[Federal Register Volume 84, Number 188 (Friday, September 27, 2019)]
[Notices]
[Pages 51211-51214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20974]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87060; File No. SR-CboeEDGX-2019-047]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, To 
Adopt Rule 21.21 (Solicitation Auction Mechanism)

September 23, 2019.

I. Introduction

    On July 31, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt Rule 21.21, the Solicitation Auction 
Mechanism (``SAM''), a solicited order mechanism for larger-sized 
orders. The proposed rule change was published for comment in the 
Federal Register on August 15, 2019.\3\ On September 9, 2019, the 
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The 
Commission has received no comments regarding the proposal. This order 
approves the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86621 (August 9, 
2019), 84 FR 41779 (``Notice'').
    \4\ Amendment No. 1 revises the proposal to correct a citation 
signal and to add an explanatory sentence regarding the requirements 
of Rule 11a2-2(T) under the Act. Because Amendment No. 1 does not 
materially alter the substance of the proposed rule change or raise 
unique or novel regulatory issues, it is not subject to notice and 
comment. Amendment No. 1 is available at https://www.sec.gov/comments/sr-cboeedgx-2019-047/srcboeedgx2019047-6090026-191882.pdf.
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II. Description of the Proposed Rule Change

    As described more fully in the Notice,\5\ the Exchange proposes to 
adopt Rule 21.21 \6\ establishing a solicited order mechanism. The 
proposal permits an Options Member (the ``Initiating Member'') to 
execute electronically a larger-sized order it represents as agent 
(``Agency Order'') against a solicited order(s) (``Solicited 
Order(s)''), provided that it submits both the Agency Order and 
Solicited Order(s) into the SAM.\7\
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    \5\ See Notice, supra note 3.
    \6\ 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.
    \7\ 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. The Agency 
Order and Solicited Order cannot both be for the accounts of a 
customer.
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A. Eligibility and SAM Auction Process

    The Initiating Member may initiate a SAM in any class traded on the 
Exchange.\8\ The order size of an Agency Order marked for SAM 
processing must be 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 size of the Solicited Order(s) must be 
for/total the same size as the Agency Order.\9\ In addition, the 
Initiating Member must designate each of the Agency Order and Solicited 
Order as all-or-none (``AON''),\10\ and the price of the Agency Order 
and Solicited Order must be in an increment of $0.01.\11\ Also, an 
Initiating Member may not designate an Agency Order or Solicited Order 
as Post Only.\12\
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    \8\ See proposed Rule 21.21(a)(1).
    \9\ See proposed Rule 21.21(a)(3).
    \10\ See id.
    \11\ See proposed Rule 21.21(a)(4).
    \12\ See proposed Rule 21.21(a)(5). See also Exchange Rule 
21.19(a)(5).
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    The Solicited Order must stop the entire buy (sell) Agency Order at 
a price that is at or better than the then-current NBO (NBB).\13\ 
Regarding resting orders that are on the same side as the Agency Order, 
the proposal provides that 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).\14\ 
Regarding resting orders that are on the opposite side as the Agency 
Order, the proposal provides that if the Agency Order is to buy (sell) 
and the Exchange best offer (bid) represents (i) a Priority Customer 
order on the EDGX Book, the stop price must be at least $0.01 better 
than the Exchange best offer (bid); or (ii) a quote or order that is 
not a Priority Customer order on the EDGX Book, the stop price must be 
at or better than the Exchange best offer (bid).\15\
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    \13\ See proposed Rule 21.21(b)(1).
    \14\ See proposed Rule 21.21(b)(2). The Exchange notes that 
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 Exchange Rule 21.19(b).
    \15\ See proposed Rule 21.21(b)(3).
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    A ``SAM sweep order'' or ``SAM ISO'' is the submission of two 
orders for crossing in a SAM without regard for better-priced Protected 
Quotes (as defined in Exchange 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 Book with a price better than the stop price. If the 
Initiating Member submits a SAM sweep order to a SAM, the stop price, 
SAM responses, and executions will be permitted at a price inferior to 
the Initial NBBO. Any execution(s) resulting from these sweeps will 
accrue to the SAM Agency Order.\16\
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    \16\ See proposed Rule 21.21(b)(4). The Exchange notes that ISOs 
are similarly permitted for AIM auctions, and the proposed 
definition of a SAM ISO is consistent with linkage rules. See 
Exchange Rules 21.19(b)(3)(A) and 27.1.
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    The Exchange system will initiate the SAM 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.\17\ 
SAM auction notification messages will not be included in the 
disseminated BBO or disseminated to the Options Price Reporting 
Authority (``OPRA'').\18\ The SAM auction will last for a period of 
time determined by the Exchange (the ``SAM auction period''), which may 
be no less than 100 milliseconds and no more than one second.\19\ An 
Initiating Member may not modify or cancel an

[[Page 51212]]

Agency Order or Solicited Order after submission to a SAM auction.\20\
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    \17\ See proposed Rule 21.21(c)(2).
    \18\ See id.
    \19\ See proposed Rule 21.21(c)(3). Pursuant to Exchange Rule 
16.3, the Exchange will announce the length of the SAM auction 
period via specification, Exchange Notice, or Regulatory Circular.
    \20\ See proposed Rule 21.21(c)(4).
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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.\21\ A SAM response may 
specify a limit price or be treated as market. SAM responses must be on 
the opposite side of the market as the Agency Order, \22\ and the 
minimum price increment for SAM responses is $0.01.\23\ 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. 
For purposes of the SAM auction, the system will aggregate all of a 
User's orders and quotes resting on the EDGX Book and SAM responses for 
the same EFID at the same price.\24\ The System will cap the size of a 
SAM response, or the aggregate size of a User's orders and quotes 
resting on the EDGX Book and SAM responses for the same EFID at the 
same price, at the size of the Agency Order (i.e., the System will 
ignore size in excess of the size of the Agency Order when processing a 
SAM auction).\25\ SAM responses will not be visible to SAM auction 
participants or disseminated to OPRA.\26\ A User may modify or cancel 
its SAM responses during the SAM auction.
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    \21\ The Exchange notes that the system will disregard 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 Book). See Notice, supra note 3, at 41781 
n.25. As a result, the system will handle a SAM response with a Post 
Only instruction in the same manner as all other SAM responses, 
which is as a provider of liquidity (i.e., maker). See id.
    \22\ See proposed Rule 21.21(c)(5)(E). The Exchange notes that 
this is the same as the corresponding provision for the Exchange's 
AIM auction. See Exchange Rule 21.19(c)(5)(E).
    \23\ See proposed Rule 21.21(c)(5)(A).
    \24\ See proposed Rule 21.21(c)(5)(C). The Exchange notes that 
this is the same as the corresponding provision for the Exchange's 
AIM auction. See Exchange Rule 21.19(c)(5)(C). The Exchange also 
notes that this (combined with the proposed size cap) is intended to 
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. See Notice, supra note 3, at 41781.
    \25\ See proposed Rule 21.21(c)(5)(D). The Exchange notes that 
this is the same as the corresponding provision for the Exchange's 
AIM auction. See Exchange Rule 21.19(c)(5)(D). The Exchange notes 
that this is intended 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. See Notice, 
supra note 3, at 41781.
    \26\ See proposed Rule 21.21(c)(5)(F).
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    One or more SAM auctions in the same series may occur at the same 
time. To the extent there is more than one SAM in a series underway at 
a time, the SAM auctions will conclude sequentially based on the exact 
time each SAM commenced, unless terminated early pursuant to proposed 
Rule 21.21(d). At the time each SAM concludes, the system will allocate 
the Agency Order pursuant to proposed Rule 21.21(e) and will take into 
account all SAM 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 Rule 
21.21(d), the system will process the SAM auctions sequentially based 
on the exact time each SAM commenced.\27\
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    \27\ See proposed Rule 21.21(c)(1). See also Notice, supra note 
3, at 41780.
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B. Conclusion of the SAM Auction

    The SAM will conclude at the sooner of the following: (i) The end 
of the SAM auction period; (ii) 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 Book; 
(iii) 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; (iv) the market close; and (v) any time the Exchange halts trading 
in the affected series, provided, however, that in such instance the 
SAM auction will conclude without execution.\28\
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    \28\ See proposed Rule 21.21(d)(1).
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    An unrelated market or marketable limit order (against the EDGX 
BBO), including a Post Only Order,\29\ on the opposite side of the 
Agency Order received during the SAM will not cause the SAM auction to 
end early and will execute against interest outside of the SAM auction. 
If contracts remain from such unrelated order at the time the SAM ends, 
they may be allocated for execution against the Agency Order pursuant 
to proposed Rule 21.21(e).\30\
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    \29\ The Exchange notes that any Post Only order resting on the 
EDGX Book at the conclusion of a SAM auction that executes against 
the Agency Order pursuant to proposed Rule 21.21(e) will execute in 
the same manner as any other type of order resting on the EDGX Book, 
which is as a provider of liquidity (i.e., maker). See Notice, supra 
note 3, at 41782 n.34.
    \30\ See proposed Rule 21.21(d)(2). The Exchange notes that the 
proposed reasons why a SAM auction may conclude early are the same 
as those that will cause an AIM auction to conclude early. See 
Exchange Rule 21.19(d).
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C. Priority and Allocation

    At the conclusion of the SAM auction, the system will execute the 
Agency Order against the Solicited Order or contra-side interest (which 
includes orders and quotes resting in the EDGX Book and SAM responses) 
at the best price(s) as follows (provided that any execution price(s) 
must be at or between the EDGX BBO existing at the conclusion of the 
SAM auction and at or between the Initial NBBO): \31\
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    \31\ See proposed Rule 21.21(e).
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     The system will execute 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 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.\32\
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    \32\ See proposed Rule 21.21(e)(1).
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     The system will execute the Agency Order against contra-
side interest (and cancel 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 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 execution against such contra-side 
interest will occur 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 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 Book and SAM responses) 
pursuant to Exchange 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.\33\
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    \33\ See proposed Rule 21.21(e)(2).
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     The system will cancel the Agency Order and Solicited 
Order with no execution if (i) 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 (ii) there is a Priority

[[Page 51213]]

Customer order (including a Priority Customer AON order) resting on the 
opposite side of the Agency Order at the stop price on the EDGX Book, 
and the aggregate size of the Priority Customer order and any other 
contra-side interest is insufficient to satisfy the Agency Order.\34\
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    \34\ See proposed Rule 21.21(e)(3). The Exchange notes that the 
proposed provisions regarding the execution of the Agency Order at 
the conclusion of a SAM auction are similar to the corresponding 
provisions for a Cboe Options SAM, as well as current Exchange Rules 
regarding priority and allocation of resting orders and quotes. See 
Cboe Options Rule 6.74B(b)(2)(A); Exchange Rule 21.8.

The system will cancel or reject any unexecuted SAM responses (or 
unexecuted portions) at the conclusion of the SAM auction.\35\
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    \35\ See proposed Rule 21.21(e)(4).
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D. Notification Requirement and Order Exposure Rule

    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 proposed Rule 21.21 and be in a form 
approved by the Exchange.\36\
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    \36\ See proposed Rule 21.21, Interpretation and Policy .01.
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    Exchange 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 notes 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.\37\ Accordingly, proposed Rule 
21.21, Interpretation and Policy .02 provides that Options Members may 
not use the SAM auction to circumvent Exchange 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.\38\
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    \37\ See Notice, supra note 3, at 41783.
    \38\ See proposed Rule 21.21, Interpretation and Policy .02.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, with 
Section 6(b) of the Act.\39\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\40\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \39\ 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).
    \40\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that allowing Options Members to enter 
orders into the SAM could provide additional opportunities for such 
large-sized orders to receive price improvement over the NBBO. The 
Commission further believes that the proposal to establish the SAM may 
allow for greater flexibility in executing large-sized orders, is not 
novel, and does not otherwise raise any issues of first impression.\41\ 
The Commission believes that the proposal includes appropriate terms 
and conditions to assure that the Agency Order is exposed to Options 
Members for the possibility of price improvement over the NBBO and that 
Priority Customer orders on the Exchange are protected. At the 
conclusion of a SAM, the Agency Order would either be executed in full 
(at a price at or between the Initial NBBO and at or between the EDGX 
BBO at the conclusion of the SAM auction) or cancelled. The Agency 
Order will be executed against the Solicited Order at the proposed stop 
price if (i) there is insufficient size among contra-side trading 
interest at a price better than the stop price to execute the Agency 
Order; and (ii) there are no Priority Customer orders (including 
Priority Customer AON orders) resting on the opposite side of the 
Agency Order at the stop price.\42\ If there are Priority Customer 
orders (including Priority Customer AON orders) and there is sufficient 
size to execute the Agency Order (considering all eligible interest), 
then the Agency Order will be executed against these interests and the 
Solicited Order will be cancelled.\43\ If, however, there are resting 
Priority Customer orders (including Priority Customer AON orders) at 
the stop price, but there is not sufficient size to execute the Agency 
Order in full, then both the Agency Order and the Solicited Order will 
be cancelled.\44\ Finally, if there is sufficient size to execute the 
Agency Order in full at an improved price equal to or better than the 
Initial NBBO and the EDGX BBO at the conclusion of the SAM auction, the 
Agency Order will execute at the improved price and the Solicited Order 
will be cancelled. The Commission believes that the priority and 
allocation rules for the SAM, which are consistent with similar 
mechanisms on other exchanges, are reasonable and consistent with the 
Act.
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    \41\ The Commission also notes that the proposal is similar to 
requirements set forth in the Cboe Options Solicitation Auction 
Mechanism, Nasdaq ISE, LLC (``ISE'') Solicited Order Mechanism, and 
Miami International Securities Exchange LLC (``MIAX'') PRIME 
Solicitation Mechanism. See Cboe Options Rule 6.74B; ISE Rule 
716(d); MIAX Rule 515A(b).
    \42\ See proposed Rule 21.21(e)(1).
    \43\ See proposed Rule 21.21(e)(2).
    \44\ See proposed Rule 21.21(e)(3).
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IV. Section 11(a) of the Act

    Section 11(a)(1) of the Act \45\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\46\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the

[[Page 51214]]

execution of the transaction once it has been transmitted to the member 
performing the execution; \47\ (iii) may not be affiliated with the 
executing member; and (iv) with respect to an account over which the 
member or an associated person has investment discretion, neither the 
member nor its associated person may retain any compensation in 
connection with effecting the transaction except as provided in the 
Rule. For the reasons set forth below, the Commission believes that 
Exchange Options Members entering orders into the SAM would satisfy the 
requirements of Rule 11a2-2(T).
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    \45\ 15 U.S.C. 78k(a)(1).
    \46\ 17 CFR 240.11a2-2(T).
    \47\ This prohibition also applies to associated persons. The 
member may, however, participate in clearing and settling the 
transaction.
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    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\48\ The Exchange represents that its trading system 
and the proposed SAM receive all orders electronically through remote 
terminals or computer-to-computer interfaces.\49\ The Exchange also 
represents that orders for covered accounts from Options Members will 
be transmitted from a remote location directly to the proposed SAM by 
electronic means. Because no Exchange Options Member may submit orders 
into the SAM from on the floor of the Exchange, the Commission believes 
that the SAM satisfies the off-floor transmission requirement.
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    \48\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \49\ See Notice, supra note 3, at 41787.
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    Second, the Rule requires that the member and any associated person 
not participate in the execution of its order after the order has been 
transmitted. The Exchange represents that at no time following the 
submission to the SAM of an order or SAM response is an Options Member 
able to acquire control or influence over the result or timing of the 
order's or response's execution.\50\ According to the Exchange, the 
execution of an order (including the Agency and the Solicited Order) or 
a SAM response sent to the SAM is determined by what other orders and 
responses are present and the priority of those orders and 
responses.\51\ Accordingly, the Commission believes that an Options 
Member does not participate in the execution of an order or response 
submitted to the SAM.
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    \50\ See id. (also representing, among other things, that no 
Options Member, including the Initiating Member, will see a SAM 
response submitted into SAM and therefore will not be able to 
influence or guide the execution of their Agency Orders, Solicited 
Orders, or SAM responses, as applicable).
    \51\ See id. The Exchange notes that an Initiating Member may 
not cancel or modify an Agency Order or Solicited Order after it has 
been submitted into SAM, but that Options Members may modify or 
cancel their responses after being submitted to a SAM. See id. at 
41787 n.68. As the Exchange notes, the Commission has stated that 
the non-participation requirement does not preclude members from 
cancelling or modifying orders, or from modifying instructions for 
executing orders, after they have been transmitted so long as such 
modifications or cancellations are also transmitted from off the 
floor. See Securities Exchange Act Release No. 14563 (March 14, 
1978), 43 FR 11542, 11547 (the ``1978 Release''). See also Amendment 
No. 1, supra note 4.
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities, such as the SAM, 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.\52\ The Exchange represents that the 
SAM 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.\53\ Based on the Exchange's representation, 
the Commission believes that the SAM satisfies this requirement.
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    \52\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 44.
    \53\ See Notice, supra note 3, at 41787.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\54\ The Exchange represents that Options Members 
relying on Rule 11a2-2(T) for transactions effected through the SAM 
must comply with this condition of the Rule and that the Exchange will 
enforce this requirement pursuant to its obligations under Section 
6(b)(1) of the Act to enforce compliance with federal securities 
laws.\55\
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    \54\ In addition, Rule 11a2-2(T)(d) requires a member or 
associated person authorized by written contract to retain 
compensation, in connection with effecting transactions for covered 
accounts over which such member or associated persons thereof 
exercises investment discretion, to furnish at least annually to the 
person authorized to transact business for the account a statement 
setting forth the total amount of compensation retained by the 
member or any associated person thereof in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 47, 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'').
    \55\ See Notice, supra note 3, at 41787.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\56\ that the proposed rule change (SR-CboeEDGX-2019-047), as 
modified by Amendment No. 1, is approved.
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    \56\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
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    \57\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20974 Filed 9-26-19; 8:45 am]
 BILLING CODE 8011-01-P


