[Federal Register Volume 86, Number 119 (Thursday, June 24, 2021)]
[Notices]
[Pages 33425-33427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13244]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92203; File No. SR-CBOE-2021-025]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend Cboe Rules 5.37 and 5.38 in Connection With Allocations 
at the Conclusion of the Exchange's Automated Improvement Mechanism 
(``AIM'') and Complex AIM (``C-AIM'') Auctions

June 17, 2021.

I. Introduction

    On April 14, 2021, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') 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 adopt a Priority Order Plus status in 
connection with the allocation of exclusively listed index option 
classes at the conclusion of the Exchange's Automated Improvement 
Mechanism (``AIM'' or ``AIM Auction'') and Complex AIM (``C-AIM'' or 
``C-AIM Auction'') auctions. The proposed rule change was published for 
comment in the Federal Register on May 3, 2021.\3\ The Commission 
received no comments regarding the proposal. On June 8, 2021, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\4\ The 
Commission is approving the proposed rule change.
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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. 91689 (April 27, 
2021), 86 FR 23453 (``Notice'').
    \4\ In Amendment No. 1, the Exchange updated Exhibit 5 of the 
proposed rule change to reflect another proposed rule change 
unrelated to this proposed rule change. Because Amendment No. 1 is a 
technical amendment that does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
it is not subject to notice and comment. Amendment No. 1 to the 
proposed rule change is available on the Commission's website at: 
https://www.sec.gov/rules/sro/cboe.htm#SR-CBOE-2021-025.

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[[Page 33426]]

II. Description of the Proposed Rule Change

    The AIM and C-AIM are electronic auctions intended to provide an 
Agency Order with the opportunity to receive price improvement (over 
the National Best Bid or Offer (``NBBO'') in AIM, or the synthetic best 
bid or offer (``SBBO'') on the Exchange in C-AIM).\5\ Upon submitting 
an Agency Order into one of these auctions, 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. Upon commencement of an auction, market 
participants may submit responses to trade against the agency order. At 
the conclusion of the auction, the System \6\ allocates the Agency 
Order, taking into account all auction responses, unrelated orders, and 
quotes.\7\ Depending on the contra-side interest available, the 
Initiating Order may be allocated a certain percentage of the Agency 
Order.\8\ 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,\9\ 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 each side of the Complex Order Book (``COB'') at the 
conclusion of the C-AIM Auction.
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    \5\ See Rules 5.38 (AIM) and 5.38 (C-AIM).
    \6\ The term ``System'' means the Exchange's hybrid trading 
platform that integrates electronic and open outcry trading of 
option contracts on the Exchange, and includes any connectivity to 
the foregoing trading platform that is administered by or on behalf 
of the Exchange, such as a communications hub. See Rule 1.1.
    \7\ See Rules 5.37(e) and 5.38(e).
    \8\ Id.
    \9\ The term ``Initial NBBO'' means the national best bid or 
national best offer at the time an Auction is initiated. See Rule 
5.37.
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    Currently, the Exchange may offer Priority Order \10\ status to 
Users \11\ for allocations at the conclusion of an AIM Auction. If the 
Exchange designates a class as eligible for Priority Order status, then 
at the conclusion of an AIM Auction, Users with Priority Orders receive 
executions against the Agency Order after Priority Customers \12\ and 
the Initiating TPH have received their Agency Order allocations.\13\ 
Priority Order status is only valid for the duration of the particular 
AIM Auction.\14\
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    \10\ The term ``Priority Order'' refers to displayed resting 
quotes and orders that were at a price equal to the Initial NBBO on 
the opposite side of the market form the Agency Order. See Rule 
5.37(e)(4). See also Securities Exchange Release No. 87972 
(September 24, 2019), 84 FR 51673, 51678 (September 30, 2019) 
(defining the term ``Priority Order'' and providing that these 
orders will have priority at each price level).
    \11\ The term ``User'' means any TPH or Sponsored User who is 
authorized to obtain access to the System pursuant to Rule 5.5. See 
Rule 1.1.
    \12\ The term ``Priority Customer'' means a person or entity 
that is a Public Customer and is not a Professional. See Rule 1.1.
    \13\ 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).
    \14\ The Exchange states that Priority Order status is currently 
activated for numerous classes in AIM.
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    The Exchange proposes to adopt a new Priority Order Plus status in 
connection with the allocation of exclusively listed index option 
classes at the conclusion of the Exchange's AIM and C-AIM auctions. 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.\15\
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    \15\ See Notice, supra note 3, at 23453, n.3. The Exchange 
states that 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. See id.
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A. Priority Order Plus and Priority Order Status in AIM

    Proposed Rule 5.37(e)(4) would provide 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 would not be 
eligible for the other status.\16\ If the Exchange designates a class 
as eligible for Priority Order Plus or Priority Order status, Users 
would have priority for their contra-side interest Priority Orders up 
to their size in the Initial NBBO at each price level at or better than 
the Initial NBBO.\17\ Each status is only valid for the duration of the 
particular AIM Auction.\18\
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    \16\ See Proposed Rule 5.37(e)(4).
    \17\ See id.
    \18\ See id.
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    The proposed rule change amends Rule 5.37(e)(1)(B), which describes 
the allocation priority where the AIM results in no price improvement 
to the Agency Order, to provide that Users with Priority Order Plus 
status may be allocated directly following Priority Customer 
allocations but prior to Initiating TPH allocations. The proposed rule 
change also amends Rule 5.37(e)(2)(B), which sets forth the allocation 
priority where the AIM results in price improvement and the Initiating 
TPH has selected a single-price submission, to provide that Users with 
Priority Order status or Priority Order Plus status (as designated by 
the Exchange) may be allocated directly following Priority Customer 
allocations.
    Additionally, proposed Rule 5.37(e)(1)(B) would provide 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) 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.\19\
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    \19\ 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.
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B. Priority Complex Order Plus Status in C-AIM

    With respect to allocation priority in C-AIM, the proposed Rule 
5.38(e)(4) would permit 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 (``Priority Complex Orders''), have priority in their contra-
side complex interest 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.\20\ The proposed change also adopts new Rules 
5.38(e)(1)(B) and 5.38(e)(2)(B),\21\ which provide for the allocation 
of Priority

[[Page 33427]]

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).
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    \20\ See proposed Rule 5.38(e)(4).
    \21\ 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).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\22\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\23\ 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, and that the 
rules of a national securities exchange not be designed to permit 
unfair discrimination between customers, issuers, brokers or dealers. 
The Commission believes that the proposed new Priority Order Plus 
allocation status may encourage further competition in the AIM and C-
AIM in exclusively listed classes, by encouraging aggressive quoting 
from Users. According to the Exchange, price improvement auctions have 
provided the market with benefits (such as providing an efficient 
manner of access to liquidity for customers), however, 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.\24\ 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 
Commission believes the potential for increased competition within an 
individual AIM or C-AIM auction 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.
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    \22\ 15 U.S.C. 78f(b). 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).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 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.
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    While the Commission recognizes that the loss of Initiating TPH 
priority to Users with Priority Order Plus status may potentially 
result in fewer auctions being initiated, the Commission believes that 
those individual auctions should be more competitive, as Users may be 
encouraged by the prospect of Priority Order Plus status to submit 
competitive orders/quotes. This may benefit the Agency Order by 
providing more opportunity for price improvement within an individual 
auction. The AIM Auction in particular should benefit from potentially 
increased competition, especially since the AIM Auction no longer 
provides guaranteed price improvement for smaller orders (except where 
the NBBO spread is $0.01).\25\
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    \25\ See Securities Exchange Act Release No. 91609 (April 19, 
2021), 86 FR 21773 (April 23, 2021) (SR-CBOE-2021-024).
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    The Commission also 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, may 
enhance competition by encouraging market participants to bring more 
liquidity into the auctions and provide competitive bids and offers 
throughout an auction. The Commission notes that pro-rata allocation is 
consistent with the manner in which other options exchanges allocate 
agency orders at the conclusion of comparable price improvement 
auctions \26\ and solicitation auctions on those exchanges.\27\ 
Further, the proposed 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'').\28\
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    \26\ 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.
    \27\ 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]''.
    \28\ Pursuant to EDGX Options Rules 21.19(e)(1)(C)-(D) and 
(e)(2)(B)-(C), Priority Orders or all other contra-side interest, as 
applicable, are allocated pursuant to EDGX Options 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.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-CBOE-2021-025), is approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13244 Filed 6-23-21; 8:45 am]
BILLING CODE 8011-01-P


