[Federal Register Volume 85, Number 207 (Monday, October 26, 2020)]
[Notices]
[Pages 67804-67806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23571]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90229; File No. SR-CBOE-2020-095]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Its Fees Schedule To Adopt New Fee Codes Related to the Execution of 
Equity Legs of a Stock-Option Order

October 20, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 7, 2020, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``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'') is filing with 
the Securities and Exchange Commission (``Commission'') a proposal to 
amend its Fees Schedule to adopt new fee codes related to the execution 
of equity legs of a stock-option order. 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 its fee schedule to adopt a new fee 
codes for equity legs of a stock-option orders managed by additional 
designated broker-dealers, effective October 7, 2020.
    The Exchange first notes that it operates in a highly competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. More specifically, the 
Exchange is only one of 16 options venues to which market participants 
may direct their order flow. Based on publicly available information, 
no single options exchange has more than 16% of the market share.\3\ 
Thus, in such a low-concentrated and highly competitive market, no 
single options exchange possesses significant pricing power in the 
execution of option order flow. The Exchange believes that the ever-
shifting market share among the exchanges from month to month 
demonstrates that market participants can shift order flow or 
discontinue to reduce use of certain categories of products in response 
to fee changes. Accordingly, competitive forces constrain the 
Exchange's transaction fees, and market participants can readily trade 
on competing venues if they deem pricing levels at those other venues 
to be more favorable. In response to competitive pricing, the Exchange, 
like other options exchanges, offers rebates and assesses fees for 
certain order types executed on or routed through the Exchange.
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    \3\ See Cboe Global Markets U.S. Options Market Volume Monthly 
Summary (October 2, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
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    Stock-option orders are complex instruments that constitute the 
purchase or sale of a stated number of units of an underlying stock or 
a security convertible into the underlying stock coupled with the 
purchase or sale of an option contract(s) on the opposite side of the 
market and execute in the same manner as complex orders. Through this 
functionality, the stock portions of stock-option strategy orders are 
electronically communicated by the Exchange to a designated broker-
dealer (currently, Penserrra and Cowen are the only broker-dealers that 
may be designated for this service), who then manages the execution of 
such stock portions. Currently, the Exchange assesses a stock handling 
fee of $0.0010 per share for the processing and routing by the Exchange 
of the stock portion of stock-option strategy orders communicated to 
Cowen (i.e., yielding fee code EQ).\4\ The stock handling fee covers 
the fees charges by the outside venue that prints the trade, as well as 
assists in covering the Exchange's costs in matching these stock-option 
orders against other stock option orders on the complex book. 
Additionally, the Exchange also largely passes through to

[[Page 67805]]

Trading Permit Holders (``TPHs'') the fees assessed to the Exchange by 
the designated broker, Cowen, that may manage the execution of these 
stock portions of stock-option strategy orders. The fee schedule also 
provides for a cap of $50 per execution for orders yielding fee code 
EQ, which aligns with how Cowen applies a cap to the execution 
management of the stock portion of stock-option strategy orders. In 
addition to this, the Exchange also currently assesses $0.00 for equity 
leg orders whose executions are managed by Penserra (i.e., yielding fee 
code EP). Unlike Cowen, Penserra does not assess the Exchange fees for 
managing the stock portion of a stock-option order, but assesses and 
bills its customers directly.\5\ Therefore, the Exchange assess no 
stock handling fee for such orders managed by Penserra as it does to 
(in part) recoup the fees assessed to the Exchange by Cowen.
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    \4\ See Securities Exchange Act Release No. 67383 (July 10, 
2012), 77 FR 41841 (July 16, 2012) (SR-CBOE-2012-063) (stating the 
stock portions of stock-option strategy orders will be 
electronically communicated by the Exchange to a designated broker-
dealer, who will then manage the execution of such stock portions).
    \5\ The Exchange notes it is possible Cowen directly charges 
fees to customers in addition to the stock handling fee the Exchange 
charges.
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    The Exchange proposes to amend its fee schedule to reflect the 
option of three additional designated broker-dealers, Libucki, FOG and 
SRT, to manage the execution of the stock portion of a stock-option 
strategy order. Specifically, the Exchange proposes to adopt: Fee code 
EL, applicable to equity leg orders whose executions are managed by 
Libucki; fee code EF, applicable to equity leg orders whose executions 
are managed by FOG; and fee code ES, applicable to equity leg orders 
whose executions are managed by SRT. Like Penserra, the three 
additional designated broker-dealers will not assess the Exchange fees 
for managing the stock-portion of a stock-option order, but rather will 
assess and bill their customers directly, and therefore, the Exchange 
does not wish to assess a stock handling fee on stock-option orders 
yielding fee codes EL, EF and ES. The proposed rule change reflects in 
the Stock Portion of Stock-Option Strategy Orders table of the Fees 
Schedule that, along with stock-option strategy orders managed by 
Penserra, such orders managed by Libucki, FOG and SRT will not be 
subject to a fee.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\6\ in general, and furthers the requirements 
of Section 6(b)(4),\7\ in particular, as it is designed to provide for 
the equitable allocation of reasonable dues, fees and other charges 
among its facilities and does not unfairly discriminate between 
customers, issuers, brokers or dealers. The Exchange also believes that 
the proposed rule change is consistent with the objectives of Section 
6(b)(5) 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, and, particularly, is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that its proposed change to adopt fee codes 
EL, EF and ES, which will assess no fee for stock portions of stock-
option strategy order executions managed by Libucki, FOG and SRT, 
respectively, is consistent with Section 6(b)(4) of the Act in that the 
proposal is reasonable, equitable and not unfairly discriminatory. 
Specifically, the Exchange believes the proposal is reasonable as 
market participants will not be subject to a fee for the execution of 
the stock-portion of a stock-option order handled by these designated 
broker-dealers. The Exchange believes it's appropriate to not assess a 
fee for orders managed by these three broker-dealers as they will 
directly charge customers for the stock portion of stock-option 
strategy orders and not charge the Exchange (which would, if charged, 
pass those fees through to customers). Assessing no charge for orders 
yielding the proposed fee codes is also reasonable, equitable and not 
unfairly discriminatory because the Exchange currently assesses no 
charge for stock-option orders managed by another designated broker-
dealer, Penserra, for the same reason Penserra also directly charges 
customers instead of the Exchange for handling of the equity portion of 
a stock-option order. Further, the Exchange believes the proposal is 
equitable and not unfairly discriminatory because the proposed change 
applies to all TPHs and all TPHs that execute stock-option orders in 
the complex book will have the option to utilize Libucki, FOG and SRT 
to manage the execution of the stock portion of their stock-option 
strategy orders.

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 rule change will impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Specifically, the Exchange does not believe that 
the proposed change will impose any burden on intramarket competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act because the proposed change will apply uniformly to the stock 
portions of all market participants' stock-option strategy orders that 
are handled by Libucki, FOG and SRT, respectively. The proposed rule 
change provides TPHs with additional options regarding the Exchange's 
handling of their stock-option orders.
    The Exchange does not believe that 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 previously 
discussed, the Exchange operates in a highly competitive market. TPHs 
have numerous alternative venues that they may participate on and 
direct their order flow, including 15 other options exchanges. Based on 
publicly available information, no single options exchange has more 
than 16% of the market share.\8\ Therefore, no exchange possesses 
significant pricing power in the execution of option order flow. In 
such an environment, the Exchange must continually adjust its fees to 
remain competitive with other exchanges and to attract order flow to 
the Exchange. Indeed, participants can readily choose to send their 
orders to other exchange, and, additionally off-exchange venues, if 
they deem fee levels at those other venues to be more favorable. 
Moreover, the Commission has repeatedly expressed its preference for 
competition over regulatory intervention in determining prices, 
products, and services in the securities markets. Specifically, in 
Regulation NMS, the Commission highlighted the importance of market 
forces in determining prices and SRO revenues and, also, recognized 
that current regulation of the market system ``has been remarkably 
successful in promoting market competition in its broader forms that 
are most important to

[[Page 67806]]

investors and listed companies.'' \9\ The fact that this market is 
competitive has also long been recognized by the courts. In 
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit 
stated as follows: ``[n]o one disputes that competition for order flow 
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . ..'' \10\ Accordingly, the Exchange 
does not believe its proposed fee change imposes any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \8\ See supra note 3.
    \9\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
    \10\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \11\ and paragraph (f) of Rule 19b-4 \12\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f).
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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-2020-095 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-2020-095. 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-2020-095 and should be submitted on 
or before November 16, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23571 Filed 10-23-20; 8:45 am]
BILLING CODE 8011-01-P


