
[Federal Register Volume 88, Number 248 (Thursday, December 28, 2023)]
[Notices]
[Pages 89771-89783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-28608]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99222; File No. SR-CBOE-2023-018]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 3 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 3, To Make Permanent 
the Operation of its Flexible Exchange Options Pilot Program Regarding 
Permissible Exercise Settlement Values for FLEX Index Options

December 21, 2023.

I. Introduction

    On April 10, 2023, Cboe Exchange, Inc. (``Exchange'') filed with 
the Securities and Exchange Commission (``Commission''), pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to

[[Page 89772]]

make permanent the operation of its Flexible Exchange Options (``FLEX 
Options'') pilot program that permits PM-settled Flexible Exchange 
Index Options (``FLEX PM Third Friday Options'') to expire on or within 
two business days of the third-Friday-of-the-month expirations for non-
FLEX Options (``Pilot Program'').\3\ The proposed rule change was 
published for comment in the Federal Register on April 28, 2023.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A third-Friday-of-the month expiration is referred to as 
``Expiration Friday''. Prior to the Pilot Program, Exchange rules 
prohibited PM-settled FLEX Index Options to expire on any business 
day that falls on or within two business days of an Expiration 
Friday. During the Pilot Program, PM-settled FLEX Index Options are 
permitted on or within two business days of an Expiration Friday.
    \4\ See Securities Exchange Act Release No. 97368 (April 24, 
2023), 88 FR 26353 (``Notice'').
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    On June 8, 2023, pursuant to section 19(b)(2) of the Act,\5\ 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.\6\ On July 19, 2023, the Commission instituted proceedings 
under section 19(b)(2)(B) of the Act \7\ to determine whether to 
approve or disapprove the proposed rule change.\8\ On September 26, 
2023, CBOE filed Amendment No. 1 to the proposed rule change.\9\ On 
September 27, 2023, the Commission designated a longer period for 
Commission action on the proposed rule change.\10\ On November 20, 
2023, CBOE filed Amendment No. 2 to the proposed rule change.\11\ On 
December 7, 2023, CBOE filed Amendment No. 3 to the proposed rule 
change.\12\ The Commission is publishing this notice to solicit 
comments on Amendment No. 3 from interested persons, and is approving 
the proposed rule change, as modified by Amendment No. 3, on an 
accelerated basis.
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 97672, 88 FR 38930 
(June 14, 2023).
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 97950, 88 FR 47930 
(July 25, 2023).
    \9\ Amendment No. 1 superseded and replaced the original 
proposal in its entirety. Amendment No. 1 was subsequently 
superseded and replaced in its entirety by Amendment No. 2.
    \10\ See Securities Exchange Act Release No. 98557, 88 FR 68236 
(October 3, 2023). The Commission designated December 24, 2023, as 
the date by which the Commission shall approve or disapprove the 
proposed rule change.
    \11\ Amendment No. 2 superseded and replaced Amendment No. 1 in 
its entirety. Amendment No. 2 was subsequently superseded and 
replaced in its entirety by Amendment No. 3.
    \12\ Amendment No. 3, which supersedes and replaces Amendment 
No. 2 in its entirety, provides additional support and data for the 
Exchange's assertion that listing and trading of FLEX PM Third 
Friday Index Options under the Pilot Program has had no negative 
impact on the market and price volatility of underlying indexes and 
their underlying component stocks or related products or negatively 
impacts options market quality. Amendment No. 3 is available at 
https://www.sec.gov/comments/sr-cboe-2023-018/srcboe2023018-308519-794402.pdf.
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II. Self-Regulatory Organization's Description of the Proposal, as 
Modified by Amendment No. 3 \13\
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    \13\ This Section II reproduces Amendment No. 3, as filed by the 
Exchange.
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    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to make permanent its Pilot Program that 
permits the Exchange to list FLEX Options overlying indexes (``FLEX 
Index Options'') whose exercise settlement value is derived from 
closing prices on the last trading day prior to expiration that expire 
on or within two business days of a third Friday-of-the-month 
expiration day for a non-FLEX Option (other than QIX options) (``FLEX 
PM Third Friday Options''). The Securities and Exchange Commission (the 
``Commission'') approved a Cboe Options rule change that, among other 
things, established a pilot program regarding permissible exercise 
settlement values for FLEX Index Options on January 28, 2010.\14\ The 
Exchange has extended the pilot period nearly 20 times since the 
Commission initially approved the Pilot Program in 2010, with the pilot 
period currently set to expire on the earlier of May 6, 2024 or the 
date on which the pilot program is approved on a permanent basis.\15\ 
The Exchange hereby requests that the Commission approve the Pilot 
Program on a permanent basis.
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    \14\ Securities Exchange Act Release No. 61439 (January 28, 
2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (``Approval 
Order''). The initial pilot period was set to expire on March 28, 
2011, which date was added to the rules in 2010. See Securities 
Exchange Act Release No. 61676 (March 9, 2010), 75 FR 13191 (March 
18, 2010) (SR-CBOE-2010-026).
    \15\ See Securities Exchange Act Release Nos. 64110 (March 23, 
2011), 76 FR 17463 (March 29, 2011) (SR-CBOE-2011-024); 66701 (March 
30, 2012), 77 FR 20673 (April 5, 2012) (SR-CBOE-2012-027); 68145 
(November 2, 2012), 77 FR 67044 (November 8, 2012) (SR-CBOE-2012-
102); 70752 (October 24, 2013), 78 FR 65023 (October 30, 2013) (SR-
CBOE-2013-099); 73460 (October 29, 2014), 79 FR 65464 (November 4, 
2014) (SR-CBOE-2014-080); 77742 (April 29, 2016), 81 FR 26857 (May 
4, 2016) (SR-CBOE-2016-032); 80443 (April 12, 2017), 82 FR 18331 
(April 18, 2017) (SR-CBOE-2017-032); 83175 (May 4, 2018), 83 FR 
21808 (May 10, 2018) (SR-CBOE-2018-037); 84537 (November 5, 2018), 
83 FR 56113 (November 9, 2018) (SR-CBOE-2018-071); 85707 (April 23, 
2019), 84 FR 18100 (April 29, 2019) (SR-CBOE-2019-021); 87515 
(November 13, 2020), 84 FR 63945 (November 19, 2019) (SR-CBOE-2019-
108); 88782 (April 30, 2020), 85 FR 27004 (May 6, 2020) (SR-CBOE-
2020-039); 90279 (October 28, 2020), 85 FR 69667 (November 3, 2020) 
(SR-CBOE-2020-103); 91782 (May 5, 2021), 86 FR 25915 (May 11, 2021) 
(SR-CBOE-2021-031); 93500 (November 1, 2021), 86 FR 61340 (November 
5, 2021) (SR-CBOE-2021-064); 94812 (April 28, 2022), 87 FR 26381 
(May 4, 2022) (SR-CBOE-2022-020); 96239 (November 4, 2022), 87 FR 
67985 (November 10, 2022) (SR-CBOE-2022-053); 97452 (May 8, 2023), 
88 FR 30821 (May 12, 2023) (SR-CBOE-2023-025); and 98637 (September 
28, 2023), 88 FR 68819 (October 4, 2023) (SR-CBOE-2023-057). At the 
same time the permissible exercise settlement values pilot was 
established for FLEX Index Options, the Exchange also established a 
pilot program eliminating the minimum value size requirements for 
all FLEX Options. See Approval Order, supra note 3. The pilot 
program eliminating the minimum value size requirements was extended 
twice pursuant to the same rule filings that extended the 
permissible exercise settlement values (for the same extended 
periods) and was approved on a permanent basis in a separate rule 
change filing. See id.; and Securities Exchange Act Release No. 
67624 (August 8, 2012), 77 FR 48580 (August 14, 2012) (SR-CBOE-2012-
040) (Order Granting Approval of Proposed Rule Change Related to 
Permanent Approval of Its Pilot on FLEX Minimum Value Sizes).
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    By way of background, when cash-settled \16\ index options were 
first introduced in the 1980s, settlement was based on the closing 
value of the underlying index on the option's expiration date. The 
Commission later became concerned about the impact of P.M.-settled, 
cash-settled index options on the markets for the underlying stocks at 
the close on expiration Fridays. Specifically, certain episodes of 
price reversals around the close on quarterly expiration dates 
attracted the attention of regulators to the possibility that the 
simultaneous expiration of index futures, futures options, and options 
might be inducing abnormal volatility in the index value around the 
close.\17\ Academic research at the time provided

[[Page 89773]]

at least some evidence suggesting that futures and options expirations 
contributed to excess volatility and reversals around the close on 
those days.\18\ In light of the concerns with P.M.-settlement and to 
help ameliorate the price effects associated with expirations of P.M.-
settled, cash-settled index products, in 1987, the Commodity Futures 
Trading Commission (``CFTC'') approved a rule change by the Chicago 
Mercantile Exchange (``CME'') to provide for A.M. settlement \19\ for 
index futures, including futures on the S&P 500 Index.\20\ The 
Commission subsequently approved a rule change by Cboe Options to list 
and trade A.M.-settled SPX options.\21\ In 1992, the Commission 
approved Cboe Options' proposal to transition all of its European-style 
cash-settled options on the S&P 500 Index to A.M.-settlement \22\; 
however, in 1993, the Commission approved a rule allowing Cboe Options 
to list P.M.-settled options on certain broad-based indices, including 
the S&P 500 Index, expiring at the end of each calendar quarter 
(``Quarterly Index Expirations'').\23\ Starting in 2006, the Commission 
noticed or approved numerous rule changes, on a pilot basis, permitting 
the Cboe Options to introduce other index options with P.M.-
settlement.\24\ These include the Pilot Program,\25\ P.M.-settled index 
options expiring weekly (other than the third Friday of the month) and 
at the end of each month (``EOM''),\26\ P.M.-settled options on the S&P 
500 Index that expire on the third Friday-of-the-month (``SPXPM''),\27\ 
as well as P.M.-settled Mini-SPX Index (``XSP'') options and Mini-
Russell 2000 Index (``MRUT'') options expiring on the third Friday of 
the month.\28\ The Commission recently approved proposed rule changes 
to make these other pilot programs to list P.M.-settled index options 
permanent.\29\
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    \16\ The seller of a ``cash-settled'' index option pays out the 
cash value of the applicable index on expiration or exercise. A 
``physically settled'' option, like equity and ETF options, involves 
the transfer of the underlying asset rather than cash. See 
Characteristics and Risks of Standardized Options, available at: 
https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.
    \17\ The close of trading on the quarterly expiration Friday 
(i.e., the third Friday of March, June, September and December), 
when options, index futures, and options on index futures all expire 
simultaneously, became known as the ``triple witching hour.''
    \18\ See Securities and Exchange Commission, Division of 
Economic Risk and Analysis, Memorandum, Cornerstone Analysis of PM 
Cash-Settled Index Option Pilots (February 2, 2021) (``DERA Staff PM 
Pilot Memo'' or ``Pilot Memo'') at 5, available at: https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
    \19\ The exercise settlement value for an A.M.-settled index 
option is determined by reference to the reported level of the index 
as derived from the opening prices of the component securities on 
the business day before expiration.
    \20\ See Securities Exchange Act Release No. 24367 (April 17, 
1987), 52 FR 13890 (April 27, 1987) (SR-CBOE-87-11) (noting that CME 
moved S&P 500 futures contract's settlement value to opening prices 
on the delivery date).
    \21\ See id.
    \22\ See Securities Exchange Act Release No. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09). Thereafter, the 
Commission approved proposals by the options markets to transfer 
most of their cash-settled index products to A.M. settlement.
    \23\ See Securities Exchange Act Release No. 31800 (February 1, 
1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13).
    \24\ Securities Exchange Act Release Nos. 54123 (July 11, 2006), 
71 FR 40558 (July 17, 2006) (SR-CBOE-2006-65) (notice of filing of 
proposed rule change to list quarterly option series on up to five 
indexes or exchange-traded funds with p.m.-settlement); see also 
Securities Exchange Act Release No. 60164 (June 23, 2009), 74 FR 
31333 (June 30, 2009) (SR-CBOE-2009-029) (order permanently 
approving the program to list quarterly option series on up to five 
indexes or exchange-traded funds with p.m.-settlement).
    \25\ See Approval Order, supra note 14.
    \26\ See Securities Exchange Act Release Nos. 62911 (September 
14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-2009-075); 
76529 (November 30, 2015), 80 FR 75695 (December 3, 2015) (SR-CBOE-
2015-106); 78132 (June 22, 2016), 81 FR 42018 (June 28, 2016) (SR-
CBOE-2016-046); and 78531 (August 10, 2016), 81 FR 54643 (August 16, 
2016) (SR-CBOE-2016-046).
    \27\ See Securities Exchange Act Release No. 68888 (February 8, 
2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-2012-120) (the 
``SPXPM Approval Order''). Pursuant to Securities Exchange Act 
Release No. 80060 (February 17, 2017), 82 FR 11673 (February 24, 
2017) (SR-CBOE-2016-091), the Exchange moved third-Friday P.M.-
settled options into the S&P 500 Index options class, and as a 
result, the trading symbol for P.M.-settled S&P 500 Index options 
that have standard third Friday-of-the-month expirations changed 
from ``SPXPM'' to ``SPXW.'' This change went into effect on May 1, 
2017, pursuant to Cboe Options Regulatory Circular RG17-054.
    \28\ See Securities Exchange Act Release Nos. 70087 (July 31, 
2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055); and 91067 
(February 5, 2021) 86 FR 9108 (February 11, 2021) (SR-CBOE-2020-
116).
    \29\ See Securities Exchange Act Release Nos. 98454 (September 
20, 2023) (SR-CBOE-2023-005) (order approving proposed rule change 
to make permanent the operation of a program that allows the 
Exchange to list p.m.-settled third Friday-of-the-month SPX options 
series) (``SPXPM Approval''); 98455 (September 20, 2023) (SR-CBOE-
2023-019) (order approving proposed rule change to make permanent 
the operation of a program that allows the Exchange to list p.m.-
settled third Friday-of-the-month XSP and MRUT options series) 
(``XSP and MRUT Approval''); and 98456 (September 20, 2023) (SR-
CBOE-2023-020) (order approving proposed rule change to make the 
nonstandard expirations pilot program permanent) (``Nonstandard 
Approval'').
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    FLEX Index Options have traded on the Exchange since February 
1993.\30\ The Exchange began offering FLEX Index options in response to 
the development of an over-the-counter (``OTC'') market in customized 
index options, in which participants could designate basic option 
features, including size, expiration date, exercise style, and certain 
exercise prices.\31\ FLEX Index Options provide investors with the 
ability to customize these basic options terms in order to meet their 
individual investment needs. The Exchange understands that participants 
in the FLEX market are typically sophisticated portfolio managers, 
insurance companies, and other institutional investors who buy and sell 
options in larger-sized transactions. The Exchange continues to believe 
that market participants benefit from the trading of FLEX Index Options 
in several ways, including, but not limited to the following: (1) 
enhanced efficiency in initiating and closing out positions; (2) 
increased market transparency; and (3) heightened contra-party 
creditworthiness due to the role of the Options Clearing Corporation 
(``OCC'') as issuer and guarantor of FLEX Index Options. Further, the 
Exchange believes providing investors--institutional investors in 
particular--that require increased flexibility with respect to the 
terms of index options with the ability to customize basic options 
terms, including whether an option is A.M.-settled or P.M.-settled, is 
essential to meeting the needs of these investors so they can satisfy 
particular investment objectives that cannot otherwise be met by 
standard listed options.
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    \30\ See Securities Exchange Act Release No. 31920 (February 24, 
1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-17).
    \31\ See id. at 12281.
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    In recent years, the Exchange has heard from numerous institutional 
investors--insurance companies, in particular--who use index options to 
hedge their portfolio risk need those options to provide them with a 
level of precision not available in standard options. They have 
expressed their preference to transact on the Exchange to eliminate the 
counterparty risk they must incur by trading in the OTC market. The 
Exchange understands that it is a critical and regular part of an 
insurance company's business to hedge their risk, which many do with 
index options. When insurance companies issue policies to their 
customers, those companies accumulate liabilities for the payouts they 
may need to make to their customers pursuant to those policies. 
Insurance companies regularly hedge the notional amount of these 
liabilities to protect against downturns in the market. Because they 
are looking to protect against broad market downturns, broad-based 
index options are a tool insurance companies often use for this 
protection. Given the size of insurance companies' portfolios, which 
can be in the tens of billions of dollars, these portfolios translate 
to index options with an aggregate notional value of billions of 
dollars being transacted annually. The Exchange understands these 
companies often have to trade in the nontransparent, unregulated, and 
riskier OTC market (where there is counterparty risk and no price 
protection exists for these customers) because standard listed options 
do not often provide them with the precision they need to execute their 
hedges.

[[Page 89774]]

Whether an insurance company is able to precisely hedge the notional 
value of its portfolio ultimately impacts its customers. If an 
insurance company, for example, ``underhedges'' the notional value of 
its portfolio (which, again, is generally at least tens of billions of 
dollars), even 1% of such ``slippage'' would leave hundreds of millions 
of dollars of that portfolio unhedged,\32\ which creates significant 
risk for that company.\33\ Alternatively, if an insurance company 
``overhedges'' the notional value of its portfolio, that would 
unnecessarily tie up some of its financial resources, as the difference 
in value of the options and the value of the portfolio is serving no 
purpose. Either case will likely result in higher premiums or reduced 
benefits for customers. Therefore, the Exchange believes providing 
insurance companies with the continued ability to hedge with p.m.-
settled index options on all days, including the third Friday-of-the-
month, is critical so that insurance companies, in addition to other 
institutional investors, can choose FLEX Index Options terms that 
provide them with the precision they need to implement their hedging 
strategies on the Exchange as opposed to the unregulated, riskier OTC 
market.
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    \32\ For example, if an insurance company has a $40,000,000,000 
portfolio, 1% of that portfolio equates to $400,000,000.
    \33\ The Exchange notes the total unhedged risk across the 
insurance industry would be multiplied if each insurance company 
were unable to hedge the full notional value of its portfolio.
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    The benefits of the Exchange's FLEX market are demonstrated by the 
continued increase volume of FLEX Options executed on the Exchange. In 
2012, just under 9 million FLEX Options contracts (nearly 1.7 million 
of which were FLEX Index Options contracts) executed on the Exchange, 
compared to approximately 38.9 million FLEX Options contracts (over 2.8 
million of which were FLEX Index Options contracts) that executed on 
the Exchange in 2023 (through August). The Exchange has attributed much 
of the growth in the FLEX Options markets in recent years to the 
entrance into the FLEX market of new institutional investors. 
Institutional investors often use FLEX Options to execute their 
volatility strategies using exercise values and expiration dates not 
available in the standard market. Additionally, issuers of exchange-
traded funds (``ETFs'') have recently increased their usage of FLEX 
Options. FLEX Options are particularly useful in ETFs as opposed to 
standardized options contracts because they enable the issuers to have 
more granular control over the options exposure within a portfolio. In 
particular, ETFs that are designed to provide a ``defined outcome'' 
(i.e., a defined upside and downside risk to a particular index or 
underlying ETF) use FLEX Options because they can be used to tailor the 
options exposure in the portfolio by strike and date in such a way that 
is not possible with standardized options contracts.
    As stated above, since its inception in 2010, the Exchange has 
continuously extended the Pilot Program period and, during the course 
of the Pilot Program and in support of the extensions of the Pilot 
Program, the Exchange has submitted reports to the Commission regarding 
the Pilot Program that detail the Exchange's experience with the Pilot 
Program, pursuant to the Pilot Program requirements.\34\ Specifically, 
the Exchange provided the Commission with annual reports analyzing 
volume and open interest for each broad-based FLEX Index Options class 
overlying a third Friday-of-the-month expiration day, P.M.-settled FLEX 
Index Options series. The annual reports also contained certain pilot 
period and pre-pilot period analyses of volume and open interest for 
third Friday-of-the-month expiration days, A.M.-settled FLEX Index 
series and third Friday-of-the-month expiration day Non-FLEX Index 
series overlying the same index as a third Friday-of-the-month 
expiration day, P.M.-settled FLEX Index option. The annual reports also 
contained information and analysis of FLEX Index Options trading 
patterns, and index price volatility and underlying share trading 
activity for each broad-based index class overlying an Expiration 
Friday, P.M.-settled FLEX Index Option that exceeds certain minimum 
open interest parameters. The Exchange also provided the Commission, on 
a periodic basis, interim reports of volume and open interest.
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    \34\ See Approval Order, supra note 14.
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    Also, during the course of the Pilot Program, the Exchange provided 
the Commission with any additional data or analyses the Commission 
requested if it deemed such data or analyses necessary to determine 
whether the Pilot Program was consistent with the Exchange Act. The 
Exchange has made public on its website all data and analyses 
previously submitted to the Commission under the Pilot Program,\35\ and 
will continue to make public any data and analyses it submits to the 
Commission while the Pilot Program is still in effect.
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    \35\ Available at https://www.cboe.com/aboutcboe/legal-regulatory/national-market-system-plans/pm-settlement-spxpm-data.
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    The Exchange has concluded that FLEX PM Third Friday Options have 
not resulted in increased market and price volatility in the underlying 
component stocks, negatively impacted market quality, or raised any 
unique or prohibitive regulatory concerns. The Exchange has identified 
no evidence from the pilot data indicating that the trading of FLEX PM 
Third Friday Options had any adverse impact on fair and orderly markets 
on Expiration Fridays for broad-based indexes or the underlying 
securities comprising those indexes and has observed no abnormal market 
movements attributable to FLEX PM Third Friday Options from any market 
participants that have come to the attention of the Exchange.\36\
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    \36\ The Exchange also notes it is unaware of any concerns 
raised to it by market participants or of any public comments 
expressing concerns about the Pilot Program, including with respect 
to the current rule filing (which was noticed for public comment on 
April 28, 2023 and for which no public comments were submitted).
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    Based on a study conducted by the Commission's Division of Economic 
and Risk Analysis (``DERA'') staff on the pilot data from 2006 through 
2018,\37\ and the Exchange's review of the pilot data from 2019 through 
2021, the size of the market for P.M.-settled SPX options (including 
quarterly, weekly, EOM and third Friday expirations) since 2007 has 
grown from a trivial portion of the overall market to a substantial 
share (from around 0.1% of open interest in 2007 to 30% in 2021).\38\ 
Notional value of open interest in P.M.-settled SPX options increased 
from approximately a median of $1.5 billion in 2007 to $1.9 trillion in 
2021, approximately 1260 times its value in 2007. Notional open 
interest in A.M.-settled SPX options was already hovering around a 
median of $1.4 trillion in 2007, and it has since increased to 
approximately $4.4 trillion in 2021. It is also important to note that 
open interest on expiring P.M.-settled SPX options, as compared to 
A.M.-

[[Page 89775]]

settled options, is spread out across a greater number of expiration 
dates, which results in a smaller percentage of open interest expiring 
on any one date, thus mitigating concerns that SPXPM option expiration 
may have a disruptive effect on the market.\39\ Daily trading volume in 
P.M.-settled SPX options has increased from a median of about 700 
contracts in 2007 to nearly 1.9 million contracts in 2021,\40\ and now 
exceeds trading volume in A.M.-settled SPX options.
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    \37\ See DERA Staff PM Pilot Memo, at 13 (``Option settlement 
quantity data for A.M.- and P.M.-settled options were obtained from 
the Cboe, including the number of contracts that settled in-the-
money for each exchange-traded option series on the S&P 500 index . 
. . on expiration days from January 20, 2006 through December 31, 
2018. Daily open interest and volume data for [SPX] option series 
were also obtained from Cboe, including open interest data from 
January 3, 2006 through December 31, 2018 and trading volume data 
from January 3, 2006 through December 31, 2018.'')
    \38\ The DERA staff study reviewed and provided statistics for 
market share, median notional value of open interest and median 
volume in 2007 and in 2018. The Exchange provides updated statistics 
for market share, median notional value of open interest and median 
volume in 2021, replacing the 2018 statistics provided in the 
Commission staff study.
    \39\ See DERA Staff PM Pilot Memo, at 2.
    \40\ The Exchange notes that the DERA staff study used two-sided 
volume data for the median volume in 2007 and in 2018; therefore, 
the Exchange provides two-sided volume data for the median volume in 
2021.
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    Moreover, the DERA staff study of the P.M.-settled SPX options 
pilot data (2006 through 2018) did not identify any significant 
economic impact on S&P 500 futures,\41\ the S&P 500 Index, or the 
underlying component securities of the S&P 500 Index surrounding the 
close. For purposes of the study, volatility was by and large measured 
by using the standard deviation \42\ of one-minute returns of S&P 500 
futures values and the index value during regular hours on each day 
reviewed (excluding the first and last 15 minutes of trading) and then 
compared with the standard deviation of one-minute returns (for S&P 500 
futures, the S&P 500 Index, and the underlying component securities of 
the S&P 500 Index) over the last 15 minutes of a trading day.\43\ Using 
this as a general measure,\44\ the DERA staff study then reviewed 
whether, and to what extent, the settlement quantity of SPXPM options 
and the levels of open interest in SPXPM options on expiration days (as 
compared to non-expiration days) may be associated with general price 
volatility and price reversals for S&P 500 futures, the S&P 500 Index, 
and the underlying component securities of the S&P 500 Index near the 
close. From its review of the study, the Exchange agrees that, although 
volatility before the market close is generally higher than during the 
rest of the trading day, there is no evidence of any significant 
adverse economic impact to the futures, index, or underlying index 
component securities markets as a result of the quantity of P.M.-
settled SPX options that settle at the close or the amount of expiring 
open interest in P.M.-settled SPX options. For example, the largest 
settlement event that occurred during the time period of the study (a 
settlement of $100.4 billion of notional on December 29, 2017) had an 
estimated impact on the futures price of only approximately 0.02% (a 
predicted impact of $0.54 relative to a closing futures price of 
$2,677).
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    \41\ Futures on the S&P 500 experience high volume and liquidity 
both before and after the close of the underlying market. Therefore, 
futures are a useful measure of abnormal volatility surrounding the 
close and the open. See DERA Staff PM Pilot Memo, at 14. The 
Exchange agrees with this approach.
    \42\ Standard deviation applied to a rate of return (in this 
case, one-minute) of an instrument can indicate that instrument's 
historical volatility. The greater the standard deviation, the 
greater the variance between price and the mean, which indicates a 
larger price range, i.e., higher volatility.
    \43\ For example, if on a particular day the standard deviation 
of one-minute returns between 3:45 p.m. ET and 4:00 p.m. ET is 0.004 
and the standard deviation of returns from 9:45 a.m. ET to 3:45 p.m. 
ET is 0.002, this metric would take on a value of 2 for that day, 
indicating that volatility during the last 15 minutes of the trading 
day was twice as high as it was during the rest of the trading day. 
See DERA Staff PM Pilot Memo, at 15; see also DERA Staff PM Pilot 
Memo, at Section V, which discusses in detail the metrics used to 
measure, for the purposes of the study, the extent to which the 
market may experience abnormal volatility surrounding SPXPM option 
settlement.
    \44\ See DERA Staff PM Pilot Memo, at Section V, which discusses 
in detail the metrics used to measure, for the purposes of the 
study, the extent to which the market may experience abnormal 
volatility surrounding SPXPM option settlement.
---------------------------------------------------------------------------

    In particular, the DERA staff study found that an additional P.M.-
settled SPX options settlement quantity equal to $10 billion in 
notional value is associated with a marginal impact on futures prices 
during the last 15 minutes of the trading day of only about $0.06 
(where the hypothetical index level is 2,500), additional expiring open 
interest in P.M.-settled SPX options equal to $10 billion in notional 
value is associated with a marginal impact on futures prices during the 
last 15 minutes of the trading day of only about $0.05 (assumed index 
level is 2,500). Also, an additional increase in settlement quantity or 
in expiring open interest, each equal to $20 million in notional value, 
did not result in any meaningful futures price reversals near the close 
(neither was found to cause a price reversal of over one standard 
deviation.\45\)
---------------------------------------------------------------------------

    \45\ See supra note 42.
---------------------------------------------------------------------------

    Likewise, the study identified that an additional total P.M.-
settled SPX options settlement quantity equal to $10 billion in 
notional value corresponds to price movement in the S&P 500 of only 
about $0.08 (assuming an index level of 2,500) during the last 15 
minutes of the trading day, and that additional expiring open interest 
equal to $10 billion in notional value corresponds to a price movement 
in the S&P 500 of only about $0.06 (assuming an index level of 2,500) 
during the last 15 minutes of the trading day. The study also 
identified that it would take an increase of $34 billion in notional 
value of total settlement quantity and of expiring open interest for 
one additional S&P 500 price reversal of greater than two standard 
deviations to occur in the last 15 minutes before the market close. 
Also, regarding potential impact to S&P 500 component securities, it 
would take an increase in total P.M.-settled SPX options settlement 
quantity equal to $20 billion to effect a price movement of only 
approximately $0.03 for a $200 stock, an increase in expiring open 
interest in P.M.-settled SPX options equal to $10 billion to effect a 
price movement less than half a standard deviation, and an increase in 
total P.M.-settled SPX settlement quantity equal to $7 billion to 
achieve a price reversal greater two standard deviations.
    The study employed the same metrics to determine whether there is 
greater price volatility for S&P 500 futures, the S&P 500, and the 
component securities of the S&P 500 related to SPXPM option settlements 
during an environment of high market volatility (i.e., on days in which 
the VIX Index was in the top 10% of closing index values) and did not 
identify indicators of any significant economic impact on these markets 
near the close as a result of the P.M.-settled SPX options 
settlement.\46\ In addition to this, the DERA staff study, applying the 
same metrics and analysis as for P.M.-settled SPX options to A.M.-
settled SPX options, did not identify any evidence of a statistically 
significant relationship between settlement quantity or expiring open 
interest of A.M.-settled options and volatility near the open.
---------------------------------------------------------------------------

    \46\ The Exchange also notes that the study did not identify any 
evidence that less liquid S&P 500 constituent securities experienced 
any greater impact from the settlement of P.M.-settled SPX options.
---------------------------------------------------------------------------

    Upon review of the results of the DERA staff study, the Exchange 
agrees that each of the above-described marginal price movements in S&P 
500 futures, the S&P 500, and the S&P 500 component securities affected 
by increases in P.M.-settled SPX options settlement quantity and 
expiring open interest appear to be de minimis pricing changes from 
those that occur over regular trading hours (outside of the last 15 
minutes of the trading day). Further, the Exchange has not observed any 
significant economic impact or other adverse effects on the market from 
similar reviews of its pilot reports and data submitted after 2018.\47\ 
In its review of a sample of the pilot data from 2019 through 2021, the 
Exchange similarly measured volatility over the final fifteen minutes 
of each trading day by taking the standard deviation of

[[Page 89776]]

rolling one-minute returns of the S&P 500 level (excluding the first 
and last fifteen minutes of trading) and comparing such with the 
standard deviation of one-minute returns \48\ of the S&P 500 level, 
over the last 15 minutes of a trading day. The Exchange identified an 
average standard deviation ratio of 1.42 for the S&P 500 on non-
expiration days and an average standard deviation ratio of 1.54 for the 
S&P 500 on expiration days (a ratio between expiration days and non-
expiration days of 1.09). The Exchange also notes that, using the same 
methodology, it observed that, from 2015 through 2019,\49\ the average 
standard deviation ratio for the S&P 500 on non-expiration days was 
1.11 and the average standard deviation ratio for the S&P 500 on 
expiration days was 1.22 (a ratio between expiration days and non-
expiration days of 1.10). While the average standard deviation ratio on 
both expiration and non-expiration days was higher in 2019 through 2021 
due to overall market volatility, the ratios between the standard 
deviation ratios on expiration days and non-expirations days remained 
nearly identical between the 2015 through 2019 timeframe and the 2019 
through 2021. The Exchange believes this shows that, in cases where 
overall market volatility may increase, the normalized impact on 
expiration days to non-expiration days generally remains consistent.
---------------------------------------------------------------------------

    \47\ Total SPX open interest volumes were examined for 
expiration dates over a roughly two-year period between October 2019 
and November 2021.
    \48\ Calculated at every tick for the prior minute.
    \49\ November 2015 through November 2021.
---------------------------------------------------------------------------

    In addition to this, the Exchange notes that the S&P 500 Index is 
rebalanced quarterly. The changes resulting from each rebalancing 
coincide with the third Friday of the quarterly rebalancing month 
(i.e., March, June, September, October and December) \50\ and generally 
drive an increase in trading activity from investors that seek to track 
the S&P 500. As such, the Exchange measured volatility on quarterly 
rebalancing dates and found that the average standard deviation ratio 
was 1.62, which suggests more closing volatility on quarterly rebalance 
dates compared to non-quarterly expiration dates (for which the average 
standard deviation ratio was 1.22), thus indicating that the impact 
rebalancing may have on the S&P 500 Index is greater than any impact 
that P.M.-settled SPX options may have on the S&P 500 Index.
---------------------------------------------------------------------------

    \50\ See S&P Dow Jones Indices, Equity Indices Policies & 
Practices, Methodology (August 2021), at 15, available at https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-equity-indices-policies-practices.pdf.
---------------------------------------------------------------------------

    The Exchange additionally focused its study of the post-2018 sample 
pilot data on reviewing for potential correlation between excess market 
volatility and price reversals and the hedging activity of liquidity 
providers. As explained in the DERA staff study, potential impact of 
P.M.-settled SPX options on the correlated equity markets is thought to 
stem from the hedging activity of liquidity providers in such 
options.\51\ To determine any such potential correlation, the Exchange 
studied the expected action of liquidity providers that are the primary 
source of the hedging on settlement days. These liquidity providers 
generally delta-hedge their S&P 500 Index exposure via S&P 500 futures 
and on settlement day unwind their futures positions that correspond 
with the delta of their in-the-money (ITM) expiring P.M.-settled SPX 
options. Assuming such behavior, the Exchange estimated the Market-On-
Close (``MOC'') \52\ volume for the shares of the S&P 500 component 
securities (i.e., ``MOC share volume'') that could ultimately result 
from the unwinding of the liquidity providers' futures positions by 
equating the notional value of the futures positions that correspond to 
expiring ITM open interest to the number S&P 500 component security 
contracts (based on the weight of each S&P 500 component security). 
That is, the Exchange calculated (an estimate) of the amount of MOC 
volume in the S&P 500 component markets attributable hedging activity 
as a result of expiring ITM P.M.-settled SPX options (i.e., ``hedging 
MOC''). The Exchange then: (1) compared the hedging MOC share volume to 
all MOC share volume on expiration days and non-expiration trading 
days; and (2) compared the notional value of the hedging futures 
positions (i.e., that correspond to expiring ITM P.M.-settled SPX 
options open interest) to the notional value of expiring ITM P.M.-
settled SPX options open interest, the notional value of all expiring 
P.M.-settled SPX options open interest and the notional value of all 
P.M.-settled SPX options open interest.
---------------------------------------------------------------------------

    \51\ See DERA Staff PM Pilot Memo, at 10-12.
    \52\ MOC orders allow a market participant to trade at the 
closing price. Market participants generally utilize MOC orders to 
ensure they exit positions at the end of the trading day.
---------------------------------------------------------------------------

    The Exchange observed that, on average, there were approximately 
25% more MOC shares executed on expiration days (332 expiration days) 
than non-expiration days (209 non-expiration days). While, at first 
glance, the volume of MOC shares executed on expiration days seems much 
greater than the volume executed on non-expiration days, the Exchange 
notes that much of this difference is attributable to just eight 
expiration days--the quarterly index rebalancing dates captured within 
the scope of the post-2018 sample pilot data. The average MOC share 
volume on the eight quarterly rebalancing dates was approximately 4.8 
times the average MOC share volume on the non-quarterly rebalancing 
expiration dates; again, indicating that the impact rebalancing may 
have on the S&P 500 Index is greater than any impact that P.M.-settled 
SPX options may have on the S&P 500 Index. That is, the Exchange 
observed that the majority of closing volume on quarterly rebalance 
dates is driven by rebalancing of shares in in the S&P 500, and not by 
P.M.-settled SPX options expiration-related hedging activity. 
Notwithstanding the MOC share volume on quarterly rebalancing dates, 
the volume of MOC shares executed on expiration days (324 expiration 
days) was only approximately 13% more than that on non-expiration days, 
substantially less than the increase in volume over non-expiration days 
wherein the eight index rebalancing dates are included in expiration 
day volume. In addition to this, the Exchange observed that the hedging 
MOC share volume (i.e., the expected MOC share volume resulting from 
hedging activity in connection with expiring ITM P.M.-settled SPX 
options) was, on average, less than the MOC share volume on non-
expiration days, and was only approximately 20% of the total MOC share 
volume on expiration days, indicating that other sources of MOC share 
volume generally exceed the volume resulting from hedging activity of 
expiring ITM P.M.-settled SPX options and would more likely be a source 
of any potential market volatility.
    The Exchange also observed that, across all third-Friday 
expirations, the notional value of the hedging futures positions was 
approximately 25% of the notional value of expiring ITM P.M.-settled 
SPX options, approximately 3.8% of the notional value of all expiring 
P.M.-settled SPX options, and approximately only 0.5% of the notional 
value of all P.M.-settled SPX options. As such, the estimated hedging 
activity from liquidity providers on expiration days is a fraction of 
the expiring open interest in P.M.-settled SPX options, which, the 
Exchange notes, is only 14% of the total open interest in P.M.-settled 
SPX options; thus, indicating negligible capacity for hedging activity 
to increase volatility in the underlying markets.
    At the request of the Commission in connection with proposed rule 
changes to make other p.m.-settled options pilot programs permanent, 
the Exchange recently completed an analysis intended to evaluate 
whether the introduction of P.M.-settled options impacted the

[[Page 89777]]

quality of the A.M.-settled option market. Specifically, the Exchange 
compared values of key market quality indicators (specifically, the 
bid-ask spread \53\ and effective spread \54\) in SPXW options both 
before and after the introduction of Tuesday expirations and Thursday 
expirations for SPXW options on April 18 and May 11, 2022, 
respectively.\55\ Options on the Standard & Poor's Depositary Receipts 
S&P 500 ETF (``SPY'') were used as a control group to account for any 
market factors that might influence key market quality indicators. The 
Exchange used data from January 3, 2022 through March 4, 2022 (the two-
month period prior to the introduction of SPXW options with Tuesday 
expirations) and data from May 11, 2022 to July 10, 2022 (the two-month 
period following the introduction of SPXW options with Thursday 
expirations).\56\
---------------------------------------------------------------------------

    \53\ The Exchange calculated for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading 
hours session, adjusted for the difference in size between SPXW 
options and SPY options (SPXW options are approximately ten times 
the value of SPY options).
    \54\ The Exchange calculated the volume-weighted average daily 
effective spread for simple trades for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) as twice the amount 
of the absolute value of the difference between an order execution 
price and the midpoint of the national best bid and offer at the 
time of execution, adjusted for the difference in size between SPXW 
options and SPY options.
    \55\ For purposes of comparison, the Exchange paired SPXW 
options and SPY options with the same moneyness and same days to 
expiration.
    \56\ The Exchange observed comparable market volatility levels 
during the pre-intervention and post-intervention time ranges.
---------------------------------------------------------------------------

    As a result of this analysis, the Exchange believes the 
introduction of SPX options with Tuesday and Thursday options had no 
significant impact on the market quality of SPXW options with Monday, 
Wednesday, and Friday expirations. With respect to the majority of 
series analyzed, the Exchange observed no statistically significant 
difference in the bid-ask spread or the effective spread of the series 
in the period prior to introduction of the Tuesday and Thursday 
expirations and the period following the introduction of the Tuesday 
and Thursday expirations. While statistically insignificant, the 
Exchange notes that in many series, particularly as they were closer to 
expiration, the Exchange observed that the values of these spreads 
decreased during the period following the introduction of the Tuesday 
and Thursday expirations.\57\ The full analysis is included in Exhibit 
3 of this Amendment No. 3.\58\
---------------------------------------------------------------------------

    \57\ In any series in which the Exchange observed an increase in 
the market quality indicators, the Exchange notes any such increase 
was also statistically insignificant.
    \58\ Exhibit 3 begins at page 72 of 85 of Amendment No. 3 and is 
available at https://www.sec.gov/comments/sr-cboe-2023-018/srcboe2023018-308519-794402.pdf.
---------------------------------------------------------------------------

    Given the time that as passed since the introduction of FLEX PM 
Third Friday Options, the Exchange is unable to analyze whether the 
introduction of those options significantly impacted the market quality 
of non-FLEX A.M.-settled options at the time the FLEX PM Third Friday 
Options began trading. Additionally, the Exchange is unable to analyze 
whether the introduction of the FLEX P.M.-settled options significantly 
impacted the market quality of A.M.-settled FLEX options, as there is 
no book for FLEX options (and thus no quoted spreads), as FLEX options 
are listed only if and when market participants create them for 
trading. The Exchange acknowledges the above analysis, due to the type 
of study performed, may not be used as a direct substitute to 
demonstrate that the introduction of FLEX PM Third Friday Options did 
not significantly impact the market quality of non-FLEX A.M.-settled 
options. However, the Exchange believes the analysis is relevant. Since 
2013, approximately 400,000 contracts in FLEX PM Third Friday Options 
have executed on the Exchange, compared to 156 million total FLEX 
Options contracts; 14.2 billion total options contracts; 5.6 billion 
index option contracts; 3.8 billion total SPX options contracts; and 
2.3 billion A.M.-settled SPX options contracts in the same time period. 
This equates to an ADV of under 150 contracts for FLEX PM Third Friday 
Options compared to an ADV of over 800,000 contracts for SPX options 
over that time. As noted above, the Exchange's analysis demonstrated 
the introduction of SPXW options with Tuesday and Thursday expirations 
did not significantly impact the market quality of non-FLEX SPX P.M.-
options. Given that the Exchange determined, based on its above 
analysis, that the introduction of SPXW options with Tuesday and 
Thursday expirations had no significant impact on the market quality of 
non-FLEX SPX A.M.-settled options, the Exchange believes it is logical 
and reasonable to conclude that it is unlikely that the introduction of 
FLEX PM Third Friday Options (which has an ADV of approximately 0.04% 
the size of the ADV of SPXW Tuesday and Thursday expirations) \59\ 
would have any impact on the market quality of non-FLEX SPX A.M.-
settled options.
---------------------------------------------------------------------------

    \59\ The Exchange acknowledges that, while FLEX PM Third Friday 
Options has historically represented a very small percentage of 
overall volume, it is possible trading in these options may grow in 
the future.
---------------------------------------------------------------------------

    The Exchange believes it is fair to assume FLEX PM Third Friday 
Options likely had no measurable impact on that market of non-FLEX SPX 
options with A.M.-settlement for several reasons: (1) as noted above, 
the volume in the FLEX PM Third Friday Options is a minute fraction 
(0.02%) of SPX options with A.M.-settlement; (2) FLEX Options are not 
quoted on a continuous basis, so Market-Makers do not need to estimate 
the risk associated with the potential trade as they do with options 
they are continuously quoting in the non-FLEX Options market; and (3) 
the FLEX market requires either verbal responses on the trading floor 
or auction responses electronically to represented orders, which 
provides Market-Makers with time to decide whether to trade, something 
which does not occur for the thousands of series they continuously 
quote in the non-FLEX Options market.
    To further support the Exchange's view that FLEX PM Third Friday 
Options did not materially impact the market quality of corresponding 
non-FLEX options, the Exchange evaluated each FLEX PM Third Friday 
Options trade for more than 500 contracts \60\ that occurred on the 
Exchange during the last two years \61\ and analyzed the market quality 
(specifically, the average time-weighted quote spread and size 30 
minutes prior to the trade and the average time-weighted quote spread 
and size 30 minutes after the trade) of series of non-FLEX a.m.-settled 
options overlying the same index with similar terms as the FLEX PM 
Third Friday Option that traded (time to expiration, type (call or 
put), and strike price) as set forth in the table below: \62\
---------------------------------------------------------------------------

    \60\ The Exchange believes it is reasonable to consider only 
these large trades, because if large trades had no significant 
impact on market quality, then the Exchange believe it is unlikely 
that smaller trades would have had a significant impact on market 
quality. As noted below, the vast majority of FLEX PM Third Friday 
Options executed as parts of trades smaller than 500 contracts 
(which would have a notional value of 225,000). See Amendment No. 3, 
at 29-30.
    \61\ The Exchange believes it is reasonable to use data from 
this time period as representative of the entire pilot period given 
that volume in FLEX PM Third Friday Options remained consistently 
low throughout the entire pilot period. The Exchange notes this 
sampling of data points may not cover different market conditions, 
such as volatility levels (e.g., high volatility days), which may 
impact quote spreads and sizes of index options.
    \62\ All of these trades were SPX options. During the time 
period reviewed, there were no trades of more than 500 contracts for 
FLEX PM Third Friday Options in any other index class. The Exchange 
believes it is reasonable to limit this analysis to SPX options 
trades given that the vast majority of FLEX PM Third Friday Options 
trade were in SPX options, and the limited number of trades in 
options FLEX PM Third Friday Options (particularly given the smaller 
size of such trades) would have created sampling difficulties for 
designing a meaningful analysis of the impact of such trades on 
market quality of the corresponding non-FLEX a.m.-settled options.

[[Page 89778]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Average time-   Average time-   Average time-   Average time-
                                                                                          weighted quote  weighted quote  weighted quote  weighted quote
                              Date                                   Time     Number of    price spread    price spread    size prior to   contract size
                                                                              contracts   prior to trade    after trade        trade      after to trade
                                                                                                ($)             ($)         (contracts)     (contracts)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10/25/22........................................................      11:57          660            9.89            9.08            16.4            16.7
3/21/23.........................................................      13:07          660            9.40            9.76            13.8            13.9
12/20/22........................................................      12:23          655           10.29           10.28            27.2            27.5
11/22/22........................................................      12:49          635            9.85            9.78            25.6            25.8
9/20/22.........................................................      12:50          615           10.16           10.23            15.4            15.0
4/25/23.........................................................      13:05          610           11.66           11.54            20.1            19.9
5/23/23.........................................................      12:24          610            9.65            9.77            18.6            18.7
5/24/22.........................................................      11:44          590            8.99            8.87            15.1            15.6
3/22/22.........................................................      12:36          575           10.44           10.39            19.2            19.1
6/27/23.........................................................      11:58          560            9.57            9.61            13.9            14.3
7/25/23.........................................................      14:12          550           10.87           10.85            22.1            22.8
8/23/23.........................................................      13:48          535           11.41           11.44            15.6            15.2
1/24/23.........................................................      12:16          535            9.54            9.43            21.6            22.0
2/21/23.........................................................      13:01          515           10.20           10.22           18.61           18.65
6/21/22.........................................................      12:47          510           11.12           11.08            14.2            14.8
7/26/22.........................................................      12:23          510           10.66           10.67            16.8            16.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As this table demonstrates, the average time-weighted quote spread 
and size did not materially change after the FLEX PM Third Friday 
Options trade. Specifically, the average time-weighted quoted spread 
was never more than 0.36 wider in the time period after the trade 
compared to before the trade, and the average time-weighted size was 
never more than 0.7 contracts different in the time period after the 
trade compared to before the trade. Further, given that the spreads 
were relatively stable before and after large trades, the Exchange 
believes this demonstrates that large FLEX PM Third Friday Options 
trades had no material negative impact (and the Exchange believes 
likely no impact) on quote quality of non-FLEX a.m.-settled options 
overlying the same index with similar terms as the FLEX PM Third Friday 
Option. The Exchange believes this evaluation effectively demonstrates 
it is likely that FLEX PM Third Friday Options have had no significant 
negative impact on the market quality of non-FLEX Options with A.M.-
settlement.\63\
---------------------------------------------------------------------------

    \63\ The Exchange acknowledges that, while FLEX PM Third Friday 
Options has historically represented a very small percentage of 
overall volume, it is possible trading in these options may grow in 
the future.
---------------------------------------------------------------------------

    To further note, given the significant changes in the closing 
procedures of the primary markets in recent decades, including 
considerable advances in trading systems and technology, the Exchange 
believes that the risks of any potential impact of FLEX PM Third Friday 
Options on the underlying cash markets are also de minimis.
    The Exchange proposes to make the Pilot Program permanent as P.M.-
settled index products have become an integral part of the Exchange's 
product offerings, providing investors with greater trading 
opportunities and flexibility. As indicated by the significant growth 
in the size of the market for P.M.-settled options, as well as the 
significant growth in FLEX Options, such options have been, and 
continue to be, well-received and widely used by market participants. 
Therefore, the Exchange wishes to be able to continue to provide 
investors with the ability to trade FLEX PM Third Friday Options on a 
permanent basis. The Exchange believes that the permanent continuation 
of the Pilot Program will serve to maintain the status quo by 
continuing to offer a product to which investors have become accustomed 
and have incorporated into their business models and day-to-day trading 
methodologies for nearly 14 years. As such, the Exchange also believes 
that ceasing to offer FLEX PM Third Friday Options may result in market 
disruption and investor confusion. The Exchange has not identified any 
significant impact on market quality nor any unique or prohibitive 
regulatory concerns as a result of the Pilot Program, and, as such, the 
Exchange believes that the continuation of the Pilot Program as a 
pilot, including the use of time and resources to compile and analyze 
quarterly and annual pilot reports and pilot data, is no longer 
necessary and that making the Pilot Program permanent will allow the 
Exchange to otherwise allocate time and resources to other industry 
initiatives.
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.\64\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
section 6(b)(5) \65\ 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.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78f(b).
    \65\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the Exchange believes that the making the Pilot 
Program permanent will allow the Exchange to be able to continue to 
offer FLEX PM Third Friday Options on a continuous and permanent basis. 
These products have been, and continue to be, well-received and widely 
used by market participants, providing investors with greater trading 
opportunities and flexibility. The Exchange believes that the permanent 
continuation of the Pilot Program will remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest by 
continuing to offer a product to which investors have become accustomed 
and have incorporated into their business models and day-to-day trading 
strategies

[[Page 89779]]

for nearly 14 years. The Exchange notes the Commission recently 
approved proposals to make other pilots permitting P.M.-settlement of 
index options permanent after finding those pilots were consistent with 
the Act and the options subject to those pilots had no significant 
impact on the market.\66\ The Exchange believes ceasing to offer the 
Pilot Program may result in market disruption and investor confusion, 
as P.M.-settled index products, particularly SPX options, have become 
an integral part of the Exchange's product offerings, providing 
investors with greater trading opportunities and flexibility.
---------------------------------------------------------------------------

    \66\ See supra note 29.
---------------------------------------------------------------------------

    The Exchange further believes that making the Pilot Program 
permanent will remove impediments to and perfect the mechanism of a 
free and open market and a national market system and protect 
investors, while maintaining a fair and orderly market, as the Exchange 
believes that previous concerns (arising in the 1980s) regarding 
options expirations potentially contributing to excess volatility and 
reversals around the close have been adequately diminished. As 
described in detail above, the Exchange has observed no significant 
adverse market impact or identified any meaningful regulatory concerns 
during the nearly 14-year operation of the FLEX PM Third Friday Program 
as a pilot nor during the 15 years since P.M.-settled index options 
(SPX) were reintroduced to the marketplace.\67\ Notably, the Exchange 
did not identify any significant economic impact (including on pricing 
or volatility or in connection with reversals) on related futures, the 
underlying indexes, or the underlying component securities of the 
underlying indexes surrounding the close as a result of the quantity of 
FLEX PM Third Friday Options or the amount of expiring open interest in 
FLEX PM Third Friday Options, nor any demonstrated capacity for options 
hedging activity to impact volatility in the underlying markets. While 
the DERA staff study and corresponding Exchange study described above 
specifically evaluated SPX options, FLEX PM Third Friday Options 
overlay broad-based indexes (including the S&P 500 Index), the Exchange 
believes it is appropriate to extrapolate the data to apply to FLEX PM 
Third Friday Options. This is particularly true given that the data and 
reports submitted by the Exchange during the pilot period have 
similarly demonstrated no significant economic impact on the respective 
underlying indexes or other products. As set forth in the data and 
reports the Exchange provided to the Commission during the pilot period 
and noted above, since 2013, approximately 400,000 contracts in FLEX PM 
Third Friday Options executed on the Exchange (the vast majority of 
which were SPX options). Given that this represented approximately 
0.01% of all SPX options volume executed on the exchange during that 
time, the Exchange believes the chance that such a small number of 
contracts \68\ could have measurably impacted the underlying index or 
other products is near zero. This is consistent with the findings in 
the DERA staff study set forth above regarding the impact of certain 
notional amounts of SPX options on the underlying index and related 
futures. For example, if you assume an index value for the S&P 500 
Index of 4500, the notional value of one SPX option contract is 
450,000. If 400,000 FLEX PM Third Friday Option contracts executed 
since 2013, that results in an average annual volume of approximately 
36,300 FLEX PM Third Friday Options, with the notional value of this 
total annual volume (the vast majority of which executed as parts of 
trades smaller than 500 contracts (which would have a notional value of 
225,000), as demonstrated by the table above) of just over $16 billion. 
As discussed above, the DERA staff study demonstrated that a similar 
amount of notional value of P.M.-settled SPX options had only a 
marginal impact on the underlying index and related futures.
---------------------------------------------------------------------------

    \67\ See supra notes 37-51.
    \68\ The Exchange acknowledges that, while FLEX PM Third Friday 
Options has historically represented a very small percentage of 
overall volume, it is possible trading in these options may grow in 
the future.
---------------------------------------------------------------------------

    The DERA staff study and corresponding Exchange study concluded 
that a significantly larger amount of non-FLEX p.m.-settled index 
options had no significant adverse market impact and caused no 
meaningful regulatory concerns. Therefore, the Exchange believes it is 
reasonable to conclude that the relatively small amount of FLEX Index 
Option volume subject to the current Pilot Program would similarly have 
no significant adverse market impact or cause no meaningful regulatory 
concerns. Additionally, these studies measured any impact on related 
futures, the underlying indexes, or the underlying component securities 
of the underlying indexes surrounding the close. Despite FLEX SPX 
options (which represent approximately half of the year-to-date 2023 
volume of FLEX Index Options but only approximately 0.3% of total SPX 
volume) not being included in the DERA staff study and corresponding 
Exchange study, those studies concluded that during the time periods 
covered (which included the period of time in which the Pilot Program 
has been operating), there was no significant economic impact on the 
underlying index or related products. Therefore, the Exchange believes 
it is reasonable to conclude that any FLEX SPX Options that executed 
during the timeframes covered by the studies had no significant impact 
on the underlying index or related products, as neither DERA staff nor 
the Exchange observed any significant economic impact on the underlying 
index or related product.
    The Exchange also believes the introduction of FLEX PM options had 
no significant impact on the market quality of corresponding A.M.-
settled options or other options. As discussed above, the Exchange's 
analysis conducted after the introduction of SPXW options with Tuesday 
and Thursday expirations demonstrated no statistically significant 
impact on the bid-ask or effective spreads of SPXW options with Monday, 
Wednesday, and Friday expirations after trading in the SPXW options 
with Tuesday and Thursday expirations began. As noted above, the 
Exchange acknowledges the above analysis, due to the type of study 
performed, may not be used as a direct substitute to demonstrate that 
the introduction of FLEX PM Third Friday Options did not significantly 
impact the market quality of non-FLEX A.M.-settled options. However, 
the Exchange believes the analysis is relevant. Since 2013, 
approximately 400,000 contracts in FLEX PM Third Friday Options have 
executed on the Exchange, compared to 156 million total FLEX Options 
contracts; 14.2 billion total options contracts; 5.6 billion index 
option contracts; 3.8 billion total SPX options contracts; and 2.3 
billion A.M.-settled SPX options contracts in the same time period. 
This equates to an ADV of under 150 contracts for FLEX PM Third Friday 
Options compared to an ADV of over 800,000 contracts for SPX options 
over that time. As noted above, the Exchange's analysis demonstrated 
the introduction of SPXW options with Tuesday and Thursday expirations 
did not significantly impact the market quality of non-FLEX SPX P.M.-
options. Given that the Exchange determined that the introduction of 
SPXW options with Tuesday and Thursday expirations had no significant 
impact on the market quality of non-FLEX SPX A.M.-settled options, the 
Exchange believes it is logical and reasonable to conclude that

[[Page 89780]]

it is unlikely that the introduction of FLEX PM Third Friday Options 
(which has an ADV of approximately 0.04% the size of the ADV of SPXW 
Tuesday and Thursday expirations) \69\ would have any impact on the 
market quality of non-FLEX SPX A.M.-settled options.
---------------------------------------------------------------------------

    \69\ The Exchange acknowledges that, while FLEX PM Third Friday 
Options has historically represented a very small percentage of 
overall volume, it is possible trading in these options may grow in 
the future.
---------------------------------------------------------------------------

    The Exchange believes it is fair to assume there is likely no 
measurable impact on that market for several reasons: (1) as noted 
above, the volume in the FLEX PM Third Friday Options is a minute 
fraction (0.02%) of SPX options with A.M.-settlement; (2) FLEX Options 
are not quoted on a continuous basis, so Market-Makers do not need to 
estimate the risk associated with the potential trade as they do with 
options they are continuously quoting in the non-FLEX Options market; 
and (3) the FLEX market requires either verbal responses on the trading 
floor or auction responses electronically to represented orders, which 
provides Market-Makers with time to decide whether to trade, something 
which does not occur for the thousands of series they continuously 
quote in the non-FLEX Options market.
    The Exchange evaluated each FLEX PM Third Friday Options trade for 
more than 500 contracts \70\ that occurred on the Exchange during the 
last two years \71\ and analyzed the market quality (specifically, the 
average time-weighted quote spread and size 30 minutes prior to the 
trade and the average time-weighted quote spread and size 30 minutes 
after the trade) of series non-FLEX a.m.-settled options overlying the 
same index with similar terms as the FLEX PM Third Friday Option that 
traded (time to expiration, type (call or put), and strike price) as 
set forth in the table above. Given that the above-table shows that the 
spreads were relatively stable before and after large trades, the 
Exchange believes this demonstrates that large FLEX PM Third Friday 
Options trades had no material negative impact (and the Exchange 
believes likely no impact) on quote quality of non-FLEX a.m.-settled 
options overlying the same index with similar terms as the FLEX PM 
Third Friday Option. Therefore, the Exchange believes this evaluation 
effectively demonstrates it is likely that FLEX PM Third Friday Options 
have had no significant negative impact on the market quality of non-
FLEX Options with A.M.-settlement.\72\
---------------------------------------------------------------------------

    \70\ The Exchange believes it is reasonable to consider only 
these large trades, because if large trades had no significant 
impact on market quality, then it is unlikely that smaller trades 
would have had a significant impact on market quality.
    \71\ The Exchange believes it is reasonable to use data from 
this time period as representative of the entire pilot period given 
that volume in FLEX PM Third Friday Options remained consistently 
low throughout the entire pilot period.
    \72\ The Exchange acknowledges that, while FLEX PM Third Friday 
Options has historically represented a very small percentage of 
overall volume, it is possible trading in these options may grow in 
the future.
---------------------------------------------------------------------------

    As discussed above, the Exchange believes that evaluation 
effectively demonstrates that FLEX PM Third Friday Options have had no 
significant negative impact on the market quality of non-FLEX Options 
with A.M.-settlement.
    Additionally, the significant changes in the closing procedures of 
the primary markets in recent decades, including considerable advances 
in trading systems and technology, has significantly minimized risks of 
any potential impact of FLEX PM Third Friday Options on the underlying 
cash markets. As such, the Exchange believes that a permanent Pilot 
Program does not raise any unique or prohibitive regulatory concerns 
and that such trading has not, and will not, adversely impact fair and 
orderly markets on Expiration Fridays for the underlying indexes or 
their component securities. Further, as the Exchange has not identified 
any significant impact on market quality or any unique or prohibitive 
regulatory concerns as a result of offering FLEX PM Third Friday 
Options, the Exchange believes that the continuation of the Pilot 
Program as a pilot, including the gathering, submission and review of 
the pilot reports and data, is no longer necessary and that making the 
Pilot Program permanent will allow the Exchange to otherwise allocate 
time and resources to other industry initiatives.

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

    Cboe Options 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 that making the Pilot Program permanent will impose any 
unnecessary or inappropriate burden on intramarket competition because 
FLEX PM options will continue to be available to all market 
participants who wish to participate in the FLEX PM options market. The 
Exchange believes that the growth that the P.M.-settled options market, 
including FLEX PM options, has experienced since their reintroduction 
through pilot programs indicates strong, continued investor interest 
and demand, warranting a permanent Pilot Program. The Exchange believes 
that, for the period that P.M.-settled FLEX options have been in 
operation as pilot programs, they have provided investors with a 
desirable product with which to trade and wishes to permanently offer 
this product to investors. Furthermore, during the pilot period, the 
Exchange has not observed any significant adverse market effects nor 
identified any regulatory concerns as a result of the Pilot Program, 
and, as such, the continuation of the Pilot Program as a pilot, 
including the gathering, submission and review of the pilot reports and 
data, is no longer necessary--a permanent Pilot Program will allow the 
Exchange to otherwise allocate time and resources to other industry 
initiatives.
    The Exchange further does not believe that making the Pilot Program 
permanent will impose any burden on intermarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act 
because it applies to a class of options listed only for trading on 
Cboe Options. The Exchange notes that other exchanges are free to and 
do offer competing products. To the extent that the permanent offering 
and continued trading of FLEX PM Third Friday Options may make Cboe 
Options a more attractive marketplace to market participants at other 
exchanges, such market participants may elect to become Cboe Options 
market participants.

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. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 3, is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\73\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment No. 3, is consistent 
with section 6(b)(5) of the Act,\74\ which requires, among other 
things, that the Exchange's rules be designed to prevent fraudulent and 
manipulative acts and

[[Page 89781]]

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. In its proposal to make the Pilot Program permanent, 
the Exchange addressed whether the Pilot Program negatively impacts 
markets or impacted options market quality.\75\ Each of these elements 
is discussed in greater detail below. As stated above, no comments were 
received on the proposed rule change.
---------------------------------------------------------------------------

    \73\ 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).
    \74\ 15 U.S.C. 78f(b)(5).
    \75\ Certain studies cited by the Exchange do not include, as 
part of their analysis, FLEX Options. See Amendment No. 3. However, 
the Commission acknowledges that the market for FLEX Options is 
small and the products included as part of those studies, while much 
larger than the FLEX market, did not have a disruptive impact on the 
underlying indexes or the underlying components. As a result, the 
Commission recognizes that it is not unreasonable for the Exchange 
to infer that since the FLEX PM Third Friday Options market is 
significantly smaller than the SPX PM market, FLEX PM Third Friday 
Options are unlikely to adversely impact the market.
---------------------------------------------------------------------------

Market Impact Considerations

    The Exchange states it has not identified any evidence from the 
pilot data indicating that the trading of PM-settled FLEX options has 
any adverse impact on fair and orderly markets on Expiration Fridays 
for broad-based indexes or the underlying securities comprising those 
indexes and has observed no abnormal market movements attributable to 
FLEX PM Third Friday Options from any market participants that have 
come to the attention of the Exchange.\76\ In order to support its 
overall assessment of the Program, the Exchange included a review and 
analysis of pilot data.\77\ Among other things, the Exchange's analysis 
includes end of day volatility as well as a comparison of the impact of 
quarterly index rebalancing versus PM-settled expirations.\78\
---------------------------------------------------------------------------

    \76\ See Amendment No. 3, at 12-13.
    \77\ Id. at 17.
    \78\ Id. at 13. The Exchange states that although its analysis 
specifically evaluated SPX options, the Exchange believes it is 
appropriate to extrapolate the data to apply to FLEX PM Third Friday 
Options. See Amendment No. 3, at 29. The Commission agrees it is 
appropriate to extrapolate the data to FLEX PM Third Friday Options, 
as the Exchange's analysis examines liquidity and volatility 
dynamics around the market close, which may be associated with 
typical hedging activities tied to expiring p.m.-settled index 
option.
---------------------------------------------------------------------------

    In addition to reviewing the data and analysis provided by the 
Exchange, the Commission reviewed the analysis in the Pilot Memo, which 
evaluates whether higher levels of expiring open interest in PM-settled 
index options results in increased volatility and price reversals 
around the close. The Pilot Memo shows that the market share for PM-
settled options on the S&P 500 has grown substantially since 2007.\79\ 
The Exchange's review of pilot data also showed this trend continuing 
from 2019 through 2021.\80\
---------------------------------------------------------------------------

    \79\ See Pilot Memo at 2.
    \80\ See Amendment No. 3, at 13. Specifically, since 2007, PM-
settled SPX options grew from 0.1% of open interest to 30% of open 
interest in 2021. Id.
---------------------------------------------------------------------------

    The Pilot Memo examines whether and to what extent expiring open 
interest in PM-settled index options is empirically related with the 
tendency of the corresponding index futures, the underlying index, or 
index components to experience increased transitory volatility and 
price reversals around the time of market close on expiration dates. 
The Pilot Memo concludes that, although expiring PM-settled index 
option open interest may have a statistically significant relationship 
with volatility and price reversals of the underlying index, index 
futures, and index component securities around the market close, the 
magnitude of the effect is economically very small.\81\ For example, 
the largest settlement event that occurred during the time period 
studied in the Pilot Memo (a settlement of $100.4 billion of notional 
on December 29, 2017) had an estimated impact on the futures price of 
only approximately 0.02% (a predicted impact of $0.54 relative to a 
closing futures price of $2,677).\82\
---------------------------------------------------------------------------

    \81\ See Pilot Memo at 3.
    \82\ See id.
---------------------------------------------------------------------------

    The Exchange further reviewed a sample of pilot data from 2019 
through 2021, and measured the volatility of the S&P 500 over the final 
fifteen minutes of each trading day and compared expiration days to 
non-expiration days.\83\ Generally volatility was slightly higher on 
expiration days, but in cases where overall market volatility 
increased, the normalized impact on expiration days versus non-
expiration days remained consistent.\84\ The Exchange further analyzed 
volatility on days when the S&P 500 was rebalanced, and states its 
results suggest more closing volatility on rebalance dates compared to 
non-rebalance expiration dates, indicating that rebalancing of the S&P 
500 may have a greater impact on S&P 500 volatility than p.m.-settled 
option expirations.\85\
---------------------------------------------------------------------------

    \83\ See Amendment No. 3, at 17-19.
    \84\ See id.
    \85\ See id.
---------------------------------------------------------------------------

    The Exchange also reviewed a sample of post-2018 pilot data for 
potential correlation between excess market volatility and price 
reversals and the hedging activity of liquidity providers.\86\ To 
determine whether there is a correlation, the Exchange calculated an 
estimate of the amount of MOC volume in the S&P 500 component markets 
attributable to expected hedging activity as a result of expiring in-
the-money options.\87\ The Exchange states its results indicate that 
other sources of MOC share volume generally exceed the volume resulting 
from hedging activity for PM-settled SPX options.\88\ Further, the 
Exchange also compared hedging futures positions that would correspond 
to expiring in-the-money PM-settled SPX options and concludes the data 
indicate negligible capacity for hedging activity to increase 
volatility in the underlying markets.\89\
---------------------------------------------------------------------------

    \86\ See id.
    \87\ See id.
    \88\ See Amendment No. 3, at 20.
    \89\ See id.
---------------------------------------------------------------------------

    The Exchange acknowledged in its proposal that the Commission's 
Pilot Memo and corresponding Exchange studies discussed above 
specifically evaluated SPX options rather than FLEX PM Third Friday 
Options.\90\ To support its reliance on these studies, the Exchange 
states that there have been approximately 400,000 contracts in FLEX PM 
Third Friday Options executed on the Exchange since 2013, that vast 
majority of which were on SPX, representing approximately 0.01% of all 
SPX options volume during that time.\91\ The Exchange further states 
that given that the Pilot Memo and other Exchange studies concluded 
that PM settlements of a significantly larger amount of non-FLEX PM-
settled index options had no significant adverse market impact on the 
underlying index or related products, it is reasonable to conclude that 
the small amount of expiring PM settled FLEX index options under the 
Pilot Program, ``. . .would similarly have no significant adverse 
market impact.'' \92\
---------------------------------------------------------------------------

    \90\ See Amendment No. 3, at 29.
    \91\ See id.
    \92\ See Amendment No. 3, at 30.
---------------------------------------------------------------------------

    Finally, the Exchange states that the significant changes in the 
closing procedures of the primary markets in recent decades, including 
considerable advances in trading systems and technology, have 
significantly minimized risks of any potential impact of PM-, cash-
settled SPX options on the underlying cash markets.\93\
---------------------------------------------------------------------------

    \93\ See Amendment No. 3, at 26.
---------------------------------------------------------------------------

Market Quality Considerations

    The Exchange also completed an analysis intended to evaluate 
whether the Pilot Program impacted the quality of the SPX options 
market. Specifically,

[[Page 89782]]

the Exchange compared values of key market quality indicators 
(specifically, the bid-ask spread \94\ and effective spread \95\) in 
PM-settled SPX weekly (``SPXW'') options both before and after the 
introduction of Tuesday expirations and Thursday expirations for SPXW 
options on April 18 and May 11, 2022, respectively.\96\ The Exchange 
concludes from this analysis that the introduction of SPX options with 
Tuesday and Thursday options had no significant impact on the market 
quality of SPXW options with Monday, Wednesday, and Friday expirations. 
For a majority of the series analyzed, the Exchange observed no 
statistically significant difference in bid-ask spread or effective 
spread.\97\ While the Exchange acknowledges that this analysis may not 
be a direct substitute to demonstrate that the introduction of FLEX PM 
Third Friday Options did not significantly impact the market quality of 
non-FLEX AM-settled options the Exchange believes the analysis is still 
relevant.\98\
---------------------------------------------------------------------------

    \94\ The Exchange calculated for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) the daily time-
weighted bid-ask spread on the Exchange during its regular trading 
hours session, adjusted for the difference in size between SPXW 
options and SPY options (SPXW options are approximately ten times 
the value of SPY options).
    \95\ The Exchange calculated the volume-weighted average daily 
effective spread for simple trades for each of SPXW options (with 
Monday, Wednesday, and Friday expirations) and SPY Weekly options 
(with Monday, Wednesday, and Friday expirations) as twice the amount 
of the absolute value of the difference between an order execution 
price and the midpoint of the national best bid and offer at the 
time of execution, adjusted for the difference in size between SPXW 
options and SPY options.
    \96\ For purposes of comparison, the Exchange paired SPXW 
options and SPY options with the same moneyness and same days to 
expiration.
    \97\ See Amendment No. 3, at 56.
    \98\ Id. at 23
---------------------------------------------------------------------------

    Specifically, the Exchange states the data shows that 400,000 FLEX 
PM Third Friday Options have executed on the Exchange since 2013; 
compared to 156 million total FLEX Options contracts; 14.2 billion 
total options contracts; 5.6 billion index option contracts; 3.8 
billion total SPX options contracts; and 2.3 billion AM-settled SPX 
options contracts in the same time period.\99\ The Exchange states that 
since FLEX PM Third Friday Options have an average-daily-volume of 
approximately 0.04% of the average-daily-volume of SPXW Tuesday and 
Thursday expirations, it is reasonable to conclude that it is unlikely 
that FLEX PM Third Friday Options would have any impact on the market 
quality of non-FLEX SPX AM-settled options.\100\
---------------------------------------------------------------------------

    \99\ Id.
    \100\ Id.
---------------------------------------------------------------------------

    As part of its filing, to further analyze the impact FLEX PM Third 
Friday Options had on market quality, the Exchange provided additional 
data and evaluated each FLEX PM Third Friday Options trade for more 
than 500 contracts that occurred on the Exchange during the last two 
years and analyzed the market quality (specifically, the average time-
weighted quote spread and size 30 minutes prior to the trade and the 
average time-weighted quote spread and size 30 minutes after the trade) 
of non-FLEX AM-settled SPX option series with similar terms as the FLEX 
PM Third Friday Option that traded (time to expiration, type (call or 
put), and strike price) as set forth in the table above.
    The Exchange's analysis shows that the average time-weighted quote 
spread and size of non-FLEX AM-settled SPX option did not materially 
change after the FLEX PM Third Friday Options trade.\101\ Specifically, 
the average time-weighted quoted spread was never more than $0.36 wider 
in the time period after the trade compared to before the trade, and 
the average time-weighted size was never more than 0.7 contracts 
different in the time period after the trade compared to before the 
trade.\102\ The Exchange also stated that the observed spreads were 
relatively stable before and after large trades. The Exchange states 
that this demonstrates that large FLEX PM Third Friday Options trades 
had no material negative impact on quote quality of non-FLEX AM-settled 
SPX options with similar terms as the FLEX PM Third Friday 
Options.\103\ Therefore, the Exchange concludes that this evaluation 
effectively shows that it is likely FLEX PM Third Friday Options have 
had no significant negative impact on the market quality of non-FLEX 
Options with AM-settlement.\104\
---------------------------------------------------------------------------

    \101\ The Exchange acknowledged certain limitations related to 
its analysis. See Amendment No. 3, at notes 47-49.
    \102\ See Amendment No. 3, at 25.
    \103\ Id.
    \104\ Id.
---------------------------------------------------------------------------

Conclusion

    The Commission believes that the evidence contained in the 
Exchange's filing, and the Exchange's pilot data and reports, 
demonstrate that the Pilot Program has benefitted investors and other 
market participants by providing more flexible trading and hedging 
opportunities using FLEX options under the Pilot Program, while also 
having observed no evidence of an adverse impact on the market. The 
market for FLEX PM Third Friday Options has grown in size over the 
course of the Pilot Program, but remains relatively small compared to 
non-FLEX PM-settled index options, and analysis of the pilot data did 
not identify any significant economic impact, nor did it indicate a 
deterioration in market quality (as measured by average time weighted 
quote spreads and average time weighted quote size) for series of non-
FLEX AM-settled SPX option series with similar terms as the FLEX PM 
Third Friday Options. Additionally, the Pilot Memo and Exchange studies 
analyzing the non-Flex options market did not identify any adverse 
market impact on the underlying indexes, components of those indexes or 
related products or any significant impact on market quality of AM-
settled index options.\105\ Further, significant changes in closing 
procedures in the decades since index options moved to AM settlement 
may also serve to mitigate the potential impact of PM-settled index 
options on the underlying cash markets.
---------------------------------------------------------------------------

    \105\ While the Exchange recognized certain limitations as to 
its analysis, given the totality and scope of the studies described 
above and the current size of the FLEX PM Third Friday Options 
market it is not unreasonable for the Exchange to infer from those 
studies that it is unlikely FLEX PM Third Friday Options adversely 
impacted the options or other markets.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment No. 3, is consistent with section 6(b)(5) of the 
Act \106\ and the rules and regulations thereunder applicable to a 
national securities exchange.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment No. 3 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 3 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

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-2023-018 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-2023-018. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your

[[Page 89783]]

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-2023-018 and should be submitted on or before January 18, 2024.

V. Accelerated Approval of Amendment No. 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 3, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
3 in the Federal Register. As noted above, Amendment No. 3 makes no 
substantive changes to the proposal. Amendment No. 3 provides 
additional analysis and data to support certain assertions made by the 
Exchange and provides greater clarity to, and justification for, the 
proposal.\107\ The additional analysis and information in Amendment No. 
3 assist the Commission in evaluating the Exchange's proposal and in 
determining that it is consistent with the Act. Amendment No. 3 also 
raises no new novel issues. Accordingly, the Commission finds good 
cause, pursuant to section 19(b)(2) of the Act,\108\ to approve the 
proposed rule change, as modified by Amendment No. 3, on an accelerated 
basis.
---------------------------------------------------------------------------

    \107\ See supra note 12.
    \108\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that proposed rule change SR-CBOE-2023-018, as modified by Amendment 
No. 3, be, and hereby is, approved on an accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\109\
---------------------------------------------------------------------------

    \109\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Christina Z. Milnor,
Assistant Secretary.
[FR Doc. 2023-28608 Filed 12-27-23; 8:45 am]
BILLING CODE 8011-01-P


