[Federal Register Volume 87, Number 43 (Friday, March 4, 2022)]
[Notices]
[Pages 12521-12523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04566]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94329; File No. SR-CboeEDGX-2022-007]


Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Modify How Drill-Through Price Protection Applies to Users' Orders When 
Multiple Stop Orders and Stop-Limit Orders Are Triggered by the Same 
Price

February 28, 2022.
    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 February 17, 2022, Cboe EDGX Exchange, Inc. (the ``Exchange'' 
or ````EDGX'''') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe EDGX Exchange, Inc. (``EDGX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (the ``Commission'') a 
proposal to modify how Drill-Through Price protection applies to Users' 
\5\ orders when multiple Stop Orders and Stop-Limit Orders are 
triggered by the same price. The text of the proposed rule change is 
provided in Exhibit 5.
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    \5\ The term ``User'' shall mean any Member or Sponsored 
Participant who is authorized to obtain access to the System 
pursuant to Rule 11.3. See Rule 1.5(ee).
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    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), 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 purpose of this rule filing is to amend current Rule 21.17, 
Additional Price Protection Mechanisms and Risk Controls, to add new 
Rule 21.17(a)(4)(C), which modifies what the Drill-Through Price will 
be for Stop Orders \6\ and Stop-Limit Orders \7\ when multiple Stop 
Orders Stop-Limit Orders are triggered by the same stop price specified 
by Users.
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    \6\ A Stop Order is order is an order that becomes a Market 
Order when the stop price is elected. A Stop Order to buy is elected 
when the consolidated last sale in the option occurs at or above, or 
the NBB is equal to or higher than, the specified stop price. A Stop 
Order to sell is elected when the consolidated last sale in the 
option occurs at or below, or the NBO is equal to or lower than, the 
specified stop price. Users may not designate bulk messages as Stop 
Orders. See 21.1(d)(11).
    \7\ A ``Stop-Limit'' Order is an order that becomes a limit 
order when the stop price is elected. A Stop Limit Order to buy is 
elected and becomes a buy limit order when the consolidated last 
sale in the option occurs at or above, or the NBB is equal to or 
higher than, the specified stop price. A Stop Limit Order to sell is 
elected and becomes a sell limit order when the consolidated last 
sale in the option occurs at or below, or the NBO is equal to or 
lower than, the specified stop price. Users may not designate a Stop 
Limit Order as All Sessions. Users may not designate bulk messages 
as Stop Limit Orders. See 21.1(d)(12).
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    Drill-through price protection is currently described in Exchange 
Rule 21.17(a)(4). Rule 21.17(a)(4) provides that if a buy (sell) order 
enters the EDGX Options Book at the conclusion of the opening auction 
process or would execute or post to the EDGX Options Book at the time 
of order entry. The System executed the order up to a buffer amount 
(the Exchange determines the buffer amount on a class and premium 
basis) above (below) the offer (bid) limit of the Opening Collar or NBO 
(NBB) that existed at the time of order entry, respectively (the, 
``Drill-Through Price'').\8\
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    \8\ See Rule 21.17(a)(4).
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    Currently, when multiple Stop Orders and Stop-Limit Orders are 
triggered by the same price, the System \9\ considers them separate 
orders received in sequence and enters them sequentially into the EDGX 
Options Book.\10\ As such, when determining the Drill-Through Price for 
each order, the System uses the contra side NBBO that existed at the 
time each of the orders was entered into the EDGX Options Book.\11\ By 
applying drill-through price protection in this manner, the Exchange 
has observed, particularly in thinly traded markets, that the first 
order triggered will trade with the best priced contra-side order, 
while the second triggered order can trade at prices that may be 
multiple price levels away, as it is using the NBBO that existed after 
the first triggered order executed. Accordingly, the Exchange seeks to 
enhance the drill-through price functionality as it relates to Stop 
Orders and Stop-Limit Orders, through the addition of proposed Rule 
21.17(a)(4)(C). Under proposed Rule 21.17(a)(4)(C), rather than using 
separate Drill-Through Prices for each individual Stop Order and Stop-
Limit Order, the System will instead use the contra-side NBBO that 
existed at the time the first order in sequence was entered into the 
EDGX Options Book as the Drill-Through Price, for all orders. This is 
the Drill-Through Price that would apply to each Stop Order or Stop-
Limit Order if it was the only one triggered at that price. By way of 
illustration, consider the following examples:
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    \9\ ``System'' means the electronic communications and trading 
facility designated by the Board through which securities orders of 
Users are consolidated for ranking, execution and, when applicable, 
routing away. See Rule 1.5(cc).
    \10\ ``EDGX Options Book'' means the System's electronic file of 
orders. See Rule 1.5.(e).
    \11\ See Rule 21.17(a)(4).
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Example 1--Current Functionality
    Assume that the Drill-Through Price buffer \12\ for a certain 
option series is $0.25, and that the following quotes are in the EDGX 
Options Book: Quote 1 (NBBO): 5.00 x 7.00; Quote 2: 4.00 x 8.00. Each 
quote has a size of 1. Additionally, the following Stop Orders/Stop 
Limit Orders are being held in the System when the Quote 1 offer is 
updated to $6.50 (they were received by the System in sequence):
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    \12\ The Exchange determines the buffer amount on a premium and 
class basis.

Order 1: Sell 1 @Market, Stop Price = $6.50
Order 2: Sell 1 @Market, Stop Price = $6.55
Order 3: Sell 1 @Market, Stop Price = $6.50


[[Page 12522]]


    Per current Rule 21.17(d), the following will occur:
    1. Orders 1, 2 and 3 are held in the System, and handled as 
separate orders received in sequence. Each have stop prices less than 
the NBO, and are therefore triggered by the 6.50 quote, and enter the 
EDGX Options Book for execution or posting. Under today's 
functionality, the System assigns each order a separate Drill-Through 
Price, equal to the contra-side NBBO in existence at the time each 
order separately entered the EDGX Options Book for execution.
    2. Order 1 will execute against Quote 1 @$5.00. Using the NBB of 
$5.00 as the Drill-Through Price, the System would prevent execution 
beyond $4.75.
    3. When Order 1 executes against Quote 1 @5.00, that NBB will no 
longer be in the EDGX Options Book. Instead Order 2 will execute 
against Quote 2 @4.00 and use the NBB of 4.00 as the Drill-Through 
Price and prevent execution beyond $3.75.
    4. Order 3 will cancel due to no liquidity left at the drill-
through price of $3.75.
Example 2--Proposed Functionality
    Again, assume that the Drill-Through Price buffer for a certain 
option series is $0.25, and that the following quotes are in the EDGX 
Options Book: Quote 1 (NBBO): 5.00 x 7.00; Quote 2: 4.00 x 8.00. Each 
quote has a size of 1. Additionally, the following Stop Orders/Stop 
Limit Orders are being held in the System when the Quote 1 offer is 
updated to $6.50 (they were received by the System in sequence):

Order 1: Sell 1 @Market, Stop Price = $6.50
Order 2: Sell 1 @Market, Stop Price = $6.55
Order 3: Sell 1 @Market, Stop Price = $6.50

    Per proposed Rule 21.17(d), the following will occur:
    1. Orders 1, 2 and 3 each have stop prices less than the NBO, and 
will therefore be triggered by the 6.50 quote, and enter the EDGX 
Options Book for execution or posting. A Drill-Through Price for all 
three orders is set at the contra-side NBB of 5.00.
    2. Order 1 will execute against Quote 1 @$5.00.
    3. Orders 2 and 3 will cancel due to no liquidity left at the 
drill-through price of $4.75.
    The Exchange notes that aside from the difference in Drill-Through 
Price, the drill-through mechanism will apply in the same manner to 
these orders. The Exchange is not proposing wholly new drill-through 
protection behavior, but rather only seeks to modify the reference 
price utilized by the drill-through price protection for Stop Orders 
and Stop-Limit Orders if multiple such orders are triggered and entered 
into the EDGX Options Book for execution due to the same price event. 
By using the same Drill-Through Price for all triggered orders eligible 
for execution, the proposed modification will help the drill-through 
protection prevent executions too far away from the NBBO when multiple 
Stop Orders and Stop Limit Orders become eligible for execution. In 
doing so, Stop Orders and Stop Limit Orders will receive executions at 
prices more closely aligned to the stop prices specified by Exchange 
Users.
2. Statutory Basis
    The Exchange believes the proposed rule amendment is consistent 
with the requirements of Section 6(b) of the Act,\13\ in general, and 
Section 6(b)(5) of the Act,\14\ in particular, in that it is 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 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.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that proposed Rule 
21.17(a)(4)(C) does not unfairly discriminate amongst Users. Under 
proposed Rule 21.17(a)(4)(C), all Users with Stop Orders and Stop-Limit 
Orders triggered by the same price event will have the same drill-
through reference price. The primary purpose of the drill-through price 
protection is to prevent orders from executing at prices ``too far 
away'' from the market when they enter the EDGX Options Book for 
potential execution. The Exchange believes the proposed rule change is 
consistent with this purpose, and thus will promote just and equitable 
principles of trade and protect investors, because Users who submit 
Stop Orders and Stop-Limit Orders will receive the same level of drill-
through price protection against execution at potentially erroneous 
prices, regardless of the sequence in which they enter the EDGX Options 
Book. As a result of the proposed rule change, all Users' Stop Orders 
and Stop-Limit Orders will receive protection based on the NBBO at the 
time those orders were triggered to enter the EDGX Options Book for 
potential execution, which is consistent with the drill-through 
protection as well as Stop Order functionality.

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

    The Exchange does not believe that the proposed rule change imposes 
any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. Under the 
current drill-through price protection functionality, the System's use 
of separate Drill-Through Prices can result in Stop Orders executed 
later in sequence being filled at prices several levels away from the 
NBBO in existence at the time they are triggered and entered into the 
EDGX Options Book for execution merely because those orders were 
submitted after another Stop Order. As discussed above, the proposed 
rule change will apply the same Drill-Through Price (and thus the same 
level of drill-through price protection) to Stop Orders and Stop-Limit 
Orders that become eligible for potential execution at the same time 
due to the same price triggering event.
    The Exchange does not believe that 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 because it 
relates solely to how an Exchange price protection applies to Stop 
Orders and Stop Limit Orders. The proposed enhancement to the drill-
through protection is consistent with the current protection and 
provides orders subject to drill-through price protection with improved 
protection against execution at potentially erroneous prices.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposal. No written comments were solicited or 
received on the proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section

[[Page 12523]]

19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) \16\ thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay such that Exchange Users will be able to more quickly benefit 
from the proposed Drill through protections that are designed to: (1) 
Prevent potentially erroneous executions and (2) more closely align the 
execution prices of Stop Orders and Stop Limit Orders that become 
eligible for potential execution at the same time due to the same price 
triggering event.\17\ The Commission finds that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Specifically, waiver of the operative delay should 
allow Exchange Users to utilize Stop Orders and Stop Limit Orders with 
an increased likelihood that the execution price of such orders will be 
more closely related to the market at the time the order is triggered 
for entry onto the EDGX Book. Accordingly, the Commission designates 
the proposal operative upon filing.\18\
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    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 [email protected]. Please include 
File Number SR-CboeEDGX-2022-007 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-CboeEDGX-2022-007. 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; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CboeEDGX-2022-007 and should 
be submitted on or before March 25, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-04566 Filed 3-3-22; 8:45 am]
BILLING CODE 8011-01-P


