[Federal Register Volume 86, Number 203 (Monday, October 25, 2021)]
[Notices]
[Pages 58975-58978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-23141]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93386; File No. SR-CFE-2021-008]


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

October 19, 2021.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 5, 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 
October 5, 2021.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 7 U.S.C. 7a-2(c).
---------------------------------------------------------------------------

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.

[[Page 58976]]

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 Section E of P&P XVIII 
in the following manner.
    The title of Section E of P&P XVIII is currently ``Orders entered 
by mistake.'' The proposed rule change proposes to revise the title of 
Section E of P&P XVIII to be ``Orders entered by mistake or error'' to 
clarify that Section E of P&P XVIII covers Orders entered either by 
mistake or error. The Exchange considers the terms ``mistake'' and 
``error'' to be synonyms for one another while recognizing that a 
mistake may be more associated with human action while an error may be 
more associated with system behavior. To the extent that there is a 
difference between the two terms and that Section E of P&P XVIII refers 
to ``errors'' within the text of the provision, the Exchange is making 
this change to make clear that a mistake is encompassed within the 
references to ``errors'' in the text of the provision.
    The first sentence of Section E of P&P XVIII currently provides 
that: ``An unintentional, accidental, or `fat-finger' Order will not 
constitute a violation of Rule 620, but such activity may be a 
violation of other Exchange rules, including, but not limited to, Rule 
608 (Acts Detrimental to the Exchange; Acts Inconsistent with Just and 
Equitable Principles of Trade; Abusive Practices).'' The proposed rule 
change proposes to insert the word ``typically'' after the word ``not'' 
so that the sentence provides that an unintentional, accidental, or 
``fat-finger'' Order will not typically constitute a violation of Rule 
620, but such activity may be a violation of other Exchange rules, 
including, but not limited to, Rule 608.
    The second sentence of Section E of P&P XVIII currently provides 
that: ``Market participants are expected to take steps to mitigate the 
occurrence of errors, and their impact on the market.'' The proposed 
rule change proposes to further flesh out this sentence by revising it 
to provide that: ``Market participants are expected to take reasonable 
steps or otherwise have controls to prevent, detect and mitigate the 
occurrence of errors, market disruptions and system anomalies and their 
impact on the market.'' This proposed additional language clarifies 
that market participants are expected to take reasonable steps or to 
otherwise have controls in place to prevent, detect, and mitigate the 
occurrence of errors, market disruptions and system anomalies, and 
their impact on the market.
    The proposed rule change proposes to add the following sentence at 
the end of Section E of P&P XVIII in reference to the second sentence 
of Section E of P&P XVIII: ``Failure to take reasonable steps to 
prevent, detect and mitigate such errors, market disruptions, system 
anomalies or impacts may violate Rule 609 (Supervision) or other 
Exchange rules.'' This sentence is intended to provide additional 
clarity to market participants about how P&P XVIII interacts with other 
CFE rules.
    Section K of P&P XVIII describes factors that may be considered in 
determining whether a market participant intended to disrupt the 
orderly conduct of trading or the fair execution of transactions or 
demonstrated a reckless disregard for the orderly conduct of trading or 
the fair execution of transactions. CFE is proposing to amend Section K 
of P&P XVIII to provide that additional factors that may be considered 
in this regard include, but are not limited to, the impact to other 
market participants' ability to trade, engage in price discovery, or 
manage risk. CFE believes that the addition of these added non-
exhaustive factors will provide further clarity regarding how CFE 
determines whether a market participant intended to disrupt, or 
demonstrated a reckless disregard for, the orderly conduct of trading 
or the fair execution of transactions.
    CFE also proposes to make the following clarifying updates to the 
provisions of Section U of P&P XVIII.
    The title of Section U of P&P XVIII is currently ``Submission of 
partial messages to reduce latency or purposeful corruption of data 
packets.'' The proposed rule change proposes to revise the title of 
Section U of P&P XVIII to be ``Submission of partial messages to reduce 
latency or purposeful submission of intentionally corrupted or 
malformed data packets.''
    The second sentence of Section U of P&P XVIII currently provides 
that: ``Purposefully corrupting or constructing malformed data packets 
also has the potential to disrupt the systems of the Exchange.'' The 
proposed rule change proposes to revise this sentence to provide that: 
``Purposefully submitting intentionally corrupted or malformed data 
packets also has the potential to disrupt the systems of the 
Exchange.''
    The proposed revisions to Section U of P&P XVIII are intended 
clarify that activity within the scope of Section U of P&P XVIII 
relating to corrupted or malformed data packets involves the purposeful 
submission of intentionally corrupted or malformed data packets.
    CFE also is proposing to add an example of prohibited activity 
under Rule 620. In particular, P&P XVIII includes a non-exhaustive list 
of various examples of conduct that may be found to violate Rule 620. 
The additional example provides a specific illustration of a trading 
strategy that may violate Rule 620 which involves purposefully 
submitting malformed data packets to CFE's trading system (``CFE 
System'') as part of a trading strategy to reduce latency. In 
particular, this type of trading strategy may violate Rule 620(b)(iv) 
which provides 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.
    The proposed additional 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 submit 
malformed data across one or more physical connections to the Exchange. 
For example, based on information received, the participant's trading 
system begins constructing an order message (e.g., an Ethernet Frame, 
TCP or IP packet, etc.). The trading system is designed so that if 
further information is received during construction that negates the 
desire or need to trade the order being constructed, the trading system 
will stop construction and submit the incomplete data to the Exchange.

[[Page 58977]]

Because the incomplete data (e.g., a TCP/IP packet missing required TCP 
or IP fields such as Sequence Number or Destination Port) cannot be 
properly processed by a network switch or receiving device at the 
logical or physical entry point to the CFE System, the receiving device 
will discard the data. If no further information is received by the 
trading system during construction that would negate the desire or need 
to trade the order, the trading system will complete construction of, 
and submit, the data so that an Order message from the trading system 
is able to reach the CFE System. The practice of submitting to the 
Exchange purposefully incomplete or malformed data packets has the 
potential to disrupt the systems of the Exchange and may violate Rule 
620(b)(iv).
    The purposeful submission of intentionally corrupted or malformed 
data packets has the potential to impact the systems of the Exchange 
and the Exchange believes that this activity serves no useful purpose. 
Accordingly, the proposed rule change further clarifies how this type 
of activity may violate Rule 620 and P&P XVIII.
    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 trading practices.
---------------------------------------------------------------------------

    \3\ These DCMs are ICE Futures U.S., Inc. (``ICE''), 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., ICE 
Submission 21-44 (June 22, 2021) and CME Submission No. 20-306 (July 
16, 2021), which are available on the CFTC website.
---------------------------------------------------------------------------

    CFE also believes that the proposed rule change is consistent with 
the Electronic Trading Risk Principles recently adopted by the CFTC.\4\ 
The Electronic Trading Risk Principles are intended to address the 
potential risk of a DCM's trading platform experiencing a market 
disruption or system anomaly due to electronic trading. For example, 
CFTC Regulation 38.251(e) \5\ provides that a DCM must adopt and 
implement rules governing market participants subject to its 
jurisdiction to prevent, detect, and mitigate market disruptions or 
system anomalies associated with electronic trading. The proposed rule 
change furthers the goals of the Electronic Trading Risk Principles by 
making clear, among other things, (i) that market participants are 
expected to take reasonable steps or otherwise have controls to 
prevent, detect, and mitigate the occurrence of errors, market 
disruptions, and system anomalies and their impact on the market and 
(ii) that factors which may be considered in determining whether a 
market participant intended to disrupt, or demonstrated a reckless 
disregard for, the orderly conduct of trading or the fair execution of 
transactions include, but are not limited to, the impact to other 
market participants' ability to trade, engage in price discovery, or 
manage risk.
---------------------------------------------------------------------------

    \4\ See CFTC Final Rule regarding Electronic Trading Risk 
Principles, 86 FR 2048 (January 11, 2021).
    \5\ 17 CFR 38.251(e).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\6\ in general, and furthers the 
objectives of Sections 6(b)(1) \7\ and 6(b)(5) \8\ in particular, in 
that it is designed:
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(1).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

     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,
     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, CFE Rule 608 (Acts Detrimental to the Exchange, Acts 
Inconsistent with Just and Equitable Principles of Trade; Abusive 
Practices) and CFE Rule 609 (Supervision). 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 purposefully submitting intentionally 
corrupted or malformed data packets 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 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 operation of the Exchange or the ability of other market 
participants to trade, engage in price discovery, or manage risk.
    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

[[Page 58978]]

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 October 20, 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.\9\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

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 [email protected]. Please include 
File Number SR-CFE-2021-008 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-2021-008. 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-2021-008, and should be submitted on 
or before November 15, 2021.
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(73).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-23141 Filed 10-22-21; 8:45 am]
BILLING CODE 8011-01-P


