[Federal Register Volume 86, Number 83 (Monday, May 3, 2021)]
[Notices]
[Pages 23453-23458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09132]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91689; File No. SR-CBOE-2021-025]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rule 5.37 and Rule 5.38 in 
Connection With Allocations at the Conclusion of the Exchange's 
Automated Improvement Mechanism (``AIM'') and Complex AIM (``C-AIM'') 
Auctions

April 27, 2021.
    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 April 14, 2021, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 5.37 and Rule 5.38 in connection with allocations at the 
conclusion of the Exchange's Automated Improvement Mechanism (``AIM'') 
and Complex AIM (``C-AIM'') auctions. 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 adopt a Priority Order Plus status in 
connection with the allocation of exclusively listed \3\ index option 
classes, as designated by the Exchange, at the conclusion of an AIM and 
C-AIM auction.
---------------------------------------------------------------------------

    \3\ An ``exclusively listed option'' is an option that trades 
exclusively on an exchange because the exchange has an exclusive 
license to list and trade the option or has the proprietary rights 
in the interest underlying the option. An exclusively listed option 
is different than a ``singly listed option,'' which is an option 
that is not an ``exclusively listed option'' but that is listed by 
one exchange and not by any other national securities exchange.
---------------------------------------------------------------------------

    The AIM and C-AIM auctions are electronic auctions intended to 
provide an Agency Order with the opportunity to receive price 
improvement (over the

[[Page 23454]]

National Best Bid or Offer (``NBBO'') in AIM, or the synthetic best bid 
or offer (``SBBO'') on the Exchange in C-AIM). Upon submitting an 
Agency Order into an AIM or C-AIM auction, the initiating Trading 
Permit Holder (``Initiating TPH'') must also submit a contra-side 
second order (``Initiating Order'') for the same size as the Agency 
Order. The Initiating Order guarantees that the Agency Order will 
receive an execution at no worse than the auction price. Upon 
commencement of an auction, market participants may submit responses to 
trade against the Agency Order. At the conclusion of an auction, 
depending on the contra-side interest available, the Initiating Order 
may be allocated a certain percentage of the Agency Order. Rule 5.37(e) 
and Rule 5.38(e) currently govern the order in which an Agency Order 
submitted into an AIM and C-AIM auction, respectively, is allocated 
among available contra-side interest. At the time each AIM or C-AIM 
Auction concludes, the System allocates the Agency Order pursuant to 
Rule 5.37(e) or Rule 5.38(e), as applicable, and takes into account all 
auction responses and unrelated orders and quotes in place at the exact 
time of conclusion. Any execution prices at the conclusion of an AIM 
Auction must be at or better than both sides of the BBO existing at the 
conclusion of the AIM Auction and at or better than both sides of the 
Initial NBBO,\4\ and any execution prices at the conclusion of a C-AIM 
Auction must be at or between the SBBO and the best prices of any 
complex orders resting on \5\ each side of the Complex Order Book 
(``COB'') at the conclusion of the C-AIM Auction.
---------------------------------------------------------------------------

    \4\ The term ``Initial NBBO'' means the national best bid or 
national best offer at the time an Auction is initiated. See Rule 
5.37.
    \5\ The proposed rule change removes an extraneous ``the'' from 
Rule 5.38(e).
---------------------------------------------------------------------------

    Currently, the Exchange may offer Priority Order status for 
allocations at the conclusion of an AIM Auction. If the Exchange 
designates a class as eligible for Priority Order status, then Priority 
Orders receive Agency Order executions after Priority Customers and the 
Initiating TPH (as applicable) have received their Agency Order 
allocations.\6\. Rule 5.37(e)(4) provides that if the Exchange 
designates a class as eligible for Priority Order status, Users with 
displayed resting quotes and orders that were at a price equal to the 
Initial NBBO on the opposite side of the market from the Agency Order 
have priority up to their size for their contra-side interest 
(``Priority Orders'') \7\ in the Initial NBBO at each price level at or 
better than the Initial NBBO (after Priority Customers and the 
Initiating TPH have received allocations, as set forth in subparagraphs 
(e)(1) through (3)). Priority Order status is only valid for the 
duration of the particular AIM Auction.\8\
---------------------------------------------------------------------------

    \6\ Priority Orders receive priority pursuant to the order of 
allocation as set forth in Rule 5.37(e)(1) (if the Auction results 
in no price improvement), Rule 5.37(e)(2) (if the Auction results in 
price improvement for the Agency Order and the Initiating TPH 
selected a single-price submission) or Rule 5.37(e)(3) (if the 
Auction results in price improvement for the Agency Order and the 
Initiating TPH selected auto-match).
    \7\ The proposed rule also updates the language in Rule 
5.37(e)(4) to clarify that a User that establishes Priority Order 
status (by having displayed resting quotes and orders priced equal 
to the Initial NBBO contra to the Agency Order) receives that 
Priority Order status for their contra-side interest (up to their 
size in the Initial NBBO) at each price level at which the Agency 
Order executes. This is how the Priority Order status functions 
today and the proposed clarification does not alter any current 
functionality. Instead, the proposed clarification merely makes the 
Rule more explicit and relocates the defined term ``Priority 
Orders'' to more appropriately describe the Priority Order status 
allocation process.
    \8\ Priority Order status is currently activated for numerous 
classes in AIM.
---------------------------------------------------------------------------

    The Exchange now proposes to adopt a new allocation incentive for 
Priority Orders in exclusively listed index options classes at the 
conclusion of AIM, as well as C-AIM, auctions. First, the proposed rule 
change amends Rule 5.34(e)(4) to permit the Exchange to designate any 
exclusively listed index option class as eligible for Priority Order 
Plus status at the conclusion of an AIM Auction. As stated, Rule 
5.34(e)(4) currently governs Priority Order status and, as proposed, 
the manner in which Priority Order Plus status functions is 
substantively the same as Priority Order status, except that Priority 
Order Plus status will be available only for exclusively listed index 
option classes and Priority Orders eligible for Priority Order Plus 
status will receive higher priority than Priority Orders eligible for 
Priority Order status. Specifically, proposed Rule 5.37(e)(4) provides 
that the Exchange may designate any exclusively listed index option 
class as eligible for Priority Order Plus status and any class as 
eligible for Priority Order status. A class designated as eligible for 
one status is not eligible for the other status. If the Exchange 
designates a class as eligible for Priority Order Plus or Priority 
Order status, Users with displayed resting quotes and orders that were 
at a price equal to the Initial NBBO on the opposite side of the market 
from the Agency Order have priority for their contra-interest 
(``Priority Orders'') up to their size in the Initial NBBO at each 
price level at or better than the Initial NBBO. Priority Order Plus and 
Priority Order allocations are received after Priority Customers have 
received allocations, and Priority Order allocations are also received 
after the Initiating TPH has received its entitlement allocation, as 
set forth in Rule 5.37(e)(1) through (3). Each status is only valid for 
the duration of the particular AIM Auction. As a result of the proposed 
status, the proposed rule change also adopts new Rule 5.37(e)(1)(B),\9\ 
which provides for the allocation of Priority Orders, if the Exchange 
has designated the class as eligible for Priority Order Plus status, 
immediately following Priority Customer allocations but prior to 
Initiating TPH allocations when an AIM Auction results in no price 
improvement. The proposed rule change also amends Rule 5.37(e)(2)(B) to 
include that Priority Orders may be allocated immediately following 
Priority Customer allocations, in the same order of allocation priority 
as they currently are, if the Exchange has designated a class as 
eligible for Priority Order Plus or Priority Order status.
---------------------------------------------------------------------------

    \9\ The proposed rule change also updates the numbering of 
current Rule 5.37(e)(1)(B) through (e)(1)(E) to reflect the addition 
of new Rule 5.37(e)(1)(B).
---------------------------------------------------------------------------

    Additionally, proposed Rule 5.37(e)(1)(B) provides that Priority 
Orders eligible for Priority Order Plus status are allocated in a pro-
rata manner. Likewise, the proposed rule change updates Rules 
5.37(e)(1)(C) and (D) \10\ and (e)(2)(B), (C) and (D) to reflect that 
Priority Orders, all other contra-side interest (including AIM 
responses and orders and quotes on the Book) and non-Priority Customer 
non-displayed Reserve Quantity pursuant to these Rules are allocated in 
a pro-rata manner. The proposed rule change also updates Rule 
5.39(e)(2)(C), which provides for generally similar order of 
allocations at the conclusion of a Solicitation Auction Mechanism 
(``SAM'' or ``SAM Auction''), to likewise reflect that non- Priority 
Customer non-displayed Reserve Quantity is allocated in a pro-rata 
manner.\11\ Currently, these Rules provide that Priority Orders and all 
other contra-side interest are allocated pursuant to the base 
allocation

[[Page 23455]]

algorithm applicable to the class pursuant to Rule 5.32(b) (i.e., 
either in time priority or in a pro-rata manner) \12\ and that non-
Priority Customer non-displayed Reserve Quantity is allocated in time 
priority. The Exchange notes that pro-rata allocation for Priority 
Orders and all other contra-side interest at the conclusion of an AIM 
Auction is consistent with the manner in which the same orders 
currently receive allocations at the conclusion of an AIM auction on 
the Exchange's affiliated options exchange, Cboe EDGX Exchange, Inc. 
(``EDGX Options''), pursuant to EDGX Options Rules 21.19(e)(1)(C) and 
(D) and (e)(2)(B) and (C).\13\ Pro-rata allocation is also consistent 
with the manner in which other options exchanges allocate agency orders 
at the conclusion of comparable price improvement auctions \14\ and 
solicitation auctions on those exchanges.\15\
---------------------------------------------------------------------------

    \10\ Rule 5.37(e)(1)(D) and (E), as a result of the addition of 
new Rule 5.37(e)(1)(B). See id.
    \11\ The proposed rule change also corrects an inadvertent error 
in Rule 5.39(e)(2)(B), that currently references EDGX Option ``Rule 
21.8(c)'' regarding pro-rata allocation of remaining contra-side 
interest. The proposed rule change corrects this incorrect reference 
to EDGX Option's pro-rata rule to appropriately reference ``a pro-
rata manner.'' The Exchange notes that Rule 5.39 was intended to be 
substantively identical to EDGX Options Rule 21.21 (EDGX Options 
SAM). See Securities and Exchange Act Release No. 87192 (October 1, 
2019), 84 FR 53525 (October 7, 2019) (SR-CBOE-2019-063).
    \12\ Rule 5.32(b) provides that the Exchange may determine that 
a class has a base algorithm of price-time (i.e., price time 
priority) (where the System prioritizes resting orders at the same 
price in the order in which the System received them) or pro-rata 
(where the System allocates orders resting at the same price 
proportionally according to size).
    \13\ Pursuant to EDGX Options Rules 21.19(e)(1)(C) and (D) and 
(e)(2)(B) and (C), Priority Orders or all other contra-side 
interest, as applicable, are allocated pursuant to Rule 21.8(c), 
which provides that all option classes on EDGX Options have a pro-
rata base algorithm for orders resting at the same best price. The 
Exchange notes that EDGX Options intends to submit a rule filing to, 
among other things, update its corresponding AIM and SAM allocation 
provisions to harmonize pro-rata allocation of non-Priority Customer 
non-displayed Reserve Quantity with the proposed changes herein.
    \14\ See Nasdaq ISE Options 3, Section 13(d)(3), which governs 
allocations at the conclusion of ISE's price improvement mechanism 
and allocates an agency order across non-Priority Customer interest 
``based upon the percentage of the total number of contracts 
available at the price that is represented by the size of such 
interest''; and MIAX Options Rule 515A(a)(2)(iii), which governs 
allocations at the conclusion of MIAX's price improvement mechanism 
and allocates an agency order across Professional interest on a pro-
rata basis.
    \15\ See Nasdaq ISE Options 3, Section 11(d)(3), which governs 
the allocations at the conclusion of ISE's solicitation mechanism 
and allocates an agency order across non-Priority Customer interest 
``based upon the percentage of the total number of contracts 
available at the best price that is represented by the size of the 
non-Priority Customer [interest]''.
---------------------------------------------------------------------------

    Second, the proposed rule change adopts new Rule 5.38(e)(4),\16\ 
which permits the Exchange to designate any exclusively listed index 
option class as eligible for Priority Complex Order Plus status, 
pursuant to which proposed Priority Complex Orders may receive Agency 
Order executions after Priority Customers at the conclusion of a C-AIM 
Auction. Specifically, proposed Rule 5.38(e)(4) provides that, if the 
Exchange designates a class as eligible for Priority Complex Order Plus 
status, Users with contra-side complex interest at the conclusion of 
the C-AIM Auction and displayed resting quotes and orders that were at 
a price equal to the BBO on the opposite side of the market from any of 
the components of the Agency Order at the time the C-AIM Auction 
commenced, have priority in their contra-side complex interest 
(``Priority Complex Orders'') up to their largest size in a BBO in a 
pro-rata manner (after Priority Customers have received allocations, as 
set forth in subparagraphs (e)(1) through (3) above). Priority Complex 
Order Plus status is only valid for the duration of the particular C-
AIM Auction. As a result of the proposed status, the proposed change 
also adopts new Rules 5.38(e)(1)(B) and 5.38(e)(2)(B),\17\ which 
provide for the allocation of Priority Complex Orders (in a pro-rata 
manner), if the Exchange has designated the class as eligible for 
Priority Complex Order Plus status, immediately following Priority 
Customer allocations and prior to any Initiating TPH allocations, 
pursuant to Rule 5.38(e)(1)(A) (if the C-AIM Auction results in no 
price improvement) and Rule 5.38(e)(2) (if the C-AIM Auction results in 
price improvement for the Agency Order and the Initiating TPH selected 
a single-price submission).
---------------------------------------------------------------------------

    \16\ The proposed rule change also updates the numbering of 
current Rule 5.38(e)(4) through (e)(6) to reflect the addition of 
new Rule 5.38(e)(4).
    \17\ The proposed rule change also updates the numbering of 
current Rule 5.38(e)(1)(B) through (e)(1)(D) and current Rule 
5.38(e)(2)(B) to reflect the addition of new Rules 5.38(e)(1)(B) and 
(e)(2)(B).
---------------------------------------------------------------------------

    The proposed Priority Complex Order Plus status and Priority 
Complex Orders in C-AIM Auctions will function in substantively the 
same manner in which Priority Order status (and Priority Order Plus 
status, as proposed) and Priority Orders currently function in AIM 
Auctions, and differ only to the extent that certain requirements or 
functionality differs for complex orders and C-AIM. Like Priority Order 
(and Priority Order Plus) status, Priority Complex Order Plus status 
allows for Users' to be given, at the conclusion of an auction, 
priority in their contra-side interest at each price level up to their 
size that existed at the best price level available at the start of an 
auction. Reference to Users' orders and quotes on the BBO (as opposed 
to the Initial NBBO for Priority Orders in an AIM Auction) for Priority 
Complex Order status is consistent with the permissible pricing and 
Customer Priority requirements for all complex orders, which consider 
the BBO of each component of a complex strategy.\18\ Priority Complex 
Orders are also allocated in a pro-rata manner, which is consistent 
with the manner that all non-Customer contra-side complex interest is 
currently allocated at the conclusion of a C-AIM Auction. Users contra-
side complex interest (which includes complex orders on the COB and C-
AIM responses) \19\ at the end of an auction will receive an allocation 
of the Agency Order up to their largest BBO size that existed at the 
time the C-AIM Auction commenced. For example, a complex Agency Order 
to sell 12 SPX JUN 2950 calls and buy 4 SPX MAY 2850 calls is submitted 
into C-AIM. At the time the C-AIM Auction commences a User has two 
orders at the best bid for the SPX JUN 2950 calls, an order for two 
contracts and an order for five contracts (for a total of seven 
contracts on the BBO). The User also has one order for 10 contracts at 
the best offer for the SPX MAY 2850 calls. If the User has any contra-
side complex interest at the time the C-AIM Auction concludes, then the 
User will receive up to 10 Agency Order contracts executed against the 
User's contra-side complex interest (after Agency Order executions are 
given to any Priority Customer complex orders on the COB) because the 
User's largest size on a BBO was 10-lot order at the best offer 
opposite the buy leg of the Agency Order.
---------------------------------------------------------------------------

    \18\ See Rule 5.33(f)(2)(A). The Exchange notes that the prices 
at which complex orders may execute is based on prices set in the 
simple market and the proposed Priority Complex Order Plus status 
allows those market participants that set the simple market prices 
which create permissible complex pricing to have priority in the 
complex market and is, thus, equivalent to AIM Priority Order 
status, providing a benefit to those market participants who set the 
market.
    \19\ See Rule 5.38(e).
---------------------------------------------------------------------------

    By permitting the Exchange to designate any exclusively listed 
index option class as eligible for Priority Order Plus and Priority 
Complex Order Plus status (collectively, ``Priority Plus'' statuses), 
the proposed rule change provides further incentive for market 
participants that set the market in eligible classes, as such market 
participants would receive priority over all other non-Customer contra-
side interest, including the Initiating Order, at the conclusion of an 
AIM or C-AIM auction. By allowing Priority Orders to receive allocation 
prior to the Initiating Order, the proposed Priority Plus statuses are 
designed to encourage competition and the provision of more aggressive 
prices in exclusively listed index options (as designated) displayed in 
the Exchange's Book. While the Exchange acknowledges that price 
improvement auctions have provided the market with benefits (such as

[[Page 23456]]

providing an efficient manner of access to liquidity for customers), 
the options industry overall has observed that quoted liquidity on the 
book has decreased, quotes have widened, and options market makers have 
reduced their participation in the market, which the Exchange believes 
has impacted market quality.\20\ By providing market participants, 
particularly Market-Makers and other liquidity providers, the 
opportunity to receive priority over the Initiating TPH in exclusively 
listed index classes if they post more aggressive markets, the Exchange 
believes the proposed rule change creates an AIM incentive allocation 
feature that may enhance displayed liquidity, provide for tighter 
markets, and ultimately provide better execution prices for all market 
participants in classes available exclusively for trading on the 
Exchange's marketplace.
---------------------------------------------------------------------------

    \20\ See Letter to Brett Redfearn, Director, Division of Trading 
& Markets, from Cboe Global Markets, Inc. the Listed Options Trading 
Committee of the Securities Industry and Financial Markets 
Association (``SIFMA''), and the Listed Options Committee of the 
Security Traders Association (``STA''), dated June 4, 2018, 
available at http://cdn.batstrading.com/resources/comment_letters/Cboe-Joint-Letter-with-SIFMA-and-The-STA-on-Options-Market-Structure.pdf.
---------------------------------------------------------------------------

    The Exchange likewise believes that updating the allocation of 
Priority Orders and other contra-side interest (including non-Priority 
Customer non-displayed Reserve Quantity) to be pro-rata for all AIM- or 
SAM-eligible classes (as applicable), as opposed to price-time, creates 
more appropriate incentives in connection with the Exchange's auctions, 
which are intended to encourage market participants to produce 
competitive bids and offers within the entirety of an auction, and thus 
ultimately increases price improvement opportunities in the auctions.
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.\21\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \22\ 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) \23\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes that by allowing the Exchange 
to permit Priority Orders and Priority Complex Orders, as proposed, to 
receive allocation of an Agency Order prior to any other non-Customer 
contra-side interest (including the Initiating Order), the proposed 
rule change will remove impediments to and perfect the mechanism of a 
free and open market and national market system, and, in general, 
protect investors. For classes in which Priority Plus status is 
enabled, interest of Users with orders and quotes displayed at the best 
bid or offer in the book will be prioritized higher at the conclusion 
of AIM and C-AIM auctions, namely, ahead of the Initiating Order, and 
thus possibly be allocated more contracts from an Agency Order than 
they otherwise would be. As such, the proposal is designed to create an 
AIM allocation incentive that encourages Market-Makers and other 
liquidity providers to quote more aggressively so that they have the 
opportunity for higher priority in the event an auction commences. As 
described above, price improvement auctions may have diminished the 
incentive for displayed liquidity provider participation in the options 
markets. The Exchange believes the proposed allocation status may 
incentivize participation on the Exchange at more aggressive and 
competitive prices by providing an opportunity for liquidity providers 
to receive priority ahead of an Initiating TPH if they have such quotes 
in the Book when an auction commences. The Exchange believes that this 
may increase competitive and meaningful quotes on the Exchange's 
displayed markets, which may enhance liquidity provide for tighter 
markets and ultimately result in better execution prices for customer 
orders (both submitted into auctions or to the Book), to the benefit of 
all investors.
    The proposed Priority Plus statuses will function in substantively 
the same manner as the currently Priority Order status available for 
AIM Auction allocations, allowing for Users to receive priority in 
their contra-side interest at each price level up to their size that 
existed at the best price level available at the start of an 
auction,\24\ but will just allow Users' Priority Orders to have a 
higher priority at the conclusion of an auction and will be available 
in any exclusively listed index option classes so designated by the 
Exchange.\25\ Complex Order Plus status differs only to the extent that 
certain requirements or functionality differs for complex orders and C-
AIM, in particular, reference to the BBO pricing and pro-rata 
allocation. The proposed Priority Plus statuses are consistent with the 
allocation rules and will continue to yield to Priority Customer 
allocations. The proposed rule change provides an additional benefit at 
the conclusion of AIM and C-AIM auctions to those market participants 
that set the market prices upon which auction prices must ultimately be 
based.\26\ The Exchange believes that further prioritizing the orders 
and quotes of Users that set the market will further incentivize 
liquidity providing market participants to increase their displayed 
liquidity at the best prices in eligible exclusively listed index 
option classes. An increase in displayed liquidity would encourage more 
participation overall on the Exchange, in turn contributing to 
increased levels of overall market quality to the benefit of all 
investors.
---------------------------------------------------------------------------

    \24\ See also supra note 7.
    \25\ The Exchange notes that, pursuant to proposed Rule 
5.37(e)(4), a class designated as eligible for one status (Priority 
Order or Priority Order Plus) is not eligible for the other status.
    \26\ See also supra note 18.
---------------------------------------------------------------------------

    In addition to this, the Exchange believes that updating the 
allocation of Priority Orders and other contra-side interest (including 
non-Priority Customer non-displayed Reserve Quantity) to be pro-rata 
for all AIM- or SAM-eligible classes (as applicable) serves to remove 
impediments to and perfect the mechanism of a free and open market and 
national market system because the proposed change is also designed to 
encourage increased participation at the best prices, resulting in 
enhanced liquidity, competition, and ultimately more price improvement 
opportunities, thereby benefitting investors. As stated above, the 
Exchange believes that providing allocations based on price and size, 
as opposed to price-time, creates more appropriate incentives in 
connection with the Exchange's auctions, which are designed to 
encourage price improvement. The Exchange believes allocating interest 
to market participants with the best-priced interest during the 
entirety of the auction rather than

[[Page 23457]]

allocating interest to the fastest responding market participants more 
appropriately encourages competitive pricing in an auction environment. 
Indeed, the Commission has previously asserted that it believes ``that 
allocations based on price/size priority are consistent with the Act'' 
and that it does not believe that a lack of time priority would 
discourage price competition in a price improvement auction.\27\ The 
proposed change also benefits investors by further harmonizing the 
auction rules across the Exchange and its affiliated options exchange, 
EDGX Options, which facilitates increased understanding of auction 
functionality for market participants and mitigates any potential 
confusion by removing discrepancies, where possible, between the two 
sets of rules governing auctions.\28\ Additionally, pro-rata allocation 
is also consistent with the manner in which other options exchanges 
allocate agency orders at the conclusion of their comparable price 
improvement auctions \29\ and solicitation auctions.\30\
---------------------------------------------------------------------------

    \27\ See Securities Exchange Act Release No. 50819 (December 8, 
2004), 69 FR 75093 (December 15, 2004) (SR-ISE-2003-06) (Order 
Granting Approval of Proposed Rule Change and Amendment No. 1 
Thereto and Notice of Filing and Order Granting Accelerated Approval 
to Amendments No. 2 and 3 Thereto by the International Securities 
Exchange, Inc. To Establish Rules Implementing a Price Improvement 
Mechanism).
    \28\ See also supra note 13.
    \29\ See supra note 14.
    \30\ See supra note 15.
---------------------------------------------------------------------------

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 on the purposes of the Act as the proposed Priority Plus 
statuses will be equally available and apply in the same manner to all 
orders and quotes resting in the Book or COB, as applicable, in an 
exclusively listed index option class the Exchange has designated as 
eligible for the status. The Exchange does not believe 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 the proposed rule change relates to Exchange-specific auction 
mechanisms in index option classes listed exclusively on the Exchange. 
The Exchange also notes that other options exchanges offer similar 
price improvement auctions \31\ that are available to market 
participants, and other options exchanges may, in their discretion, 
adopt similar priority order statuses in connection with allocations at 
the conclusion of their auctions. Additionally, the Exchange believes 
it is appropriate to limit Priority Order Plus status to exclusively 
listed index option classes because they only trade on the Exchange (or 
an affiliated Cboe options exchange). The proposal is designed to 
incentivize competitive quoting in the Exchange's displayed marketplace 
in connection with its auctions. Other options exchanges may propose a 
similar allocation incentive for any classes that trade on those 
exchanges.
---------------------------------------------------------------------------

    \31\ See e.g., supra note 14; BOX Options' Price Improvement 
Period (``PIP'') available at https://boxoptions.com/about/price-improvement; and Complex Order Price Improvement Period (``COPIP'') 
available at https://boxoptions.com/about/complexorder-description/; 
and MIAX Options' Price Improvement Mechanism (``PRIME'') and 
Complex Price Improvement Mechanism (``cPRIME'') available at 
https://www.miaxoptions.com/sites/default/files/knowledge-center/2017-07/MIAX_PRIME_07212017.pdf.
---------------------------------------------------------------------------

    Additionally, the proposed pro-rata allocations for Priority Orders 
and other contra-side interest (including non-Priority Customer non-
displayed Reserve Quantity) will apply equally to all such orders at 
the conclusion of an AIM or SAM Auction (as applicable). The Exchange 
notes pro-rata allocation is currently applied to all Priority Orders 
and other contra-side interest at the conclusion of an AIM auction on 
EDGX Options \32\ and at the conclusion of price improvement and 
solicitation auctions on other options exchanges.\33\
---------------------------------------------------------------------------

    \32\ See supra note 13. The Exchange notes that EDGX Options 
also intends to submit a rule filing to, among other things, update 
the allocation of non-Priority Customer non-displayed Reserve 
Quantity to pro-rata in order to more closely align its AIM and SAM 
rules with Cboe Options.
    \33\ See supra notes 14 and 15.
---------------------------------------------------------------------------

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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-CBOE-2021-025 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-2021-025. 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-2021-025, and

[[Page 23458]]

should be submitted on or before May 24, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09132 Filed 4-30-21; 8:45 am]
BILLING CODE 8011-01-P


