[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Notices]
[Pages 53051-53054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18827]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89635; File No. SR-CBOE-2020-050]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment Nos. 1 and 2 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2, To Amend Rules 5.37 and 5.73 
Related to the Solicitation of Market Makers for SPX Initiating Orders 
in the Automated Improvement Mechanism and FLEX Automated Improvement 
Mechanism

August 21, 2020.

I. Introduction

    On June 3, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
permit orders for the accounts of market makers with an appointment in 
S&P 500[supreg] Index Options (``SPX'') to be solicited for the 
initiating order submitted for execution against an agency order into 
an Automated Improvement Mechanism (``AIM'') auction or a FLEX AIM 
auction. The proposed rule change was published for comment in the 
Federal Register on June 18, 2020.\3\ On July 2, 2020, the Exchange 
submitted Amendment No. 1 to the proposed rule change, which replaced 
and superseded the proposed rule change in its entirety.\4\ On July 22, 
2020, the Exchange submitted Amendment No. 2 to the proposed rule 
change.\5\ On July 27, 2020, pursuant to Section 19(b)(2) of the 
Act,\6\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\7\ The Commission is publishing this notice and 
order to solicit comment on the proposed rule change, as modified by 
Amendment Nos. 1 and 2, from interested persons and to institute 
proceedings pursuant to Section 19(b)(2)(B) of the Act \8\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89062 (June 12, 
2020), 85 FR 36907. Comments received on the proposed rule change 
are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050.htm.
    \4\ In Amendment No. 1, the Exchange: (1) Limited the scope of 
its original proposal, which would have permitted orders for the 
accounts of market makers with an appointment in any class to be 
solicited for the initiating order in an AIM or FLEX AIM auction in 
that class, to only allow market makers with an appointment in SPX 
to be solicited for the initiating order in an AIM or FLEX AIM 
auction in SPX; and (2) provided additional data, justification, and 
support for its modified proposal. The full text of Amendment No. 1 
is available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050-7382058-218888.pdf.
    \5\ In Amendment No. 2, the Exchange: (1) Provided additional 
data, justification, and support for its proposal; and (2) made 
technical corrections and clarifications to the description of the 
proposal. The full text of Amendment No. 2 is available on the 
Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-050/srcboe2020050-7464399-221161.pdf.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 89398, 85 FR 46197 
(July 31, 2020). The Commission designated September 16, 2020 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2

    The Exchange proposes to permit orders for the accounts of Market-
Makers with an appointment in SPX to be solicited for the Initiating 
Order \9\ submitted for execution against an Agency Order in SPX 
options into a simple AIM Auction pursuant to Rule 5.37 or a simple 
FLEX AIM Auction pursuant to Rule 5.73. The Exchange does not generally 
activate AIM for SPX options, and AIM for SPX options is currently not 
activated.\10\ The introductory paragraphs of Rules 5.37 and 5.73 
prohibit orders for the accounts of Market-Makers with an appointment 
in the applicable class to be solicited to execute against the Agency 
Order in a simple AIM or FLEX AIM Auction, respectively. No similar 
restriction applies to crossing transactions in open outcry trading, 
where a significant portion of SPX options trade.\11\ As further 
discussed below, brokers seeking liquidity to execute against customer 
orders on the trading floor regularly solicit appointed SPX Market-
Makers for this liquidity, as they are generally the primary source of 
pricing and liquidity for those options.
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    \9\ The ``Initiating Order'' is the order comprised of principal 
interest or a solicited order(s) submitted to trade against the 
order the submitting Trading Permit Holder (the ``Initiating TPH'' 
or ``Initiating FLEX Trader,'' as applicable) represents as agent 
(the ``Agency Order'').
    \10\ FLEX AIM is generally activated, and currently is 
activated, for FLEX SPX options.
    \11\ See Rules 5.86 and 5.87.
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    As of March 16, 2020, the Exchange suspended open outcry trading to 
help prevent the spread of the novel coronavirus and began operating in 
an all-electronic configuration.\12\ As a result, the Exchange 
activated AIM for SPX options for the first time to provide market 
participants with a mechanism to cross SPX options while the floor was 
inoperable, which would otherwise not be possible without open outcry 
trading The Exchange adopted a temporary rule change to permit Market-
Makers to be solicited for electronic crossing transactions in its 
exclusively listed index options (including SPX options) when the 
Exchange's trading floor was inoperable. The Exchange believed this 
would make the same sources of liquidity for customer orders that are 
generally available in open outcry available for those orders in an 
electronic-only environment.\13\ This was particularly true for SPX 
options, for which the Exchange enabled AIM for the first time. The 
Exchange believed not permitting Market-Makers to participate as 
contras could have made it difficult for brokers to find sufficient 
liquidity to fill their customer orders, which liquidity they generally 
solicited from SPX Market-Makers on the trading floor. For example, 
when the Exchange operates in its a hybrid manner as it currently is 
(with electronic and open outcry trading), if a customer order is not 
fully executable against electronic bids and offers, a floor broker can 
attempt to execute the order, or remainder thereof, on the trading 
floor, where the liquidity to trade with this remainder is generally 
provided by Market-Makers in the open outcry trading crowd. 
Additionally, brokers may solicit liquidity from upstairs Market-Maker 
firms.
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    \12\ The Exchange continues to operate in an all-electronic 
environment, but currently plans to reopen its trading floor on June 
8, 2020.
    \13\ See Rule 5.24(e)(1)(A); see also Securities Exchange Act 
Release No. 88886 (May 15, 2020), 85 FR 31008 (May 21, 2020) (SR-
CBOE-2020-047).
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    Upon the reopening of the trading floor, the Exchange deactivated 
AIM for SPX options. While AIM was activated

[[Page 53052]]

for SPX options, the Exchange observed price improvement benefits AIM 
auctions provided to smaller, retail-sized SPX options.\14\ As a 
result, the Exchange intends to reactivate AIM for SPX options while 
the trading floor is operable for orders up to a maximum size to 
continue to provide these price improvement opportunities for retail-
sized SPX orders.\15\ Regardless of whether the trading floor is open, 
the Exchange believes brokers will have difficulty finding sufficient 
liquidity to initiate AIM auctions from only market participants that 
are not SPX Market-Makers. If the Exchange determines to reactivate AIM 
for SPX options, the Exchange believes it is appropriate to permit 
orders for the account of an appointed SPX Market-Maker to be submitted 
as the contra order, as the Exchange believes the liquidity provided by 
SPX Market-Makers will need to be available for brokers to initiate AIM 
Auctions and create potential price improvement opportunities for those 
retail-sized orders. Currently, there are 28 TPHs with SPX 
appointments, which represent a significant pool of SPX liquidity that 
would be available to participate in AIM Auctions through both contra 
orders and auction responses. To demonstrate the importance of the 
liquidity provided by SPX Market-Makers, in January and February 2020, 
the percentage of smaller simple Customer orders (20 or fewer) that 
executed in open outcry against an SPX Market-Maker as contra was 
approximately 85%, and the percentage of smaller simple Customer orders 
(20 or fewer) that executed electronically against an SPX Market-Maker 
as contra was approximately 87%. If SPX Market-Makers cannot be 
solicited for SPX AIM Auctions, the Exchange believes brokers may not 
be able to initiate as many AIM Auctions for their retail orders as 
they were able to do while the trading floor was closed, which may 
reduce the price improvement opportunities available for those orders. 
While the trading floor was closed, orders for the accounts of SPX 
Market-Makers created opportunities for customer orders to be submitted 
in AIM Auctions and receive price improvement. The Exchange believes 
those SPX Market-Maker orders should be permitted to be solicited at 
all times for SPX AIM Auctions in order to create similar price 
improvement opportunities for those customer orders.
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    \14\ See Securities Exchange Act Release No. 89058 (June 12, 
2020), 85 FR 36918 (June 18, 2020) (SR-CBOE-2020-051).
    \15\ Id.
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    In multi-list classes, many market-makers serve as both appointed 
Market-Makers on the Exchange and as market-makers on other options 
exchanges. These firms, as a result, can use their accounts for their 
away market-maker activities for being solicited with respect to AIM 
Auctions. In general, solicited orders submitted as the Initiating 
Order for AIM Auctions are almost always comprised of orders for the 
accounts of away market-makers. For example, in April of 2020, 
approximately 99.6% of the orders submitted into all AIM Auctions had 
Initiating Orders comprised of orders for accounts of away market-
makers, making up approximately 86.2% of the volume executed through 
AIM auctions. However, SPX is an exclusively listed class on the 
Exchange, so a firm cannot serve as an SPX market-maker at another 
options exchange. During April and May 2020, when Initiating Orders 
could be comprised of orders for accounts of SPX Market-Makers pursuant 
to a temporary rule, approximately 22% of Initiating Orders executed in 
SPX AIM Auctions were comprised of orders for SPX Market-Makers, 
representing approximately 45% of SPX volume executed in AIM Auctions. 
While approximately 76% of Initiating Orders executed in SPX AIM 
Auctions were comprised of orders for accounts of away market-makers, 
those orders represented only approximately 5% of the SPX volume 
executed through AIM Auctions. The Exchange notes SPX Market-Makers 
also executed approximately 31% of SPX volume executed through AIM 
Auctions with auction responses. This demonstrates the difficulty 
brokers may have to find sufficient interest to fill customer orders in 
SPX if the Exchange activates AIM for SPX without permitting appointed 
Market-Makers to be solicited. If brokers may solicit primary liquidity 
providers in SPX for electronic auctions, regardless of whether the 
trading floor is operational, the Exchange believes brokers will be 
able to more efficiently locate liquidity to initiate AIM Auctions to 
fill their customer orders, particularly during times of volatility, 
which may create additional execution and price improvement 
opportunities for customers at all times. The Exchange believes the 
proposed rule change will, therefore, provide retail-sized orders with 
similar price improvement opportunities when AIM is activated while the 
trading floor is open that those orders realized while the trading 
floor was closed.
    Permitting SPX Market-Makers to serve as contra parties to crossing 
transactions submitted into an AIM Auction will also further align AIM 
Auctions with SPX crossing executions that occur on the trading floor. 
SPX Market-Makers frequently serve as contra parties to crossing 
transactions on the trading floor. For example, during February 2020 
(when the trading floor was open), approximately 76% of SPX orders 
crossed on the trading floor (consisting of 2,944,161 contracts) 
included an order of an SPX Market-Maker one side of the transaction.
    This further demonstrates the importance of appointed SPX Market-
Makers to the provision of liquidity in the SPX market with respect to 
crossing transactions, which liquidity would not be available to 
initiate electronic crossing transactions under the current AIM rule. 
Therefore, the Exchange believes the proposed rule change will permit 
it to activate AIM in SPX in a manner that aligns open outcry and 
electronic crossing auctions, and thus aligns the execution and price 
improvement opportunities available in both auctions, by permitting the 
same participants to be solicited as contras in both types of auctions 
in SPX at all times.
    While FLEX AIM is currently available for SPX orders of all sizes, 
the Exchange believes brokers currently have similar difficulties 
locating liquidity to initiate FLEX AIM Auctions for SPX orders. Unlike 
in simple non-FLEX markets, FLEX Market-Makers have no obligations to 
provide liquidity to FLEX classes (and there is book into which FLEX 
Market-Makers may submit quotes to rest). Therefore, in FLEX markets, 
appointed Market-Makers are on equal footing with all other market 
participants with respect to FLEX AIM Auctions. Permitting FLEX Market-
Makers to be solicited provides all market participants with the 
opportunity to provide liquidity to execute against Agency Orders in 
FLEX AIM Auctions in the same manner (both through solicitation and 
responses). The Exchange believes the proposed rule change may result 
in additional FLEX AIM auctions occurring in SPX, which may create 
additional price improvement opportunities for FLEX SPX orders.\16\ The 
Exchange also believes permitting FLEX SPX Market-Makers to be 
solicited for FLEX AIM Auctions will provide consistency among 
electronic crossing auctions for SPX.
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    \16\ The Exchange notes Market-Makers are currently able to be 
solicited for complex AIM and complex FLEX AIM for similar reasons. 
See Rules 5.38 and 5.73.

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[[Page 53053]]

    The proposed rule change also amends Rules 5.37(c)(5) and 
5.73(c)(5) to codify that any User or FLEX Trader, respectively, other 
than the Initiating TPH or FLEX Trader, respectively, may submit 
responses to AIM and FLEX AIM Auctions. As set forth in Rules 5.37(e) 
and 5.73(e), the Initiating Order may receive an entitlement of 40% or 
50% of the Agency Order. The Exchange believes it is appropriate to not 
permit the Initiating TPH or Initiating FLEX Trader, as applicable, to 
also submit responses in order to try to trade against a larger 
percentage of the Agency Order. This is consistent with allocation 
rules, pursuant to which the Initiating Order may only receive more 
than 40% or 50%, as applicable, of the Agency Order if there are 
remaining contracts after all other interest has executed.
    The Rule change also notes that the System will reject a response 
with the same EFID \17\ as the Initiating Order. The Exchange notes 
that orders for the same User may have different EFIDs. However, the 
rule prohibits all responses from the same User, even with different 
EFIDs. The System is currently only able to reject responses with the 
same EFID as the Initiating Order, which is why that is specified in 
the proposed rule. If the same User submits a response to an auction in 
which that same User had an order comprising the Initiating Order (even 
with a different EFID), the Exchange may take regulatory action against 
that User for a violation of the proposed rule. The Exchange currently 
applies this restriction to simple AIM and FLEX AIM Auctions, but it 
was inadvertently omitted from the Rules, so the proposed rule change 
adds transparency to the Rules. This restriction is also currently in 
the Rules related to AIM for complex orders, so the proposed rule 
change adds consistency to the rules of Exchange auctions.\18\
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    \17\ See Rule 1.1, which defines EFID as an Executing Firm ID.
    \18\ See Rule 5.38(c)(5).
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III. Summary of the Comment Letters Received

    To date the Commission has received two comment letters on the 
proposal.\19\ The commenters agreed with Cboe's assertions that the 
proposal would increase liquidity for AIM auctions, which could 
increase execution and price improvement opportunities.\20\ One 
commenter argued that removing the market maker solicitation 
prohibition would eliminate an inequity against market makers that 
unduly curtails liquidity to customer orders.\21\ This commenter argued 
that, because Cboe's rules no longer restrict AIM and FLEX AIM 
responses to appointed market makers and trading permit holders 
representing customer orders at the top of the book, the market maker 
solicitation prohibition is no longer necessary.\22\ The commenters 
also supported the proposal because it would better align the execution 
and price improvement opportunities in electronic crossing auctions 
with those available in open outcry trading, where no similar 
solicitation prohibition exists.\23\
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    \19\ See letters to Vanessa Countryman, Secretary, Commission, 
from Richard J. McDonald, Susquehanna International Group, LLP, 
dated July 8, 2020 (``SIG Letter'') and Ellen Greene, Managing 
Director, Equities & Options Market Structure, The Securities 
Industry and Financial Markets Association, dated July 9, 2020 
(``SIFMA Letter'').
    \20\ See SIG Letter, supra note 19, at 2 and SIFMA Letter, supra 
note 19, at 3.
    \21\ See SIG Letter, supra note 19, at 1.
    \22\ See id. at 2.
    \23\ See id.; SIFMA Letter, supra note 19, at 3.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2020-050, as Modified by Amendment Nos. 1 and 2, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \24\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as stated below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the proposed rule change, as modified by 
Amendment Nos. 1 and 2, to inform the Commission's analysis of whether 
to approve or disapprove the proposed rule change.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\25\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulate 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 to protect investors and the public interest, and 
not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers; \26\ and Section 6(b)(8) of the Act, 
which requires that the rules of the Exchange do not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act.\27\
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    \25\ 15 U.S.C. 78s(b)(2)(B).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ 15 U.S.C. 89f(b)(8).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \28\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding,\29\ and any failure of a self-
regulatory organization to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Act and the 
applicable rules and regulations.\30\
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    \28\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \29\ See id.
    \30\ See id.
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    The Commission is instituting proceedings to allow for additional 
consideration and comment on the issues raised herein, including as to 
whether the proposal is consistent with the Act.

V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of 
the Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of

[[Page 53054]]

views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4 under the Act,\31\ any request for an opportunity to make an 
oral presentation.\32\
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    \31\ 17 CFR 240.19b-4.
    \32\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by September 17, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 1, 2020. Commission 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-2020-050 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-2020-050. 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-2020-050, and should be submitted 
on or before September 17, 2020. Rebuttal comments should be submitted 
by October 1, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18827 Filed 8-26-20; 8:45 am]
BILLING CODE 8011-01-P


