[Federal Register Volume 84, Number 217 (Friday, November 8, 2019)]
[Notices]
[Pages 60461-60464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24362]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87455; File No. SR-CBOE-2019-102]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend the Fat Finger Check in Rule 5.34 as It Applies to Stop-Limit 
Orders

November 4, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the

[[Page 60462]]

``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 29, 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, and 
II below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 the fat finger check in Rule 5.34 as it applies to Stop-Limit 
orders. 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 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 fat finger check under Rule 
5.34(c)(1) as it applies to Stop-Limit orders. Currently, Rule 
5.34(c)(1) provides that if a User submits a buy (sell) limit order to 
the System with a price that is more than a buffer amount above (below) 
the NBO (NBB), the System cancels or rejects the order (i.e., the ``fat 
finger'' check). The Exchange determines a default buffer amount; 
however, a User may establish a higher or lower amount than the 
Exchange default. This check generally applies to orders and quotes 
with a limit price, subject to certain exceptions set forth in current 
Rules 5.34(c)(1)(B) through (D). For example, current Rule 
5.34(c)(1)(D) provides that the check does not apply to bulk 
messages.\5\
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    \5\ The Exchange notes that a separate provision governs a fat 
finger check specific to bulk messages. See Rule 5.34(a)(5).
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    The Exchange proposes to add Stop-Limit orders to Rule 
5.34(c)(1)(D) as an additional order type to which the fat finger check 
does not apply. A ``Stop-Limit'' order is an order to buy (sell) that 
becomes a limit order when the consolidated last sale price (excluding 
prices from complex order trades if outside the NBBO) or NBB (NBO) for 
a particular option contract is equal to or above (below) the stop 
price specified by the User.\6\ Stop-Limit orders allow Users increased 
control and flexibility over their transactions and the prices at which 
they are willing to execute an order. The purpose of a Stop-Limit order 
is to not execute upon entry, and instead rest in the System until the 
market reaches a certain price level, at which time the order could be 
executed. As such, when a buy (sell) Stop-Limit order is activated, its 
limit price may likely be outside of the buffer amount above (below) 
the NBO (NBB) in anticipation of capturing rapidly increasing 
(decreasing) market prices.
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    \6\ See Rule 5.6(c) (definition of Stop-Limit order).
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    The primary purpose of the fat finger check is to prevent limit 
orders from executing at potentially erroneous prices upon entry, 
because the limit prices are ``too far away'' from the then-current 
NBBO. As noted above, a Stop-Limit order is not intended to execute 
upon entry. Currently, because a Stop-Limit order does not ``become'' a 
limit order until activated, the limit order fat finger check applies 
to a Stop-Limit order at the time the order is activated. As noted 
above, at that time, the limit price may cross the NBO, and thus may be 
cancelled due to the fat finger check if the limit price crosses the 
NBO by more than the buffer. Therefore, the manner in which the fat 
finger check cancels/rejects a Stop-Limit order may conflict with the 
intended purpose of a Stop-Limit order and a User's control over the 
time when and the price at which it executes. For example, assume that 
when the NBBO is 8.00 x 8.05, a User submits a Stop-Limit order to buy 
at 9.25 and a stop price of 8.15 and the User has set the fat finger 
buffer to $1.00. Assume the NBBO then updates to 8.15 x 8.20. The 
updated NBB equals the stop price of the order will activate the stop 
price of the Stop Limit Order, converting it into a limit order to buy 
at 9.25, which would be more than the fat finger buffer of $1.00 above 
the current NBO, thus canceled/rejected by the System in accordance 
with the fat finger check. The Exchange also notes that the System is 
currently able to apply only one buffer amount (either the Exchange 
default amount or a User's established amount) across multiple order 
types. Therefore, a User would not be able to expand the buffer amount 
to accommodate Stop-Limit orders without potentially over-expanding the 
buffer amount for other limit orders that execute upon entry.
    The Exchange notes that a User's Stop-Limit orders would still be 
subject to other price protections already in place on the Exchange. In 
particular, Rule 5.32(c)(2) specifically applies to Stop-Limit orders 
and provides that the System cancels or rejects a buy (sell) Stop-Limit 
order if the NBB (NBO) at the time the System receives the order is 
equal to or above (below) the stop price.\7\ Because the purpose of a 
Stop-Limit order is to rest in the Book until a specified price is 
reached, the Exchange believes rejecting a stop or stop-limit order 
entered above or below, as applicable, that price may be erroneous, as 
entry at that time would be inconsistent with the purpose of the order. 
Additionally, drill-through protections are in place pursuant to Rule 
5.34(a)(4), such that, if a buy (sell) order would execute (i.e., when 
the stop price for a Stop-Limit order is activated), the System 
executes the order up to a buffer amount (the Exchange determines the 
amount on a class and premium basis) above (below) the NBO (NBB) that 
existed at the time of order entry (``the drill-through price'').
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    \7\ However, the System accepts a buy (sell) Stop-Limit order if 
the consolidated last sale price at the time the System receives the 
order is equal to or above (below) the stop price. The Exchange 
notes that the System is unable to compare the stop price of a stop-
limit order to the last consolidated sale price upon receipt of the 
order, which is why the order is accepted when the stop price is 
above (below) the last consolidated sale price when the System 
receives it.
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    The Exchange believes that allowing a Stop-Limit order, once 
activated, with a limit price outside of the NBBO (notwithstanding any 
fat finger buffer) to execute at that limit price (up to the drill-
through buffer amount) is consistent with the intended purpose of

[[Page 60463]]

a Stop-Limit order. As stated, when a buy (sell) Stop-Limit order is 
activated, its limit price is intended to be at a consequential amount 
above (below) the NBO (NBB) in order to capture rapidly increasing 
(decreasing) trade prices, to which the NBBO would as rapidly track and 
reflect. To cancel or reject such orders based on the NBBO at the time 
of its activation would inhibit Stop-Limit orders from capturing 
favorable trade prices as a result of a rapidly shifting market.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\8\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    In particular, the proposed rule change benefits market 
participants by ensuring that they are able to use Stop-Limit orders to 
achieve their intended purpose. As stated, Stop-Limit orders are 
intended to increase User price control and flexibility, particularly 
in the face of price swings and market volatility, by resting in the 
System until the market reaches a certain price level. Thus, they are 
not intended to execute upon entry. Conversely, the primary purpose of 
the fat finger check is to prevent limit orders from executing at 
potentially erroneous prices upon entry, because the limit prices are 
``too far away'' from the then-current NBBO. By excluding Stop-Limit 
orders from the fat finger check, which would currently cancel/reject a 
Stop-Limit order if its buy (sell) limit price was above (below) the 
NBO (NBB) upon activation of its stop limit price, the proposed rule 
change removes impediments to and perfects the mechanism of a free and 
open market and national market system by allowing Users the control 
and flexibility to set the limit prices on Stop-Limit orders so as to 
capture significant market fluctuations, which, as stated, result in 
corresponding significant adjustments in the NBBO. Therefore, the 
proposed rule change is designed to protect investors by allowing their 
Stop-Limit orders to execute as intended without being canceled or 
rejected in connection with the NBBO that existed at the time of their 
activation, and instead to consider rapid price movements and 
corresponding NBBO adjustments. The Exchange notes that the proposed 
rule change will not affect the protection of investors or the 
maintenance of a fair and orderly market because other price controls 
would apply to Stop-Limit orders, both at the time of their submission 
and when their stop prices are activated and they become limit orders.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change 
will not impose any burden on intramarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act 
because all Users' Stop-Limit orders will be excluded from the fat 
finger check in the same manner. Also, all Users' Stop-Limit orders 
will continue to be subject to other specific price controls in place, 
both at the time of their submission and once their stop prices are 
activated and they become limit orders. The proposed rule change will 
not impose any burden on intermarket competition that that is not 
necessary or appropriate in furtherance of the purposes of the Act 
because the proposed change is merely designed to allow Users' Stop-
Limit orders to execute in a manner that achieves their intended 
purpose by updating a price protection mechanism already in place on 
the Exchange and applicable only to trading on the Exchange.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \13\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay. The 
Exchange believes that waiver of the operative delay is appropriate 
because, as the Exchange discussed above, excluding Stop-Limit orders 
from the fat finger check, which would currently cancel/reject a Stop-
Limit order if its buy (sell) limit price was above (below) the NBO 
(NBB) upon activation of its stop limit price, will benefit market 
participants by ensuring that they are able to use Stop-Limit orders to 
achieve their intended purpose. Thus, the Exchange believes that the 
proposed rule change is designed to protect investors by allowing their 
Stop-Limit orders to execute as intended without being canceled or 
rejected due to the application of the fat finger check provision.
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiver of the 30-day operative delay 
is consistent with the protection of investors and the public interest 
because the proposal will permit Stop-Limit orders to execute as 
intended and not be inadvertently cancelled in certain situation, as 
discussed above, by the fat finger check provision. Therefore, the 
Commission hereby waives the

[[Page 60464]]

operative delay and designates the proposal as operative upon 
filing.\15\
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    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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 shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2019-102 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-2019-102. 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-2019-102 and should be submitted on 
or before November 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24362 Filed 11-7-19; 8:45 am]
BILLING CODE 8011-01-P


