[Federal Register Volume 86, Number 31 (Thursday, February 18, 2021)]
[Notices]
[Pages 10154-10157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03219]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91116; File No. SR-CBOE-2020-050]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving 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

February 11, 2021.

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and superseded the proposed rule change in its entirety.\4\ On July 22, 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

[[Page 10155]]

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\ On August 
21, 2020, the Commission published notice of Amendment Nos. 1 and 2 and 
instituted proceedings under 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.\9\ On December 8, 2020, pursuant to 
Section 19(b)(2) of the Act,\10\ the Commission designated a longer 
period within which to approve or disapprove the proposed rule change, 
as modified by Amendment Nos. 1 and 2.\11\ This order approves 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).
    \9\ See Securities Exchange Act Release No. 89635, 85 FR 53051 
(August 27, 2020).
    \10\ 15 U.S.C. 78s(b)(2).
    \11\ See Securities Exchange Act Release No. 90593, 85 FR 80842 
(December 14, 2020). The Commission designated February 13, 2021 as 
the date by which the Commission shall approve or disapprove the 
proposed rule change, as modified by Amendment Nos. 1 and 2.
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II. Description of the Proposal, 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 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.\12\ Currently, 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. The Exchange states that no similar 
restriction applies to crossing transactions in open outcry trading, 
where a significant portion of SPX options trade.\13\ The Exchange 
represents that 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.\14\
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    \12\ 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). The Exchange states that AIM is currently not 
activated for SPX options, although FLEX AIM is currently activated 
for FLEX SPX options. See Amendment No. 1, supra note 4, at 4 & n.2.
    \13\ See Rules 5.86 and 5.87. See also Amendment No. 1, supra 
note 4, at 4.
    \14\ See Amendment No. 1, supra note 4, at 4.
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    The Exchange states that, during a period of time in which it 
suspended open outcry trading to help prevent the spread of the novel 
coronavirus and began operating in an all-electronic configuration, it 
activated AIM for SPX options and 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.\15\ 
According to the Exchange, while AIM was activated for SPX options, the 
Exchange observed price improvement benefits in AIM auctions for 
smaller, retail-sized SPX options.\16\ Although the Exchange has 
deactivated AIM for SPX options with the reopening of its trading 
floor, the Exchange further states that, if it determines to reactivate 
AIM for SPX options, it 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 is necessary for brokers to initiate AIM auctions and 
create potential price improvement opportunities for those retail-sized 
orders.\17\ The Exchange also states that with additional market 
participants available for solicitation to represent the initiating 
order, the increased competition may encourage these participants to 
provide more aggressive prices to initiate an auction in SPX.\18\
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    \15\ See id. at 4-5. See also Rule 5.24(e)(1)(A); Securities 
Exchange Act Release No. 88886 (May 15, 2020), 85 FR 31008 (May 21, 
2020) (SR-CBOE-2020-047).
    \16\ See Securities Exchange Act Release No. 89058 (June 12, 
2020), 85 FR 36918 (June 18, 2020) (SR-CBOE-2020-051).
    \17\ See Amendment No. 1, supra note 4, at 5-6.
    \18\ See Amendment No. 2, supra note 5, at 4.
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    The Exchange further states that, in multi-list classes, many 
market makers serve as both appointed market makers on the Exchange and 
as market makers on other options exchanges and, as a result, can use 
their away market maker accounts to be solicited as a contra order for 
AIM auctions.\19\ The Exchange provides data from April 2020 
demonstrating that 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.\20\
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    \19\ See Amendment No. 1, supra note 4, at 7.
    \20\ See id.
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    According to the Exchange, however, because SPX is an exclusively-
listed class on the Exchange, a firm cannot serve as an SPX market 
maker at another options exchange.\21\ The Exchange represents that 
there are currently 28 trading permit holders with SPX appointments 
that would be available to participate in AIM auctions through both 
contra orders and auction responses.\22\ The Exchange provides data 
showing that 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.\23\ The Exchange's data further demonstrates that during 
April and May 2020, 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.\24\ The Exchange's data 
also shows that during April and May 2020, SPX market makers executed 
approximately 31% of SPX volume executed through AIM auctions with 
auction responses.\25\
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    \21\ See id.
    \22\ See Amendment No. 2, supra note 5, at 3.
    \23\ See Amendment No. 1, supra note 4, at 7.
    \24\ See id.
    \25\ See id.
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    The Exchange also states that SPX market makers frequently serve as 
contra parties to crossing transactions on the trading floor and the 
proposed rule change will further align AIM auctions with SPX crossing 
executions that occur on the trading floor. According to the Exchange, 
for example, during February 2020, approximately 76% of SPX orders 
crossed on the trading floor (consisting of 2,944,161 contracts) 
included an order of an SPX

[[Page 10156]]

market maker on one side of the transaction.\26\
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    \26\ See id. at 8.
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    With respect to FLEX AIM, the Exchange states that, unlike in 
simple non-FLEX markets, FLEX market makers have no obligations to 
provide liquidity to FLEX classes and there is no book into which FLEX 
market makers may submit quotes to rest. According to the Exchange, 
therefore, appointed market makers in FLEX markets are on equal footing 
with all other market participants with respect to FLEX AIM auctions 
and permitting FLEX market makers to be solicited as the contra order 
in a FLEX AIM auction would provide all market participants with the 
opportunity to provide liquidity to execute against agency orders in 
FLEX AIM auctions in the same manner (i.e., through solicitation and 
responses).\27\
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    \27\ See id. at 9.
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    The Exchange also proposes to amend 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. The Exchange also proposes to specify that 
the system will reject a response with the same EFID as the initiating 
order.\28\ The Exchange represents that 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.\29\ Further, with respect to any potential misuse of 
non-public information by an SPX market maker regarding an upcoming SPX 
AIM auction, the Exchange represents that it has existing rules that 
prohibit a pattern or practice of submitting orders or quotes for the 
purpose of disrupting or manipulating AIM auctions and that require 
trading permit holders to establish, maintain, and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
material, non-public information.\30\
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    \28\ See Rule 1.1 (defining EFID as an ``Executing Firm ID''). 
The Exchange states that, although the system is only able to reject 
responses with the same EFID as the initiating order, the rule 
prohibits all responses from the same user that represents the 
initiating order, even if orders for the same user have different 
EFIDs. See Amendment No. 1, supra note 4, at 10.
    \29\ See Amendment No. 1, supra note 4, at 10.
    \30\ See Amendment No. 2, supra note 5, at 5. See also Rules 
5.37.02 and 8.10.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1 and 2, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\31\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1 and 2, is 
consistent with Section 6(b)(5) of the Act,\32\ 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. The Commission also finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 2, is consistent with Section 6(b)(8) 
of the Act,\33\ which requires that the rules of a national securities 
exchange do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \31\ 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).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ 15 U.S.C. 78f(b)(8).
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    As described above, the Exchange proposes to permit orders for the 
accounts of market makers with an appointment in SPX to be solicited 
for the initiating order submitted for execution against an agency 
order in SPX options into an AIM auctions. In support of its proposal, 
the Exchange states that 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. Accordingly, the 
Exchange believes the liquidity provided by SPX market makers is 
necessary for brokers to initiate AIM auctions and would create 
potential price improvement opportunities for retail-sized orders in 
SPX. As summarized in more detail above, the Exchange collected data 
during the time open outcry trading was temporarily suspended and SPX 
options traded in AIM auctions while the trading floor was inoperable. 
The data demonstrates that significant price improvement opportunities 
for retail-sized orders occurred during this time.
    Two commenters agreed with Cboe that the proposal would increase 
liquidity for AIM auctions and thereby would increase execution and 
price improvement opportunities for retail investors.\34\ One such 
commenter argued that removing the market maker solicitation 
prohibition would eliminate an inequity against market makers that 
unduly curtails liquidity to customer orders.\35\ 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.\36\
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    \34\ See letters to Vanessa Countryman, Secretary, Commission, 
from Richard J. McDonald, Susquehanna International Group, LLP, 
dated July 8, 2020, at 2 (``SIG Letter'') and Ellen Greene, Managing 
Director, Equities & Options Market Structure, The Securities 
Industry and Financial Markets Association, dated July 9, 2020, at 3 
(``SIFMA Letter''). The SIG Letter and SIFMA Letter commented on 
Cboe's original proposal, which would have applied the proposed rule 
change to all classes, not just SPX.
    \35\ See SIG Letter, supra note 34, at 1.
    \36\ See SIFMA Letter, supra note 34, at 3; SIG Letter, supra 
note 34, at 2.
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    After careful consideration, the Commission believes that the 
proposal is reasonably designed to protect investors and the public 
interest. The data provided by the Exchange supports the Exchange's 
conclusion that the proposal could provide additional execution and 
price improvement opportunities for customer orders in SPX options 
submitted through the Exchange's AIM auctions. As described above, the 
Exchange provided data demonstrating market maker participation in SPX 
AIM auctions during April and May 2020, the temporary period when SPX 
market makers were permitted to be solicited as contra side to the 
agency order in AIM auctions.\37\ The Commission believes that the 
Exchange's data shows that SPX market makers represented a significant 
amount of SPX AIM volume during this period, both as initiating orders 
and through auction responses. Accordingly, the Exchange's data 
supports a finding that permanently permitting initiating orders from 
SPX market makers is designed to increase the number of AIM auctions 
and consequently, provide a larger number of agency orders with the 
opportunity for price improvement. For example, an AIM agency order for 
less than 50 contracts is guaranteed price improvement of at least one 
minimum increment better than the then-current National Best Bid or 
National Best Offer.\38\
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    \37\ See supra notes 23-25 and accompanying text.
    \38\ See Amendment No. 1, supra note 4, at 8.
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    The Commission further believes that the proposed rule change will 
not impose any burden on competition that is not necessary or 
appropriate in

[[Page 10157]]

furtherance of the purposes of the Act. 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.\39\ Cboe states that this 
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.\40\ Thus, 
the proposed rule change will further align open outcry and electronic 
crossing auctions in SPX and provide execution and price improvement 
opportunities in both auctions by permitting all market participants, 
not just Cboe SPX market makers, to be solicited to participate in AIM 
transactions.
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    \39\ See Amendment No. 1, supra note 4, at 8.
    \40\ See id.
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    Moreover, because the Exchange's rules no longer restrict the group 
of participants that may provide responses to AIM auctions,\41\ there 
are a number of appointed SPX market makers on the Exchange that would 
remain eligible to provide competitive responses to AIM auctions.\42\ 
According to the Exchange, there are currently 28 trading permit 
holders with SPX appointments that would be available to participate in 
AIM auctions through both contra orders and auction responses.\43\ 
Further, the proposal would allow for an increased number of 
participants to provide the contra-side interest necessary to initiate 
a competitive AIM auction, particularly in an exclusively-listed class 
such as SPX where away market makers are unavailable to provide such 
interest. The Exchange's data demonstrated that during the temporary 
period, SPX market makers executed approximately 31% of SPX volume 
executed through AIM auctions with auction responses.\44\
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    \41\ See Rules 5.37(c)(5) (AIM) and 5.38(c)(5).
    \42\ See text accompanying supra note 22.
    \43\ See Amendment No. 2, supra note 5, at 3.
    \44\ See Amendment No. 1, supra note 4, at 7.
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    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 2, is consistent with the requirements 
of the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\45\ that the proposed rule change, as modified by Amendment Nos. 1 
and 2 (SR-CBOE-2020-050), be, and hereby is, approved.
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    \45\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-03219 Filed 2-17-21; 8:45 am]
BILLING CODE 8011-01-P


