[Federal Register Volume 85, Number 203 (Tuesday, October 20, 2020)]
[Notices]
[Pages 66673-66675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23137]



[[Page 66673]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90173; File No. SR-CBOE-2020-072]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Establish a 
Priority Queue for Auction Response Messages

October 14, 2020.

I. Introduction

    On July 30, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') 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 establish a priority queue for auction response 
messages. The proposed rule change was published for comment in the 
Federal Register on August 18, 2020.\3\ On September 25, 2020, pursuant 
to Section 19(b)(2) of the Act,\4\ 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.\5\ The Exchange filed Amendment 
No. 1 to the proposal on October 9, 2020.\6\ The Commission received no 
comments regarding the proposal. The Commission is publishing this 
notice to solicit comment on Amendment No. 1 and is approving the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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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. 89528 (August 12, 
2020), 85 FR 50855 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90007 (September 25, 
2020), 85 FR 62004 (October 1, 2020). The Commission designated 
November 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.
    \6\ In Amendment No. 1, the Exchange revised the proposal to: 
(1) State that the Exchange does not intend to assess a fee for use 
of the proposed priority queue; (2) indicate that messages to modify 
or cancel an auction response would not be processed through the 
proposed priority queue; (3) provide updated information regarding 
the number of auction responses that did not reach the auction to 
which they were submitted in time to participate in the auction; (4) 
clarify the current duration of the auction response period; (5) 
state that all market participants are permitted to submit auction 
responses to any of the Exchange's auction mechanisms, and that all 
auction responses, to any auction mechanism, from any user, would be 
processed through the proposed priority queue; and (6) provide 
additional analysis to support the proposal. Amendment No. 1 will be 
available on the Commission's website.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    As described more fully in the Notice,\7\ the Exchange currently 
offers several auction mechanisms that provide price improvement 
opportunities for eligible orders.\8\ Users \9\ may submit responses to 
an auction during an auction response period determined by the 
Exchange.\10\ Trading Permit Holders (``TPHs'') submit auction 
responses through logical ports within the Exchange's trading system 
that deliver and/or receive trading messages, including orders, 
cancels, and auction responses.\11\ Currently, the System \12\ 
processes all messages through a single queue.\13\ Under certain 
circumstances, including when there is a deep queue of other message 
traffic, the auction response period may end before the System is able 
to process queued auction response messages, resulting in the auctioned 
order missing potential price improvement from the queued auction 
response(s) and the auction response(s) missing an execution 
opportunity.\14\
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    \7\ See note 3, supra.
    \8\ These auction mechanisms include the Complex Order Auction 
(``COA'') (Cboe Rule 5.33(d)); the Step Up Mechanism (``SUM'') (Cboe 
Rule 5.35); the Automated Improvement Mechanism (``AIM'') (Cboe Rule 
5.37); the Complex AIM (``C-AIM'') (Cboe Rule 5.38); the 
Solicitation Auction Mechanism (``SAM'') (Cboe Rule 5.39); the 
Complex SAM (``C-SAM'') (Cboe Rule 5.40); the FLEX Auction Process 
(Cboe Rule 5.72(c)); the FLEX AIM (Cboe Rule 5.73); and the FLEX SAM 
(Cboe Rule 5.74). See Notice, 85 FR at 50855.
    \9\ A User is a Trading Permit Holder or Sponsored User who is 
authorized to obtain access to the System pursuant to Cboe Rule 5.5. 
See Cboe Rule 1.1.
    \10\ See Notice, 85 FR at 50855-6.
    \11\ See id. at 50856.
    \12\ The System is the Exchange's hybrid trading platform that 
integrates electronic and open outcry trading of option contracts on 
the Exchange, and includes any connectivity to the foregoing trading 
platform that is administered by or on behalf of the Exchange, such 
as a communications hub. See Cboe Rule 1.1.
    \13\ See Notice, 85 FR at 50856.
    \14\ See id.
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    To reduce the latency associated with auction responses, the 
Exchange proposes to amend Cboe Rule 5.25 to establish a priority queue 
for the processing of auction response messages.\15\ All other 
messages, including new orders and quotes, cancel messages, and modify 
messages, will be processed through a general queue.\16\ The System 
will process a certain number of messages, as determined by the 
Exchange, from each queue on an alternating basis, and will process the 
messages in each queue in time priority.\17\ The Exchange believes that 
the priority queue will provide for more timely processing of auction 
responses and will increase the likelihood that an auction response is 
able to participate in the auction to which it is submitted, thereby 
increasing execution opportunities for auction responses and enhancing 
the potential for price improvement for orders submitted to the 
Exchange's auction mechanisms.\18\ The Exchanges notes that every 
market participant may submit a response message to any of the 
Exchange's auction mechanisms and that all auction response messages 
would be processed through the proposed priority queue.\19\
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    \15\ Modifications or cancellations of auction responses will 
not be processed through the Priority Queue. See Amendment No. 1.
    \16\ See proposed Cboe Rule 5.25(c) and Notice, 85 FR at 50856.
    \17\ See proposed Cboe Rule 5.25(c).
    \18\ See Notice, 85 FR at 50856.
    \19\ See Amendment No. 1.
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    The Exchange states that from March 30-April 3, 2020, approximately 
17% of all auction responses and 47% of SPXW auction responses 
submitted during their auction response periods had no opportunity to 
execute in their respective auctions.\20\ During the period from 
September 1-September 21, 2020, approximately 3% of all auction 
responses, and 8% of auction responses in SPXW, had no opportunity to 
execute in their respective auctions, notwithstanding being submitted 
within the auction response period.\21\ Although there were fewer 
missed auction responses during the period from September 1-September 
21, 2020, than during the week of March 30, the Exchange believes that 
both auction responders and market participants (including customers) 
whose orders are being auctioned benefit when the number of missed 
auction responses is as close to zero as possible because an auctioned 
order may miss an opportunity for price improvement if an auction 
response message is not processed in time.\22\ In addition, the 
Exchange states that, absent the proposed rule change, the percentage 
of missed auction responses could increase

[[Page 66674]]

during periods of increased volatility because of the increased message 
traffic that occurs at such times.\23\ The Exchange also believes that 
the percentage of missed auction responses would likely increase if the 
Exchange reduced the auction response period back to 100 
milliseconds.\24\
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    \20\ See id. Effective March 9, 2020, the Exchange increased the 
auction response period for COA in classes SPX/SPXW from 100 
milliseconds to 1,000 milliseconds. On March 16, 2020, the Exchange 
activated AIM for classes SPX/SPXW and set the auction response 
period for classes SPX/SPXW to 1,000 milliseconds. See Amendment No. 
1.
    \21\ The AIM and COA auction response period during this time 
was set at 1,000 milliseconds for SPX/SPXW. See id.
    \22\ See id.
    \23\ See id.
    \24\ The Exchange believes that a shorter auction response 
period, such as 100 milliseconds, allows the Exchange to provide 
investors and other TPHs with more timely executions, thereby 
reducing their market risk. The Exchange notes that TPHs who 
initiate auction orders in AIM are required to guarantee an 
execution at the National Best Bid/Offer (``NBBO'') or a better 
price based on market prices prior to the commencement of the 
auction and are subject to market risk while the order is exposed 
during the auction response period. The Exchange states that large 
price changes can occur in one second or less, leaving initiating 
TPHs vulnerable to trading losses. The Exchange further states that 
the initiating TPH's willingness to guarantee its customer an 
execution at the NBBO or a better price is essential to the customer 
order gaining the opportunity for price improvement. Accordingly, 
the Exchange believes that an auction time as low as 100 
milliseconds would provide investors and other market participants 
with more timely executions and reduce their market risk. See 
Amendment No. 1.
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    The Exchange believes that the proposed priority queue for auction 
response messages will not disadvantage other orders, including 
customer orders.\25\ The proposal does not modify the Exchange's rules 
regarding allocations at the conclusion of an auction and, accordingly, 
priority customer orders in the Book \26\ will continue to have first 
priority at each price level at the conclusion of a paired auction, 
even when an auction response is processed via a priority queue ahead 
of a priority customer order processed via the general queue.\27\ The 
Exchange states that the number of messages that would be processed via 
the proposed priority queue as compared to the general queue is 
small.\28\ The Exchange notes that during the period from March 9-March 
13, 2020, auction responses across all of the Exchange's auction 
mechanisms accounted for approximately 0.02% of the message traffic, 
while new order/quote messages accounted for approximately 40.3% of the 
message traffic, modify messages accounted for approximately 47.9% of 
the message traffic, and cancel messages accounted for approximately 
11.7% of the message traffic.\29\ The Exchange further notes that only 
0.007% of non-auction response messages were related to a customer 
order.\30\ Accordingly, the Exchange believes that it is unlikely that 
a customer's order would not be posted to the Book in time to receive a 
priority allocation because the System was processing messages in the 
priority queue.\31\
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    \25\ See Amendment No. 1.
    \26\ The Book is the electronic book of simple orders and quotes 
maintained by the System, which single book is used during both the 
Regular Trading Hours and Global Trading Hours trading sessions. See 
Cboe Rule 1.1.
    \27\ See Notice, 85 FR at 50856.
    \28\ See id.
    \29\ See id.
    \30\ See id.
    \31\ See Amendment No. 1.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, with 
Section 6(b) of the Act.\32\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\33\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, 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, and that the 
rules of a national securities exchange not be designed to permit 
unfair discrimination between customers, issuers, brokers or dealers. 
The Commission believes that the proposed priority queue could help 
auction responses reach the auction to which they were submitted in 
time to participate in the auction, potentially enhancing competition 
in the Exchange's auctions and increasing the likelihood that orders 
submitted to auctions, including customer orders, will receive price 
improvement. The Commission notes that all market participants may 
submit auction responses to any of the Exchange's auction mechanisms 
and that all auction responses will be processed through the priority 
queue.\34\ In addition, the Exchange's rules governing allocations at 
the conclusion of an auction remain unchanged and, accordingly, 
priority customer orders resting in the Book will continue to have 
first priority at each price level at the conclusion of a paired 
auction.\35\
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    \32\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \33\ 15 U.S.C. 78f(b)(5).
    \34\ See Amendment No. 1.
    \35\ See Notice, 85 FR 50856.
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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 November 10, 2020.

[[Page 66675]]

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1 prior to the thirtieth day after 
the date of publication of notice of the filing of Amendment No. 1 in 
the Federal Register. Amendment No. 1 does not modify the substance of 
the proposal or raise new regulatory issues. As described more fully 
above, Amendment No. 1 clarifies several aspects of the proposal and 
provides updated data and additional analysis to support the proposal. 
Among other things, Amendment No. 1 provides further analysis regarding 
the potential effect of the proposal on non-auction response message 
traffic, including customer orders. Amendment No. 1 also states that 
all market participants are permitted to submit auction responses to 
any of the Exchange's auction mechanisms and that all auction responses 
will be processed through the priority queue. Accordingly, the 
Commission finds good cause, pursuant to Section 19(b)(2) of the 
Act,\36\ to approve the proposed rule change, as modified by Amendment 
No. 1, on an accelerated basis.
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    \36\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-CBOE-2020-072), as modified 
by Amendment No. 1, is approved on an accelerated basis.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23137 Filed 10-19-20; 8:45 am]
BILLING CODE 8011-01-P


