[Federal Register Volume 87, Number 43 (Friday, March 4, 2022)]
[Notices]
[Pages 12518-12520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04563]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94327; File No. SR-CBOE-2022-006]


Self-Regulatory Organizations; Cboe 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 (Stop-Loss) 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 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 
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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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

    Cboe Exchange, Inc. (``C1'' 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 (Stop-Loss) and Stop-Limit orders are triggered by 
the same price. The text of the proposed rule change is provided in 
Exhibit 5.
---------------------------------------------------------------------------

    \5\ The Term ``User'' shall mean any Trading Privilege Holder 
(TPH) or Sponsored User who is authorized to obtain access to the 
System pursuant to Rule 5.5.
---------------------------------------------------------------------------

    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 purpose of this rule filing is to amend current Rule 
5.34(a)(4), Order and Quote Price Protection Mechanisms and Risk 
Controls, to add new Rule 5.34(a)(4)(E), which modifies what the drill-
through price will be for Stop (Stop-Loss) \6\ and Stop-Limit \7\ 
orders when multiple Stop and Stop-Limit orders are triggered by the 
same stop price specified by Users.
---------------------------------------------------------------------------

    \6\ A ``Stop (Stop-Loss)'' order is an order to buy (sell) that 
becomes a market order when the consolidated last sale price 
(excluding prices from complex order trades if outside of the NBBO) 
or NBB (NBO) for a particular option contract is equal to or above 
(below) the stop price specified by the User. Users may not 
designate a Stop Order as All Sessions. Users may not designate bulk 
messages as Stop Orders. A User may not designate a Stop order as 
Direct to PAR. See Rule 5.6(c) (definition of ``Stop (Stop-Loss)'' 
order).
    \7\ A ``Stop-Limit'' order is an order to buy (sell) that 
becomes a limit order when the consolidated last sale price 
(excluding prices from complex order trades if outside the NBBO) or 
NBB (NBO) for a particular option contract is equal to or above 
(below) the stop price specified by the User. A User may not 
designate a Stop-Limit Order as All Sessions. Users may not 
designate bulk messages as Stop-Limit Orders. A User may not 
designate a Stop-Limit order as Direct to PAR. See Rule 5.6(c) 
(definition of ``Stop-Limit'' order).
---------------------------------------------------------------------------

    Drill-through price protection is currently described in Exchange 
Rule 5.34(a)(4)(A). Rule 5.34(a)(4)(A) equates the drill-through 
reference price for a buy (sell) order to a price 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 the 
NBO (NBB) that existed at the time of order entry, respectively (the, 
``drill-through price'').\8\
---------------------------------------------------------------------------

    \8\ See Rule 5.34(a)(4)(A).

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

[[Page 12519]]

    Currently, when multiple Stop (Stop-Loss) or 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 
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 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 (Stop-Loss) and Stop 
Limit Orders, through the addition of proposed Rule 5.34(a)(4)(E). 
Under proposed Rule 5.34(a)(4)(E), rather than using separate drill-
through prices for each individual Stop 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 Book as the drill-
through price, for all orders. This is the drill-through price that 
would apply to each Stop or Stop-Limit order if it was the only one 
triggered at that price. By way of illustration, consider the following 
examples:
---------------------------------------------------------------------------

    \9\ ``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. (definition of, ``System'').
    \10\ ``Book'' means 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 Rule 1.1 (definition of, ``Book'').
    \11\ See Rule 5.34(a)(4)(A).
---------------------------------------------------------------------------

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 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-Loss/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):
---------------------------------------------------------------------------

    \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

    Per current Rule 5.34(a)(4), 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 
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 
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 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 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-Loss/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 5.34(a)(4)(E), 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 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 (Stop-
Loss) and Stop Limit orders if multiple such orders are triggered and 
entered into the 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 (Stop-Loss) and Stop Limit orders become eligible for execution. 
In doing so, Stop (Stop-Loss) 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.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Exchange believes that proposed Rule 
5.34(a)(4)(E) does not unfairly discriminate amongst Users. Under 
proposed Rule 5.34(a)(4)(E), all Users with Stop (Stop-Loss) 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 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 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 Book. As a result of 
the proposed rule change, all Users' Stop and Stop-Limit Orders will 
receive protection based on the NBBO at the time those orders were 
triggered to enter the Book for potential

[[Page 12520]]

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 
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 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 
(Stop-Loss) 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 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) 
\16\ thereunder.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Exchange Book. Accordingly, the Commission 
designates the proposal operative upon filing.\18\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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-CBOE-2022-006 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-2022-006. 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-CBOE-2022-006 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\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-04563 Filed 3-3-22; 8:45 am]
BILLING CODE 8011-01-P


