[Federal Register Volume 84, Number 241 (Monday, December 16, 2019)]
[Notices]
[Pages 68520-68523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26983]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87706; File No. SR-CBOE-2019-115]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
the Maximum Composite Width Check of the Opening Rotation as Provided 
in Subparagraph (e)(1) of Exchange Rule 5.31

December 10, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 4, 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'') proposes to 
amend the Maximum Composite Width Check of the opening rotation as 
provided in subparagraph (e)(1) of Exchange Rule 5.31. 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

[[Page 68521]]

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
    Exchange Rule 5.31 sets forth the Exchange's opening auction 
process. Paragraph (e) of the Rule provides the opening rotation 
process, during which the System will determine whether the Composite 
Market \5\ for a series is not wider than a maximum width, will 
determine the opening price, and open the series. Subparagraph (e)(1) 
provides that the System will determine whether the Composite Market 
for a series is not wider than a maximum width, as follows:
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    \5\ The term ``Composite Market'' means the market for a series 
comprised of (1) the higher of the then-current best appointed 
Market-Maker bulk message bid on the Exchange and the ABB (if there 
is an ABB) and (2) the lower of the then-current best appointed 
Market-Maker bulk message offer on the Exchange and the ABO (if 
there is an ABO). The term ``Composite Bid (Offer)'' means the bid 
(offer) used to determine the Composite Market. See Exchange Rule 
5.31(a).
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     If the Composite Width \6\ of a series is less than or 
equal to the Maximum Composite Width,\7\ the series is eligible to open 
(and the System determines the Opening Price).\8\
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    \6\ The term ``Composite Width'' means the width of the 
Composite Market (i.e., the width between the Composite Bid and the 
Composite Offer) of a series. See Exchange Rule 5.31(a).
    \7\ The term ``Maximum Composite Width'' means the amount that 
the Composite Width of a series may generally not be greater than 
for the series to open (subject to certain exceptions set forth in 
subparagraph (e)(1)). The Exchange determines this amount on a class 
and Composite Bid basis, which amount the Exchange may modify during 
the opening auction process (which modifications the Exchange 
disseminates to all subscribers to the Exchange's data feeds that 
deliver opening auction updates). See Exchange Rule 5.31(a).
    \8\ See Exchange Rule 5.31(e)(1)(A).
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     If the Composite Width of a series is greater than the 
Maximum Composite Width, but there are no non-M Capacity \9\ market 
orders or buy (sell) limit orders with prices higher (lower) than the 
Composite Bid (Offer) and there are no locked or crossed orders or 
quotes, the series is eligible to open (and the System determines the 
Opening Price).\10\
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    \9\ Capacity M is used for orders for the account of a Market-
Maker (with an appointment in the class), thus ``non-M Capacity'' 
orders refer to orders entered for the accounts of non-Market-Makers 
(e.g., Customer or Firm accounts). See U.S. Options Binary Order 
Entry Specifications, at 28 (definition of Capacity), available at 
http://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf.
    \10\ See Exchange Rule 5.31(e)(1)(B).
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     If neither of the conditions above are satisfied for a 
series, or if the Composite Market of a series is crossed, the series 
is ineligible to open. The Queuing Period \11\ for the series continues 
(including the dissemination of opening auction updates) until one of 
the above conditions for the series is satisfied, or the Exchange opens 
the series pursuant to paragraph (h).\12\
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    \11\ The term ``Queuing Period'' means 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. See 
Exchange Rule 5.31(a).
    \12\ See Exchange Rule 5.31(e)(1)(C).
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    The Exchange implemented the price protection measure of 
subparagraph (e)(1)(B) in order to conservatively protect non-M 
capacity orders from executing in the Opening Auction Process at an 
extreme price. While it is possible for Market-Makers to submit orders 
to the Exchange at an extreme price, the Exchange believes there is 
less risk of a Market-Maker inputting an order at an extreme price 
given that Market-Makers are generally responsible for pricing the 
market. The following example shows the application of the Maximum 
Composite Width check provided for in subparagraph (e)(1)(B) and the 
type of extreme trade price for which the check is intended to limit.
Example #1
    Suppose the Maximum Composite Width for a class is 1.00, and the 
Composite Market is 5.00 x 20.00 comprised of an appointed Market-Maker 
bulk message bid of 5.00 and an appointed Market-Maker bulk message 
offer of 20.00. There is a non-M capacity limit order to buy for 18.00 
in the Queuing Book. Prior to the open, the Exchange does not know the 
market value of the option series; however, assume that the intrinsic 
value of the option series is 6.00. In this case, the series would not 
be eligible to open because the width of the Composite Market is 
greater than the Maximum Composite Width, and there is a non-M Capacity 
order at a price inside of the Composite Market. If the Exchange 
permitted the option series to open in this circumstance, the non-M 
capacity limit order may execute in the Opening Auction Process at its 
limit price, which the Exchange would consider an extreme price given 
that the intrinsic value of the option series is 6.00. Therefore, 
subparagraph (e)(1)(B) is designed to protect the non-M capacity order 
from executing at such an extreme price by not opening the option 
series in such a scenario.
    However, in certain instances where the Composite Market is wide, 
the Exchange believes the conditions of subparagraph (e)(1)(B) may be 
overly conservative and unnecessarily prevent the opening of a series 
when the risk of execution at the open at an extreme price is minimal. 
The following example shows the application of the Maximum Composite 
Width check provided for in subparagraph (e)(1)(B) and the type of non-
extreme trade price for which the check will limit.
Example #2
    Suppose the Maximum Composite Width for a class is 1.00, and the 
Composite Market is 5.00 x 7.00 comprised of an appointed Market-Maker 
bulk message bid of 5.00 and an appointed Market-Maker bulk message 
offer of 7.00. There is a non-M capacity limit order to buy for 5.75 in 
the Queuing Book.\13\ Prior to the open, the Exchange does not know the 
market value of the option series; however, assume that the intrinsic 
value of the option series is 5.75. In this case, the series would not 
be eligible to open because the width of the Composite Market is 
greater than the Maximum Composite Width, and there is a non-M Capacity 
order at a price inside of the Composite Market.
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    \13\ The term ``Queuing Book'' means the book into which Users 
may submit orders and quotes (and onto which Good-til-Cancelled 
(``GTC'') and Good-til-Date (``GTD'') 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 opening rotation. The Queuing Book for the 
Global Trading Hours (``GTH'') opening auction process may be 
referred to as the ``GTH Queuing Book,'' and the Queuing Book for 
the Regular Trading Hours (``RTH'') opening auction process may be 
referred to as the ``RTH Queuing Book.'' See Exchange Rule 5.31(a).
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    As demonstrated in Example #2, subparagraph (e)(1)(B) provides no 
circumstance under which a non-M capacity order may improve the 
Composite Market when the Composite Width is greater than the Maximum 
Composite Width that would allow the Exchange to open the series, even 
when such non-M capacity order is not entered at an extreme limit 
price. Given this, the Exchange proposes to amend subparagraph 
(e)(1)(B) to allow the Exchange to open a series if the Composite Width 
is greater than the Maximum Composite Width and there are non-M 
Capacity limit orders at a price better than the Composite Bid (Offer) 
in certain circumstances. Specifically, the proposed amendment will 
allow the Exchange to open a series

[[Page 68522]]

if the Composite Width of a series is greater than the Maximum 
Composite Width, but there are no non-M Capacity market orders or buy 
(sell) limit orders with prices higher (lower) than the Composite 
Market midpoint and there are no locked or crossed orders or quotes. 
Thus, under proposed subparagraph (e)(1)(B), the Exchange would allow 
the option series to open in Example #2 above as the non-M capacity 
limit bid was entered at a price lower than the Composite Market 
midpoint. The proposed amendment would continue to limit the risk of a 
non-M capacity order executing at an extreme price in Example #1 as the 
non-M capacity limit bid was entered at a price higher than the 
Composite Market midpoint.
    The Exchange believes the proposed amendment strikes a reasonable 
balance between protecting non-M capacity orders from executing at 
extreme prices and encouraging the submission of non-M capacity orders 
at prices that improve the Composite Market, which will allow the 
Exchange to open series earlier and also allow for more trading 
opportunities on the Exchange throughout the trading day. The Exchange 
believes the proposed amendment is reasonable, as it will allow the 
Exchange to open series on a less restrictive basis and potentially 
earlier, while still limiting the risk of a non-M capacity order 
executing at an extreme price on the open. If the width of the 
Composite Market (which the Exchange believes represents the prices 
most reflective of the market, as it is comprised of the better of 
Market-Maker bulk messages on the Exchange or any away market quotes) 
is no greater than the Maximum Composite Width, the Exchange will open 
the series because there is minimal risk of execution at an extreme 
price. Further, the Exchange notes that there are other price 
protections available to limit the risk of executions at an extreme 
price (e.g., drill-through protection).\14\ However, if the Composite 
Width is greater than the Maximum Composite Width but there are no non-
M Capacity bids (offers) higher (lower) than the midpoint of the 
Composite Market (and thus better than the best Composite Bid (Offer) 
but still not marketable at a price at which the Exchange would open), 
there is minimal risk of an order executing at an extreme price on the 
open. Because the risk that the Maximum Composite Width Check is 
intended to address is limited in this situation and also because any 
such orders would be subject to other price protections to further 
limit this risk, and that the Exchange believes such minimal risk is 
outweighed by the benefits of additional trading opportunities by 
opening these series earlier, the Exchange believes it is appropriate 
to open a series in either of these conditions. Therefore, if neither 
the (1) Composite Width of a series is less than or equal to the 
Maximum Composite Width, nor (2) if the Composite Width of a series is 
greater than the Maximum Composite Width, but there are no non-M 
Capacity \15\ market orders or buy (sell) limit orders with prices 
higher (lower) than the Composite Market midpoint and there are no 
locked or crossed orders or quotes, the Exchange continues to believe 
there may be higher risk that orders would execute at an extreme price 
if the series opened, and therefore the Exchange will continue to not 
open a series.
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    \14\ The Exchange notes that drill-through protection is 
designed to limit a marketable non-bulk message bid (offer) from 
executing a certain amount higher (lower) than the National Best 
Offer (National Best Bid) or the Opening Collar. See Exchange Rule 
5.34(a)(4).
    \15\ Capacity M is used for orders for the account of a Market-
Maker (with an appointment in the class), thus ``non-M Capacity'' 
orders refer to orders entered for the accounts of non-Market-Makers 
(e.g., Customer or Firm accounts). See Exchange Rule 1.1.
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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.\16\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ 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) \18\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
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    The Exchange believes proposed Rule 5.31(e) will protect investors, 
because it will continue to limit the risk of execution of orders at 
extreme prices at the open in a manner similar to the existing Rule. 
The Exchange also believes the proposed amendment will benefit market 
participants as it may encourage the submission of orders at prices 
that improve the Composite Market in the Opening Auction Process on the 
Exchange, and allow the Exchange to open series earlier, which may also 
allow for more trading opportunities on the Exchange throughout the 
trading day.

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 Exchange does not 
believe that the proposed amendment will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, because it will apply to orders 
and quotes of all market participants in the same manner. Further, the 
proposed amendment would allow trading in options series to open 
sooner, which would benefit all market participants in these series. 
The Exchange notes that the protections of Rule 5.31(e)(1)(B) are not 
applied to Market-Maker orders because the Exchange believes there is 
less risk of a Market-Maker inputting an order at an extreme price 
given that Market-Makers are generally responsible for pricing the 
market.
    The Exchange does not believe that the proposed rule change to 
amend the Maximum Composite Width Check of the opening rotation will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, because the 
proposed rule change only impacts the conditions under which a series 
will open on the Exchange. The proposed amendment may increase 
participation in the Opening Auction Process and further allow more 
series to open on the Exchange to the benefit of all Exchange Trading 
Permit Holders.
    The Exchange believes the proposed rule change may enhance 
intermarket competition by encouraging the submission of orders at 
improved prices in the Opening Auction Process and allowing more series 
to open on the Exchange in a more timely manner. Further, the proposed 
amendment will continue to limit the risk of orders executing at 
extreme prices at the open in a similar manner as set forth under 
current Rule 5.31(e).

[[Page 68523]]

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 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 \19\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 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 \21\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \22\ 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 so that 
the proposal may become operative upon filing. The Exchange believes 
that the proposed rule change may encourage submission of orders at 
improved prices in the Opening Auction Process on the Exchange and 
allow the Exchange to open series earlier, which will allow for more 
trading opportunities on the Exchange throughout the trading day. In 
addition, as noted above, the Exchange believes the Maximum Composite 
Width Check will continue to limit the risk of executions at extreme 
prices, and executions will be subject to other price protections on 
the Exchange. Accordingly, the Commission hereby waives the operative 
delay and designates the proposed rule change operative upon filing so 
that the benefits of this proposed rule change can be realized 
immediately.\23\
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    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ 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-2019-115 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-2019-115. 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-2019-115 and should be submitted on 
or before January 6, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-26983 Filed 12-13-19; 8:45 am]
 BILLING CODE 8011-01-P


