[Federal Register Volume 85, Number 7 (Friday, January 10, 2020)]
[Notices]
[Pages 1351-1354]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00200]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87891; File No. SR-CboeEDGX-2019-077]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend the Opening Triggers for Its Opening Rotation Process for Equity
Options
January 6, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 23, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange''
or ``EDGX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Exchange
filed the proposal as a ``non-controversial'' proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 21.7 (Opening Auction Process)
in connection with the opening triggers for its opening rotation
process for the Regular Trading Hours (``RTH'') trading session in
equity options.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 21.7 (Opening Auction Process)
in connection with the opening triggers for its opening rotation
process for the Regular Trading Hours (``RTH'') trading session in
equity options. Currently, Rule 21.7(d)(1) governs the RTH opening
rotation triggers for equity options, as well as index options.
Particularly, regarding equity options, Rule 21.7(d)(1) provides that
the System \5\ will initiate the opening rotation after a time period
(which the Exchange determines for all classes) following the System's
observation after 9:30 a.m. of the first disseminated transaction on
the primary listing market in the security underlying an equity option.
In order to ensure a more orderly opening process, the Exchange
proposes to amend the opening trigger process in order to contemplate
the first disseminated quote (in addition to the already included first
disseminated transaction) on the primary listing market in the
underlying security in determining whether to initiate the opening
rotation, as well as to add an additional timing process following the
System's observation of one, but not both, of the opening triggers.
---------------------------------------------------------------------------
\5\ See EDGX Options Rule 16.1, which defines the ``System'' or
``Trading System'' to mean the automated trading system used by EDGX
Options for the trading of options contracts.
---------------------------------------------------------------------------
Specifically, the Exchange proposes to include the System's
observation of the first disseminated quote on the primary market in
the security underlying the equity options as an additional opening
trigger for equity options.\6\ The Exchange notes this trigger is
intended to tie the Exchange's opening process to quoting in the
underlying security. The Exchange believes that quoting activity in the
underlying market is an additional trigger that generally indicates the
presence of post-open price discovery and liquidity in the primary
market for the underlying, and, therefore, that the market for the
underlying is adequately situated for the commencement of options
trading on the underlying. This additional trigger is also consistent
with general practice in the industry, as other options exchanges use
the first disseminated quote, as well as first disseminated
transaction, as an opening trigger for their opening auction
processes.\7\ As a result, the proposed additional trigger is an
industry practice to which market participants are generally already
accustomed and will provide for greater consistency in the opening
process across the industry. In light of this additional opening
trigger, the Exchange also proposes to adopt additional timing
specifications prior to the initiation of the opening rotation and
contingent upon the System's observation of the first disseminated
transaction and/or quote, as proposed, on the primary market in the
underlying security. Specifically, under proposed Rule
21.7(d)(1)(A),\8\ the System would
[[Page 1352]]
initiate the opening rotation after an Exchange-determined time period
(which it currently does) upon the earlier occurrence of either: (i)
The passage of two minutes (or such shorter time as determined by the
Exchange) after the System's observation after 9:30 a.m. of either the
first disseminated transaction or the first disseminated quote on the
primary listing market in the security underlying an equity option; or
(ii) the System's observation after 9:30 a.m. of both the first
disseminated transaction and the first disseminated quote on the
primary listing market in the security underlying an equity option.
---------------------------------------------------------------------------
\6\ The quote must be a two-sided quote.
\7\ See Nasdaq PHLX LLC (``PHLX'') Rule 1017(d)(i); Nasdaq ISE
LLC (``ISE'') Options 3 Section 8(c)(1); Nasdaq GEMX LLC (``GEMX'')
Options 3 Section 8(c)(1); Nasdaq MRX LLC (``MRX'') Options 3
Section 8(c)(1); Miami International Securities Exchange, LLC
(``MIAX'') Rule 503(e); NYSE American, Inc. (``NYSE American'') Rule
952NY; and NYSE Arca, Inc. (``NYSE Arca'') Rule 6.64-O(b).
\8\ The Exchange also proposes to format current Rule 21.7(d)(1)
into two subparagraphs; subparagraph (d)(1)(A), governing the RTH
opening rotation triggers for equity options, and subparagraph
(d)(1)(B), governing such for index options. This proposed
formatting change will make the rule better organized and easier to
follow and understand.
---------------------------------------------------------------------------
The proposed additional timing steps in connection with the opening
triggers are intended to ensure that the market for the underlying
security has had sufficient time to open prior to the initiation of the
opening rotation where there is not both a two-sided quote and an
execution in the underlying security. By waiting a requisite amount of
time after the System observes one of the opening triggers, the
proposed process pursuant to proposed Rule 21.7(d)(1)(A)(i) is intended
to permit post-opening price discovery to occur in the underlying
security prior to the opening of options on the security. Similarly, by
initiating the opening rotation upon the System's observation of both
opening triggers prior to the passage of two minutes, proposed Rule
21.7(d)(1)(A)(ii) ties the Exchange's opening process to specific
market conditions in the underlying security that generally indicate
that sufficient post-opening price discovery has occurred prior to the
opening of options on the security. To illustrate, if the System were
to observe a disseminated quote (or transaction) in the primary market
for the underlying security, it would begin the two-minute (or shorter)
timer pursuant to proposed Rule 21.7(d)(1)(A)(i). If two minutes then
passed without the System's observation of a disseminated transaction
(or quote) on the primary market for the underlying security (which
would cause the scenario in Rule 21.7(d)(1)(A)(ii) to occur) then it
would initiate the opening rotation after a time period determined by
the Exchange, as it currently does today. Conversely, if the System
were to observe a disseminated quote (or transaction) in the primary
listing market and begin the two minute (or shorter) timer, but then
observe a disseminated transaction (or quote) in the primary listing
market before the passage of two minutes (or shorter), it would then,
at the time it observed the disseminated transaction (or quote) prior
to the passage of two minutes (or shorter), initiate the opening
rotation after a period of time determined by the Exchange.
The Exchange notes that the proposed rule change in connection with
initiating the opening rotation upon receipt of a trade and a quote in
the underlying is consistent with the opening process rules of NYSE
Arca.\9\ Additionally, the proposed rule change in connection with
initiating the opening rotation following the receipt of either a quote
or trade in the underlying and a timed pause is consistent with other
options exchanges that have similar timers in place following the
receipt of a transaction or quote in the primary market for the
underlying security. For example, MIAX's opening process rule currently
provides that its opening process may begin following a pause period
(no longer than one half second) that, like the proposed rule change,
begins upon the dissemination of either a quote or a trade in the
underlying security.\10\ The Exchange notes that the MIAX opening
process rule provides that following the dissemination of either a
quote or a trade in the underlying security and the requisite pause
period, its opening process will begin upon the occurrence of certain
Market Maker quotes submitted on MIAX. The Exchange notes, however,
that this is not consequential to the activity or status of the market
for the underlying security or the use of an opening quote or trade in
the underlying to trigger the initiation of an opening process on an
options exchange. The Exchange further notes that the proposed two
minute timer (or shorter) is consistent with the timer provided
pursuant to the opening process rules on PHLX, ISE, GEMX, and MRX.\11\
---------------------------------------------------------------------------
\9\ See NYSE Arca Rule 6.64-O(b).
\10\ See MIAX Rule 503(e).
\11\ See PHLX Options Rule 1017(d)(i); ISE Options 3 Section
8(c)(1); GEMX Options 3 Section 8(c)(1); and MRX Options 3 Section
8(c)(1), each of which begin their opening processes within two
minutes (or such shorter time as determined by the Exchange) of the
opening trade or quote on the market for the underlying security in
the case of equity options (plus the occurrence of another condition
as laid out in the exchanges' rules).
---------------------------------------------------------------------------
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.\12\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \13\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \14\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ Id.
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change to include the
first dissemination of a quote on the primary market for the underlying
security as an additional opening trigger for equity options would
serve to remove impediments to and perfect the mechanism of a free and
open market and national market system by incorporating an additional
opening trigger into the Exchange's opening process which would help
ensure that the primary market for the underlying is adequately
situated with the appropriate liquidity and active price discovery in
order to open for trading options on the underlying. Additionally, the
proposed rule change would foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities because it will align the triggers for its equity options
opening rotation with the triggers used by most other options
exchanges.\15\ The proposed change will benefit investors, as it will
create consistency throughout the industry by implementing an
additional opening rotation trigger already in place across much of the
industry and, thus, already familiar to market participants.
---------------------------------------------------------------------------
\15\ See supra note 3 [sic].
---------------------------------------------------------------------------
In addition to this, the Exchange believes that the proposed rule
change to implement additional timing procedures in connection with the
System's observation of the first disseminated transaction and/or quote
in the primary market for the underlying security prior to the
initiation of the opening rotation would also serve to remove
impediments to and perfect the mechanism of a free and open market
[[Page 1353]]
and national market system by ensuring that stability is present in the
underlying markets upon the initiation of the opening rotation to the
benefits of investors. The proposed rule change is intended to promote
the maintenance of a fair and orderly market and, in general, to
protect investors and the public interest by either waiting a requisite
amount of time after the System observes one opening trigger in order
to allocate enough time to permit the price of the underlying security
to stabilize after its opening, or by initiating the opening rotation
upon the System's observation of both opening triggers (as proposed),
thus tying the Exchange's open to the existence of liquidity on the
primary market which generally indicates that sufficient post-opening
price discovery has occurred prior to the opening of options on the
underlying security. Additionally, the Exchange does not believe that
the proposed rule change in connection with initiating trading on the
Exchange when the System observes a quote and a trade in the underlying
security, or observes either a quote or a trade in the underlying
security followed by a pause, which, as proposed would be two minutes
(or shorter) would significantly impact investors or the public
interest because, as stated, these conditions are consistent with other
options exchanges that have substantively the same conditions in place
in connection with their opening processes.\16\
---------------------------------------------------------------------------
\16\ See supra notes 3, 5, 6, and 7 [sic].
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed changes would
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 the proposed rule changes would impose any burden on
intramarket competition that is not necessary in furtherance of the
purposes of the Act, because the proposed additional opening trigger
and steps in the opening trigger process would apply in the same manner
to all equity options. The proposed rule change impacts a System
process that occurs prior to the opening of trading, and merely
modifies when the System will initiate an opening rotation. The
Exchange also does not believe that the proposed change would impose
any burden on intermarket competition that is not necessary in
furtherance of the purposes of the Act, because use of the first
disseminated quote from the primary market as a trigger for the opening
rotation, as well as the combination of both opening triggers, or of
one opening trigger plus a pause period of a two minutes (or shorter)
prior to initiating the opening rotation, is consistent with the rules
of other options exchanges.\17\
---------------------------------------------------------------------------
\17\ See id.
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not: (i) Significantly affect
the protection of investors or the public interest; (ii) Impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the Act \18\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\19\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \20\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \21\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposal may become operative upon filing. The Exchange states that
the waiver of the operative delay would serve to sooner protect
investors by implementing an additional opening trigger and additional
timing steps in the Exchange's opening process. Based on the Exchange's
representations, the Commission believes that waiver of the 30-day
operative delay is consistent with the protection of investors and the
public interest. Therefore, the Commission hereby waives the operative
delay and designates the proposed rule change operative upon
filing.\22\
---------------------------------------------------------------------------
\20\ 17 CFR 240.19b-4(f)(6).
\21\ 17 CFR 240.19b-4(f)(6)(iii).
\22\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeEDGX-2019-077 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-CboeEDGX-2019-077. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE,
[[Page 1354]]
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-CboeEDGX-2019-077 and should
be submitted on or before January 31, 2020.
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00200 Filed 1-9-20; 8:45 am]
BILLING CODE 8011-01-P