[Federal Register Volume 86, Number 57 (Friday, March 26, 2021)]
[Notices]
[Pages 16267-16269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06233]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91383; File No. SR-CFE-2021-006]


Self-Regulatory Organizations; Cboe Futures Exchange, LLC; Notice 
of a Filing of a Proposed Rule Change Regarding Disruptive Trading 
Practices

March 22, 2021.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 15, 2021 Cboe 
Futures Exchange, LLC (``CFE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change described in Items I, II, and III below, which Items have been 
prepared by CFE. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons. CFE also 
has filed this proposed rule change with the Commodity Futures Trading 
Commission (``CFTC''). CFE filed a written certification with the CFTC 
under Section 5c(c) of the Commodity Exchange Act (``CEA'') \2\ on 
March 15, 2021.
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 7 U.S.C. 7a-2(c).
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    The Exchange proposes to provide additional guidance in its rules 
regarding prohibited disruptive practices.
    The rule amendments included as part of this proposed rule change 
are to apply to all products traded on CFE, including both non-security 
futures and any security futures that may be listed for trading on CFE. 
The scope of this filing is limited solely to the application of the 
proposed rule change to security futures that may be traded on CFE. 
Although no security futures are currently listed for trading on CFE, 
CFE may list security futures for trading in the future.
    The text of the proposed rule change is attached as Exhibit 4 to 
the filing but is not attached to the publication of this notice.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CFE 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. CFE 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
    CFE Rule 620 (Disruptive Practices) prohibits various disruptive 
practices and CFE Policy and Procedure XVIII (Disruptive Trading 
Practices) (``P&P XVIII'') of the Policies and Procedures section of 
the CFE Rulebook lists various factors that CFE may consider in 
assessing whether conduct violates Rule 620. The proposed rule change 
proposes to make the following clarifying updates in relation to these 
provisions.
    CFE is proposing to amend the provisions of Rule 620 in the 
following manner.
    Rule 620(b)(iii) currently provides that no Person shall enter or 
cause to be entered an actionable or non-actionable message or messages 
with intent to overload, delay, or disrupt the systems of the Exchange 
or other market participants. CFE proposes to add a new subparagraph 
(b)(iv) to Rule 620 to address disruption to the systems of the 
Exchange or market participants in this context and accordingly 
proposes to remove reference to disruption from Rule 620(b)(iii).
    Specifically, proposed revised Rule 620(b)(iii) will provide that 
no Person shall enter or cause to be entered an actionable or non-
actionable message(s) with intent to overload or delay the systems of 
the Exchange or other market participants.
    Proposed new Rule 620(b)(iv) will provide that no Person shall 
intentionally or recklessly submit or cause to be submitted an 
actionable or non-actionable message(s) that has the potential to 
disrupt the systems of the Exchange or other market participants.
    CFE also proposes to make the following two non-substantive changes 
to Rule 620(b): (1) To change the numbering of current subparagraph 
(b)(iv) of Rule 620 to subparagraph (b)(v) of Rule 620 to account for 
the addition of proposed new Rule 620(b)(iv) and (2) to revise Rule 
620(b)(ii), Rule 620(b)(iii), and renumbered Rule 620(b)(v) to use the 
same wording when referring to an actionable or non-actionable 
message(s) and thus to provide for consistent language in relation to 
these references throughout Rule 620(b).

[[Page 16268]]

    CFE is also proposing to amend the provisions of P&P XVIII in the 
following manner.
    CFE proposes to revise Section A of P&P XVIII to specifically 
reference an additional factor that the Exchange may consider in 
assessing whether conduct violates Rule 620. Section A of P&P XVIII 
enumerates a non-exclusive list of factors that the Exchange may 
consider in assessing whether conduct violates Rule 620. CFE proposes 
to revise Section A of P&P XVIII to specifically provide that the 
Exchange may consider industry best practices regarding the design, 
testing, implementation, operation, change management, monitoring, and 
documentation of automated trading systems in assessing whether conduct 
violates Rule 620.
    CFE proposes to update Section J of P&P XVIII to reference 
additional examples of non-actionable messages. Currently, Section J of 
P&P XVIII lists a heartbeat message transmitted to CFE's trading system 
(``CFE System'') as a non-actionable message. CFE proposes to revise 
Section J of P&P XVIII to list the entry of Orders in test products and 
network packets that are incomplete, partial, corrupt, or otherwise 
unable to be processed by the Exchange as additional examples of non-
actionable messages.
    CFE proposes to add new Section U to P&P XVIII to specifically 
reference two examples of practices that are prohibited by new Rule 
620(b)(iv). In particular, CFE proposes to add new Section U of P&P 
XVIII, which will provide that (1) engaging in a pattern and practice 
of submitting partial messages for the purpose of seeking to reduce 
latency has the potential to disrupt the systems of the Exchange; (2) 
purposefully corrupting or constructing malformed data packets also has 
the potential to disrupt the systems of the Exchange; and (3) the 
Exchange considers any market participant engaging in either of these 
practices as part of a trading strategy to have recklessly disregarded 
the potential to disrupt the systems of the Exchange in violation of 
new Rule 620(b)(iv).
    CFE proposes to add these provisions to make clear that 
intentionally submitting partial order messages for the purpose of 
seeking to reduce latency only to complete the order message upon the 
happening of an event or trading signal is prohibited activity. 
Similarly, these provisions are intended to make clear that 
purposefully corrupting or constructing malformed data packets as part 
of a trading strategy to reduce latency is also prohibited activity. 
These strategies have the potential to impact the systems of the 
Exchange, and the Exchange believes they serve no useful purpose.
    CFE proposes to add new Section V to P&P XVIII to make clear that 
brokers and execution clerks are obligated to consider market 
conditions when executing an order on behalf of a customer or employer 
pursuant to their instructions and that the instructions of a customer 
or employer do not negate the obligation for brokers and execution 
clerks to comply with Rule 620. In connection with the addition of new 
Section V to P&P XVIII, CFE proposes to amend P&P XVIII to change the 
lettering of current Section U to new Section W of P&P XVIII and of 
current Section V to new Section X of P&P XVIII to account for the 
addition of proposed new Section V to P&P XVIII.
    Finally, CFE proposes to amend new Section X of P&P XVIII to add 
two examples of prohibited activity under Rule 620. In particular, this 
Section of P&P XVIII includes a non-exhaustive list of various examples 
of conduct that may be found to violate Rule 620. The proposed 
additional examples in new Section X of P&P XVIII provide specific 
illustrations of trading strategies that may violate Rule 620, 
including the provisions of new Rule 620(b)(iv), which involve 
purposefully corrupting or constructing malformed data packets.
    The first proposed example includes the following fact pattern: A 
market participant engages in a trading strategy where the market 
participant's trading system is designed to purposefully corrupt data 
sent across one or more physical connections to the Exchange. For 
example, prior to the occurrence of an event or signal, the market 
participant's trading system begins transmitting to the Exchange data 
necessary for an order message (e.g., Ethernet frame; Internet Protocol 
(IP) packet; Transmission Control Protocol (TCP) packet; etc.). The 
trading system is designed so that if the event or signal does not 
occur as expected, the trading system will corrupt the partially 
transmitted data, for instance by invalidating the Frame Check Sequence 
(FCS) checksum causing the packet or Ethernet frame to be dropped by a 
network switch or receiving device at the logical or physical entry 
point to the CFE System. If the event does occur as expected, the 
trading system will complete the partially transmitted data so that an 
order message from the trading system is able to reach the Exchange 
trading platform.
    The second proposed example includes the following fact pattern: A 
market participant engages in a trading strategy where the market 
participant's trading system is designed to purposefully send to the 
Exchange untradeable orders or orders that have no reasonable 
probability of trading. For example, prior to the occurrence of an 
event or signal, the market participant's trading system begins 
transmitting to the Exchange data necessary for an order message (e.g., 
Ethernet frame; TCP packet; etc.). The trading system is designed so 
that if the event or signal does not occur as expected, the trading 
system will complete the partially transmitted data and successfully 
submit an order message to the Exchange. However, because the event or 
signal did not occur as expected, the trading system is designed to 
render the completed order message untradeable or improbable of 
trading. This may be accomplished, for example, by submitting the order 
message as a fill or kill order type with a price or quantity that 
causes the order to immediately be cancelled by the trading platform. 
This may also be accomplished, for example, by submitting the order 
message at an off-market price, deep in the order book, and intending 
to cancel that order prior to execution.
    The proposed rule change is consistent with similar updated 
guidance provided by other designated contract markets (``DCMs'') 
regarding disruptive practices.\3\ The Exchange believes that aligning 
its guidance regarding disruptive trading practices across DCMs where 
appropriate protects the Exchange, investors, and the public interest 
by promoting uniform expectations among market participants regarding 
disruptive trade practices.
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    \3\ These DCMs are Chicago Mercantile Exchange, Inc. (``CME''), 
The Board of Trade of the City of Chicago, Inc., New York Mercantile 
Exchange, Inc., and Commodity Exchange, Inc. Each submitted rule 
certification filings to the CFTC to effectuate their respective 
updated guidance. See, e.g., CME Submission No. 20-305 (July 24, 
2020), which is available on the CFTC website at: https://www.cftc.gov/sites/default/files/filings/orgrules/20/07/rule072420cmedcm003.pdf.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\4\ in general, and furthers the 
objectives of Sections 6(b)(1) \5\ and 6(b)(5) \6\ in particular, in 
that it is designed:
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(1).
    \6\ 15 U.S.C. 78f(b)(5).
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     To enable the Exchange to enforce compliance by its 
Trading Privilege Holders and persons associated with its Trading 
Privilege Holders with the provisions of the rules of the Exchange,
     to prevent fraudulent and manipulative acts and practices,

[[Page 16269]]

     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 proposed rule change provides additional guidance regarding 
disruptive practices that violate CFE Rule 620. CFE considers the 
disruptive trading practices addressed by the proposed rule change to 
be prohibited by existing CFE rules, including current Rule 620, P&P 
XVIII, and CFE Rule 608 (Acts Detrimental to the Exchange, Acts 
Inconsistent with Just and Equitable Principles of Trade; Abusive 
Practices). CFE also considers the provisions that are proposed to be 
added to P&P XVIII relating to factors that the Exchange may consider 
in assessing whether conduct violates Rule 620 and relating to the 
obligation of brokers to consider market conditions when executing 
orders to be within the scope of existing CFE rules, including current 
Rule 620 and P&P XVIII. Although this is the case, CFE believes that it 
is beneficial to provide additional guidance to market participants 
through the inclusion of further detail in CFE's rules regarding 
prohibited disruptive practices. By further describing prohibited 
disruptive trading practices in CFE's rules and by providing additional 
guidance relating to the application of CFE's rule provisions with 
respect to disruptive trading practices, the proposed changes to Rule 
620 and P&P XVIII contribute to the protection of CFE's market and 
market participants from abusive practices; to the promotion of fair 
and equitable trading on CFE's market; and to precluding activity on 
CFE's market that is disruptive to the orderly execution of 
transactions and that may negatively impact the systems of the 
Exchange.
    Accordingly, the Exchange believes that the proposed rule change 
will benefit market participants because it will provide greater 
clarity regarding the Exchange's current prohibited disruptive trading 
practices and the various factors that CFE may consider in assessing 
whether conduct violates Rule 620. Additionally, the Exchange believes 
that the proposed rule change will strengthen its ability to carry out 
its responsibilities as a self-regulatory organization by providing 
further guidance regarding the type of activity that is prohibited 
under CFE Rule 620. In addition, the proposed rule change benefits 
market participants by contributing to the protection of CFE's market 
and market participants from abusive practices and to the promotion of 
a fair and orderly market.
    The Exchange also believes that the proposed rule change is 
equitable and not unfairly discriminatory in that the rule amendments 
included in the proposed rule change would apply equally to all market 
participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CFE does not believe that the proposed rule changes will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. Specifically, the Exchange believes that the 
proposed rule change will not burden intra-market competition because 
the clarifying updates to the prohibited disruptive trading practices 
will apply equally to all market participants. The Exchange also 
believes that these clarifying updates will help to foster a fair and 
orderly market and contribute to furthering the promotion of fair and 
equitable trading on the Exchange. Additionally, the proposed rule 
change is designed to make CFE's disruptive trading practice rules 
consistent with the existing rules and guidance published by other DCMs 
and thus will not burden intermarket competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change will become operative on March 29, 2021. 
At any time within 60 days of the date of effectiveness of the proposed 
rule change, the Commission, after consultation with the CFTC, may 
summarily abrogate the proposed rule change and require that the 
proposed rule change be refiled in accordance with the provisions of 
Section 19(b)(1) of the Act.\7\
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    \7\ 15 U.S.C. 78s(b)(1).
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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-CFE-2021-006 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-CFE-2021-006. 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-CFE-2021-006, and should be submitted on 
or before April 16, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(73).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-06233 Filed 3-25-21; 8:45 am]
BILLING CODE 8011-01-P


