[Federal Register Volume 88, Number 15 (Tuesday, January 24, 2023)]
[Notices]
[Pages 4243-4245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-01264]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96684; File No. SR-CBOE-2022-051]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend Rules Relating to the Processing of 
Auction Responses

January 18, 2023.
    On October 3, 2022, Cboe Exchange, Inc. (``the Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its rules relating to the processing of 
auction responses. The proposed rule change was published for comment 
in the Federal Register on October 20, 2022.\3\ On November 23, 2022, 
pursuant to Section 19(b)(2) of the Act,\4\ 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 disapprove the proposed rule change.\5\ The 
Commission has received no comments on the proposed rule change. This 
order institutes proceedings under Section 19(b)(2)(B) of the Act \6\ 
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\ See Securities Exchange Act Release No. 96081 (Oct. 14, 
2022), 87 FR 63830 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 96380, 87 FR 73366 
(Nov. 29, 2022). The Commission designated January 18, 2023 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposed Rule Change 7
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    \7\ For a full description of all aspects of the proposed rule 
change, please see the Notice, supra note 3.
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    The Exchange proposes to adopt new functionality that would be 
applicable to all of its auction mechanisms, to increase the likelihood 
that timely submitted auction responses may participate in the 
applicable auction, even during periods of high message traffic. The 
affected auctions are the Complex Order Auction,\8\ Step Up 
Mechanism,\9\ Automated Improvement Mechanism,\10\ Complex AIM,\11\ 
Solicitation Auction Mechanism,\12\ Complex SAM,\13\ FLEX Auction 
Process,\14\ FLEX AIM \15\ and FLEX SAM.\16\ The Exchange also proposes 
to amend its current rule relating to Priority Queue \17\ functionality 
to provide itself with discretion on whether or not to implement 
Priority Queue \18\ functionality for responses to the auction 
mechanisms.
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    \8\ See Cboe Rule 5.33(d).
    \9\ See Cboe Rule 5.35.
    \10\ See Cboe Rule 5.37.
    \11\ See Cboe Rule 5.38.
    \12\ See Cboe Rule 5.39.
    \13\ See Cboe Rule 5.40.
    \14\ See Cboe Rule 5.72(c).
    \15\ See Cboe Rule 5.73.
    \16\ See Cboe Rule 5.74.
    \17\ See Cboe Rule 5.25(c).
    \18\ See Cboe Rule 5.25(c).
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    The Exchange represents that the above-referenced auction 
mechanisms provide price improvement opportunities for an eligible 
order. Within each auction mechanism, the eligible order is 
electronically exposed for an Exchange-determined period of time 
(``auction response period'') in accordance with the applicable 
Exchange Rule.\19\ After the Exchange disseminates an auction 
notification message, Users \20\ may submit responses (``auction 
responses'' or ``auction response messages'') during the auction 
response period.\21\ An auction response may only execute in the 
applicable auction mechanism, and the auction response is cancelled if 
it does not execute during an auction.\22\
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    \19\ See Notice, supra note 3, at 63831.
    \20\ The term ``User'' means any Trading Permit Holder or 
Sponsored User who is authorized to obtain access to the System 
pursuant to Cboe Rule 5.5. See Cboe Rule 1.1.
    \21\ See Notice, supra note 3, at 63831.
    \22\ See id.
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    The Exchange states that auction response messages historically 
have waited in the same System \23\ queue as all other order and quote 
message traffic.\24\ According to the Exchange, if an auction response 
is submitted when there is a deep queue of other unprocessed message 
traffic (such as mass cancellation messages or other orders and 
quotes), it is possible that the auction response may not be 
``processed'' by the System prior to the end of the auction response 
period,\25\ The Exchange states that in such an instance, the queued 
auction response may not be able to participate in the applicable 
auction mechanism because the System had unprocessed (queued) messages 
at the time of the auction execution, despite the fact that the User 
submitted the auction response prior to the end of the auction response 
period.\26\ The Exchange believes that

[[Page 4244]]

auctioned orders may therefore be missing out on potential price 
improvement that may have otherwise resulted if queued timely auction 
response(s) were able to participate in the auction.\27\ The Exchange 
further states that its review of auction responses during July 2022 
indicates that approximately 55% of auction responses had no 
opportunity to execute in their respective auctions, notwithstanding 
being submitted within the auction response period.\28\
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    \23\ The term ``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 Cboe Rule 1.1.
    \24\ Although the Exchange previously adopted Priority Queue 
functionality, which provides that auction response messages may be 
processed through a Priority Queue, and all remaining messages would 
be processed through a General Queue, the Exchange never implemented 
use of the functionality. See Notice, supra note 3 at 63832. The 
Exchange states that, should it decide to implement use of a 
Priority Queue in the future, it would provide notice to all TPHs. 
Id.
    \25\ For example, the Exchange states that it takes the System 
approximately 10 microseconds to process a single order/quote or 
auction response message and, on average, approximately 190 
microseconds to process a mass cancel message. As such, under the 
current System, an auction response that is entered after a mass 
cancel message is more likely to be detrimentally delayed as 
compared to a mass cancel message that is entered after an auction 
response (i.e., a 190 microsecond ``wait time'' versus a 10 
microsecond ``wait time''). See id.
    \26\ See id.
    \27\ See id.
    \28\ See id.
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    The Exchange thus proposes to adopt new functionality under 
proposed Cboe Rule 5.25(e), which would apply across all of its auction 
mechanisms. Under the proposed functionality, at the time an auction 
response period ends, the System would continue to process its inbound 
queue for any messages that were received before the end of the auction 
period (including auction messages) for up to an Exchange-determined 
period of time, not to exceed 100 milliseconds (which the Exchange may 
determine on a class-by-class basis).\29\ The Exchange states that 
under the proposed rule change, any auction responses that were in the 
queue before the conclusion of the auction (as identified by the 
Network Interface Card (``NIC'') timestamp on the message) \30\ would 
be processed as long as the Exchange-determined time on a class-by-
class basis (not to exceed 100 milliseconds) is not exceeded.\31\ Only 
auction messages received prior to the execution of the applicable 
auction are eligible to be processed for that auction.\32\ The 
applicable auction mechanism would execute once all messages, including 
auction responses, received before the end time of the auction response 
period have been processed or the Exchange-determined maximum time 
limit of up to 100 milliseconds has elapsed, whichever occurs 
first.\33\
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    \29\ See id.
    \30\ All incoming messages are ``timestamped'' by the Exchange's 
System. See Notice, supra note 3, at id. n14.
    \31\ See Notice, supra note 3, at 63831.
    \32\ See id.
    \33\ See id. For an example of how the proposed new 
functionality would operate, please see id.
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    The Exchange believes the proposed functionality will increase the 
possibility that timely-submitted auction responses are processed by 
the Exchange and have an opportunity for execution in the applicable 
auction mechanism, even if there is a deep pending message queue.\34\ 
The Exchange also believes the proposed maximum amount of additional 
time for processing is both an adequate amount of time to provide 
pending auction responses with such execution opportunity, but also an 
amount minimal enough that impact to other message traffic, if any, 
would be de minimis.\35\
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    \34\ See Notice, supra note 3, at 63832.
    \35\ See id. The Exchange states that based on the Exchange's 
analysis, in July 2022, auction response messages accounted for a 
mere 0.04% of all message traffic submitted to the Exchange. See 
Notice, supra note 3, at 63833.
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    Currently, Cboe Rule 5.25 provides that all Auction response 
messages will be processed through the Priority Queue, and all 
remaining messages will be processed through the General Queue. The 
proposed rule change would amend Cboe Rule 5.25 to provide the Exchange 
with the discretion to determine whether or not to implement a Priority 
Queue and a General Queue.\36\ The Exchange states that under a 
Priority Queue, the System processes a certain number of messages, as 
determined by the Exchange, from each queue on an alternating basis and 
prioritize processing messages in each respective queue in the order in 
which the System receives them (i.e., in time priority).\37\ While the 
Exchange proposes to provide itself the discretion to implement or not 
implement a Priority Queue, the Exchange states that it currently 
anticipates implementing the proposed additional processing time 
functionality at this time in lieu of a Priority Queue.\38\ The 
Exchange states that if it determines that utilization of a Priority 
Queue for auction responses is necessary or appropriate, it would 
provide notice to all TPHs pursuant to Cboe Rule 1.5.\39\
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    \36\ See Notice, supra note 3, at 63832. Cboe Rule 5.25(c) 
currently states that all messages will be processed through either 
a ``Priority Queue'' or a ``General Queue.''
    \37\ See id.
    \38\ See id.
    \39\ See id.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-Cboe-
2022-051 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \40\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposal. 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 additional comment on the 
proposed rule change.
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    \40\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\41\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposal with Sections 6(b)(5) \42\ and 6(b)(8) \43\ of the Act. 
Section 6(b)(5) of the Act requires that the rules of a national 
securities exchange be designed, among other things, 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. Section 6(b)(8) of the Act requires that the rules 
of a national securities exchange not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, which are set 
forth in the Notice,\44\ in addition to any other comments they may 
wish to submit about the proposed rule change. In particular, the 
Commission seeks comment on the following aspects of the proposal and 
asks commenters to submit data where appropriate to support their 
views:
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    \41\ Id.
    \42\ 15 U.S.C. 78f(b)(5).
    \43\ 15 U.S.C. 78f(b)(8).
    \44\ See Notice, supra note 3.
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    1. The Exchange proposes an extension of the processing time for 
auction responses received prior to the end of the auction response or 
exposure period, not to exceed 100 milliseconds. The Exchange believes 
that modifying its System to allow it to potentially process more, if 
not all, timely submitted auction responses may provide further 
opportunities for auctioned orders to receive price improvement, which 
removes impediments to a free and open market and ultimately protects 
and benefits investors \45\ What are commenters' views on the extent to 
which an extension of the processing time could result in further 
opportunities for price improvements for auctioned orders?
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    \45\ See id. at 63832.
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    2. The Exchange acknowledges that instead of proposing an extension 
of processing time beyond the end of the

[[Page 4245]]

auction or exposure period, the Exchange ``may increase the length of 
auction response periods to accommodate more auction responses.'' \46\ 
However, the Exchange states that it believes the proposed rule change 
will ``accommodate more auction responses and allow the Exchange to 
continue to mitigate the market risk that may accompany a longer 
auction period for auctioned orders by setting the length of an auction 
response period to a timeframe that allows an adequate amount of time 
for TPHs to respond to an auction message and providers orders with 
fast executions.'' \47\ Do commenters agree with the Exchange's 
assessment? Why or why not?
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    \46\ See id.
    \47\ See id.
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    3. The Exchange states that adopting the proposed functionality for 
auction responses would ``better provide customers with additional 
opportunities for price improvements with little to no impact to non-
auction response message traffic.'' \48\ The Exchange states that in 
July 2022, auction response messages accounted for a ``mere 0.04% of 
all message traffic submitted to the Exchange. The Exchange believe[s] 
the processing of such a small account of message traffic, even after 
the conclusion of an auction response period, would therefore have de 
minimis, if any, impact on the process of non-auction response messages 
waiting in the queue.'' \49\ What are commenters' views on the impact 
of the proposed rule change on the processing of non-auction message 
traffic?
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    \48\ See id. at 63833.
    \49\ See id.
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    4. The Exchange states that the proposed additional processing time 
of up to 100 milliseconds ``is both an adequate amount of time'' to 
provide pending auction responses with ``execution opportunities, but 
also an amount minimal enough that impact to other message traffic, if 
any, would be de minimis.'' \50\ What are commenters' views regarding 
the sufficiency of the proposed 100 millisecond time period for 
additional processing?
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    \50\ See id. at 63832.
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    5. The Exchange proposes in Cboe Rule 5.25 to give the Exchange 
discretion in whether or not to utilize priority queue functionality 
for auction responses and states that the proposed additional 
processing time for auction responses ``is currently a better 
alternative to provide timely submitted auction responses with 
opportunities to participate in an applicable auction as compared to 
the priority queue functionality.'' \51\ What are commenters' views on 
the ability of the current priority queue functionality to address 
concerns regarding the System's inability to timely process auction 
responses during the auction or exposure response period?
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    \51\ See id. at 63833.
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III. 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 Sections 6(b)(5) and 6(b)(8), or any other provision 
of the Act, or the 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,\52\ any request for an opportunity to make an oral 
presentation.\53\
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    \52\ 17 CFR 240.19b-4.
    \53\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (Jun. 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 February 14, 2023. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
February 28, 2023.
    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-2022-051 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-2022-051. 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-2022-051 and should be submitted by 
February 14, 2023. Rebuttal comments should be submitted by February 
28, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-01264 Filed 1-23-23; 8:45 am]
BILLING CODE 8011-01-P


