
[Federal Register Volume 88, Number 175 (Tuesday, September 12, 2023)]
[Notices]
[Pages 62612-62618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19593]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98304; File No. SR-CBOE-2023-044]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Adopt a Quote Protection Timer

September 6, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 30, 2023, Cboe Exchange, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 5.32. The text of the proposed rule change is provided in 
Exhibit 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 Exchange proposes to amend Rule 5.32 to adopt a passive quote 
protection mechanism.
    The options market is driven by Market-Maker quotes, and thus 
Market-Maker quotes are critical to provide liquidity to the market and 
contribute to price discovery for investors. If Market-Makers do not 
have sufficient time to refresh their resting quotes (the primary 
source of liquidity for customers in the market) in response to market 
updates before executing against incoming interest that has 
incorporated those market updates, this increased risk of execution at 
stale prices may cause Market-Makers to widen their quotes to the 
detriment of investors or otherwise withhold liquidity. This reduced 
liquidity may reduce execution opportunities or cause executions to 
occur at worse prices for customers. Further, Market-Makers must comply 
with various obligations, including to provide continuous electronic 
quotes and to update quotes in response to market conditions.\3\ It 
takes time for Market-Makers to update quotes in series in their 
appointed classes, which may not take effect until after faster market 
participants have updated orders. The Exchange believes it is 
appropriate to provide Market-Maker quotes with a reasonable amount of 
protection to allow them to execute at prices reflective of market 
updates given not only the Exchange-imposed requirements to provide and 
updates such quotes but also the resources Market-Makers expend to 
comply with those requirements.
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    \3\ See Rule 5.51.
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    Market-Maker quotes are based generally on pricing models that rely 
on various factors, including the price of the underlying security and 
that security's volatility. As these variables change, a Market-Maker's 
pricing model automatically will enter updates to a number of its bids 
and offers. Additionally, a Market-Maker's system may also 
automatically enter orders in response to changes in those variables as 
part of their market-making activity, such as hedging. As a result, 
there can be a multitude of instances in which the bids and offers of 
multiple Market-Makers attempting to update their quotes and submit 
orders in response to market changes inadvertently interact with each 
other, which can lead to significant risk and exposure. This may occur, 
for example, when one Market-Maker's price update system is faster than 
systems used by other Market-Makers. In this respect, a Market-Maker's 
system that updates options prices microseconds, or even nanoseconds, 
faster than another Market-Maker's system may lock or cross its bids 
(offers) against the other Market-Maker's offers (bids) every time its 
bid (offer) adjusts to the offer (bid) of the second Market-Maker even 
if the second Market-Maker's system was also in the process of updating 
that offer (bid).
    For example, suppose three Market-Makers for class XYZ have the 
following displayed markets:

Market-Maker A: (10) 10.00-10.20 (10)
Market-Maker B: (5) 10.05-10.20 (5)
Market-Maker C: (5) 9.95-10.15 (5)

Each of the Market-Maker's systems identify an increase in the price of 
stock XYZ, which causes those systems to send updated quotes. However, 
Market-Maker A, as a result of its own technological investment, has 
the fastest system, which received the updated price of stock XYZ three 
microseconds before the systems of the other two Market-Makers, and 
thus sent its updated quotes to the Exchange three microseconds before 
the systems of the other two Market-Makers. Market-Maker a sent a 
revised two-sided market of (10) 10.20-10.40 (10) based on the updated 
price of XYZ. Because the quotes for Market-Maker A's updated market 
reached the Exchange before the updated markets of Market-Makers B and 
C, Market-Maker A's bid will execute against Market-Maker C's offer of 
10.15 and Market-Maker B's offer of 10.20, which offers were based on a 
lower stock price. Market-Maker B's and C's updated markets of (5) 
10.25-10.40 (5) and (5) 10.15-10.35 (5) reached the Exchange after this 
execution, despite those Market-Makers no longer being interested in 
selling at the price of 10.15 or 10.20. Market-Maker A likely submitted 
its updated market to display liquidity available for customer prices 
at an updated price, rather than remove liquidity from other liquidity 
providers at outdated prices. This could happen contemporaneously in a 
large number of series within the class, such that instead of locking 
one quote, Market-Maker A may lock 20 of Market-Maker B's and Market-
Maker C's quotes. This may expose each Market-Maker to significant risk 
due to these unintended executions and prevent orders intended to 
provide liquidity in the Book from doing so.

[[Page 62613]]

    The Exchange understands Market-Makers primarily use bulk message 
quotes to input and update quote prices for purposes of providing 
liquidity, as bulk messages allow Market-Makers to update efficiently 
quotes in multiple series using a single message. To protect these 
quotes--Market-Makers' primary liquidity source--from inadvertent 
executions as well as executions at stale prices due to technological 
disparities between Market-Maker systems, the Exchange adopted the 
functionality in current Rules 5.6(c)(3) and 5.32(c)(6), which prevents 
executions of incoming Market-Maker interest against resting Market-
Maker interest. The purpose of this functionality is to provide resting 
Market-Maker quotes with time to update before execution so that 
executions occur at prices based on then-current market, which the 
Exchange believes encourages Market-Makers to provide competitive 
markets on the Exchange. Specifically, Rule 5.32(c)(6) provides that 
the System cancels or rejects a Cancel Back \4\ Book Only \5\ bulk 
message bid (offer) or order bid (offer) (or unexecuted portion) 
submitted by a Market-Maker with an appointment in the class through a 
bulk port if it would execute against or lock a resting offer (bid) 
with a Capacity of M. In other words, a Cancel Back Book Only Market-
Maker quote or order submitted through a bulk port will be rejected if 
it would execute against resting Market-Maker interest. Additionally, 
pursuant to Rule 5.32(b), the System adjusts the price of a Price 
Adjust (i.e., an order designated Price Adjust or not designated as 
Cancel Back) Book Only bulk message quote submitted through a bulk port 
if, at the time of entry, would lock or cross a resting order or quote 
with Capacity M.\6\ In other words, a Price Adjust Book Only Market-
Maker quote or order submitted through a bulk port will rest on the 
Book at one increment away from a resting order or quote with Capacity 
M. This functionality is designed to protect resting Market-Maker 
quotes from executions at potentially stale prices due to technology 
disparities (1) rather than the intention of Market-Maker quote and 
order updates to trade against resting Market-Maker quotes (and thus 
eliminate displayed liquidity) and (2) against incoming Market-Maker 
orders (that may be submitted for the purpose of providing liquidity or 
to trade for other Market-Maker purposes, such as hedging) with prices 
that have incorporated market updates.
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    \4\ A ``Cancel Back'' order is an order (including a bulk 
message) designated to not be subject to the price adjust process 
pursuant to Rule 5.32 (as described below) that the System cancels 
or rejects if displaying the order on the Book would create a locked 
or crossed market or if the order cannot otherwise be executed or 
displayed in the Book at its limit price. See Rule 5.6(c) 
(definition of ``Cancel Back'').
    \5\ A ``Book Only'' order is an order the System ranks and 
executes pursuant to Rule 5.32, subjects to the price adjust process 
pursuant to Rule 5.32, or cancels, as applicable (in accordance with 
User instructions), without routing away to another exchange. See 
Rule 5.6(c) (definition of ``Book Only'').
    \6\ Rule 5.32(b) describes additional price adjust scenarios, 
but these scenarios are not relevant to the proposed rule change.
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    The protection in Rule 5.32(c)(6) specifically prevents incoming 
appointed Market-Maker interest (which may be Book Only and thus 
otherwise eligible for execution against resting interest on the Book) 
from executing against resting Market-Maker interest. To further 
protect liquidity of Market-Makers in appointed classes (which 
liquidity is subject to quoting obligations, as noted above), Rule 
5.6(c)(3) provides that bulk messages used by Market-Makers in non-
appointed classes may be Post Only only, which would prevent executions 
of these incoming quotes against resting interest (including resting 
appointed Market-Maker interest) in those classes.
    This current functionality also recognizes that resting Market-
Maker interest needs protection from orders (in addition to quotes) of 
all users, including non-Market-Makers, as orders submitted through 
bulk ports by Users other than appointed Market-Makers may also only be 
Post Only, which again would prevent executions of these incoming 
orders against resting interest (including resting appointed Market-
Maker interest). Given the primary purpose of bulk ports is to allow 
Market-Makers and other users to provide liquidity to the Book, the 
Exchange adopted functionality to prevent executions of interest 
submitted through bulk ports against resting Market-Maker interest due 
to technological disparities (as demonstrated in the example above to 
protect the primary liquidity source to the Exchange.
    While this current functionality protects resting Market-Maker 
interest from execution at stale prices against incoming Market-Maker 
and non-Market-Maker interest submitted through bulk ports, resting 
Market-Maker interest remains unprotected from Market-Maker orders that 
may be submitted through non-bulk ports. As noted above, Market-Makers 
may submit orders for other market-making purposes, such as hedging, 
which orders can be generated from the same systems generating bulk 
message quotes. As a result, resting Market-Maker interest remains 
subject to risk of execution at stale prices against incoming Market-
Maker non-bulk port orders due to technological disparities. Given the 
critical role Market-Makers play in the options market, the Exchange 
believes it is imperative to have the ability to protect Market-Makers' 
resting quotes from execution at stale prices against incoming Market-
Maker interest resulting from technological disparities between Market-
Makers. The Exchange believes it should be able to extend this 
protection to incoming interest from Market-Makers, regardless of the 
type of port through which it was submitted, as it can expose Market-
Makers to the same level of risk. Ultimately, this exposure may 
negatively impact liquidity to the detriment of the entire market. 
Unlike quotes and orders submitted through bulk ports, the primary 
purpose of which is generally to rest on the Book and provide 
liquidity, it is likely the intention of orders submitted through non-
bulk ports to execute against the resting interest (including Market-
Maker quotes). As a result, the Exchange believes it is important to 
balance the need to protect resting Market-Maker quotes from executions 
at stale prices with the need to provide opportunities for this 
incoming interest to execute against those quotes.
    The proposed rule change proposes to adopt a quote protection timer 
(``QPT'') to provide the Exchange with the ability to provide Market-
Maker quotes with this additional protection. The purpose of QPT is to 
provide Market-Makers with opportunities to update the prices of their 
resting quotes prior to execution against aggressing non-bulk port 
incoming Market-Maker interest while still providing that incoming 
interest with the opportunity to execute against resting liquidity. 
Specifically, the Exchange proposes to adopt Rule 5.32(h), which 
provides the Exchange with the ability to determine on a class basis to 
activate a QPT. In a class in which the Exchange has activated the QPT, 
if an incoming order (including an incoming complex order legging into 
the Book pursuant to Rule 5.33(g), but excluding paired orders, orders 
(or unexecuted portions) that routed to another exchange(s), and orders 
routed from PAR) enters the Book \7\ in that class

[[Page 62614]]

with Capacity M that a User submitted through a non-bulk port (the 
``initial aggressor order'') and that is marketable against a resting 
bulk message quote (except for a quote offer a price equal to the 
minimum increment for the class) \8\ with Capacity M (the ``initial 
protected quote'') at the time the initial aggressor order enters the 
Book, the initial aggressor order executes against any resting orders 
and quotes with a Capacity other than M at the same price as the 
initial protected quote.\9\ After that, as set forth in proposed Rule 
5.32(h)(2), except for a non-ISO IOC order for which the Trading Permit 
Holder (``TPH'') opts out of QPT (in which case the System cancels any 
portion of the order not executed pursuant to proposed subparagraph 
(1)),\10\ the System initiates the QPT,\11\ the start time of which is 
the time when the initial aggressor order enters (or a complex order 
\12\ Legs into) the Book (the ``quote protection period''), provided if 
there is an ongoing QPT in every leg of a complex order that Legs into 
the Book, the length of the QPT for the complex order equals the 
longest remaining time of the leg QPTs.\13\
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    \7\ This includes Immediate-or-Cancel (``IOC'') orders and 
Intermarket Sweep Orders (``ISOs''). See Rule 5.6(c). Contingent 
orders (i.e., stop, stop-limit, market-on-close, and limit-on-close) 
are excluded from the QPT (except for market-on-close and limit-on-
close orders submitted to the Exchange within the specified amount 
of time set by the Exchange pursuant to Rule 5.6(d), as they would 
just be market or limit orders at that point), as by definition 
these orders are not executable upon entry (they become executable 
once the applicable contingency is satisfied), so it is unnecessary 
to prevent from immediate execution against resting Market-Maker 
quotes. The Exchange believes the proposed exclusions are 
appropriate, as they would by definition provide resting quotes with 
time to update before potential execution. For example, paired 
orders would go through an auction (such as pursuant to Rule 5.37 or 
5.38 (the automated improvement mechanism for simple and complex 
orders)), during which Market-Maker quotes could update before they 
would potentially execute against those orders after the auction. 
Similarly, if an order routes away to another exchange because that 
exchange has better prices available than those on the Exchange, by 
the time any portion of that order comes back to the Exchange for 
execution against the Book, any resting Market-Maker quotes could 
have been updated before executing against that returned order. 
Likewise, if an order routes from PAR for electronic execution, it 
would have first been handled by a person on the trading floor after 
entry and before execution against interest in the Book, giving 
quotes sufficient time for update before potential execution against 
that order.
    \8\ The Exchange believes this exclusion is appropriate, as 
there would be no price at which an incoming bid could adjust to and 
rest during the quote protection period if the resting offer is 
equal to the minimum increment for the class. For example, if the 
minimum increment for a class is $0.05, and the market is $0-$0.05 
on the Exchange, if an incoming order is priced at $0.05, as further 
described below, during the quote protection period, the price of 
the order is adjusted to one increment below the offer to prevent a 
locked market. However, that would make the adjusted price of the 
incoming order $0, which is not a permissible price for an order.
    \9\ See proposed Rule 5.32(h)(1).
    \10\ The Exchange believes it is appropriate to permit TPHs to 
opt out of QPT for their non-ISO IOC orders (and just have them 
execute against any resting interest with a Capacity other than M, 
cancelling any remainder) because it is consistent with the IOC 
instruction, pursuant to which a user desires execution in whole or 
in part as soon as the System receives it. See Rule 5.6(d) 
(definition of IOC time-in-force instruction).
    \11\ The Exchange determines the length of the timer in 
microseconds on a class basis, which may not exceed five 
milliseconds. The Exchange believes this flexibility is reasonable 
so it can apply a timer length that appropriately reflects market 
structure differences among classes, as discussed above regarding 
why it is appropriate to provide the Exchange with flexibility to 
determine whether to apply QPT on a class basis. The Exchange has 
this same flexibility for other Exchange functionality, such as 
auction timers. See, e.g., Rule 5.37(c)(3) (providing the Exchange 
with flexibility to determine the length of an AIM auction period on 
a class basis).
    \12\ The Exchange understands complex orders may similarly cause 
executions against protected quotes due to technical disparities in 
the same manner as simple orders.
    \13\ The Exchange believes this is appropriate, as the resting 
quotes in each leg of the complex order that are intended to be 
protected by this proposed functionality will be subject to the full 
length of the quote protection period before the legs of the complex 
order in this scenario can execute against them.
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    The Exchange believes it is reasonable to permit the Exchange to 
determine whether to activate QPT on a class basis to address market 
structure differences that apply to different classes. This is 
consistent with other Exchange functionality, such as auctions, which 
the Exchange may activate on a class basis.\14\ For example, in classes 
in which there is high retail customer order volume, the Exchange 
believes Market-Makers may be willing to accept additional execution 
risk for the additional opportunities to execute against a significant 
number of customer orders, which may ultimately offset any stale-priced 
executions against faster-acting professional customers. To the 
contrary, in low volume classes or classes comprised mostly of 
professional investor volume, the execution risk is greater as there 
are fewer potential executions against customers to offset the risk. 
Additionally, in classes with smaller minimum increments, the execution 
risk is higher because Market-Maker quote updates may be more granular 
and thus more frequent. Therefore, in a non-penny class, a ``stale'' 
execution price may be wider than it might be in a penny class and thus 
still within a Market-Maker's pricing parameters and risk profile. The 
Exchange notes it does not believe this class flexibility is necessary 
for its current protection functionality (which applies to all 
classes), as the Exchange understands Market-Makers primarily use bulk 
port functionality to provide liquidity and satisfy their quoting 
obligations. As there are Market-Makers appointed to all classes 
trading on the Exchange, the Exchange believes it is appropriate to 
prevent this interest (orders and bulk messages) submitted through bulk 
ports in all classes from executing against resting Market-Maker 
interest, as much of the incoming interest was likely submitted to rest 
on the Book (and satisfy quoting obligations to provide liquidity to 
the market) rather than execute upon entry.
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    \14\ See, e.g., Rule 5.37(a)(1) (permitting the Exchange to 
determine in which classes orders may be submitted into an automated 
improvement mechanism (``AIM'') auction for potential price 
improvement).
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    The Exchange also believes limiting the proposed rule change to 
orders of Market-Makers (Capacity M) is appropriate because it is 
consistent with current and prior functionality, which protected 
resting Market-Maker interest from incoming Market-Maker interest.\15\ 
As noted above, Market-Maker systems may automatically generate order 
and quote updates in response to market changes. The Exchange believes 
resting Market-Maker interest should be protected from stale execution 
against all incoming Market-Maker interest generated by those same 
systems, regardless of the type of port through which the interest is 
submitted.
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    \15\ The Exchange notes current functionality also prevents 
execution of orders with Capacities other than M against resting 
Market-Maker quotes. See Rule 5.5(c)(3) (requiring users other than 
appointed Market-Makers to submit orders through bulk ports as Post 
Only, which cannot execute upon entry against resting interest). If 
the Securities and Exchange Commission (``Commission'') approves the 
proposed rule change, the Exchange may determine to submit a 
separate rule filing to propose to extend QPT to other Capacities.
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    Pursuant to proposed Rule 5.32(h)(3), during the quote protection 
period, neither the initial aggressor order (or unexecuted portion) nor 
any other incoming marketable orders with Capacity M received during 
the quote protection period (together with the initial aggressor order, 
the ``aggressor orders'') may execute against the protected quote or 
any other contra-side bulk message quotes with Capacity M that enter 
the Book (together with the initial protected quote, the ``protected 
quotes''), and the System ranks (in time priority) and displays the 
aggressor orders at one minimum price variation below (above) the price 
of the displayed protected offer (bid).\16\ In other words, during the 
quote protection period, no aggressor orders may execute against 
protected quotes resting in the Book. Therefore, all aggressor orders 
in a series that are entered during an ongoing quote protection period 
are similarly prevented from executing against any protected quote 
(whether

[[Page 62615]]

the initial protected quote or any protected quote in that series that 
is entered during the quote protection period and rests on the Book). 
Additionally, by having incoming aggressor orders ``join'' the initial 
aggressor order and incoming protected quotes ``join'' the initial 
protected quotes, a series with protected quotes will be subject to a 
full quote protection period for the protected quotes in that series.
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    \16\ This is similar to the Exchange's Price Adjust 
functionality (see Rule 5.32(b)), which prevents the Exchange from 
disseminating a locked or crossed market.
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    The TPH that submitted any aggressor order during the quote 
protection period, or the Market-Maker that submitted any protected 
quote during the quote protection period, may update the price of its 
order or quote, as applicable; however, those orders and quotes remain 
firm at their displayed prices in accordance with Rule 5.59 until 
updated. Therefore, aggressor orders and protected quotes may continue 
to execute at their resting prices (which is an adjusted price with 
respect to aggressor orders, as described above) against incoming 
interest. This provides other interest that enters the Book during the 
quote protection period with potential execution opportunities. 
Specifically:
     an incoming order with a Capacity other than M (``non-
aggressor order'') executes against resting contra-side interest at its 
displayed price in accordance with the allocation algorithm applicable 
to the class;
     an incoming aggressor order executes against resting non-
protected quote contra-side interest at its adjusted price in 
accordance with the allocation algorithm applicable to the class; and
     an incoming contra-side order or quote executes against 
resting aggressor and non-aggressor orders at their displayed prices in 
accordance with the allocation algorithm applicable to the class.
    If (a) for simple orders, there are no more protected quotes at the 
initial prices of any price-adjusted aggressor orders, the System 
unadjusts the prices of the aggressor buy (sell) orders to one minimum 
price variation below (above) the next lowest (highest) priced 
protected quote (to their limit prices); or (b) for complex orders, the 
SBO (SBB) increases (decreases), the System unadjusts the prices of the 
aggressor buy (sell) complex orders to one minimum variation below 
(above) the then-current SBO (SBB) (to their limit prices).
    Proposed Rule 5.32(h)(4) provides at the conclusion of the quote 
protection period, the System unadjusts the prices of the aggressor 
orders (or unexecuted portions) to their initial prices, which then 
execute (in time priority) against any remaining marketable contra-side 
interest, including the protected quotes, in accordance with the 
allocation algorithm applicable to the class; \17\ and any unexecuted 
portions of aggressor orders rest on the Book and unexecuted portions 
of protected quotes remain on the Book.\18\
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    \17\ See Rule 5.33(a).
    \18\ If the market closes or the Exchange halts trading in the 
affected series prior to the conclusion of the quote protection 
period, the QPT concludes without execution.
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    The Exchange believes the proposed rule change to delay execution 
of resting Market-Maker quotes against incoming aggressor Market-Maker 
interest is appropriate, rather than prevention of execution (as occurs 
in current functionality described above), because as noted above, 
unlike interest submitted through bulk ports (the primary purpose of 
which is to provide liquidity on the Book), the primary purpose of 
orders submitted through non-bulk ports is to execute against interest 
resting on the Book.\19\ Therefore, the Exchange believes it is 
important to provide this incoming interest with execution 
opportunities, after a slight delay, to provide Market-Makers with 
opportunities to effect their quote updates. Additionally, execution of 
bulk messages (which may only be submitted through bulk ports) exposes 
Market-Makers to increased risk compared to order execution. For 
example, the System will not determine whether a Market-Maker's risk 
monitor mechanism \20\ thresholds have been exceeded until all quotes 
within a bulk message have been processed, unlike orders, which may 
result in execution in only one series before the System determines 
whether those thresholds have been exceeded. The Exchange believes the 
proposed rule change will close a gap that currently exposes Market-
Maker liquidity resting on the Book to executions at potentially stale 
prices due to technology disparities against the orders submitted by 
Market-Makers through non-bulk ports. The quote protection timer will 
provide a balance between protecting resting Market-Maker quotes in 
order to maintain liquidity and providing incoming Market-Maker 
interest with execution opportunities.
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    \19\ It is possible some liquidity providers, including Market-
Makers, are submitting orders through non-bulk ports for the 
provision of liquidity, but the Exchange believes this represents a 
small portion of non-bulk port order flow.
    \20\ See Rule 5.34(c)(4), pursuant to which a user's (including 
a Market-Maker's) interest may be cancelled after that user's risk 
limits have been exceeded. As a result, quotes in a bulk message 
will complete executions before determination of whether a user's 
risk limits have been exceeded. This makes execution risk of bulk 
message greater than an order, which only has a bid or offer for one 
series.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\21\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \22\ requirements that the rules of an exchange be 
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 regulating, clearing, 
settling, processing information with respect to, and 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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \23\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ Id.
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    In particular, the Exchange believes the proposed rule change will 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a national market system, and protect 
investors. The proposed rule change is intended to prevent incoming 
Market-Maker orders submitted through non-bulk ports from immediately 
executing against resting Market-Maker interest at potentially stale 
prices due to technological disparities between Market-Makers. The 
Exchange believes the proposed functionality will reduce execution of 
resting Market-Maker interest at prices that do not reflect the then-
current market, which executions may impede certain liquidity 
providers' ability to competitively price their bids and offers. 
Specifically, this increased risk of execution at stale prices may 
cause Market-Makers to widen their quotes or otherwise withhold 
liquidity to the detriment of investors. The Exchange expects the 
proposed rule change to increase liquidity and enhance competition in 
the market, because Market-Makers may be able to quote more 
aggressively with less concern about exposure to execution risk due to 
technological disparities in their quoting systems compared to other

[[Page 62616]]

market participants' order entry systems. As a result, the Exchange 
believes this protection for resting Market-Maker interest, and 
resulting increased liquidity and competition, would ultimately remove 
impediments to the market and benefit all investors.
    Given the critical role Market-Makers play in the options market, 
the Exchange believes it is imperative to have the ability to protect 
Market-Makers' resting quotes from execution at stale prices against 
incoming Market-Maker interest due to technological disparities between 
Market-Makers. The Exchange believes it should be able to extend this 
protection to incoming Market-Maker interest from non-bulk ports, as 
technological disparities between Market-Makers can expose Market-
Makers to the same level of risk regardless of which type of port 
Market-Makers submit interest. Ultimately, this exposure to risk from 
may negatively impact liquidity to the detriment of the entire market. 
Unlike quotes and orders submitted through bulk ports, the primary 
purpose of which is generally to rest on the Book and provide 
liquidity, it is likely the intention of orders submitted through non-
bulk ports to execute against the resting interest (including Market-
Maker quotes). As a result, the Exchange believes it is important to 
balance the need to protect resting Market-Maker quotes from executions 
at stale prices with the need to provide opportunities for this 
incoming interest to execute against those quotes. The Exchange 
believes the proposed rule change to slightly delay execution of 
certain aggressing interest provides an equitable balance between the 
need to protect resting Market-Maker interest and provide incoming 
interest with execution opportunities.
    The Exchange believes the proposed rule change is not designed to 
permit unfair discrimination by providing the Exchange with the ability 
to provide Market-Maker quotes with additional protection. The options 
market is driven by Market-Maker quotes, and thus Market-Maker quotes 
are critical to provide liquidity to the market and contribute to price 
discovery for investors. If Market-Makers do not have sufficient time 
to refresh their resting quotes (the primary source of liquidity for 
customers in the market) in response to market updates before executing 
against incoming interest that has incorporated those market updates, 
this increased risk of execution at stale prices may cause Market-
Makers to widen their quotes to the detriment of investors or otherwise 
withhold liquidity. This reduced liquidity may reduce execution 
opportunities or cause executions to occur at worse prices for 
customers. Further, Market-Makers must comply with various obligations, 
including to provide continuous electronic quotes and to update quotes 
in response to market conditions.\24\ It takes time for Market-Makers 
to update quotes in series in their appointed classes, which may not 
take effect until after faster market participants have updated orders. 
The Exchange believes it is appropriate to provide Market-Maker quotes 
with a reasonable amount of protection (as the proposed rule change 
would provide) to allow them to execute at prices reflective of market 
updates given the Market-Makers' need to comply with these obligations 
and the resources they expend to comply with these obligations.\25\ As 
described above, the protected quotes and aggressor orders will remain 
firm during the quote protection period, and executions will continue 
during that period.
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    \24\ See Rule 5.51.
    \25\ See id.
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    Further, the Exchange believes the proposed rule change to provide 
the Exchange with flexibility to determine whether to enable QPT on a 
class basis, and in such classes to provide the Exchange with 
flexibility to determine the length of the quote protection period, is 
not designed to permit unfair discrimination. The Exchange believes 
this flexibility is appropriate to address market structure 
differences, including differences among market participants and 
activity levels, within different classes, which flexibility the 
Exchange has with respect to other functionality, such as auctions.\26\ 
For example, in classes in which there is high retail customer order 
volume, the Exchange believes Market-Makers may be willing to accept 
additional execution risk for the additional opportunities to execute 
against a significant number of customer orders, which may ultimately 
offset any stale-priced executions against faster-acting professional 
customers. To the contrary, in low volume classes or classes comprised 
mostly of professional investor volume, the execution risk is greater 
as there are fewer potential executions against customers to offset the 
risk. Additionally, in classes with smaller minimum increments, the 
execution risk is higher because Market-Maker quote updates may be more 
granular and thus more frequent. Therefore, in a non-penny class, a 
``stale'' execution price may be wider than it might be in a penny 
class. The Exchange notes it does not believe this class flexibility is 
necessary for its current protection functionality (which applies to 
all classes), as the Exchange understands Market-Makers primarily use 
bulk port functionality to provide liquidity and satisfy their quoting 
obligations. As there are Market-Makers appointed to all classes 
trading on the Exchange, the Exchange believes it is appropriate to 
prevent this interest (orders and bulk messages) submitted through bulk 
ports in all classes from executing against resting Market-Maker 
interest, as much of the incoming interest was likely submitted to rest 
on the Book (and satisfy quoting obligations to provide liquidity to 
the market) rather than execute upon entry.
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    \26\ See, e.g., Rule 5.37(a)(1) (permitting the Exchange to 
determine in which classes orders may be submitted into an AIM 
auction for potential price improvement) and (c)(3) (permitting the 
Exchange to determine the length of the AIM auction period on a 
class basis).
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    The Exchange also believes limiting the proposed rule change to 
orders of Market-Makers (Capacity M) is appropriate because it is 
consistent with current and prior functionality, which protected 
resting Market-Maker interest from incoming Market-Maker interest.\27\ 
As noted above, Market-Maker systems may automatically generate order 
and quote updates in response to market changes. The Exchange believes 
resting Market-Maker interest should be protected from stale execution 
against all incoming Market-Maker interest generated by those same 
systems, regardless of the type of port through which the interest is 
submitted. Therefore, the Exchange believes the proposed rule change to 
close this current gap exposing resting Market-Maker interest to 
execution risk against incoming Market-Maker interest submitted through 
non-bulk ports due to technological disparities will remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest.
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    \27\ The Exchange notes current functionality also prevents 
execution of orders with Capacities other than M against resting 
Market-Maker quotes. See Rule 5.5(c)(3) (requiring users other than 
appointed Market-Makers to submit orders through bulk ports as Post 
Only, which cannot execute upon entry against resting interest). If 
the Securities and Exchange Commission (``Commission'') approves the 
proposed rule change, the Exchange may determine to submit a 
separate rule filing to propose to extend QPT to other Capacities.
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    The Exchange notes the underlying purpose of this proposed rule 
change, which is to provide resting Market-Maker quotes with time to 
update in response to market condition changes, is the same as the 
primary purpose of functionality and previously available

[[Page 62617]]

on the Exchange.\28\ The Exchange believes the proposed rule change to 
delay execution of resting Market-Maker quotes against incoming 
aggressor interest is appropriate, rather than prevention of execution 
(as occurs in current functionality described above), because as noted 
above, unlike interest submitted through bulk ports (the primary 
purpose of which is to provide liquidity on the Book), the primary 
purpose of orders submitted through non-bulk ports is to execute 
against interest resting on the Book.\29\ Therefore, the Exchange 
believes it is important to provide this incoming interest with 
execution opportunities, after a slight delay, to provide Market-Makers 
with opportunities to effect their quote updates. Additionally, 
execution of bulk messages (which may only be submitted through bulk 
ports) exposes Market-Makers to increased risk compared to order 
execution. For example, the System will not determine whether a Market-
Maker's risk monitor mechanism \30\ thresholds have been exceeded until 
all quotes within a bulk message have been processed, unlike orders, 
which may result in execution in only one series before the System 
determines whether those thresholds have been exceeded. The Exchange 
believes the proposed rule change will close a gap that currently 
exposes Market-Maker liquidity resting on the Book to executions at 
potentially stale prices due to technology disparities against Market-
Maker orders submitted through non-bulk ports. The quote protection 
timer will provide a balance between protecting resting Market-Maker 
quotes in order to maintain liquidity and providing incoming interest 
with execution opportunities.
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    \28\ See Rules 5.5(c)(3) and 5.32(c)(6); see also Securities 
Exchange Act Release Nos. 86374 (July 15, 2019), 84 FR 34963 (July 
19, 2019) (SR-CBOE-2019-033) (adoption of current Rules 5.5(c)(3) 
and 5.32(c)(6)); and 51822 (June 10, 2005), 70 FR 35321 (June 17, 
2005) (SR-CBOE-2004-87) (adoption of former Cboe Rule 6.45(c)).
    \29\ It is possible some liquidity providers, including Market-
Makers, are submitting orders through non-bulk ports for the 
provision of liquidity, but the Exchange believes this represents a 
small portion of non-bulk port order flow.
    \30\ See Rule 5.34(c)(4), pursuant to which a user's (including 
a Market-Maker's) interest may be cancelled after that user's risk 
limits have been exceeded. As a result, quotes in a bulk message 
will complete executions before determination of whether a user's 
risk limits have been exceeded. This makes execution risk of bulk 
message greater than an order, which only has a bid or offer for one 
series.
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    The proposed temporary adjustment of aggressor order prices will 
further perfect the mechanism of a free and open market and national 
market system, as it will prevent the display of a locked or crossed 
market consistent with the Linkage Plan.\31\ This proposed handling of 
these orders is also consistent with the Exchange's current Price 
Adjust functionality.\32\
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    \31\ See Rule 5.66.
    \32\ See Rule 5.32(g).
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    As noted above, the options market is driven by Market-Maker 
quotes, and thus Market-Maker quotes are critical to provide liquidity 
to the market and contribute to price discovery for investors. The 
proposed functionality is designed to permit the Exchange to provide 
Market-Makers with further protection against executions at potentially 
stale prices due to technology disparities while still providing 
incoming Market-Maker orders submitted through non-bulk ports with 
execution opportunities. The Exchange believes the proposed enhanced 
functionality will permit liquidity providers to more efficiently enter 
and update bids and offers. This may cause Market-Makers to quote 
tighter and deeper markets, which will increase liquidity and enhance 
competition to the ultimate benefit of all market participants.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act, because it will apply in the same manner to all 
incoming Market-Maker orders in non-bulk ports. The primary purpose of 
the proposed rule change is to permit the Exchange to provide 
additional protection to resting Market-Maker quotes from executions 
against incoming Market-Maker interest at potentially stale prices 
before they have the opportunity to update in response to market 
condition changes. The Exchange believes it is reasonable to provide 
additional protection to Market-Makers given their unique and critical 
role in the options market and the various obligations that Market-
Makers must satisfy, as discussed above. Additionally, as noted above, 
the proposed functionality supplements similar functionality currently 
available on the Exchange, which similarly protects resting Market-
Maker interest against executions at potentially stale prices.\33\ The 
Exchange does not believe the proposed flexibility to apply QPT on a 
class basis, or determine the length of the timer on a class basis, 
will impose any burden on intramarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act, as such 
flexibility is reasonable to address market structure differences among 
classes, as discussed above.
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    \33\ See Rule 5.32(c)(6).
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    The Exchange does not believe 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 
applies solely to the timing of executions against resting Market-Maker 
quotes on the Exchange. As noted above, the proposed rule change is 
consistent with the Linkage Plan.\34\
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    \34\ See Rule 5.66.
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    Additionally, the Exchange believes the proposed rule change will 
relieve any burden on, or otherwise promote, competition. As discussed 
above, the Exchange believe the proposed rule change may encourage the 
provision of more aggressive liquidity, which may result in more 
trading opportunities and tighter spreads, which contributes to price 
discovery. This may improve overall market quality and enhance 
competition on the Exchange.

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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:

[[Page 62618]]

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CBOE-2023-044 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-2023-044. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-CBOE-2023-044 and should be 
submitted on or before October 3, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-19593 Filed 9-11-23; 8:45 am]
BILLING CODE 8011-01-P


