[Federal Register Volume 85, Number 103 (Thursday, May 28, 2020)]
[Notices]
[Pages 32086-32092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11399]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88923; File No. SR-CBOE-2020-046]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
to the Debit/Credit Price Reasonability Check

May 21, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 14, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe Options'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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 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 its debit/credit price reasonability check. The text of the 
proposed rule change is provided below.

(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *

Rule 5.34. Order and Quote Price Protections Mechanisms and Risk 
Controls

    The System's acceptance and execution of orders, quotes, and bulk 
messages, as applicable, pursuant to the Rules, including Rules 5.31 
through 5.33, and orders routed to PAR pursuant to Rule 5.82 are 
subject to the following price protection mechanisms and risk controls, 
as applicable.
    (a) No change.
    (b) Complex Orders.
    (1) Definitions. For purposes of this subparagraph (b):
    (A)-(C) No change.
    (D) Calendar Spread. A ``calendar'' spread is a two-legged complex 
order with one leg to buy a number of calls (puts) and one leg to sell 
the same number of calls (puts) with the same exercise price but 
different expiration dates.
    (2) No change.
    (3) Debit/Credit Price Reasonability Checks.
    (A) The Exchange cancels or rejects a complex order (or unexecuted 
portion) that is a limit order for a debit strategy with a net credit 
price that exceeds a pre-set buffer, a limit order (or unexecuted 
portion) for a credit strategy with a net debit price that exceeds a 
pre-set buffer, or a market order (or unexecuted portion) for a credit 
strategy that would execute at a net debit price that exceeds a pre-set 
buffer (the pre-set

[[Page 32087]]

buffers are determined by the Exchange on a class and strategy (i.e., 
vertical, calendar, butterfly, orders with different expiration dates 
and exercise prices) basis).
    (B) The System defines a complex order as a debit or credit as 
follows:

    (i)-(ii) No change.
    (iii) an order for which all pairs and loners are debits 
(credits) is a debit (credit). For purposes of this check, a 
``pair'' is a pair of legs in an order for which both legs are calls 
or both legs are puts, one leg is a buy and one leg is a sell, and 
the legs have the same expiration date but different exercise prices 
(i.e., vertical), [or] the same exercise price but different 
expiration dates (i.e., calendar), or the exercise price for the 
call (put) with the farther expiration date is lower (higher) than 
the exercise price for the nearer expiration date. A ``loner'' is 
any leg in an order that the System cannot pair with another leg in 
the order. Notwithstanding the foregoing, if the stock component of 
a stock-option order is to buy (sell), the stock-option order is a 
debit (credit).
    (a) No change.
    (b) The System then pairs legs to the extent possible [with the 
same exercise prices] across expiration dates, pairing one [leg]call 
(put) with the [leg]call (put) that has the next nearest expiration 
date  and the same or next lower (higher) exercise price.
    (c) A pair of calls is a credit (debit) if the exercise price of 
the buy (sell) leg is higher than the exercise price of the sell 
(buy) leg (if the pair has the same expiration date) or if the 
expiration date of the sell (buy) leg is farther than the expiration 
date of the buy (sell) leg (if the [pair has the same] exercise 
price of the sell (buy) leg is the same as or lower than the 
exercise price of the buy (sell) leg).
    (d) A pair of puts is a credit (debit) if the exercise price of 
the sell (buy) leg is higher than the exercise price of the buy 
(sell) leg (if the pair has the same expiration date) or if the 
expiration date of the sell (buy) leg is farther than the expiration 
date of the buy (sell) leg (if the [pair has the same] exercise 
price of the sell (buy) leg is the same as or higher than the 
exercise price of the buy (sell) leg).
* * * * *

    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 proposed rule change amends the debit/credit price 
reasonability check for complex orders in Rule 5.34(b)(3) to expand its 
applicability and provide flexibility with respect to its application. 
Pursuant to the debit/credit price reasonability check, the Exchange 
cancels or rejects a complex order (or unexecuted portion) that is a 
limit order for a debit strategy with a net credit price that exceeds a 
pre-set buffer, a limit order (or unexecuted portion) for a credit 
strategy with a net debit price that exceeds a pre-set buffer, or a 
market order (or unexecuted portion) for a credit strategy that would 
execute at a net debit price that exceeds a pre-set buffer (the pre-set 
buffers are determined by the Exchange). The System defines a complex 
order as a debit (credit) if all pairs and loners are debits 
(credits).\5\ For purposes of the debit/credit price reasonability 
check, a ``pair'' is a pair of legs in an order for which both legs are 
calls or both legs are puts, one leg is a buy and one leg is a sell, 
and both legs have the same expiration date but different exercise 
prices \6\ or the same exercise price but different expiration 
dates.\7\ A ``loner'' is any leg is an order that the System cannot 
pair with another leg in the order.
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    \5\ Rule 5.34(b)(3)(B). The System also determines certain call 
and put butterfly spreads as debits and credits. See id.
    \6\ The proposed rule change defines this as a ``vertical,'' 
which is consistent with the definition of a vertical in Rule 
5.34(b)(1)(A).
    \7\ The proposed rule change defines this as a ``calendar,'' and 
adds the definition of a calendar spread to Rule 5.34(b)(1)(D).
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    (1) The System first pairs legs to the extent possible within each 
expiration date, pairing one leg with the leg that has the next highest 
exercise price.
    (2) The System then pairs legs to the extent possible with the same 
exercise prices across expiration dates, pairing one leg with the leg 
that has the next nearest expiration date.
    (3) A pair of calls is a credit (debit) if the exercise price of 
the buy (sell) leg is higher than the exercise price of the sell (buy) 
leg (if the pair has the same expiration date) or if the expiration 
date of the sell (buy) leg is farther than the expiration date of the 
buy (sell) leg (if the pair has the same exercise price).
    (4) A pair of puts is a credit (debit) if the exercise price of the 
sell (buy) leg is higher than the exercise price of the buy (sell) leg 
(if the pair has the same expiration date) or if the expiration date of 
the sell (buy) leg is farther than the expiration date of the buy 
(sell) leg (if the pair has the same exercise price).
    (5) A loner to buy is a debit, and a loner to sell is a credit.
    The System does not apply the debit/credit price reasonability 
check to an order for which the System cannot define whether it is a 
debit or credit.
Background
    The Exchange implemented a debit/credit reasonability check in 
2016.\8\ The version of the debit/credit price reasonability check in 
place until the Exchange's System migration on October 7, 2019 was 
substantially similar to the current version described above. However, 
under that version, the Exchange previously applied the debit/credit 
price reasonability check to pairs with different expiration dates and 
exercise prices for which the call (put) with the farther expiration 
date is lower (higher) than the exercise price for the nearer 
expiration (i.e., diagonals), except to options that are European-
settled.\9\ Diagonal options in European-settled options were excluded 
from the debit/credit price reasonability check, because certain market 
conditions could cause options with nearer expirations to be worth more 
than options with farther expirations (as further discussed below). 
Additionally, under the prior version of the debit/credit price 
reasonability check, while the Exchange did not apply a pre-set buffer, 
it was able to apply the debit/credit price reasonability check on a 
class-by-class basis.
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    \8\ See Securities Exchange Act Release Nos. 76960 (January 21, 
2016), 81 FR 4728 (January 27, 2016) (SR-CBOE-2015-107) (Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, 
Relating to Price Protection Mechanisms for Quotes and Orders); and 
79589 (December 19, 2016), 81 FR 94469 (December 23, 2019) (SR-CBOE-
2016-086).
    \9\ Id.
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    In connection with the System migration on October 7, 2019, the 
Exchange adopted the current version of the debit/credit price 
reasonability check.\10\ The Exchange adopted flexibility to apply a 
buffer rather than the flexibility to turn the debit/credit price 
reasonability check on or off, as the Exchange believed it would 
provide

[[Page 32088]]

additional flexibility to adapt the check to market conditions. The 
Exchange inadvertently omitted the debit/credit price reasonability 
check's application to the diagonal pairs that were subject to the 
check under the prior version of the rule; however, the debit/credit 
price reasonability check was included in the new System and has been 
applied to complex orders, including diagonals, since October 7, 2019. 
The Exchange did not exclude European-settled options from the debit/
credit price reasonability check in the Rules, as it previously did, 
because the System was built to permit the buffer to be modified on a 
class-by-class basis as well as a strategy basis. The proposed rule 
change codifies the applicability of the debit/credit price 
reasonability check to diagonal pairs, as well as the Exchange's 
ability to modify the debit/credit price reasonability check on class 
and strategy basis, which the Exchange believes is appropriate given 
that market conditions impact classes and strategies in different 
manners, and the flexibility will permit it modify the debit/credit 
price reasonability check to adapt to these market conditions so that 
legitimate strategies may receive execution opportunities.
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    \10\ See Securities Exchange Act Release No. 86923 (September 
10, 2019), 84 FR 48664 (September 16, 2019) (SR-CBOE-2019-057).
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    As discussed in the rule filing that first proposed adoption of the 
debit/credit price reasonability check, the System determines whether 
an order is a debit or credit based on general options volatility and 
pricing principles, which the Exchange understands are used by market 
participants in their option pricing models.\11\ With respect to 
options with the same underlying:
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    \11\ Securities Exchange Act Release Nos. 76960 (January 21, 
2016), 81 FR 4728 (January 27, 2016) (SR-CBOE-2015-107) (Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, 
Relating to Price Protection Mechanisms for Quotes and Orders); and 
79589 (December 19, 2016), 81 FR 94469 (December 23, 2019) (SR-CBOE-
2016-086).
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     if two calls have the same expiration date, the price of 
the call with the lower exercise price is more than the price of the 
call with the higher exercise price;
     if two puts have the same expiration date, the price of 
the put with the higher exercise price is more than the price of the 
put with the lower exercise price; and
     if two calls (puts) have the same exercise price, the 
price of the call (put) with the nearer expiration is less than the 
price of the call (put) with the farther expiration.
    In other words, a call (put) with a lower (higher) exercise price 
is more expensive than a call (put) with a higher (lower) exercise 
price, because the ability to buy stock at a lower price is more 
valuable than the ability to buy stock at a higher price, and the 
ability to sell stock at a higher price is more valuable than the 
ability to sell stock at a lower price. A call (put) with a farther 
expiration is more expensive than the price of a call (put) with a 
nearer expiration, because locking in a price further into the future 
involves more risk for the buyer and seller and thus is more valuable, 
making an option (call or put) with a farther expiration more expensive 
than an option with a nearer expiration.
Proposed Application to Certain Diagonal Pairs
    Under the current the debit/credit price reasonability check, the 
System only pairs calls (puts) if they have the same expiration date 
but different exercise prices or the same exercise price but different 
expiration dates. With respect to pairs with different expiration dates 
but the same exercise price,\12\ a pair of calls is a credit (debit) 
strategy if the expiration date of the sell (buy) leg is farther than 
the expiration date of the buy (sell) leg, and a pair of puts is a 
credit (debit) strategy if the expiration date of the sell (buy) leg is 
farther than the expiration date of the buy (sell) leg. However, based 
on the principles described above, if the sell (buy) leg of a pair of 
calls has a farther expiration date (and thus is more expensive) than 
the expiration date of the buy (sell) leg as well as a lower exercise 
price (and thus is more expensive) than the exercise price of the sell 
(buy) leg, then the pair is a credit (debit) (as is the case if the 
exercise prices of each call were the same under the current rule). 
Similarly, if the sell (buy) leg of a pair of puts has a farther 
expiration date (and thus is more expensive) than the expiration date 
of the buy (sell) leg as well as a higher exercise price (and thus is 
more expensive) than the exercise price of the buy (sell) leg, then the 
pair of puts is a credit (as is the case if the exercise prices of each 
put were the same under the current rule).
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    \12\ A complex order consisting of a buy leg and a sell leg with 
different expiration dates are commonly referred to in the industry 
as a ``calendar spread.''
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    Therefore, the proposed rule change expands the debit/credit price 
reasonability check to pair calls (puts) with different expiration 
dates if the exercise price for the call (put) with the farther 
expiration date is lower (higher) than the exercise price for the 
nearer expiration date in addition to those with different expiration 
dates and the same exercise price. Specifically, the proposed rule 
change amends subparagraph (c)(2)(C) to state, for purposes of the 
debit/credit price reasonability check, a ``pair'' is a pair of legs in 
an order for which both legs are calls or both legs are puts, one leg 
is a buy and one leg is a sell, and the legs have different expiration 
dates and the exercise price for the call (put) with the farther 
expiration date is the same as or lower (higher) than the exercise 
price for the nearer expiration date. The proposed rule change also 
amends subparagraphs (b)(3)(B)(iii)(b) through (d) to incorporate these 
orders with different expiration dates and exercise prices. When 
pairing legs across expiration dates, the System will pair one call 
(put) with the call (put) that has the next nearest expiration date and 
the same or next lower (higher) exercise price.
    Based on the pricing principles described above, a pair of calls is 
a credit (debit) strategy if the expiration date of the sell (buy) leg 
is farther than the expiration date of the buy (sell) leg (if the 
exercise price of the sell (buy) leg is the same as or lower than the 
exercise price of the buy (sell) leg). A pair of puts is a credit 
(debit) strategy if the expiration date of the sell (buy) leg is 
farther than the expiration date of the buy (sell) leg (if the exercise 
price of the sell (buy) leg is the same as or higher than the exercise 
price of the buy (sell) leg).\13\ Entering a calendar spread with a 
credit (debit) strategy at a debit (credit) price (or that would 
execute at a debit (credit) price), which price is inconsistent with 
the strategy, may result in executions at prices that are extreme and 
potentially erroneous.
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    \13\ The proposed rule change makes no changes to the debit/
credit price reasonability check with respect to pairs of orders 
with the same expiration date but different exercise prices. 
Therefore, the rule filing omits references to the portions of the 
current rule related to those pairs to focus on the changes made to 
pairs with different expiration dates.
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    Below are examples demonstrating how the System determines whether 
a complex order with two legs, which have different expiration dates 
and different exercise prices, is a debit or credit, and whether the 
System will reject the order pursuant to the debit/credit price 
reasonability check, with a pre-set buffer of $10.00.\14\
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    \14\ The same principles would apply to complex orders with more 
than two legs, which include two legs that can be paired in this 
way.
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Example #1--Limit Call Spread

    A Trading Permit Holder enters a spread to buy 10 May 30 XYZ 
calls and sell 10 Aug 20 XYZ calls at a net debit price of -$20.00. 
The

[[Page 32089]]

System defines this order as a credit, because the buy leg is for 
the call with the nearer expiration date and higher exercise price 
(and is thus the less expensive leg). The System rejects the order 
back to the Trading Permit Holder because it is a limit order for a 
credit strategy that contains a net debit price, as it exceeds the 
pre-set buffer.

Example #2--Limit Put Spread

    A Trading Permit Holder enters a spread to buy 20 May 30 XYZ 
puts and sell 20 Apr 20 XYZ puts at a net credit price of $15.00. 
The System defines this order as a debit, because the buy leg is for 
the put with the farther expiration date and the higher exercise 
price (and thus the more expensive leg). The System rejects the 
order back to the Trading Permit Holder because it is a limit order 
for a debit strategy that contains a net credit price, as it exceeds 
the pre-set buffer.
Proposed Flexibility
    Given the different characteristics applicable to different 
classes, the Exchange proposes to determine the pre-set buffer on a 
class-by-class basis. As discussed above, the prior version of the 
check excluded application of the check to pairs for which the exercise 
price for the call (put) with the farther expiration date is lower 
(higher) than the exercise price for the nearer expiration date in 
European-settled options (which is a group of classes), which 
demonstrates the need to apply different parameters to different 
classes. The Exchange will issue an Exchange notice for all pre-set 
buffers, including any changes to those buffers.\15\
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    \15\ See Rule 1.5.
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    Additionally, the proposed rule change will permit the Exchange to 
determine a different buffer on a strategy basis. In other words, the 
Exchange may have different buffers applicable to calendars, verticals, 
butterflies, and orders whose legs have different exercise prices and 
different expiration dates for which the exercise price for the call 
(put) with the farther expiration date is lower (higher) than the 
exercise price for the nearer expiration date (which the check will 
apply pursuant to this rule change). Strategies are impacted 
differently by market conditions just as classes are impacted 
differently by market conditions. As noted, the previous version of the 
check excluded European-style options from the diagonal pair check, but 
applied the check to those options for other strategy pairs (such as 
calendars and verticals), which demonstrates that different strategies 
may need different parameters.
    As previously noted, the Exchange understands that in certain 
market conditions, particularly in volatile conditions as have recently 
occurred, the general pricing principles described above may not apply 
to certain classes or strategies. For example, it is possible that the 
leg with the farther expiration may be trading at a discount and thus 
is worth less than the leg with the nearer term expiration, and thus 
entering a diagonal or calendar strategy as a debit may be consistent 
with the then-current market.\16\ In such conditions, the Exchange may 
deem it appropriate to increase the buffer to permit these orders to be 
accepted for electronic processing. While an order with a diagonal or 
calendar strategy entered as a debit in normal market conditions may 
appear erroneous and be appropriately rejected, in volatile market 
conditions, such an order entered as a debit may be accurately 
reflecting the market, and the Exchange believes it would be 
appropriate to provide such an order with electronic execution 
opportunities. The proposed flexibility to establish pre-set buffers on 
a class and strategy basis will permit the Exchange to respond to 
unusual market conditions as soon as practicable.
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    \16\ This would apply to calendar spreads and orders with legs 
with different expiration dates and exercise prices for which the 
exercise price for the call (put) with the farther expiration date 
is lower (higher) than the exercise price for the nearer expiration 
date, but not vertical spreads, demonstrating the need to apply 
different buffers to different strategies. It is for this reason 
that the previous version of the debit/credit price reasonability 
check did not apply to these diagonal strategies in European-settled 
options.
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    In the wake of recent market volatility caused by the ongoing 
coronavirus pandemic, certain classes exhibited backwardation, which 
occurs when series with the farther expirations are worth less than 
series with the nearer term expirations. As discussed above, this is 
the opposite of what occurs pursuant to general options pricing 
principles in normal market conditions. Given this backwardation, 
market participants were submitting diagonal [sic] in certain classes 
(which were European-settled) with debit prices, which were consistent 
with market conditions, but the System was rejecting those orders 
because they did not satisfy the debit/credit price reasonability check 
(as the buffer was set to $0).
    This issue became exacerbated beginning on March 16, when the 
Exchange suspended open outcry trading due to the coronavirus pandemic. 
When the trading floor was open, market participants had the option to 
submit orders that the System rejected to the trading floor for 
execution in open outcry. However, that requires additional time, which 
may introduce price risk to the execution, which is heightened when the 
markets are volatile. With the closure of the trading floor, market 
participants have no way to execute these orders with legitimate 
strategies on the Exchange, except by submitting them as separate 
orders, which introduces market and execution risk. Between March 16 
and April 9, the System rejected an average of approximately 215 SPX 
complex orders with two legs and a diagonal strategy each trading day, 
with a low of fewer than 100 and a high above 500.\17\ This range 
demonstrates the impact of market conditions on the pricing on this 
strategy in SPX. On trading days with higher volatility, more SPX 
orders were submitted with this strategy as credits rather than debits, 
which were consistent with market conditions but unable to execute on 
the Exchange. However, these orders were unable to execute on the 
Exchange, because they did not satisfy the debit/credit price 
reasonability check. The proposed rule change will permit the Exchange 
to modify the buffer of these strategies to provide execution 
opportunities to these legitimately priced orders (while providing 
continued protection to other strategies in the class (and other 
classes) not impacted by current market conditions).
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    \17\ SPX options have been impacted by backwardation given 
recent market conditions. As a European style option, the Exchange 
notes diagonal pairs in SPX were excluded from the debit/credit 
reasonability check. The Exchange intends to widen the buffer for 
SPX diagonal pairs upon effectiveness of this filing based on market 
conditions, the characteristics of SPX options, and data reviewed by 
the Exchange, which increased buffer corresponds to the exclusion of 
these options under the prior version of the reasonability check.
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    Under normal market conditions, these prices would be considered 
erroneous.\18\ However, during unusual market conditions, these prices 
are consistent with those market conditions, and the Exchange believes 
such orders should have electronic execution opportunities at prices 
consistent with the market. Under the current rule, the Exchange could 
have changed the buffer, but that change would have applied to all 
classes and all strategies. Given that backwardation does not impact 
pricing for all classes, and all strategies, the Exchange did not make 
that change, as it believes the System would have accepted many 
erroneously priced orders in addition to the

[[Page 32090]]

legitimately priced orders in the impacted classes and strategies. The 
proposed rule change would permit the Exchange in similar circumstances 
to modify the buffer in classes and strategies whose pricing was 
impacted by changed market conditions, while maintaining the same level 
of protection for classes and strategies whose pricing was not impacted 
by those market conditions. The Exchange would consider market 
conditions, investor demand, and other relevant factors when 
determining whether to modify a buffer amount to attempt to create an 
appropriate balance between protection against executions at 
potentially erroneous prices and provision of execution opportunities 
for legitimately priced orders.
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    \18\ As noted above, under the prior version of the rule, the 
diagonal pairs in European-style options were always excluded from 
the debit/credit price reasonability check (and thus two-legged 
complex orders with a diagonal pair in European-settled classes were 
always accepted into the System in all market conditions). Applying 
a widened buffer to diagonal pairs in European-style options under 
the current rule would be consistent with the prior version of the 
rule.
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    The Exchange offers a suite of risk controls, as described in Rule 
5.34, which are designed to prevent trades at potentially erroneous 
prices. The debit/credit price reasonability check is an example of one 
of these risk controls. If the Exchange modified the debit/credit check 
buffer for a class or strategy in response to changes in market 
conditions, there are other risk controls that would separately apply 
to incoming orders to provide other protections against executions at 
potentially erroneous prices. The Exchange regularly monitors the 
application of the debit/credit price reasonability check, including 
the number of orders rejected as a result of the check. Additionally, 
the Exchange monitors orders that may be executed at erroneous prices 
pursuant to Rule 6.5. The Exchange considers all of these factors, and 
the factors described above, when determining whether to modify the 
parameters of the available risk controls, including the debit/credit 
check buffer.
    The Exchange announces any changes to these parameters to market 
participants by Exchange notice pursuant to Rule 1.5. As noted above, 
market participants requested that we modify the buffer in certain 
classes with respect to diagonal pairs (as would be permitted by the 
proposed rule change) in connection with recent volatility. The 
proposal was presented to Trading Permit Holders at a town hall held on 
March 12, 2020 (which was available to all Trading Permit Holders and 
attended in person or by phone by hundreds of participants), at which 
the Exchange indicated, among other things, that it was seeking a rule 
change to permit such a modification. While requests for the change 
have decreased in recent weeks given the calming of the markets, the 
Exchange believes the proposed rule change will permit it to respond 
efficiently to any future changes in market conditions that may occur 
in connection with the ongoing coronavirus pandemic or other potential 
events.
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.\19\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \20\ 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) \21\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ Id.
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    In particular, the proposed rule change expands the applicability 
of the current debit/credit price reasonability check to additional 
complex order strategies for which the Exchange can determine whether 
the order is a debit or credit. By expanding the orders to which these 
checks apply, the Exchange can further assist with the maintenance of a 
fair and orderly market by mitigating the potential risks associated 
with additional complex orders trading at prices that are inconsistent 
with their strategies (which may result in executions at prices that 
are extreme and potentially erroneous), which ultimately protects 
investors. This proposed expansion of the debit/credit price 
reasonability check promotes just and equitable principles of trade, as 
it is based on the same general option and volatility pricing 
principles the System currently uses to pair calls and puts, which 
principles the Exchange understands are used by market participants in 
their option pricing models. As discussed above, the Exchange 
previously applied the debit/credit price reasonability check to pairs 
for which the exercise price for the call (put) with the farther 
expiration date is lower (higher) than the exercise price for the 
nearer expiration as proposed (until less than six months ago). 
However, this price check did not apply to orders with these strategies 
in option classes with European-style settlement. Therefore, to the 
extent the Exchange determines to increase the pre-set buffer for a 
class with European-style settlement, the Exchanges notes these orders 
were not subject to this price check under the previous version of the 
rules.
    Additionally, until less than six months ago, the Exchange 
previously had flexibility to apply this check on a class-by-class 
basis, and the proposed rule change to permit the Exchange to determine 
buffers on a class-by-class basis is consistent with that previous 
authority. The Exchange believe class flexibility is appropriate to 
permit the Exchange to apply reasonable buffers to classes, which may 
exhibit different trading characteristics and have different market 
models. The proposed rule change to permit the Exchange to determine 
buffers for different strategies will further permit the Exchange to 
modify this parameter in response to market conditions, which may 
create pricing conditions that are contrary to the general pricing 
principles described above. In such conditions, the System may reject 
legitimately priced complex strategies given volatile market conditions 
that would generally be erroneously priced in normal market conditions. 
The Exchange believes this flexibility is appropriate, as it will 
provide additional execution opportunities given then-current market 
conditions, which will ultimately benefit investors.
    This price check does apply to market orders that can be defined as 
a net credit or debit,\22\ which if within the pre-set buffer, will 
execute upon entry at the price of the market. With a wider buffer, the 
Exchange understands that market orders may execute within a wider 
price range. However, the Exchange believes the proposed rule change to 
permit wider buffers by class and strategy will still protect investors 
and the public interest, even with its application to market orders. 
The purpose of a market order is to execute at the then-current market. 
As noted above, the then-current market for a market order submitted as 
a debit strategy may be a

[[Page 32091]]

credit price rather than a debit price. Therefore, an investor may want 
to enter a market order with that strategy so that it executes at a 
credit price, and the proposed rule change may provide that order with 
an execution opportunity. The Exchange believes it is appropriate that 
a market order be permitted to execute at such a price, as a market 
participant that submits a market order in that market may expect 
execution at such a price. While a market participant generally takes 
on more market risk when submitting a market order rather than a limit 
order, particularly when markets are volatile, the Exchange believes 
that even if it sets a wider buffer in a class, it has other risk 
controls in place to help prevent complex market orders from erroneous 
executions.\23\ Given that market participants will receive sufficient 
advance notice of any changes the Exchange makes to the pre-set 
buffers, the Exchange believes the proposed rule change will continue 
to protect investors that submit complex market orders, as they will 
know the price range within which their market orders may execute. 
Additionally, the proposed flexibility to apply buffers by strategy as 
well as class will permit the Exchange to continue to apply the check 
with a narrower buffer to orders, including market orders, based on 
market conditions. In other words, only market orders submitted in 
classes and strategies with wider buffers would be eligible for 
executions within a wider price range.
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    \22\ Therefore, currently market orders the System cannot define 
as a credit or debit do not receive any protection from the debit/
credit price reasonability check. Additionally, the Exchange notes 
that market orders in options that are European-settled that had a 
diagonal strategy were not subject to the previous version of the 
debit/credit price reasonability check.
    \23\ See, e.g., Rule 5.34(b)(2) (which prevents a market order 
from executing at a net debit price after receiving execution at a 
net credit price), (b)(5) (which prevents orders (including market 
orders) with certain strategies from executing outside of an 
acceptable price range), and (b)(6) (which prevents orders from 
executing more than a buffer amount outside of the then-current 
SNBBO).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will not impose any burden on intramarket 
competition, because the debit/credit price reasonability check will 
continue to apply to all incoming complex orders of all Trading Permit 
Holders in the same manner. The proposed rule change expands the 
applicability of the current check to additional complex orders for 
which the Exchange can determine whether the order is a debit or 
credit, which will help further prevent potentially erroneous 
executions and benefits all market participants. Any Exchange-
determination of different pre-set buffers for different classes and 
different strategies will similarly apply to complex orders of all 
Trading Permit Holders. The proposed rule change does not impose any 
burden on intermarket competition, as it is intended to prevent 
potentially erroneously priced orders from entering Cboe Options' 
System and executing on Cboe Options' market, while providing the 
Exchange with sufficient flexibility to provide execution opportunities 
to orders that may not be erroneously priced in certain market 
conditions. The Exchange believes the proposed rule change would 
ultimately provide all market participants with additional protection 
from anomalous or erroneous executions and additional execution 
opportunities when appropriate.
    The Exchange believes the proposal will enhance risk protections, 
the individual firm benefits of which flow downstream to counterparties 
both at the Exchange and at other options exchanges, which increases 
systemic protections as well. The Exchange believes enhancing risk 
protections will allow Trading Permit Holders to enter orders and 
quotes with further reduced fear of inadvertent exposure to excessive 
risk, which will benefit investors through increased liquidity for the 
execution of their orders. Without adequate risk management tools, such 
as the one proposed to be enhanced in this filing, Trading Permit 
Holders could reduce the amount of order flow and liquidity they 
provide. Such actions may undermine the quality of the markets 
available to customers and other market participants. Accordingly, the 
proposed rule change is designed to encourage Trading Permit Holders to 
submit additional order flow and liquidity to the Exchange, which may 
ultimately promote competition. The proposed flexibility may similar 
provide additional execution opportunities, which further benefits 
liquidity in potentially volatile markets. In addition, providing 
Trading Permit Holders with more tools for managing risk will 
facilitate transactions in securities because, as noted above, Trading 
Permit Holders will have more confidence protections are in place that 
reduce the risks from potential system errors and market events.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \24\ and Rule 19b-4(f)(6) thereunder.\25\ 
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, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \26\ and Rule 19b-
4(f)(6) thereunder.\27\
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    \24\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \25\ 17 CFR 240.19b-4(f)(6).
    \26\ 15 U.S.C. 78s(b)(3)(A).
    \27\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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 under Rule 19b-4(f)(6) \28\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\29\ the Commission may 
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 proposed 
rule change may become operative immediately. The Commission believes 
that the proposal to extend the debit/credit price reasonability check 
to diagonal strategies could help to prevent diagonal strategy orders 
from executing at erroneous prices. The Commission believes that the 
proposal to allow the Exchange to modify the debit/credit price 
reasonability check on a class and strategy basis will provide the 
Exchange with flexibility to modify the price check so that it applies 
appropriately to different classes and strategies, which may have 
different trading characteristics or may be affected differently by 
market conditions. The Commission notes that the Exchange will issue an 
Exchange notice for all pre-set buffers and will provide advance notice 
of any changes to the pre-set buffers. For these reasons, the 
Commission believes that waiver of the 30-day operative delay is 
consistent

[[Page 32092]]

with the protection of investors and the public interest. Accordingly, 
the Commission hereby waives the 30-day operative delay and designates 
the proposal operative upon filing.\30\
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    \28\ 17 CFR 240.19b-4(f)(6).
    \29\ 17 CFR 240.19b-4(f)(6)(iii).
    \30\ For purposes only of waiving the 30-day operative delay, 
the Commission 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-2020-046 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-2020-046. 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-2020-046, and should be submitted 
on or before June 18, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11399 Filed 5-27-20; 8:45 am]
BILLING CODE 8011-01-P


