[Federal Register Volume 84, Number 240 (Friday, December 13, 2019)]
[Notices]
[Pages 68231-68235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26851]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87692; File No. SR-CboeEDGX-2019-064]
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Order
Approving a Proposed Rule Change To Adopt Rule 21.23 (Complex
Solicitation Auction Mechanism)
December 9, 2019.
I. Introduction
On October 23, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') 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 adopt Rule 21.23, the Complex Solicitation
Auction Mechanism (``C-SAM''), a solicited order mechanism for larger-
sized complex orders. The proposed rule change was published for
comment in the Federal Register on November 6, 2019.\3\ The Commission
has received no comments regarding the proposal. This order approves
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87435 (October 31,
2019), 84 FR 59866 (``Notice'').
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II. Description of the Proposed Rule Change
As described more fully in the Notice,\4\ the Exchange proposes to
adopt Rule 21.23 \5\ allowing complex orders to be submitted to and
processed in its solicited order mechanism. The proposal permits an
Options Member
[[Page 68232]]
(the ``Initiating Member'') to execute electronically a larger-sized
complex order it represents as agent (``Agency Order'') against a
solicited complex order(s) (``Solicited Order''), provided that it
submits both the Agency Order and Solicited Order into the C-SAM.\6\
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\4\ See id.
\5\ For purposes of proposed Rule 21.23, the term ``SBBO'' means
the synthetic best bid or offer calculated using the best displayed
price for each component of a complex strategy from the simple book
at the particular point in time applicable to the reference. The
Exchange notes that there is no national best bid or offer for
complex orders, as complex orders may be executed without
consideration of any prices for the complex strategy that might be
available on other exchanges trading the same complex strategy. See
Rule 21.20(c)(2)(E).
\6\ The Solicited Order cannot have a capacity of F for the same
EFID as the Agency Order. The Agency Order and Solicited Order
cannot both be for the accounts of a customer.
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A. Eligibility and C-SAM Auction Process
The Initiating Member may initiate a C-SAM in any class traded on
the Exchange.\7\ The smallest leg of an Agency Order marked for C-SAM
processing must be at least the minimum size designated by the
Exchange, which may not be less than 500 standard option contracts or
5,000 mini-option contracts.\8\ The size of the Solicited Order(s) must
be for/total the same size as the Agency Order.\9\ The system will
automatically handle each of the Agency Order and Solicited Order as an
all-or-none (``AON'') order,\10\ and the price of the Agency Order and
Solicited Order must be in an increment of $0.01.\11\ Also, an
Initiating Member may not designate an Agency Order or Solicited Order
as Post Only \12\ and may only submit an Agency Order after the complex
order book (``COB'') opens.\13\
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\7\ See proposed Rule 21.23(a)(1).
\8\ See proposed Rule 21.23(a)(3).
\9\ See id.
\10\ See id. The Exchange notes that it intends to separately
amend Rule 21.21, which currently states that an Initiating Member
must designate the Agency Order and Solicited Order as AON, to
conform to proposed Rule 21.23(a)(3). See Notice, supra note 3, at
59867 n.12.
\11\ See proposed Rule 21.23(a)(4).
\12\ See proposed Rule 21.23(a)(5).
\13\ See proposed Rule 21.23(a)(6).
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The Solicited Order must stop the entire buy (sell) Agency Order at
a price that is at or better than the then-current SBO (SBB) or the
price of the best-priced sell (buy) complex order on the COB.\14\
Regarding resting simple orders that are on the same side as the Agency
Order, the proposal provides that if the Agency Order is to buy (sell),
the stop price must be at or better than the SBB (SBO), unless the
applicable side of the BBO on any component of the complex strategy
represents a Priority Customer order on the simple book, in which case
the stop price must be at least $0.01 better than the SBB (SBO).\15\
Regarding resting complex orders that are on the same side as the
Agency Order, the proposal provides that if the Agency Order is to buy
(sell), the stop price must be at least $0.01 better than the bid
(offer) of the resting complex order, unless the Agency Order is a
Priority Customer order and the resting order on the COB is not a
Priority Customer, in which case the stop price must be at or better
than the bid (offer) of the resting complex order.\16\ Regarding
resting simple orders that are on the opposite side as the Agency
Order, the proposal provides that if the Agency Order is to buy (sell),
the stop price must be at or better than the SBO (SBB), unless the BBO
of any component of the complex strategy represents a Priority Customer
order on the simple book, in which case the stop price must be at least
$0.01 better than the SBO (SBB).\17\ Regarding resting complex orders
that are on the opposite side as the Agency Order, the proposal
provides that if the Agency Order is to buy (sell) and the best-priced
sell (buy) complex order on the COB represents (i) a complex order that
is not a Priority Customer, the stop price must be at or better than
the price of the resting complex order; or (ii) a Priority Customer
complex order, the stop price must be at least $0.01 better than the
SBO (SBB).\18\
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\14\ See proposed Rule 21.23(b).
\15\ See proposed Rule 21.23(b)(1).
\16\ See proposed Rule 21.23(b)(2).
\17\ See proposed Rule 21.23(b)(3).
\18\ See proposed Rule 21.23(b)(4).
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The Exchange system will initiate the C-SAM process by sending a C-
SAM auction notification message detailing the side, size, price,
capacity, auction ID, and complex strategy of the Agency Order to all
Options Members that elect to receive C-SAM auction notification
messages.\19\ C-SAM auction notification messages will not be
disseminated to the Options Price Reporting Authority (``OPRA'').\20\
The C-SAM auction will last for a period of time determined by the
Exchange (the ``C-SAM auction period''), which may be no less than 100
milliseconds and no more than one second.\21\ An Initiating Member may
not modify or cancel an Agency Order or Solicited Order after
submission to a C-SAM auction.\22\
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\19\ See proposed Rule 21.23(c)(2).
\20\ See id.
\21\ See proposed Rule 21.23(c)(3). The Exchange will announce
the length of the C-SAM auction period to Options Members pursuant
to Rule 16.3.
\22\ See proposed Rule 21.23(c)(4).
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Any user other than the Initiating Member (determined by EFID) may
submit responses to a C-SAM auction that are properly marked specifying
size, side of the market, and the auction ID for the C-SAM auction to
which the user is submitting the response.\23\ C-SAM responses must be
on the opposite side of the market as the Agency Order,\24\ and the
minimum price increment for C-SAM responses is $0.01.\25\ C-SAM buy
(sell) responses are capped at the better of the SBO (SBB) or the offer
(bid) of a resting complex order at the top of the COB, or $0.01 better
than the better of the SBO (SBB) or the offer (bid) of a resting
complex order at the top of the COB if the BBO of any component of the
complex strategy or the resting complex order, respectively, is a
Priority Customer order.\26\ For purposes of the C-SAM auction, the
system will aggregate all of a user's complex orders on the COB and C-
SAM responses for the same EFID at the same price.\27\ The system will
cap the size of a C-SAM response, or the aggregate size of a user's
complex orders on the COB and C-SAM responses for the same EFID at the
same price, at the size of the Agency Order (i.e., the system will
ignore size in excess of the size of the Agency Order when processing a
C-SAM auction).\28\ C-SAM responses will not be visible to C-SAM
auction participants or disseminated to OPRA.\29\ A user may modify or
cancel its C-SAM responses during the C-SAM auction.\30\
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\23\ See proposed Rule 21.23(c)(5).
\24\ See proposed Rule 21.23(c)(5)(E).
\25\ See proposed Rule 21.23(c)(5)(A).
\26\ See proposed Rule 21.23(c)(5)(B).
\27\ See proposed Rule 21.23(c)(5)(C). The Exchange notes that
this is similar to the corresponding provision for the Exchange's
simple SAM auction. See Rule 21.22(c)(5)(C). The Exchange also notes
that this (combined with the proposed size cap) is intended to
prevent an Options Member from submitting multiple orders or
responses at the same price to obtain a larger pro-rata share of the
Agency Order. See Notice, supra note 3, at 59870.
\28\ See proposed Rule 21.23(c)(5)(D). The Exchange notes that
this is similar to the corresponding provision for the Exchange's
simple SAM auction. See Rule 21.22(c)(5)(D). The Exchange notes that
this is intended to prevent an Options Member from submitting an
order or response with an extremely large size in order to obtain a
larger pro-rata share of the Agency Order. See Notice, supra note 3,
at 59870.
\29\ See proposed Rule 21.23(c)(5)(F).
\30\ See proposed Rule 21.23(c)(5)(G).
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One or more C-SAM auctions in the same complex strategy may occur
at the same time, C-SAM auctions in different complex strategies may be
ongoing at any given time (even if the complex strategies have
overlapping components), and a C-SAM auction may be ongoing at the same
time as a SAM auction in any component of the complex strategy.\31\ To
the extent there is more than one C-SAM auction in a complex strategy
underway at a time, the C-SAM auctions will conclude sequentially based
on the exact time each C-SAM commenced, unless terminated early
pursuant to proposed Rule 21.23(d).\32\ In the event there are multiple
C-SAM auctions underway that are each terminated early pursuant
[[Page 68233]]
to proposed Rule 21.23(d), the system will process the C-SAM auctions
sequentially based on the exact time each C-SAM auction commenced.\33\
If the system receives a simple order that causes a SAM auction and C-
SAM auction (or multiple SAM and/or C-SAM auctions) to conclude
pursuant to Rule 21.23(d) and Rule 21.21(d), the system will first
process SAM auctions (in price-time priority) and then process C-SAM
auctions (in price-time priority).\34\ At the time each C-SAM auction
concludes, the system will allocate the Agency Order pursuant to
proposed Rule 21.23(e) and will take into account all C-SAM responses
and unrelated orders and quotes in place at the exact time of
conclusion.\35\
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\31\ See proposed Rule 21.23(c)(1)(A).
\32\ See proposed Rule 21.23(c)(1)(B).
\33\ See id. See also Notice, supra note 3, at 59868-69.
\34\ See proposed Rule 21.23(c)(1)(B).
\35\ See proposed Rule 21.23(c)(1)(C).
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B. Conclusion of the C-SAM Auction
The C-SAM will conclude at the sooner of the following: (i) The end
of the C-SAM auction period; (ii) upon receipt by the system of an
unrelated non-Priority Customer complex order on the same side of
market as the Agency Order that would post to the COB at a price better
than the stop price; (iii) upon receipt by the system of an unrelated
Priority Customer complex order on the same side of the market as the
Agency Order that would post to the COB at a price equal to or better
than the stop price; (iv) upon receipt by the system of an unrelated
non-Priority Customer order or quote that would post to the simple book
and cause the SBBO on the same side of the market as the Agency Order
to be better than the stop price; (v) upon receipt by the system of a
Priority Customer order in any component of the complex strategy that
would post to the simple book and cause the SBBO on the same side of
the market as the Agency Order to be equal to or better than the stop
price; (vi) upon receipt by the system of a simple non-Priority
Customer order that would cause the SBBO on the opposite side of market
as the Agency Order to be better than the stop price, or a Priority
Customer order that would cause the SBBO on the opposite side of market
as the Agency Order to be equal to or better than the stop price; (vii)
upon receipt by the system of an order that would cause the SBBO to be
a price not permissible under the Limit Up-Limit Down Plan or
Regulation SHO, provided, however, that in such instance, the C-SAM
auction would conclude without execution; (viii) the market close; and
(ix) any time the Exchange halts trading in the complex strategy,
provided, however, that in such instance the C-SAM auction will
conclude without execution.\36\
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\36\ See proposed Rule 21.23(d)(1).
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An unrelated market or marketable limit complex order (against the
SBBO or the best price of a complex order resting in the COB),
including a Post Only complex order, on the opposite side of the Agency
Order received during the C-SAM will not cause the C-SAM auction to end
early and will execute against interest outside of the C-SAM auction or
be posted to the COB.\37\ If contracts remain from such unrelated
complex order at the time the C-SAM auction ends, they may be allocated
for execution against the Agency Order pursuant to proposed Rule
21.23(e).\38\
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\37\ See proposed Rule 21.23(d)(2).
\38\ See id.
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C. Priority and Allocation
At the conclusion of the C-SAM auction, the system will execute the
Agency Order against the Solicited Order or contra-side complex
interest (which includes complex orders on the COB and C-SAM responses)
at the best price(s) as follows (provided that any execution price(s)
must be at or between the SBBO and the best prices of any complex
orders resting on each side of the COB at the conclusion of the C-SAM
auction): \39\
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\39\ See proposed Rule 21.23(e). Additionally, if there is a
Priority Customer order representing any leg of the SBBO in the
simple book, the execution price must be better than the SBBO, in
accordance with complex order priority. See Rule 21.20(f)(2).
Additionally, any execution price must be better than the price of
any resting Priority Order complex order on the COB.
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The system will execute the Agency Order against the
Solicited Order at the stop price if there are no Priority Customer
complex orders resting on the COB on the opposite side of the Agency
Order at or better than the stop price and the aggregate size of
contra-side interest at an improved price(s) is insufficient to satisfy
the Agency Order.\40\
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\40\ See proposed Rule 21.23(e)(1).
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The system will execute the Agency Order against contra-
side interest (and cancel the Solicited Order) if (A) there is a
Priority Customer complex order resting on the COB on the opposite side
of the Agency Order at or better than the stop price and the aggregate
size of that order and other contra-side interest is sufficient to
satisfy the Agency Order; or (B) the aggregate size of contra-side
interest at an improved price(s) is sufficient to satisfy the Agency
Order.\41\ The Agency Order execution against such contra-side interest
will occur at each price level, to the price at which the balance of
the Agency Order can be fully executed, first against Priority Customer
complex orders on the COB (in time priority) and then against remaining
contra-side interest (including non-Priority Customer orders on the COB
and C-SAM responses) in a pro-rata manner.\42\
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\41\ See proposed Rule 21.23(e)(2).
\42\ See id.
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The system will cancel the Agency Order and Solicited
Order with no execution if (i) execution of the Agency Order against
the Solicited Order at the stop price would not be at or between the
SBBO at the conclusion of the C-SAM auction, better than the SBBO if
there is a Priority Customer order in any leg component in the simple
book, at or better than the best-priced complex order resting on the
COB, or better than the best-priced complex order resting on the COB if
it is a Priority Customer complex order; (ii) there is a Priority
Customer complex order resting on the COB on the opposite side of the
Agency Order at or better than the stop price, and the aggregate size
of the Priority Customer complex order and any other contra-side
interest is insufficient to satisfy the Agency Order; or (iii) there is
a non-Priority Customer complex order resting on the COB on the
opposite side of the Agency Order at a price better than the stop
price, and the aggregate size of the resting complex order and any
other contra-side interest is insufficient to satisfy the Agency
Order.\43\
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\43\ See proposed Rule 21.23(e)(3).
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Executions following a C-SAM Auction for a complex Agency Order are
subject to the complex order price restrictions and priority in Rule
21.20(f)(2).\44\ The system will cancel or reject any unexecuted C-SAM
responses (or unexecuted portions) at the conclusion of the C-SAM
auction.\45\ The Agency Order will only execute against the Solicited
Order or C-SAM responses and complex orders resting in the COB, and
will not leg into the simple book, at the conclusion of a C-SAM
auction.\46\
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\44\ See proposed Rule 21.23(e)(4).
\45\ See proposed Rule 21.23(e)(5).
\46\ See Notice, supra note 3, at 59871.
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D. Notification Requirement and Order Exposure Rule
Proposed Rule 21.23, Interpretation and Policy .01 provides that
prior to entering Agency Orders into a C-SAM auction on behalf of
customers, Initiating Members must deliver to the customer a written
notification informing the customer that his order may be executed
using the C-SAM
[[Page 68234]]
auction. The written notification must disclose the terms and
conditions contained in proposed Rule 21.23 and be in a form approved
by the Exchange.\47\
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\47\ See proposed Rule 21.23, Interpretation and Policy .01.
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Under Rule 21.23, Initiating Members may enter contra-side orders
that are solicited. C-SAM provides a facility for Options Members that
locate liquidity for their customer orders. Proposed Rule 21.23,
Interpretation and Policy .02 provides that Options Members may not use
the C-SAM auction to circumvent Rule 21.19 or 21.22 limiting principal
transactions. This may include, but is not limited to, Options Members
entering contra-side orders that are solicited from (a) affiliated
broker-dealers or (b) broker-dealers with which the Options Member has
an arrangement that allows the Options Member to realize similar
economic benefits from the solicited transaction as it would achieve by
executing the customer order in whole or in part as principal.\48\
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\48\ See proposed Rule 21.23, Interpretation and Policy .02.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with Section 6(b) of the Act.\49\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\50\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to 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.
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\49\ 15 U.S.C. 78f(b). 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).
\50\ 15 U.S.C. 78f(b)(5).
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The Commission believes that allowing Options Members to enter
complex orders into the C-SAM could provide additional opportunities
for such large-sized complex orders to receive price improvement. The
Commission further believes that the proposal to establish the C-SAM
may allow for greater flexibility in executing large-sized complex
orders, is not novel, and does not otherwise raise any issues of first
impression.\51\ The Commission believes that the proposal includes
appropriate terms and conditions to assure that the Agency Order is
exposed to Options Members for the possibility of price improvement and
that Priority Customer orders on the Exchange are protected. At the
conclusion of a C-SAM, the Agency Order would either be executed in
full (at a price at or between the SBBO and at or better than the best-
priced complex order resting on the COB at the conclusion of the C-SAM
auction) or cancelled. The Agency Order will be executed against the
Solicited Order at the proposed stop price if (i) there is insufficient
size among contra-side trading interest at a price better than the stop
price to execute the Agency Order; and (ii) there are no Priority
Customer complex orders resting in the COB on the opposite side of the
Agency Order at or better than the stop price.\52\ If there are
Priority Customer complex orders and there is sufficient size to
execute the Agency Order (considering all eligible interest), then the
Agency Order will be executed against these interests and the Solicited
Order will be cancelled.\53\ If, however, there are resting Priority
Customer complex orders at the stop price, but there is not sufficient
size to execute the Agency Order in full, then both the Agency Order
and the Solicited Order will be cancelled.\54\ Finally, if there is
sufficient size to execute the Agency Order in full at an improved
price equal to or better than the SBBO and the best-priced complex
order resting on the COB at the conclusion of the C-SAM auction, the
Agency Order will execute at the improved price and the Solicited Order
will be cancelled. The Commission believes that the priority and
allocation rules for the C-SAM, which are consistent with similar
mechanisms on other exchanges,\55\ are reasonable and consistent with
the Act.
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\51\ The Commission also notes that the proposal is nearly
identical to the requirements set forth for the complex order
solicitation mechanism on another options exchange. See Cboe Options
Rule 5.40. See also Nasdaq ISE, LLC Options 3, Section 11(e).
\52\ See proposed Rule 21.23(e)(1).
\53\ See proposed Rule 21.23(e)(2).
\54\ See proposed Rule 21.23(e)(3).
\55\ See, e.g., Cboe Options Rule 5.40 (Complex Solicitation
Auction Mechanism).
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IV. Section 11(a) of the Act
Section 11(a)(1) of the Act \56\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\57\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\58\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member or an associated
person has investment discretion, neither the member nor its associated
person may retain any compensation in connection with effecting the
transaction except as provided in the Rule. For the reasons set forth
below, the Commission believes that Exchange Options Members entering
orders into the C-SAM would satisfy the requirements of Rule 11a2-2(T).
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\56\ 15 U.S.C. 78k(a)(1).
\57\ 17 CFR 240.11a2-2(T).
\58\ This prohibition also applies to associated persons. The
member may, however, participate in clearing and settling the
transaction.
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The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. In the context of automated
trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\59\ The Exchange represents that its trading system
and the proposed C-SAM receive all orders electronically through remote
terminals
[[Page 68235]]
or computer-to-computer interfaces.\60\ The Exchange also represents
that orders for covered accounts from Options Members will be
transmitted from a remote location directly to the proposed C-SAM by
electronic means. Because no Exchange Options Member may submit orders
into the C-SAM from on the floor of the Exchange, the Commission
believes that the C-SAM satisfies the off-floor transmission
requirement.
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\59\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
\60\ See Notice, supra note 3, at 59876.
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Second, the Rule requires that the member and any associated person
not participate in the execution of its order after the order has been
transmitted. The Exchange represents that at no time following the
submission to the C-SAM of an order or C-SAM response is an Options
Member able to acquire control or influence over the result or timing
of the order's or response's execution.\61\ According to the Exchange,
the execution of an order (including the Agency and the Solicited
Order) or a C-SAM response sent to the C-SAM is determined by what
other orders and responses are present and the priority of those orders
and responses.\62\ Accordingly, the Commission believes that an Options
Member does not participate in the execution of an order or response
submitted to the C-SAM.
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\61\ See id. (also representing, among other things, that no
Options Member, including the Initiating Member, will see a C-SAM
response submitted into C-SAM and therefore will not be able to
influence or guide the execution of their Agency Orders, Solicited
Orders, or C-SAM responses, as applicable).
\62\ See id. The Exchange notes that an Initiating Member may
not cancel or modify an Agency Order or Solicited Order after it has
been submitted into C-SAM, but that Options Members may modify or
cancel their responses after being submitted to a C-SAM. See id. at
59876 n.77. As the Exchange notes, the Commission has stated that
the non-participation requirement does not preclude members from
cancelling or modifying orders, or from modifying instructions for
executing orders, after they have been transmitted so long as such
modifications or cancellations are also transmitted from off the
floor. See Securities Exchange Act Release No. 14563 (March 14,
1978), 43 FR 11542, 11547 (the ``1978 Release'').
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities, such as the C-SAM, are used, as
long as the design of these systems ensures that members do not possess
any special or unique trading advantages in handling their orders after
transmitting them to the exchange.\63\ The Exchange represents that the
C-SAM is designed so that no Options Member has any special or unique
trading advantage in the handling of its orders or responses after
transmitting its orders to the mechanism.\64\ Based on the Exchange's
representation, the Commission believes that the C-SAM satisfies this
requirement.
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\63\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release, supra note 48.
\64\ See Notice, supra note 3, at 59876.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\65\ The Exchange represents that Options Members
relying on Rule 11a2-2(T) for transactions effected through the C-SAM
must comply with this condition of the Rule and that the Exchange will
enforce this requirement pursuant to its obligations under Section
6(b)(1) of the Act to enforce compliance with federal securities
laws.\66\
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\65\ In addition, Rule 11a2-2(T)(d) requires a member or
associated person authorized by written contract to retain
compensation, in connection with effecting transactions for covered
accounts over which such member or associated persons thereof
exercises investment discretion, to furnish at least annually to the
person authorized to transact business for the account a statement
setting forth the total amount of compensation retained by the
member or any associated person thereof in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 51, at 11548 (stating ``[t]he contractual and disclosure
requirements are designed to assure that accounts electing to permit
transaction-related compensation do so only after deciding that such
arrangements are suitable to their interests'').
\66\ See Notice, supra note 3, at 59876-77.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\67\ that the proposed rule change (SR-CboeEDGX-2019-064) be, and
hereby is, approved.
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\67\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\68\
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\68\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-26851 Filed 12-12-19; 8:45 am]
BILLING CODE 8011-01-P