[Federal Register Volume 85, Number 118 (Thursday, June 18, 2020)]
[Notices]
[Pages 36918-36921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13118]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89058; File No. SR-CBOE-2020-051]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Its Automated Price 
Improvement Auction Rules in Connection With Agency Order Size 
Requirements

June 12, 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 June 11, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. 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.
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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 automated price improvement auction rules in connection 
with Agency Order size requirements. 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 Rule 5.37(a)(3) and Rule 5.38(a)(8) 
to allow the Exchange to determine maximum size requirements for Agency 
Orders in SPX submitted though the Automated Price Improvement 
Mechanism (``AIM'' or ``AIM Auction'') and the Complex Automated Price 
Improvement Mechanism (``C-AIM'' or ``C-AIM Auction'').
    Currently, Rules 5.37(a)(3) and 5.38(a)(3), which govern the size 
requirements for AIM and C-AIM Agency and Initiating Orders, provide 
that there is no minimum size for orders submitted into AIM and C-AIM 
Auctions, respectively, and that the Initiating Order must be for the 
same size as the Agency Order. As such, an Agency Order of any size \3\ 
may currently be submitted in an AIM or C-AIM Auction.
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    \3\ The proposed rule change indicates the maximum size may be 
up to 100 contracts.
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    The Exchange now proposes to amend Rule 5.37(a)(3) to provide that 
the Exchange may determine a maximum size requirement for Agency Orders 
in SPX, and by amending Rule 5.38(a)(3) to provide that the Exchange 
may determine a maximum size requirement for the smallest leg of an 
Agency Order in SPX.\4\ The Exchange believes that the proposed 
flexibility to allow the Exchange to determine to limit the size of SPX 
Agency Orders submitted in an AIM or C-AIM Auction will allow the 
Exchange to appropriately address the specific trading characteristics, 
market model, and investor basis of SPX. The Exchange notes that the 
maximum size requirement for Agency Orders in SPX would apply to all 
Agency Orders in the entire SPX class (including SPX Weeklys 
(``SPXW'')).
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    \4\ Application of the maximum size to the smallest leg of 
complex orders is consistent with the application of a size 
requirement for the Exchange's Complex Solicitation Auction 
Mechanism, which is a similar price improvement auction mechanism on 
the Exchange. See Rule 5.40(a)(3).
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    In particular, SPX has a different and more complicated market 
model,

[[Page 36919]]

involves taking on greater risk, has a significantly higher notional 
value (e.g., they are ten times the notional size of SPY options), 
tends to trade in much larger size, and tends to execute increasingly 
more complex strategies (e.g., SPX Combo orders) than in other options 
classes. The Exchange understands these factors may limit retail 
customer participation in SPX to simpler strategies and smaller-sized 
orders. These factors also have contributed to the Exchange's 
historical determination to not activate AIM in SPX when the floor is 
open so to encourage liquidity on the trading floor to accommodate 
these large and complex trades. Therefore, the Exchange believes the 
application of an Agency Order size ceiling may provide more price 
improvement opportunities in SPX geared towards retail customers. The 
Exchange believes this may incentivize increased retail customer 
auction participation in SPX and provide retail customers with 
execution and price improvement opportunities in SPX while 
incentivizing continued liquidity on the trading floor for larger and 
more complex orders.
    The Exchange has observed that increased smaller size order flow 
tends to attract Market-Maker responses, as such orders are generally 
easier to hedge than larger orders, which may encourage Market-Makers 
to compete to provide price improvement in an electronic competitive 
auction process. This, in turn, may contribute to a deeper, more liquid 
auction process with additional price improvement opportunities for 
market participants, and particularly retail customers. The Exchange 
notes, too, that the Exchange's trading floor may be better suited for 
crosses in SPX with more complex orders, complicated strategies and 
larger size. Such orders are more generally executed on the trading 
floor, where Trading Permit Holders (``TPHs'') may negotiate and fine-
tune the terms of a trade. In addition to this, the trading crowd in 
open outcry may provide markets that are more tailored to the 
complexity and size of orders typically submitted in SPX. Greater 
execution and price improvement opportunities for SPX orders may result 
from the markets given by the trading crowd that better define the 
nuanced complexity and size of such orders than if the same orders were 
submitted via AIM or C-AIM--which, instead, may provide greater price 
improvement opportunities for simpler and smaller orders. Permitting 
the Exchange to determine a maximum size for SPX orders submitted to 
AIM and C-AIM will enable the Exchange to activate AIM and C-AIM in SPX 
to provide additional price improvement opportunities for smaller 
orders and maintain liquidity on the trading floor for larger complex 
orders, thus creating a liquid hybrid environment for orders in this 
class.
    In a sample of SPX orders submitted into simple AIM during a week 
of trading in April 2020,\5\ the Exchange observed that orders 
containing quantities from one to ten contracts submitted through AIM 
received an average price improvement of approximately $0.34 over their 
limit prices, orders containing quantities from 11 to 50 contracts 
received an average price improvement of approximately $0.22, and 
orders for 51 to 100 contracts received an average price improvement of 
$0.08; whereas, orders containing quantities of between 100 and 250 
contracts received an average of $0.08 and orders containing quantities 
of between 251 and 500 received an average of $0.15. That is 
approximately 325% larger average price improvement that orders for one 
to ten contracts received than orders for 100 to 250 contracts and 
approximately 127% larger average price improvement than orders for 251 
to 500 contracts. The Exchange also observed this trend generally in 
the sample of SPX orders submitted to C-AIM, as well, where greater 
price improvement generally occurred for smaller sized orders as 
compared to larger sized orders. For C-AIM, the Exchange observed that 
orders for one to ten contracts received an average price improvement 
of $0.14, for 11 to 50 contracts received an average of $1.69, and for 
51 to 100 contracts received an average of $2.36; whereas orders for 
100 to 250 contracts received an average price improvement of $1.15 and 
orders for 251 to 500 contracts received an average of $0.24. As this 
data demonstrates, price improvement on smaller orders in SPX, a class 
which generally exhibits more complicated trading characteristics and 
complex market factors, is generally more beneficial than price 
improvement on larger orders submitted through AIM and C-AIM.\6\ As a 
result, if the Exchange is able to implement a maximum size requirement 
for SPX as proposed, it may determine to activate AIM when the trading 
floor is open. The Exchange believes this could incentive the 
submission of smaller size SPX orders to the Exchange. As a result, the 
Exchange believes the proposed rule change will provide retail 
customers with additional price improvement opportunities for retail 
customers overall when the trading floor is open while preserving 
liquidity available in the market, particularly on the trading floor, 
for larger and more complicated orders.
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    \5\ The sample was taken for average price improvement over the 
limit price of Agency Orders submitted into AIM and C-AIM from April 
6 through April 9.
    \6\ The proposed rule change to designate a maximum ``maximum 
size'' of 100 is based on this data, which demonstrates that orders 
with size up to 100 contracts generally receive the most beneficial 
price improvement (and are generally considered to be ``retail'' 
sized orders).
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    Finally, pursuant to current Rule 5.37.02 and Rule 5.38.02, it is 
deemed conduct inconsistent with just and equitable principles of trade 
and a violation of Exchange Rule 8.1 to engage in a pattern of conduct 
where the Initiating Member breaks up an Agency Order into separate 
orders for the purpose of gaining a higher allocation percentage than 
the Initiating TPH would have otherwise received in accordance with the 
allocation procedures contained in the AIM and C-AIM Rules, 
respectively. In light of the proposed rule change, the Exchange also 
proposes to amend Rules 5.37.02 and 5.38.02 to make it clear that 
Initiating TPHs also may not break up an Agency Order into separate 
orders for the purpose of circumventing a maximum quantity requirement 
as determined by the Exchange pursuant to subparagraph(s) (a)(3). The 
Exchange notes that its surveillance program will monitor for such 
violations in the same manner in which it currently monitors for 
allocation-related break up violations.
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.\7\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \8\ 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.

[[Page 36920]]

Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \9\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Id.
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    In particular, the Exchange believes the proposed rule change to 
allow the Exchange to determine a maximum size for AIM and C-AIM Agency 
Orders in SPX will provide the Exchange with the flexibility to 
activate AIM and C-AIM Auctions for SPX in a manner the Exchange 
believes will appropriately address the different trading 
characteristics, market model, investor basis and conditions presented 
in SPX as compared to different option classes. The Exchange has 
considered these factors in its determination to not activate AIM and 
C-AIM in SPX when operating in a normal hybrid trading environment. 
With the proposed rule change, the Exchange would consider activating 
AIM and C-AIM in SPX when the trading floor is open to provide 
additional execution and price improvement opportunities to retail 
customers. The Exchange believes this may encourage an increase 
smaller-sized SPX orders and meaningful and competitive responses to 
the auctions, as applicable, which ultimately benefits investors and 
retail customers in particular.
    The Exchange acknowledges that price improvement auctions have 
provided the market with benefits, such as providing an efficient 
manner of access to liquidity for customers. However, the options 
industry overall has observed that quoted liquidity on the book has 
decreased, quotes have widened, and options market makers have reduced 
their participation in the market, which has impacted market 
quality.\10\ Thus, the Exchange believes that the flexibility to impose 
a maximum order size for these auctions would permit the Exchange to 
provide retail customers in SPX with access to these auctions while 
continuing to create incentives for SPX Market-Makers to continue to 
provide liquidity in the in the trading crowd for larger and more 
complex orders. As such, the Exchange believes the proposed rule change 
may encourage a general increase in retail order flow and execution 
opportunities in AIM and C-AIM Auctions in SPX, thus enhancing the 
quality of the auctions, while maintaining market quality and liquidity 
for larger and more complicated orders, which removes impediments to 
and perfects the mechanism of a free and open market and a national 
market system, and benefits the entire market and all investors.
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    \10\ See Letter to Brett Redfearn, Director, Division of Trading 
& Markets, from Cboe Global Markets, Inc. the Listed Options Trading 
Committee of the Securities Industry and Financial Markets 
Association (``SIFMA''), and the Listed Options Committee of the 
Security Traders Association (``STA''), dated June 4, 2018, 
available at http://cdn.batstrading.com/resources/comment_letters/Cboe-Joint-Letter-with-SIFMA-and-The-STA-on-Options-Market-Structure.pdf.
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    In addition to this, the Exchange does not believe that the 
proposed rule change would significantly impact TPHs that submit larger 
and more complicated orders in SPX because the trading floor is 
generally better suited and more appropriate for such orders, where 
TPHs tend to execute much larger and more complex orders given the 
flexibility to negotiate and fine-tune the terms of an order.\11\ As 
discussed above, the Exchange believes not permitting these larger 
orders to execute in AIM and C-AIM auctions will create incentives for 
Market-Makers to continue to provide on the trading floor to execute 
against those orders. Additionally, given that the Exchange does not 
generally activate AIM and C-AIM in SPX, the proposed rule change will 
have no impact on larger orders, which TPHs are unable to submit into 
AIM and C-AIM Auctions when the trading floor is open. In addition, the 
Exchange believes that the proposed rule change to amend Rules 5.37.02 
and 5.38.02 would protect investors by prohibiting TPHs to break up 
Agency Orders to circumvent maximum size requirements.
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    \11\ This is demonstrated by the significant decrease in complex 
order execution while the Exchange has operated in an all-electronic 
environment.
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    The Exchange does not believe that the purpose of the proposed rule 
change to accommodate retail customers is new or unique, as the 
Exchange and other options exchanges currently have rules, such as 
certain reduced fees and market structure benefits, in place that 
provide preferential treatment to or are geared toward benefitting 
retail customers particularly. Moreover, the Exchange believes that the 
proposed rule change is consistent with longstanding precedent, thus 
indicating that it is consistent with the Act, to provide reasonable 
incentives to retail investors that rely on the public markets for 
their investment needs. Indeed, the Commission has long stressed the 
need to ensure that the markets are structured in a way that meets the 
needs of ordinary investors.\12\ The Exchange believes that the 
proposed rule change would assist the Exchange in achieving the 
Commission's stated goal of improving the retail investor experience in 
the public markets while protecting overall market quality.
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    \12\ See e.g. U.S. Securities and Exchange Commission, Strategic 
Plan, Fiscal Years 2018-2022, available at https://www.sec.gov/files/SEC_Strategic_Plan_FY18-FY22_FINAL_0.pdf, wherein the 
Commission's strategic plan for fiscal years 2018-2022 touts ``focus 
on the long-term interests of our Main Street investors'' as the 
Commission's number one strategic goal.
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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 the proposed rule change 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 all Agency Orders in SPX 
where the Exchange imposes a maximum size submitted into the AIM and C-
AIM auctions by all market participants. The Exchange believes having 
the ability to designate a maximum size for SPX orders only is 
appropriate given the trading characteristics, market model, investor 
base, and large notional value of SPX options compared to other 
options. The Exchange believes all market participants in SPX may 
benefit from any additional liquidity and price improvement in the AIM 
and C-AIM Auctions that may result from the proposed rule change. 
Moreover, the Exchange believes that determination of a maximum 
quantity in SPX would not significantly affect TPHs that submit larger 
and more complicated orders as open outcry auctions are generally 
better suited to facilitating liquidity for larger order size and/or 
more complex order strategies. The Exchange notes it generally does not 
activate AIM and C-AIM in SPX options, so the proposed rule change 
would have no impact on larger-sized SPX orders that currently are not 
permitted to be submitted into AIM and C-AIM auctions when the Exchange 
is operating in a normal hybrid trading environment. The Exchange 
believes not permitting larger orders into these auctions will 
encourage Market-Makers to continue to provide liquidity in the trading 
crowd while providing retail customers with price improvement 
opportunities, which may increase competition for these orders. As 
stated above, the Exchange believes the proposed rule change is 
consistent with the Commission's goal and industry practice to provide 
reasonable incentives to retail investors that rely on

[[Page 36921]]

the public markets for their investment needs. The Exchange also notes 
the proposed rule change has no impact on the allocation or priority of 
orders and responses at the conclusion of AIM and C-AIM auctions. 
Additionally, any Agency Order for less than 50 contracts must continue 
to have an auction price that improves the then-current NBBO.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as the proposed 
rule change relates to an Exchange-specific auction mechanism in a 
class of options only listed for trading on the Exchange. The Exchange 
also notes that other options exchanges offer similar price improvement 
auctions \13\ that are available to market participants, and other 
options exchanges may, in their discretion, adopt similar flexibility 
in connection with their auctions.
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    \13\ See e.g., BOX Options' Price Improvement Period (``PIP'') 
available at https://boxoptions.com/about/price-improvement; and 
Complex Order Price Improvement Period (``COPIP'') available at 
https://boxoptions.com/about/complex-order-description/; and MIAX 
Options' Price Improvement Mechanism (``PRIME'') and Complex Price 
Improvement Mechanism (``cPRIME'') available at https://www.miaxoptions.com/sites/default/files/knowledge-center/2017-07/MIAX_PRIME_07212017.pdf.
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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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-2020-051 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-2020-051. 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-2020-051, and should be submitted 
on or before July 9, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13118 Filed 6-17-20; 8:45 am]
BILLING CODE 8011-01-P


