[Federal Register Volume 85, Number 160 (Tuesday, August 18, 2020)]
[Notices]
[Pages 50855-50858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17962]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89528; File No. SR-CBOE-2020-072]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Its Rules Relating to the 
Processing of Auction Responses

August 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 July 30, 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 rules relating to the processing of auction responses. 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 seeks to amend its rules related to its auction 
mechanisms to provide a dedicated path for auction response messages 
originating from logical ports that will allow the System to process 
such messages more efficiently. Specifically, the Exchange proposes to 
amend Rule 5.25 (Message Traffic Mitigation) to adopt two separate 
message queues which would allow for auction response messages to be 
processed by the System in priority sequence relative to other non-
auction response message traffic on a rotating basis.
Background
    The Exchange currently offers a variety of auction mechanisms which 
provide price improvement opportunities for eligible orders. 
Particularly, the Exchange offers the following auction mechanisms: 
Complex Order Auction (``COA''),\3\ Step Up Mechanism (``SUM''),\4\ 
Automated Improvement Mechanism (``AIM''),\5\ Complex AIM (``C-
AIM''),\6\ Solicitation Auction Mechanism (``SAM''),\7\ Complex SAM 
(``C-SAM''),\8\ FLEX Auction Process,\9\ FLEX AIM \10\ and FLEX 
SAM.\11\ The Exchange notes that eligible orders are electronically 
exposed for an Exchange determined period (collectively referred to 
herein as ``auction response period'') in accordance with the 
applicable Exchange Rule, during which time

[[Page 50856]]

Users may submit responses (collectively referred to herein as 
``auction responses'') to an auction message. Trading Permit Holders 
(``TPHs'') may submit auction responses via logical port connectivity. 
By way of background, a User connects to the Exchange using a logical 
port available through an API, such as the industry-standard FIX or BOE 
protocol. Logical ports represent a technical port established by the 
Exchange within the Exchange's trading system for the delivery and/or 
receipt of trading messages, including orders, cancels, and auction 
responses. Currently, the System processes all messages through a 
single ``queue'' and prioritizes the processing of all message traffic 
from the logical ports in the order in which the System received them 
(i.e., in time priority).
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    \3\ See Rule 5.33(d).
    \4\ See Rule 5.35.
    \5\ See Rule 5.37.
    \6\ See Rule 5.38.
    \7\ See Rule 5.39.
    \8\ See Rule 5.40.
    \9\ See Rule 5.72(c).
    \10\ See Rule 5.73.
    \11\ See Rule 5.74.
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Proposal
    The Exchange proposes to modify the operation of its System to 
allow for the System to handle auction responses received via such 
logical ports in a way that the Exchange believes may reduce latency 
associated with auction responses. Currently, auction response messages 
wait in the same System queue as all other order and quote message 
traffic. In certain circumstances, the auction response period may end 
before queued response messages are processed, resulting in the 
initiating eligible order missing out on potential price improvement 
from respective queued auction response(s). For example, if an auction 
response submitted during an auction response period is received at a 
time where there is a deep queue of other message traffic, the auction 
response may not be ``processed'' by the System in sufficient time 
(i.e., prior to the end of the auction response period so that it is 
able to participate in the applicable auction mechanism) because the 
System is ``busy'' processing the deep queue of pending message traffic 
that was received prior to the auction response. An auction response 
may only execute in the applicable auction and is cancelled if it does 
not execute during an auction. If an auction response is unable to be 
processed by the System during the auction response period, that 
auction response is unable to receive any execution opportunity or 
provide liquidity (and possible price improvement) on the Exchange.
    The Exchange therefore proposes to modify the way the System 
processes auction responses in order to allow the System to handle 
auction responses in a more timely manner, including during periods of 
high message traffic. As noted above, the System currently processes 
all message traffic in time priority. In other words, all messages are 
placed in a single ``queue'' based on the time the message is received 
by the System and handled by the System in that order. The Exchange 
proposes to adopt a separate ``priority queue'', which queue would 
consist solely of auction response messages. Specifically, the System 
would be able to identify auction response messages and divert such 
messages from the general message queue (``general queue'') to the 
priority queue. The System would then alternate processing a certain 
number of messages as determined by the Exchange from each queue (i.e., 
on a rotating basis). Although the System would alternate between the 
two queues, the priority queue would offer reduced latency as the 
priority queue would consist only of auction responses, as compared to 
the general queue which would consist of all other message traffic, 
(i.e., new orders/quote messages, cancel messages (including mass 
cancel messages) and modify messages).
    The Exchange believes the proposed modification to provide for a 
separate queue for the processing of auction responses increases the 
possibility that such responses are processed by the Exchange during 
the auction response period and have an opportunity for execution in 
the applicable auction mechanism. The Exchange believes this will, as a 
result, increase execution opportunities for liquidity providers that 
submit auction responses and enhance the potential for price 
improvement for orders submitted to each mechanism to the benefit of 
investors and public interest. The Exchange also believes the benefits 
that result from the adoption of a priority queue for auction responses 
would outweigh any potential negative impact to other message traffic. 
Moreover, the Exchange believes the impact to other message traffic to 
be de minimis.
    Particularly, the Exchange reviewed all submitted message traffic 
from March 9-March 13, 2020 and notes that during this time period, 
auction responses across all its auction mechanisms accounted only for 
approximately 0.02% of the message traffic, whereas new order/quote 
messages accounted for approximately 40.3%, modify messages accounted 
for approximately 47.9%, and cancel messages accounted for 
approximately 11.7%. Accordingly, the number of messages that would be 
processed via the priority queue as compared to general queue is 
extremely small. Indeed, as noted above, only 0.02% of all messages 
would be processed via the priority queue and therefore the number of 
rotations between the two queues throughout the trading day would 
likely be very limited as there are only so many auction responses that 
would need to be processed compared to other message traffic. Moreover, 
only a mere 0.007% of non-auction response messages were related to a 
customer order. Therefore, the chances of a customer order being 
disadvantaged by allowing an auction response to be processed via a 
priority queue are nearly zero. Additionally, executions at the 
conclusion of an auction mechanism will occur in the same manner as 
they do today. For example, priority customer orders in the Book will 
continue to have first priority at each price level at the conclusion 
of a paired auction, regardless of whether an auction response is 
processed via a priority queue and processed ahead of a priority 
customer order.
    Furthermore, the Exchange's review of auction responses during the 
period of March 30-April 3, 2020 indicated that approximately 17% of 
auction responses had no opportunity to execute in their respective 
auctions, notwithstanding being submitted within the auction response 
period. In certain classes, such as SPXW, this percentage was even 
higher. Particularly, 47% of SPXW auction responses had no opportunity 
to execute in the applicable auction, notwithstanding being submitted 
within the auction response period.
    The Exchange also notes that it takes the system approximately 10 
microseconds to process a single order/quote or auction response 
message and, on average, approximately 190 microseconds to process a 
mass cancel message. As such, under the current system, an auction 
response that is entered after a mass cancel message is more likely to 
be detrimentally impacted as compared to a mass cancel message that is 
entered after an auction response (i.e., a 190 microsecond ``wait 
time'' versus a 10 microsecond ``wait time'').
    Accordingly, the Exchange believes that adopting a priority queue 
for all auction response messages will continue to allow the Exchange 
to set each auction response period to an amount of time that provides 
TPHs with sufficient time to respond to, compete for, and provide price 
improvement for orders but provides auctioned orders with quick 
executions that may reduce market and execution risk, while also 
providing timely submitted auction responses with more execution 
opportunities in the applicable auction prior to the end of the auction 
response

[[Page 50857]]

period, even during periods of high message traffic, thereby 
potentially providing customers with additional opportunities for price 
improvements.
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.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
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    In particular, the Exchange believes modifying its System to allow 
it to handle auction responses in a timelier manner may provide further 
opportunities for auction eligible orders to receive price improvement 
that they may not otherwise receive if the System is unable to process 
auction response messages prior to the conclusion of an auction 
response period, if submitted during a time when there is a deep queue 
of message traffic. In particular, the proposed rule change will 
continue to provide investors with timely processing of their options 
quote and order messages, while providing investors who submit auction 
eligible orders with additional auction liquidity. Indeed, the proposed 
rule change may allow more investors additional opportunities to 
receive price improvement through an auction mechanism. While the 
Exchange may increase the length of auction response periods to 
accommodate more auction responses, the Exchange believes the proposed 
rule change allows the Exchange to continue to mitigate the market risk 
for TPHs using any such mechanism by setting the length of an auction 
response period to a time frame that allows an adequate amount of time 
for TPHs to respond to an auction message and fast executions. 
Additionally, a priority queue may provide liquidity providers that 
submit auction responses with additional execution opportunities in 
auctions, which may encourage the submission of more auction responses 
which may contribute to a deeper, more liquid auction process and, 
thus, provide investors with additional price improvement 
opportunities.
    The Exchange believes that the information outlined above 
demonstrates why adopting a priority queue for auction responses would 
better provide customers with additional opportunities for price 
improvements with little impact to non-auction response message 
traffic. As discussed, auction responses account for an incredibly 
small fraction of message traffic submitted to the Exchange. Indeed, 
based on the Exchange's analysis, auction response messages accounted 
for a mere 0.02% of all message traffic submitted to the Exchange. The 
Exchange believe the processing of such a small amount of message 
traffic via a priority queue (which as proposed would rotate with the 
general queue) would therefore have a minimal impact on the processing 
of non-auction response messages in the general queue. Conversely, as 
demonstrated by the data discussed above, the current system 
configuration (i.e., a single queue for all message traffic) can 
negatively impact the timeliness of the processing of auction responses 
to the detriment of investors who may miss out on opportunities to 
receive price improvement through one of the Exchange's auction 
mechanisms due to the time necessary for the System to process auction 
responses behind a queue of other message traffic. The Exchange 
therefore believes its proposal will make it more likely that the 
System processes timely submitted auction responses prior to the end of 
an auction response period and thus have more opportunities to execute 
against auctioned orders, even during periods of high message traffic. 
The Exchange also believes having the flexibility to determine the 
number of messages that it processes in each queue before alternating 
allows the Exchange to configure the number as needed to ensure the 
benefits of alternating between a priority queue and general queue 
continue to outweigh any potential negative impact to non-auction 
response message traffic. The Exchange further believes the proposal 
will continue to allow the Exchange to set an auction response period 
to an amount of time that provides TPHs with sufficient time to respond 
to, compete for, and provide price improvement for orders but provides 
auctioned orders with quick executions that may reduce market and 
execution risk. Accordingly, the Exchange believes the adoption of a 
priority queue for auction responses would provide customers with 
additional opportunities for price improvement and enhance the quality 
of the auctions, thereby removing impediments to and perfecting the 
mechanism of a free and open market and a national market system, and, 
in general protecting investors and the public interest.
    The Exchange also believes the proposed rule change is not designed 
to permit unfair discrimination between market participants as all 
market participants are allowed to submit auction responses. 
Additionally, the Exchange believes it's reasonable to adopt a priority 
queue for auction responses as compared to other messages because 
auction responses are submitted only for the purpose of executing (and 
possibly providing price improvement) in auctions with short durations, 
whereas other messages are generally submitted to rest in or execute 
against the book (and generally not used to submit liquidity into 
auctions). As discussed above, the Exchange also believes the benefits 
that result from the adoption of a priority queue for auction responses 
would outweigh any potential negative impact to other message traffic, 
including customer orders, which have an incredibly low chance of being 
affected by the proposed change and which continue to receive priority 
allocation in any event.
    The Exchange lastly does not believe that the purpose of the 
proposed rule change to adopt a priority queue for certain message 
traffic is new or unique. As the Commission is aware, other exchanges 
offer similar functionality. For example, Miami International 
Securities Exchange LLC (``MIAX'') makes clear in its current technical 
specifications that it offers priority mass cancel ports, which 
similarly provide expedited processing for certain message types by 
alternating between processing messages from a priority queue (but for 
mass cancel requests instead of auction responses) and messages from a 
general queue (for all other message traffic).\15\
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    \15\ See e.g., MIAX Express Orders Binary Orders for Trading 
Options MEO Interface Specification, Appendix E, Priority Mass 
Cancel Ports, at: https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Express_Interface_MEI_v2.8.pdf.

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[[Page 50858]]

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 changes will impose any burden on intra-
market competition that is not necessary or appropriate in furtherance 
of the purposes of the Act, as the proposed rule change would apply 
equally to all TPHs that submit auction responses. As noted above, all 
market participants are able to submit auction responses. Additionally, 
the Exchange believes the adoption of a priority queue for auction 
responses would have little impact to non-auction response message 
traffic. As discussed, auction response messages account for an 
incredibly small fraction of message traffic submitted to the Exchange. 
The Exchange therefore believes the processing of such a small amount 
of message traffic via a priority queue would have a minimal impact on 
the processing of non-auction response messages in the general queue. 
Moreover, the Exchange believes it's reasonable to adopt a priority 
queue for auction responses as compared to other messages because 
auction responses are submitted only for the purpose of executing (and 
possibly providing price improvement) in auctions with short durations, 
whereas other messages are generally submitted to rest in or execute 
against the book (and generally not used to submit liquidity into 
auctions). Lastly, the Exchange does not believe the proposed rule 
change will impose any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act, as 
the proposed change affects how the System processes auction responses 
that may only participate in auctions that occur on the Exchange.

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

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

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

    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-2020-072 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-2020-072. 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-2020-072, and should be submitted 
on or before September 8, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17962 Filed 8-17-20; 8:45 am]
BILLING CODE 8011-01-P


