[Federal Register Volume 87, Number 196 (Wednesday, October 12, 2022)]
[Notices]
[Pages 61634-61636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22083]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95987; File No. SR-CBOE-2022-041]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Amend Exchange 
Rule 5.34(b) Related to Price Protections and Risk Controls for Complex 
Orders

October 5, 2022.

I. Introduction

    On August 4, 2022, Cboe Exchange, Inc. (``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 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Exchange Rule 5.34(b) to 
revise the definition of butterfly spread and to adopt a new buy 
strategy price check that will reject or cancel vertical or butterfly 
spread orders to buy that have a price of zero and are not designated 
as either Immediate-or-Cancel (``IOC'') or Direct to PAR.\3\ The 
proposed rule change was published for comment in the Federal Register 
on August 23, 2022.\4\ On September 14, 2022, the Exchange filed 
Amendment No. 1 to the proposed rule change.\5\ The Commission has 
received no comment letters regarding the proposal. The Commission is 
publishing this notice to solicit comment on Amendment No. 1 and is 
approving the proposed rule change, as modified by Amendment No. 1, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Under the Exchange's rules, an Immediate-or-Cancel or IOC 
order is a limit order that must execute in whole or in part as soon 
as the System receives it; the System cancels and does not post to 
the Book an IOC order (or unexecuted portion) not executed 
immediately on the Exchange or another options exchange. Users may 
designate bulk messages as IOC. A User may not designate an IOC 
order as Direct to PAR. A Direct to PAR order is an order a User 
designates to be routed directly to a specified PAR workstation for 
manual handling. A User must designate a Direct to PAR order as RTH 
Only. See Exchange Rule 5.6(b).
    \4\ See Securities Exchange Act Release No. 95520 (August 17, 
2022), 87 FR 51723 (``Notice'').
    \5\ Amendment No. 1 revises the proposal to (1) correct an error 
in the description section of the Form 19b-4 by stating that the 
component legs of a butterfly spread order have different strike 
prices; (2) provide additional explanation by stating that, in rare 
circumstances, market participants may seek to sell a vertical or 
butterfly spread at a price of zero to liquidate a position; (3) 
state that the proposal continues to provide execution opportunities 
for vertical and butterfly spread buy orders priced at zero through 
the IOC instruction or manual handling, while preventing these 
orders from overwhelming the Complex Order Book (``COB''); (4) state 
that the proposed price check does not extend to zero-priced 
vertical or butterfly spread sell orders, which will continue to be 
permitted to rest on the COB; (5) correct an error in the 
description section of the Form 19b-4 by stating that between 
January and July 2022, only 1.3% of the approximately 177 million 
zero-priced vertical and butterfly spread contracts (rather than 
orders) of the approximately 6.5 million orders submitted to rest in 
the COB, were filled; and (6) state that zero-bid vertical or 
butterfly spread orders may be submitted as part of a paired order 
as a cross on the trading floor or to a Complex Automated 
Improvement Mechanism (``C-AIM'') auction. Amendment No. 1 makes no 
changes to Exhibit 5 of the proposal. Amendment No. 1 is available 
on the Commission's website at https://www.sec.gov/comments/sr-cboe-2022-041/srcboe2022041.htm.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    As described more fully in the Notice, the Exchange proposes to 
amend Exchange Rule 5.34(b)(4) to adopt a new buy strategy price check 
for complex orders. Under proposed Exchange Rule 5.34(b)(4)(B), the 
System cancels or rejects a vertical or butterfly spread order to buy 
that has a price of zero and is not designated as either IOC or Direct 
to PAR, and the System does not initiate a Complex Order Auction 
(``COA'') with a vertical or butterfly spread order to buy that has a 
price of zero unless the order is auctioned via PAR.\6\ The

[[Page 61635]]

Exchange may apply the proposed price check on a class-by-class 
basis.\7\
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    \6\ For purposes of Exchange Rule 5.34(b), a vertical spread is 
a two-legged complex order with one leg to buy a number of calls 
(puts) and one leg to sell the same number of calls (puts) with the 
same expiration date but different exercise prices, except as set 
forth in Exchange Rule 5.34(b)(3)(A). See Exchange Rule 
5.34(b)(1)(A). As discussed below, Exchange Rule 5.34(b)(1)(B), as 
proposed to be amended, defines a butterfly spread as a three-legged 
complex order with two legs to buy (sell) the same number of calls 
(puts) and one leg to sell (buy) twice as many calls (puts), all 
with the same expiration date but different exercise prices, and the 
exercise price of the middle leg is between the exercise prices of 
the other legs. The System considers a true butterfly and a skewed 
butterfly to be a butterfly spread. If the exercise price of the 
middle leg is the average of the exercise prices of the other legs, 
it is a ``true'' butterfly; and if the exercise price of the middle 
leg is less in-the-money than the average of the exercise prices of 
the other legs, it is a ``skewed'' butterfly.
    \7\ See proposed Exchange Rule 5.34(b)(4)(B).
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    The Exchange states that it has observed a significant and 
increasing number of zero-priced vertical and butterfly spread buy 
orders in certain classes submitted to rest in the COB.\8\ The Exchange 
further states that these zero-priced buy orders execute infrequently 
against an opposing complex order and remain resting in the COB because 
market participants rarely desire to sell these strategies at a price 
of zero.\9\ Based on its analysis of orders submitted from January 2022 
through July 2022, the Exchange identified that approximately only 1.3% 
of the approximately 177 million zero-priced buy vertical and butterfly 
spread contracts, of the approximately 6.5 million orders submitted to 
rest in the COB, were filled.\10\ The Exchange states that multiple 
Trading Permit Holders (``TPHs'') have expressed concern regarding the 
amount of excess market data that results from zero-priced vertical and 
butterfly spread buy strategies, and the Exchange believes that the 
high number of these orders may impede liquidity providers from 
executing against marketable customer interest because the stream of 
incoming strategies creates new data messages that liquidity providers 
must process and synthesize into their systems, interfering with their 
time and resources to process, synthesize, and react to data messages 
in connection with marketable customer interest.\11\ In addition, the 
Exchange states that it has expended resources to implement multiple 
System enhancements to enable its System to continue to handle the 
large number of these strategies.\12\
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    \8\ See Notice, 87 FR 51724.
    \9\ See id.
    \10\ See Amendment No. 1 at 4.
    \11\ See Notice, 87 FR 51724. In addition, the Exchange states 
that complex orders generate a COA auction message before resting in 
the COB and that the COA auction message volume resulting from the 
influx of zero-priced vertical and butterfly buy spread orders 
saturates the auction market data and may deter liquidity providers 
from providing auction liquidity, which adversely impacts customer 
orders. See id.
    \12\ See id.
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    The Exchange acknowledges that there may be limited cases in which 
market participants may seek to sell a zero-priced vertical or 
butterfly spread, including when liquidating a position.\13\ Under the 
proposal, zero-priced vertical or butterfly spread sell orders will 
continue to be permitted to rest on the COB.\14\ By requiring zero-
priced vertical and butterfly spread buy orders to be designated as IOC 
or Direct to PAR, the Exchange states that proposed Exchange Rule 
5.34(b)(4)(B) will ensure that these zero-priced buy orders are either 
executed immediately against marketable orders (in whole or in part) 
and then cancelled, or are sent to directly to a PAR workstation for 
manual handling by a Floor Broker.\15\ The Exchange further states that 
by allowing zero-priced vertical and butterfly buy spread orders to be 
submitted only as IOC or for manual handling, including manual 
submission into a COA, the proposal continues to provide execution 
opportunities for vertical and butterfly spread strategies that are 
legitimately priced at zero, while preventing a significant number of 
these orders from overwhelming the COB.\16\ Proposed Exchange Rule 
5.34(b)(4)(B) provides the Exchange with flexibility to apply the 
proposed price check on a class-by-class basis, which will permit the 
Exchange to determine whether allowing zero-priced vertical and 
butterfly spread orders to rest in the COB is appropriate for different 
option classes, which may exhibit different trading characteristics and 
have different market models.\17\
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    \13\ See Amendment No. 1 at 3.
    \14\ See id.
    \15\ See Notice, 87 FR 51725. Proposed Exchange Rule 
5.34(b)(4)(B) also allows a zero-priced vertical and butterfly 
spread buy order to initiate a COA if the order is auctioned via 
PAR.
    \16\ See id.
    \17\ See id.
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    The proposal also revises the definition of butterfly spread in 
Exchange Rule 5.34(b)(1)(B) to more precisely define what the 
Exchange's System considers to be true and skewed butterfly spreads for 
purposes of Exchange Rule 5.34(b) and to provide that the System 
considers both skewed and true butterfly spreads to be butterfly 
spreads. As described more fully in the Notice, Exchange Rule 
5.34(b)(1)(B) currently states, in part, that ``If the exercise price 
of the middle leg is halfway between the exercise prices of the other 
legs, it is a ``true'' butterfly; otherwise, it is a ``skewed'' 
butterfly.'' The Exchange proposes to revise this sentence to state 
that ``If the exercise price of the middle leg is the average of the 
exercise prices of the other legs, it is a ``true'' butterfly; and if 
the exercise price of the middle leg is less-in-the-money than the 
average of the exercise prices of the other legs, it is a ``skewed'' 
butterfly.'' The Exchange states that the proposed changes more 
accurately reflect what the Exchange's System considers to be a skewed 
butterfly and a butterfly spread generally.\18\
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    \18\ See Notice, 87 FR 51725.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\19\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\20\ 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 not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
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    For the reasons set forth below, the Commission believes that the 
proposal to adopt a price check that will reject or cancel vertical and 
butterfly spread buy orders with a price of zero that are not 
designated as IOC or Direct to PAR is designed to protect investors and 
the public interest. As discussed above, orders to buy a vertical or 
butterfly spread for a price of zero execute infrequently and instead 
remain resting in the COB without being filled.\21\ The Exchange states 
that these zero-priced vertical and butterfly spread buy orders 
generate a substantial amount of market data that market participants 
must process and synthesize into their systems, and that this excess 
data, about which TPHs have expressed concern, may impede liquidity 
providers from executing against marketable customer interest.\22\ 
Although vertical and butterfly spread buy orders priced at zero will 
no longer be permitted to rest in the COB, the proposal will provide

[[Page 61636]]

for the continued execution of the limited number of vertical and 
butterfly spread orders that are legitimately priced at zero. In this 
regard, vertical and butterfly spread sell orders with a price of zero 
will continue to have the ability to rest in the COB and market 
participants will be able to submit zero-priced vertical and butterfly 
spread IOC buy orders to execute against the resting zero-priced sell 
orders.\23\ In addition, the proposal will allow market participants to 
submit vertical and butterfly spread buy orders with a price of zero as 
Direct to PAR for manual handling, and market participants will 
continue to have the ability to submit zero-bid vertical and butterfly 
spread orders as part of a paired order in a crossing transaction.\24\
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    \21\ See Notice, 87 FR 51724. As noted above, based on its 
analysis of such orders submitted from January 2022 through July 
2022, the Exchange found that approximately only 1.3% of the 
approximately 177 million zero-priced buy vertical and butterfly 
spread contracts, of the approximately 6.5 million orders submitted 
to rest in the COB, were filled. See Amendment No. 1 at 4.
    \22\ See Notice, 87 FR 51724. In addition, the Exchange states 
that it has implemented multiple System enhancements to enable its 
System to handle the large number of these strategies. See id.
    \23\ See Amendment No. 1 at 3 and proposed Exchange Rule 
5.34(b)(4)(B).
    \24\ See Exchange Rule 5.34(b)(4)(B) and Amendment No. 1 at 4.
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    The Commission believes that the proposed changes to the definition 
of butterfly spread are designed to protect investors and the public 
interest by providing more precise definitions of skewed and true 
butterfly spreads.

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 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-2022-041 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-2022-041. 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-CBOE-2022-041, and should be submitted 
on or before November 2, 2022.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. As described more fully above, Amendment No. 
1 revises the proposal to acknowledge more clearly that, in limited 
circumstances, vertical and butterfly spread sell orders may 
legitimately be priced at zero, including when a market participant 
seeks to liquidate a position. Amendment No. 1 also states that zero-
priced vertical and butterfly spread sell orders will continue to have 
the ability to rest in the COB. Amendment No. 1 emphasizes that the 
proposal provides methods for executing vertical and butterfly spread 
buy orders priced at zero by allowing market participants to submit 
these orders as IOC or for manual handling, or as part of a paired 
crossing transaction. In addition, Amendment No. 1 replaces an 
incorrect reference to ``approximately 177 million zero-priced buy 
vertical and butterfly spread orders'' with a correct reference to 
``approximately 177 million zero-priced buy vertical and butterfly 
spread contracts,'' which helps to ensure that the proposal accurately 
represents the scope of the issue that the proposal seeks to address. 
Amendment No. 1 raises no novel regulatory issues and provides 
additional discussion that assists the Commission in evaluating the 
Exchange's proposal and determining that it is consistent with the Act. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\25\ to approve the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-CBOE-2022-041), as modified 
by Amendment No. 1, is approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-22083 Filed 10-11-22; 8:45 am]
BILLING CODE 8011-01-P


