[Federal Register Volume 86, Number 227 (Tuesday, November 30, 2021)]
[Notices]
[Pages 68001-68004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25989]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93655; File No. SR-CBOE-2021-046]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend Cboe Rule 5.4 and Make Corresponding 
Changes to Other Rules

November 23, 2021.

I. Introduction

    On August 6, 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 allow all complex orders to be quoted and 
executed in $0.01 increments.\3\ The

[[Page 68002]]

proposed rule change was published for comment in the Federal Register 
on August 25, 2021.\4\ The Commission received two comment letters 
regarding the proposal.\5\ Cboe responded to the comments on September 
23, 2021.\6\ On September 28, 2021, pursuant to Section 19(b)(2) of the 
Act,\7\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\8\ On November 1, 2021, the Exchange filed 
Amendment No. 1 to the proposed rule change.\9\ This order institutes 
proceedings pursuant to Section 19(b)(2)(B) of the Act \10\ to 
determine whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``complex order'' means an order involving the 
concurrent execution of two or more different series in the same 
underlying security or index (the ``legs'' or ``components'' of the 
complex order), for the same account, occurring at or near the same 
time and for the purpose of executing a particular investment 
strategy with no more than the applicable number of legs (which 
number the Exchange determines on a class-by-class basis). The 
Exchange determines in which classes complex orders are eligible for 
processing. Unless the context otherwise requires, the term complex 
order includes stock-option orders and security future-option 
orders. For purposes of Rules 5.33 and 5.85(b)(1), the term 
``complex order'' means a complex order with any ratio equal to or 
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00), an Index Combo order, a stock-option order, or a 
security future-option order. For the purpose of applying these 
ratios to complex orders comprised of legs for both mini-options and 
standard options, ten mini-option contracts represent one standard 
option contract. For the purpose of applying these ratios to complex 
orders comprised of legs for both micro-options and standard 
options, 100 micro-option contracts represent one standard option 
contract. See Cboe Rule 1.1.
    \4\ See Securities Exchange Act Release No. 92709 (August 19, 
2021), 86 FR 47529 (``Notice'').
    \5\ See letter to Vanessa Countryman, Secretary, Commission, 
from Alanna Barton, General Counsel, BOX Exchange LLC, dated 
September 14, 2021 (``BOX Letter''); and letter from Mary Smith, 
dated August 19, 2021 (``Smith Letter''). Comments received 
regarding the proposal are available on the Commission's website at: 
https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm.
    \6\ See letter to Vanessa Countryman, Secretary, Commission, 
from Laura G. Dickman, Vice President and Associate General Counsel, 
Cboe Options, dated September 23, 2021 (``Exchange Response''). The 
Exchange Response is available on the Commission's website at: 
https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm.
    \7\ 15 U.S.C. 78s(b)(2).
    \8\ See Securities Exchange Act Release No. 93159 (September 28, 
2021), 86 FR 54780 (October 4, 2021). The Commission designated 
November 23, 2021, as the date by which the Commission shall approve 
or disapprove, or institute proceedings to determine whether to 
approve or disapprove, the proposed rule change.
    \9\ Amendment No. 1 revises the proposal to provide rationale 
for allowing complex orders with any ratio equal to or greater than 
one-to-three and less than or equal to three-to-one to trade 
electronically; provide information regarding the number of 
additional contracts that would be permitted to trade in $0.01 
increments under the proposal; and express the view that the rules 
of another options exchange do not clearly specify the minimum 
trading increment applicable to complex orders traded on that 
exchange's trading floor. Amendment No. 1 is available on the 
Commission's website at https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm.
    \10\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    Currently, Exchange Rule 5.4 provides that, except as provided in 
Exchange Rule 5.33, the minimum increment for bids and offers on 
complex orders with any ratio equal to or greater than one-to-three and 
less than or equal to three-to-one for equity and index options, and 
Index Combo orders, is $0.01 or greater, which the Exchange may 
determine on a class-by-class basis, and the legs may be executed in 
$0.01 increments. The rule further provides that the minimum increment 
for bids and offers on complex orders with any ratio less than one-to-
three or greater than three-to-one for equity and index options (except 
for Index Combo orders) is the standard increment for the class 
pursuant to Exchange Rule 5.4(a), and the legs may be executed in the 
minimum increment applicable to the class pursuant to Exchange Rule 
5.4(a).\11\ The Exchange proposes to amend Exchange Rule 5.4(a) to 
allow complex orders with any ratio to be quoted in increments of $0.01 
or greater, as determined by the Exchange on a class-by-class basis, 
and executed in $0.01 increments.
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    \11\ The minimum increment for bids and offers on complex orders 
in options on the S&P 500 Index (SPX) or on the S&P 100 Index (OEX 
and XEO), except for box/roll spreads, is $0.05 or greater, or any 
increment, which the Exchange may be determine on a class-by-class 
basis. See Cboe Rule 5.4(a).
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    The Exchange states that if complex orders cannot be expressed in 
increments smaller than the increment for the class (such as $0.05), it 
may be difficult for brokers to obtain the desired prices for their 
customers' complex orders because the parties to a trade must perform 
complicated and time-consuming calculations to break down the orders 
into the required contract quantities and prices to fit within the 
constraint of executing the orders at a minimum increment other than 
$0.01.\12\ In addition, the Exchange notes that the calculation process 
for larger-ratio complex orders is time-consuming because these orders 
generally are entered in large quantities with a large number of 
legs.\13\ As a result, brokers executing larger-ratio complex orders on 
active trading days cannot be as efficient in representing other 
customer orders they are holding.\14\ The Exchange states that the 
proposal to allow larger-ratio complex orders to be quoted and executed 
in $0.01 increments will provide market participants with flexibility 
in pricing their investment strategies and allow Trading Permit Holders 
(``TPHs'') to execute these orders more efficiently and at better 
prices for their customers.\15\
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    \12\ See Notice, 86 FR at 47530.
    \13\ See Exchange Response at 4.
    \14\ See Notice, 86 FR at 47530.
    \15\ See id. at 47530-1.
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    The Exchange notes that, in general, because fewer than one third 
of complex orders executed on the Exchange's trading floor have ratios 
greater than three-to-one, a significant majority of the complex orders 
traded on the Exchange are eligible to execute in pennies.\16\ 
Accordingly, if the proposal increases the number of complex orders 
submitted with ratios greater than three-to-one (and thus the number of 
orders that may trade in pennies), the Exchange believes that any 
increase would represent a nominal increase in the volume that would be 
eligible to execute in pennies.\17\
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    \16\ See Amendment No. 1 at 4.
    \17\ See id.
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    Currently, the Exchange permits complex orders with any ratio less 
than one-to-three or greater than three-to-one to trade only on the 
Exchange's trading floor.\18\ The Exchange proposes to allow these 
larger-ratio orders to be traded electronically, as well as in open 
outcry.\19\ The Exchange states that electronic trading of larger-ratio 
complex orders will provide investors with additional flexibility in 
executing these orders and will increase the investment strategies 
available to investors who prefer to or solely trade 
electronically.\20\
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    \18\ See Notice, 86 FR at 47529.
    \19\ See id. at n. 6.
    \20\ See Amendment No. 1 at 5.
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    The Exchange asserts that it is unlikely that market participants 
would submit orders with any ratio equal to or greater than one-to-
three and less than or equal to three-to-one that is not a bona fide 
trading strategy solely for the purpose of trading in $0.01 
increments.\21\ The Exchange states that it is unlikely that other 
market participants would be willing to execute against an order that 
is not a bona fide trading strategy, thereby reducing the likelihood 
that a market participant would be able to execute such a strategy.\22\ 
The Exchange further states that adding an extra leg to a large order 
to be able to improve the book by $0.01 would be unnecessary because 
such order could be executed in an AIM Auction in $0.01 increments.\23\ 
In addition, the Exchange notes that these orders would be subject to 
review by the

[[Page 68003]]

Exchange's regulatory division, which could determine that the 
submission of such orders was in violation of the Exchange's rules, 
including Exchange Rule 8.1, which prohibits TPHs from engaging in acts 
or practices inconsistent with just and equitable principles of 
trade.\24\
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    \21\ See Notice, 86 FR at 47531.
    \22\ See id.
    \23\ See id.
    \24\ See id.
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    The proposal does not extend the complex order priority provisions 
applicable to complex orders with any ratio equal to or greater than 
one-to-three and less than or equal to three-to-one to complex orders 
with any ratio less than one-to-three or greater than three-to-one.\25\ 
The proposal amends Exchange Rule 5.33(f)(2)(A)(v) to provide that a 
complex order that has any ratio less than one-to-three or greater than 
three-to-one will not execute at a net price that would cause any 
component of the complex strategy to be executed at a price ahead of a 
Priority Customer order on the Simple Book \26\ without improving the 
BBO \27\ of each component of the complex strategy with a Priority 
Customer order at the BBO.\28\ As a result, a complex order with any 
ratio less than one-to-three or greater than three-to-one may be 
executed at a net debit or credit price only if each leg of the order 
betters the corresponding bid (offer) of a Priority Customer order(s) 
in the Simple Book.\29\ Accordingly, the Exchange states that the 
complex order priority rules will continue to protect Priority Customer 
interest on the Simple Book.\30\
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    \25\ See Notice, 86 FR at 47530.
    \26\ The Simple Book is the electronic book of simple orders and 
quotes maintained by the System, which single book is used during 
both the Regular Trading Hours and Global Trading Hours trading 
sessions. See Exchange Rule 1.1.
    \27\ The BBO is the best bid or offer disseminated on the 
Exchange.
    \28\ See Exchange Rule 1.1. Exchange Rule 5.33(f)(2)(A)(v) will 
continue to provide that a complex order that has any ratio equal to 
or greater than one-to-three and less than or equal to three-to-one, 
or an Index Combo order, will not execute at a net price that would 
cause any component of the complex strategy to be executed at a 
price ahead of a Priority Customer Order on the Simple Book without 
improving the BBO of at least one component of the complex strategy.
    \29\ See Notice, 86 FR at 47530.
    \30\ See id.
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III. Summary of Comments and Exchange's Response

    The Commission received two comment letters regarding the 
proposal.\31\ One commenter states that the proposal would solely 
benefit high-speed traders and result in worse prices for retail 
traders due to decreased quotes.\32\
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    \31\ See supra note 5.
    \32\ See Smith Letter.
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    The Exchange states that the proposal is designed to increase the 
efficiency of trading larger-ratio, highly complex orders and is not 
intended to benefit high-speed traders.\33\ The Exchange further states 
that the proposal has minimal relevance to high-speed traders, who 
generally participate in listed options trading as market makers rather 
than as brokers conducting agency businesses.\34\ The Exchange 
concludes that the proposal ``will have minimal impact on either high-
speed traders or retail traders (or on the simple market), as it is 
intended to increase the efficiency and precision available to brokers 
attempting to execute highly complicated yet bona-fide multi-leg option 
strategies on the Exchange, which strategies are not common among high-
speed traders or retail traders.'' \35\ In addition, the Exchange notes 
that the proposal is unrelated to quoting and that the increased number 
of complex orders that would be eligible for more flexible pricing 
under the proposal could increase the number of complex orders entered 
on the Exchange that may leg into the Simple Book, thereby increasing 
execution opportunities for resting customer orders.\36\
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    \33\ See Exchange Response at 1-2.
    \34\ See id. at 2.
    \35\ Id. at 3-4.
    \36\ See id. at 2.
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    Another commenter states that, contrary to statements in the 
proposal, each component leg of s of a multi-leg Qualified Open Outcry 
Order (``QOO'') on the BOX Exchange LLC's (``BOX'') trading floor 
respects the minimum trading increment for the series (e.g., $0.01, 
$0.05, $0.10).\37\ The commenter further states that multi-leg QOO 
Orders do not meet the definition of Complex QOO Order and are treated 
like single-leg QOO Orders for purposes of execution and priority.\38\
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    \37\ See BOX Letter at 1.
    \38\ See id.
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    In its response, the Exchange states that multiple TPHs who are 
also members of BOX informed the Exchange that multi-legged orders with 
ratios greater than three-to-one or less than one-to-three are executed 
regularly on BOX's trading floor in penny increments.\39\ The Exchange 
also expressed the view that BOX's rules lack clarity regarding the 
increments applicable to QOO Orders that do not satisfy the definition 
of a complex order in BOX Rule 7240(a)(7).\40\
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    \39\ See Exchange Response at 4.
    \40\ See id. at 4-5. See also Amendment No. 1 at 6-7.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2021-046 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \41\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \41\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\42\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act,\43\ 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,'' \44\ and 
not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.\45\ The proposal would allow a complex 
order with any ratio less than one-to-three or greater than three-to-
one to be quoted and executed in $0.01 increments, regardless of the 
trading increment for the class. Thus, the component series of a 
complex order with any ratio less than one-to-three or greater than 
three-to-one in a class that trades in $0.05 increments would be able 
to trade in $0.01 increments, while single-leg orders in those series 
would trade in $0.05 increments. The Commission believes that questions 
are raised as to whether this disparity in trading increments could 
disadvantage market participants trading single-leg orders in classes 
with a standard trading increment of $0.05 or $0.10.
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    \42\ Id.
    \43\ 15 U.S.C. 78f(b)(5).
    \44\ Id.
    \45\ See id.

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V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with Section 6(b)(5) or any other provisions of the Act, 
or rules and regulations thereunder. Although there do not appear to be 
any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of data, views, and arguments, the 
Commission will consider, pursuant to Rule 19b-4 under the Act,\46\ any 
request for an opportunity to make an oral presentation.\47\
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    \46\ 17 CFR 240.19b-4.
    \47\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by December 21, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
January 4, 2022. The Commission asks that commenters address the 
sufficiency and merit of the Exchange's statements in support of the 
proposal, in addition to any other issues raised by the proposed rule 
change raised under 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 No. SR-CBOE-2021-046 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 No. SR-CBOE-2021-046. The 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 No. SR-CBOE-2021-046 and should be submitted by 
December 21, 2021. Rebuttal comments should be submitted by January 4, 
2022.
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    \48\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25989 Filed 11-29-21; 8:45 am]
BILLING CODE 8011-01-P


