exchange Rule 5.31(j)(5).
    \63\ See Amendment No. 1.
    \64\ See Notice, supra note 3, 84 FR at 35160. The System will 
determine the VMIM price pursuant to proposed Rules 5.31(e)(2)(A) 
through (C) in the same manner it determines the VMIM price on all 
other days. See proposed Exchange Rule 5.31(j)(5)(B)(i) and Notice, 
supra note 3, 84 FR at 35159-60.
    \65\ See id.
    \66\ See proposed Exchange Rule 5.31(j)(5)(B)(iii) and Amendment 
No. 1.
    \67\ See id.
    \68\ See Notice, supra note 3, 84 FR at 35160.
---------------------------------------------------------------------------

5. Opening Rotation Self-Trades
    Under the proposed modified opening process, a market participant 
could submit orders that replicate the vega, or volatility, exposure of 
its expiring VIX derivatives prior to the cut-off time, and then submit 
a SLOO after the cut-off time to contribute liquidity to the opening 
process, including to offset any imbalances.\69\ Assuming there were no 
other factors demonstrating a different purpose, the SLOO might not 
have been intended to execute against the vega replicating order (and 
thus effect a transaction that involves no change in beneficial 
ownership to create a false or misleading appearance of active trading 
in SPX options). Rather, the SLOO could have been intended to 
contribute liquidity to the modified opening auction process to offset 
an existing imbalance and to contribute to a fair and orderly opening 
process for that series.\70\
---------------------------------------------------------------------------

    \69\ See id.
    \70\ See id.
---------------------------------------------------------------------------

    To accommodate fair and orderly trading in the modified opening 
auction process, the Exchange proposes to state in the Rules that, 
subject to other facts and circumstances (such as that may demonstrate 
a different purpose for the submission of the orders), the Exchange 
will not consider self-trades resulting from the execution of a User's 
orders against each other during the opening rotation of the modified 
opening auction process to be violations of Section 9(a)(1) of the 
Exchange Act.\71\ The Exchange will review all activity, including 
these executions, during the modified opening auction process for 
compliance with the Exchange Act and with the Exchange's rules, 
including rules prohibiting manipulation.\72\
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 78(i)(a)(1). See proposed Exchange Act Rule 
5.31(j)(6).
    \72\ See proposed Exchange Act Rule 5.31(j)(6). See also Notice, 
supra note 3, 84 FR at 35161-2.
---------------------------------------------------------------------------

    The Exchange represents that it has an adequate surveillance 
program in place to review options activity during the modified opening 
auction process that occurs on each exercise settlement value 
determination day.\73\ In addition, the Exchange states that it is 
updating its surveillance program to reflect the proposed amendments to 
the process, and that it will continue to review its surveillance 
program to determine whether additional enhancements are necessary or 
appropriate.\74\ The Exchange notes that all market participants will 
be continue to be required to abide by current Exchange Rules 4.1, 4.7, 
and 4.18.\75\
---------------------------------------------------------------------------

    \73\ See id. at 35162.
    \74\ See id.
    \75\ See id. at 35164.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment Nos. 1, 2, and 3, is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, with 
Section 6(b) of the Act.\76\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\77\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \77\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the proposed opening auction process 
is consistent with the protection of investors and the public interest 
because it is designed to provide a fair and orderly opening for 
options traded on the Exchange. The Commission notes that the proposed 
standard opening process is substantially identical to the opening 
processes used on two other exchanges.\78\
---------------------------------------------------------------------------

    \78\ See C2 Rule 6.11 and EDGX Options Rule 21.7.
---------------------------------------------------------------------------

    The proposed modified opening auction process for expiring VIX 
derivatives will operate in a manner that is substantially similar to 
the Exchange's current modified opening auction process, but with 
certain changes, as described above.\79\ While the Exchange has 
designed its new methodology of determining the settlement strip to 
largely replicate how settlement strips are determined today, the new 
methodology reduces the potential that a market participant would be 
able to manipulate the VIX settlement process by attempting to affect 
which SPX series will (and will not) have zero bids at the opening, 
which impacts which strikes are included in the strip.\80\ The 
Commission believes that the proposed changes to the methodology for 
determining the settlement strip are designed to protect investors and 
the public interest by reducing the potential for manipulative or 
disruptive trading in connection with the modified opening auction 
process used on exercise settlement value determination days.
---------------------------------------------------------------------------

    \79\ See Notice, supra note 3, 84 FR at 35163.
    \80\ See id. at 35164.
---------------------------------------------------------------------------

    The Commission believes that the proposal to eliminate the concept 
of strategy orders, and instead permit two types of market activity 
following the cut-off time--the submission of SLOOs and quotes from 
Market-Makers with an SPX appointment--could help to attract liquidity 
to trade against imbalances and reduce the likelihood that a 
constituent option series will fail to open, thereby helping to 
facilitate an orderly opening for VIX derivatives. The proposed SLOOs 
are designed to provide market participants with an order type they may 
submit following the cut-off time, which could encourage them to 
provide liquidity to offset order imbalances. In addition, the SLOO 
repricing functionality will prevent the entry of a SLOO from creating 
or adding to an imbalance that would prevent a constituent option 
series from opening.\81\
---------------------------------------------------------------------------

    \81\ See id. at 35156.
---------------------------------------------------------------------------

    The Commission notes that all market participants will continue to 
be required to comply with current Exchange Rules 4.1 (Just and 
Equitable Principles of Trade), 4.7 (Manipulation), and 4.18 
(Prevention of the Misuse of Material, Nonpublic Information).\82\ In 
addition, the Exchange will continue to conduct surveillance to monitor 
all trading activity in constituent option series on exercise 
settlement value determination days, including but not limited to 
monitoring the entry of orders and quotes following the cut-off time, 
as well as compliance with other Exchange rules,\83\ which the 
Commission believes is essential to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \82\ See id.
    \83\ See id.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 1, 2, and 3, is consistent 
with Sections 6(b)(5) of the Act.\84\
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment Nos. 1, 2, and 3 to the 
Proposed Rule Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether

[[Page 47989]]

Amendment Nos. 1, 2, and 3 are 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-2019-034 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-2019-034. 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-2019-034, and should be submitted 
on or before October 2, 2019.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1, 2, and 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1, 2, and 3 prior to the 
thirtieth day after the date of publication of notice of the filing of 
Amendment No. 1 in the Federal Register. Amendment No. 1 clarifies 
several aspects of the proposal, including by providing additional 
details regarding the settlement strip and the timing and frequency of 
opening auction updates, without introducing new material concepts. In 
addition, Amendment No. 1 modifies the application of the Maximum 
Composite Width Check to provide that a constituent option series will 
not open if the Composite Width is greater than the Maximum Composite 
Width, without exception. The Exchange notes that this is similar to 
the current opening auction process in classes in which HAL is not 
activated at the open. The Commission believes that the proposed change 
to the Maximum Composite Width Check should protect investors by 
helping to assure that the constituent option series, which are used to 
determine the settlement value of expiring VIX derivatives, open at 
prices that are consistent with current market conditions. Accordingly, 
the Commission believes that Amendment No. 1 does not raise novel 
regulatory issues. Amendment Nos. 2 and 3 correct a few errors in the 
rule text, thereby helping to assure the accuracy and clarity of the 
proposed rules in a manner that is consistent with the original 
proposal and that do not introduce new concepts or raise novel 
regulatory issues. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\85\ to approve the proposed 
rule change, as modified by Amendment Nos. 1, 2, and 3, on an 
accelerated basis.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\86\ that the proposed rule change (SR-CBOE-2019-034), as modified 
by Amendment Nos. 1, 2, and 3, is approved on an accelerated basis.
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78s(b)(2).
    \87\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\87\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19611 Filed 9-10-19; 8:45 am]
 BILLING CODE 8011-01-P


