[Federal Register Volume 85, Number 209 (Wednesday, October 28, 2020)]
[Notices]
[Pages 68382-68385]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23796]



[[Page 68382]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90250; File No. SR-CboeEDGX-2020-049]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Enhance Its Drill-Through Protections and Make Other Clarifying Changes

October 22, 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 October 9, 2020, Cboe EDGX Exchange, Inc. (``Exchange'' or ``EDGX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II 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 EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX Options'') 
proposes to enhance its drill-through protections and make other 
clarifying changes. 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://markets.cboe.com/us/options/regulation/rule_filings/edgx/), 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 enhance its drill-through protections for 
simple and complex orders and make other clarifying changes. Currently, 
pursuant to Rule 21.17(a)(4) and (b)(6), the System will execute a 
marketable buy (sell) order or complex order,\3\ respectively, up to a 
buffer amount above (below) the limit of the Opening Collar or the 
national best offer (``NBO'') (national best bid (``NBB'')), as 
applicable, or the synthetic national best offer (``SNBO'') or 
synthetic national best bid (``SNBB''), respectively (the ``drill-
through price''). The System enters any order (or unexecuted portion), 
simple or complex, into the EDGX Options Book or the complex order book 
(``COB''), respectively, at the drill-through price for a specified 
period of time (determined by the Exchange).\4\ At the end of the time 
period, the System cancels any portion of the order not executed during 
that time period.
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    \3\ The System may also initiate a complex order auction 
(``COA'') at the drill-through price for a complex order that would 
otherwise initiate a COA.
    \4\ The current time period is two seconds, and the current 
default amounts are available in the technical specifications 
available at https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf. Upon implementation of the 
proposed rule change, the Exchange will likely reduce the length of 
the time period and maintain the same buffer amounts.
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    The Exchange proposes to permit orders to rest in the EDGX Options 
Book or COB, as applicable, for multiple time periods and at more 
aggressive displayed prices during each time period.\5\ Specifically, 
the System enters the order in the EDGX Options Book or COB with a 
displayed \6\ price equal to the drill-through price (as discussed 
below, if an order's limit price is less aggressive than the drill-
through price, the order will rest in the EDGX Options Book or COB, as 
applicable, at its limit price and subject to the User's instructions, 
and the drill-through mechanism as proposed to be amended would no 
longer apply to the order).\7\ The order (or unexecuted portion) will 
rest in the EDGX Options Book or COB, as applicable, until the earlier 
to occur of the order's full execution and [sic] the end of the 
duration of the number of time periods.\8\ Following the end of each 
period prior to the final period, the System adds (if a buy order) or 
subtracts (if a sell order) one buffer amount to the drill-through 
price displayed during the immediately preceding period (each new price 
becomes the ``drill-through price'').\9\ The order (or unexecuted 
portion) rests in the EDGX Options Book or COB, as applicable, at that 
new drill-through price for the duration of the subsequent period. 
Following the end of the final period, the System cancels the simple or 
complex order (or unexecuted portion) not executed during any time 
period.\10\ The Exchange has received feedback from Users that the 
current application of the drill-through mechanism is too limited. The 
Exchange believes this proposed rule change will provide additional 
execution opportunities for these orders (or unexecuted portions) while 
providing protection against execution at prices that may be erroneous.
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    \5\ The Exchange will announce to Trading Permit Holders the 
buffer amount, the number of time periods, and the length of the 
time periods in accordance with Rule 16.3. The Exchange notes that 
each time period will be the same length (as designated by the 
Exchange), and the buffer amount applied for each time period will 
be the same.
    \6\ Currently, the drill-through price is the price of orders 
and complex orders in the book or COB, respectively. The proposed 
rule change clarifies that the drill-through price is displayed, 
which is consistent with current functionality.
    \7\ See proposed Rule 21.17(a)(4)(B) and (b)(6)(B).
    \8\ The Exchange will determine on a class-by-class basis the 
number of time periods, which may not exceed five, and the length of 
the time period, which may not exceed three seconds. See proposed 
Rule 21.17(a)(4)(B) and (b)(6)(B)(i). The proposed rule change adds 
class flexibility so that the Exchange may determine different time 
periods and buffer amounts for different classes, which may exhibit 
different trading characteristics and have different market models.
    \9\ The System will apply a timestamp to the order (or 
unexecuted portion) based on the time it enters or is re-priced in 
the book or COB, as applicable, for priority purposes. See proposed 
Rule 21.17(a)(4)(B)(iii) and (b)(6)(B)(iii). This is consistent with 
the current drill-through functionality, pursuant to which the 
System applies a timestamp to the order (or unexecuted portion) 
based on the time it enters the book or COB, as applicable, modified 
to reflect the multiple price levels at which an order may rest. See 
current Rule 21.17(a)(4) and (b)(6)(A).
    \10\ Note current Rule 21.17(b)(6)(B) uses the language ``cancel 
or reject'' while the proposed rule change deletes ``reject,'' as 
both terms have the same result and merely relate to internal System 
code, making the use of both terms unnecessary.
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    For example, suppose the Exchange's market for a series in a class 
with a 0.05 minimum increment is 0.90-1.00, represented by a quote for 
10 contracts on each side (the quote offer is Quote A). The following 
sell orders or quote offers for the series also rest in the EDGX 
Options Book:
     Order A: 10 contracts at 1.05;
     Quote B: 10 contracts at 1.10;
     Order B: 10 contracts at 1.15; and
     Order C: 20 contracts at 1.25.

The market for away exchanges is 0.80-1.45. The Exchange's buffer 
amount for the class is 0.10, the drill-through resting time period is 
one second, and the number of time periods is three. The

[[Page 68383]]

System receives an incoming order to buy 100 at 1.40, which executes 
against resting orders and quotes as follows: 10 against Quote A at 
1.00 (which is the national best offer), 10 against Order A at 1.05, 
and 10 against Quote B at 1.10. The System will not automatically 
execute any of the remaining 70 contracts from the incoming buy order 
against Order B, because 1.15 is more than 0.10 away from the national 
best offer at the time of order entry of 1.00 and thus exceeds the 
drill-through price check. The 70 unexecuted contracts then rest in the 
EDGX Options Book for one second at a price of 1.10 (the initial drill-
through price). No incoming orders are entered during that one-second 
time period to trade against the remaining 70 contracts. The System 
then re-prices the buy order in the EDGX Options Book at a new drill-
through price of 1.20 (drill-through price plus one buffer of 0.10). 
Ten contracts immediately execute against Order B at a price of 1.15 
(the buy order is still handled as the ``incoming order'' that executes 
against the resting Order B, and thus receives price improvement to 
1.15). An incoming order to sell 20 contracts at 1.20 enters the EDGX 
Options Book and executes against 20 of the resting contracts at that 
price. At the end of the second one-second time period, there are 40 
remaining contracts. These contracts then rest in the EDGX Options Book 
at a price of 1.30 for the final one second time period. Twenty 
contracts immediately execute against Order C at a price of 1.25. No 
incoming orders are entered during that time period to trade against 
the remaining 20 contracts. At the end of the final one-second time 
period, the System cancels the remaining 20 contracts.\11\
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    \11\ The proposed drill-through protection for complex orders 
works in an identical manner.
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    Currently, Users may establish a higher or lower buffer amount than 
the default amount set by the Exchange with respect to complex orders 
subject to the drill-through protection.\12\ Pursuant to the proposed 
rule change, if a User establishes its own buffer amount, the drill-
through protection will work as it does today. In other words, if a 
User establishes its own buffer amount, a complex order will rest in 
the COB for one time period at the drill-through price and any 
unexecuted portion will be cancelled at the end of the time period. The 
proposed rule change clarifies that the length of the time period will 
continue to be determined by the Exchange, and will be the same as the 
length of the time period that applies to complex orders for which the 
User does not establish its own buffer amount. The Exchange believes 
this is consistent with a User's desire to set its own buffer to 
accommodate its own risk tolerance. All Users have the ability either 
to establish their own buffer amounts for complex orders, and thus have 
unexecuted orders rest for one time period, or let their complex orders 
be subject to the Exchange default buffer amount for complex orders, 
and thus have unexecuted orders rest at multiple price points for 
multiple time periods, as proposed.
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    \12\ See Rule 21.17(b)(6) (proposed subparagraph (b)(6)(A)).
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    The proposed rule change also makes certain clarifying and 
nonsubstantive changes, including movement of certain terms and 
provisions within Rule 21.17(a)(4) and (b)(6) due to the proposed rule 
changes described above. First, the proposed rule change combines the 
provisions in current subparagraphs (A) and (B) of Rule 21.17(a)(4) 
into proposed subparagraph (A). The drill-through protection in the 
following subparagraphs of Rule 21.17(a)(4) (currently and as proposed) 
apply to orders that enter the EDGX Options Book at the conclusion of 
the opening auction and intraday in the same manner. Therefore, current 
(and proposed) subparagraph (a)(4)(B) apply to all orders that enter 
the EDGX Options Book as described in proposed subparagraph (a)(4)(A) 
(current subparagraphs (a)(4)(A) and (B)). The proposed rule change 
clarifies that the drill-through protection applies to all orders that 
would enter the EDGX Options Book at prices worse than the drill-
through price, including orders not executed during the opening auction 
and orders entered intraday. This is consistent with and a 
clarification of current functionality.
    Second, the proposed rule change adds clarifying language regarding 
how the System handles orders for which the limit price is equal to or 
less than (if a buy order) or greater than (if a sell order) the drill-
through price. Current Rule 21.17(b)(6) contemplates that complex 
orders with limit prices equal to or less aggressive than the drill-
through price will not be subject to the mechanism pursuant to which 
orders will rest in the COB for a time period and then be cancelled. 
Specifically, Rule 21.17(b)(6)(A) states if a buy (sell) complex order 
would execute or enter the COB at a price higher (lower) than the 
drill-through price, the System enters the complex order into the COB 
with a price equal to the drill-through price and rests for the time 
period in accordance with the drill-through mechanism. Additionally, 
Rule 21.17(b)(6)(B) states that any complex order with a displayed 
price equal to the drill-through price (unless the drill-through price 
equals the order's limit price) will rest in the COB for the drill-
through time period. Therefore, currently, if the limit price of a 
complex order is less aggressive than or equal to the drill-through 
price (i.e., if a buy (sell) complex order (or unexecuted portion) 
would execute or enter the COB at a price lower (higher) than or equal 
to the drill-through price), the complex order will rest in the COB, as 
applicable, and the drill-through mechanism stops (i.e., the time 
period will not occur and the System will not cancel the order). This 
is also true for simple orders but is not specified in the current 
Rules.
    The proposed rule change clarifies that notwithstanding the 
provisions described above regarding an order or complex order resting 
in the EDGX Options Book or COB, respectively, for brief time periods 
at drill-through prices, if a buy (sell) order's limit price equals or 
is less (greater) than the drill-through price at any time during 
application of the drill-through mechanism, the order rests in the EDGX 
Options Book or COB, as applicable, subject to a User's 
instructions,\13\ at its limit price and any remaining time period(s) 
described above do not occur.\14\ If the drill-through price is equal 
to or more aggressive than the order's limit price, the additional 
protection of having the order rest in the COB for a short time period 
is not necessary given that the order will rest at the limit price 
entered by the User (and thus an acceptable execution price for that 
User). Additionally, displaying an order at a drill-through price (a 
price at which execution is possible) worse than the limit price of the 
order would be inconsistent with the terms of the order. This is 
consistent with current functionality (updated to reflect the proposed 
rule change to allow multiple time periods) and the definition of limit 
orders and merely clarifies this in the Rules.
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    \13\ For example, the order will remain in force subject to any 
time-in-force instruction applied to the order by the User upon 
entry.
    \14\ See proposed Rule 21.17(a)(4)(C)(iv) and (b)(6)(B)(iv).
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    Third, the proposed rule change clarifies in proposed Rule 
21.17(b)(6)(B)(ii) that if the synthetic best bid or offer (``SBBO'') 
changes prior to the end of any time period but the complex order 
cannot leg into the simple book, and the new SBB or SBO, as applicable, 
crosses the drill-through price, the System changes the displayed price 
of the complex order to the new

[[Page 68384]]

SBB or SBO, as applicable, plus or minus the applicable minimum 
increment for the class. The current Rule states that $0.01 is added to 
or subtracted from the new SBBO. However, a class may have a minimum 
increment other than $0.01 pursuant to Rule 5.4(b). Currently, the 
System adds or subtracts the applicable minimum increment. The proposed 
rule change corrects an inadvertent error in the Rules to conform to 
current System functionality and Rules regarding minimum increments for 
complex orders. The proposed rule change will ensure that a complex 
order will rest in the COB only with a displayed price in the 
applicable minimum increment applicable for the class of that complex 
order. The proposed rule change also clarifies that the complex order 
will rest in the COB (the current rule text says the complex order is 
not cancelled), and adds detail that the complex order rests at that 
displayed price, subject to a User's instructions, and if it was not 
the final period, any remaining time period(s) do not occur.
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.\15\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \16\ 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) \17\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ Id.
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    In particular, the Exchange believes the proposed enhancement to 
the drill-through mechanism removes impediments to and perfects the 
mechanism of a free and open market and a national market system, and, 
in general, protects investors and the public interest. The proposed 
rule change will permit orders (or unexecuted portions) to rest in the 
EDGX Options Book or COB, as applicable, at different displayed prices 
for a brief but overall longer period of time, which will provide 
market participants' orders with additional execution opportunities 
while continuing to protect them against execution at potentially 
erroneous prices. The proposed enhancement to the drill-through 
protection is similar to current drill-through functionality. The 
Exchange may determine the buffer amount for orders and the time period 
in which orders may rest in the EDGX Options Book or COB. The proposed 
rule change permits an order to rest at multiples of the buffer amount, 
which would have the same effect as the Exchange setting a larger 
buffer amount. For example, if the Exchange set a buffer amount of 
$0.75, that would allow orders to execute at any price no further than 
$0.75 away from the NBBO or SNBBO at the time of order entry (including 
at prices $0.25 and $0.50 away from the NBBO or SNBBO at the time of 
order entry). This allows for the same potential execution prices that 
would be possible if the Exchange set a buffer of $0.25 and three time 
periods under the proposed rule change. While the overall time period 
for which an order may rest in the EDGX Options Book or COB may be 
longer than the currently permissible time period, the longer time 
period will still be relatively brief (maximum of 15 seconds). The 
Exchange notes it may maintain the same buffer amounts that are in 
place today. However, rather than increase the buffer amount at one 
time, the proposed rule change adds the overall larger buffer amount 
incrementally over a potentially overall longer time period. While this 
may permit executions at prices farther away from the NBBO or SNBBO at 
the time of order entry, it will still never permit executions at 
prices through orders' limit prices. This will provide execution 
opportunities for orders at incremental amounts away from the NBBO or 
SNBBO, as applicable, over a slightly longer time period and thus 
against a potentially larger number of orders. Users also have the 
ability to cancel orders prior to the completion of the time periods if 
they do not want the orders resting for a longer period of time (and 
Users can set their own buffer for complex orders, which would cause 
those complex orders to rest for a single time period rather than 
multiple as proposed).
    The Exchange believes the proposed clarifying and nonsubstantive 
changes to the drill-through protection rules protect investors by 
adding transparency to the rules regarding the drill-through 
functionality. These changes are consistent with current functionality 
and thus do not impact the applicability of the drill-through mechanism 
to 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 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because the enhanced drill-
through protection will apply to all marketable orders in the same 
manner. Users may cancel orders resting on the EDGX Options Book during 
the drill-through time periods or set their own buffer with respect to 
complex orders if they do not want their orders resting for a longer 
period of time as proposed.
    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 because it 
relates solely to how and when marketable orders will rest on the EDGX 
Options Book or COB. The proposed enhancement to the drill-through 
protection is consistent with the current protection and provides 
orders subject to the protection with additional execution 
opportunities while providing continued protection against execution 
against potentially erroneous prices.
    The Exchange believes the proposed rule change would ultimately 
provide all market participants with additional execution opportunities 
when appropriate while providing protection from erroneous execution. 
The Exchange believes the proposal will enhance risk protections, the 
individual firm benefits of which flow downstream to counterparties 
both at the Exchange and at other options exchanges, which increases 
systemic protections as well. The Exchange believes enhancing risk 
protections will allow Users to enter orders and quotes with further 
reduced fear of inadvertent exposure to excessive risk, which will 
benefit investors through increased liquidity for the execution of 
their orders. Without adequate risk management tools, such as the one 
proposed to be enhanced in this

[[Page 68385]]

filing, Trading Permit Holders could reduce the amount of order flow 
and liquidity they provide. Such actions may undermine the quality of 
the markets available to customers and other market participants. 
Accordingly, the proposed rule change is designed to encourage Trading 
Permit Holders to submit additional order flow and liquidity to the 
Exchange. The proposed flexibility may similarly provide additional 
execution opportunities, which further benefits liquidity in 
potentially volatile markets. In addition, providing Trading Permit 
Holders with more tools for managing risk will facilitate transactions 
in securities because, as noted above, Trading Permit Holders will have 
more confidence protections are in place that reduce the risks from 
potential system errors and market events.
    The proposed clarifying and nonsubstantive changes are consistent 
with current functionality and are intended to add clarity to the 
Rules, and thus the Exchange expects those changes to have no 
competitive impact.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \18\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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-CboeEDGX-2020-049 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-CboeEDGX-2020-049. 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-CboeEDGX-2020-049 and should be 
submitted on or before November 18, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23796 Filed 10-27-20; 8:45 am]
BILLING CODE 8011-01-P


