[Federal Register Volume 84, Number 226 (Friday, November 22, 2019)]
[Notices]
[Pages 64600-64602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25318]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87561; File No. SR-CboeBZX-2019-096]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend the Fat Finger Check in Rule 21.17 as it Applies To Stop Limit
Orders
November 18, 2019.
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 November 12, 2019, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') 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.
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\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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'')
proposes to amend the fat finger check in Rule 21.17 as it applies to
Stop Limit Orders. The text of the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), 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 its fat finger check under Rule
21.17(b) as it applies to Stop Limit Orders. Currently, Rule 21.17(b)
provides that if a User submits a buy (sell) limit order to the System
with a price that is more than an Exchange-determined buffer amount
above (below) the NBO (NBB), the System will reject or cancel back to
the User the limit order (i.e., the ``fat finger'' check). This check
applies to orders and quotes with a limit price with the exception of
bulk messages.\5\
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\5\ The Exchange notes that a separate provision governs a fat
finger check specific to bulk messages. See Rule 21.17(f).
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The Exchange proposes to add Stop Limit Orders to Rule 21.17(b) as
an additional order type to which the fat finger check does not apply.
A Stop Limit Order is an order that becomes a limit order when the stop
price (selected by the User) is elected. A Stop Limit Order to buy is
elected and becomes a buy limit order when the consolidated last sale
in the option occurs at or above, or the NBB is equal to or higher
than, the specified stop price. A Stop Limit Order to sell is elected
and becomes a sell limit order when the consolidated last sale in the
option occurs at or below, or the NBO is equal to or lower than, the
specified stop price.\6\ Stop Limit Orders allow Users increased
control and flexibility over their transactions and the prices at which
they are willing to execute an order. The purpose of a Stop Limit Order
is to not execute upon entry, and instead rest in the System until the
market reaches a certain price level, at which time the order could be
executed. As such, when a buy (sell) Stop Limit Order is activated, its
limit price may likely be outside of the buffer amount above (below)
the NBO (NBB) in anticipation of capturing rapidly increasing
(decreasing) market prices.
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\6\ See Rule 21.1(d)(12) (definition of Stop Limit Order).
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The primary purpose of the fat finger check is to prevent limit
orders from executing at potentially erroneous prices upon entry,
because the limit prices are ``too far away'' from the then-current
NBBO. As noted above, a Stop Limit Order is not intended to execute
upon entry. Currently, because a Stop Limit Order does not ``become'' a
limit order until activated, the limit order fat finger check applies
to a Stop Limit Order at the time the order is activated. As noted
above, at that time, the limit price may cross the NBO, and thus may be
cancelled due to the fat finger check if the limit price crosses the
NBO by more than the buffer. Therefore, the manner in which the fat
finger check cancels/rejects a Stop Limit Order may conflict with the
intended purpose of a Stop Limit Order and a User's control over the
time when and the price at which it executes. For example, assume that
when the NBBO is 8.00 x 8.05, a User submits a Stop Limit Order to buy
at 9.25 and a stop price of 8.15 and the Exchange has set the fat
finger buffer to $1.00. Assume the NBBO then updates to 8.15 x 8.20.
The updated NBB equals the stop price of the order will activate the
stop price of the Stop Limit Order, converting it into a limit order to
buy at 9.25, which would be more than the fat finger buffer of $1.00
above the current NBO, thus canceled/rejected by the System in
accordance with the fat finger check. The Exchange also notes that the
System is currently able to apply only one buffer amount across
multiple order types. Therefore, the Exchange would not be able to
expand the buffer amount to accommodate Stop Limit Orders without
potentially over-expanding the buffer amount for other limit orders
that execute upon entry.
The Exchange notes that a User's Stop Limit Orders would still be
subject to other price protections already in place on the Exchange. In
particular, drill-through price protections are in place pursuant to
Rule 21.17(d), such that, if a buy (sell) order would execute (i.e.,
when the stop price for a Stop Limit Order is activated), the System
executes the order up to a buffer amount (established by the Exchange)
above (below) the NBO (NBB) that existed at the time of order entry
(``the drill-through price'').
The Exchange believes that allowing a Stop Limit Order, once
activated, with a limit price outside of the NBBO (notwithstanding any
fat finger buffer) to execute at that limit price (up to the drill-
through buffer amount) is
[[Page 64601]]
consistent with the intended purpose of a Stop Limit Order. As stated,
when a buy (sell) Stop Limit Order is activated, its limit price is
intended to be at a consequential amount above (below) the NBO (NBB) in
order to capture rapidly increasing (decreasing) trade prices, to which
the NBBO would as rapidly track and reflect. To cancel or reject such
orders based on the NBBO at the time of its activation would inhibit
Stop Limit Orders from capturing favorable trade prices as a result of
a rapidly shifting market. The Exchange further notes that its
affiliated exchange, Cboe Exchange, Inc. (``Cboe Options''), recently
submitted a rule filing that also proposed to exclude Stop Limit Orders
from its fat finger check, which function in substantively the same
manner as on the Exchange.\7\
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\7\ See Securities Exchange Act Release No. 87455 (November 4,
2019), 84 FR 60461 (November 8, 2019) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change Relating To Amend
the Fat Finger Check in Rule 5.34 as It Applies to Stop-Limit
Orders) (SR-CBOE-2019-102).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\8\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \9\ 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) \10\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
\10\ Id.
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In particular, the proposed rule change benefits market
participants by ensuring that they are able to use Stop Limit Orders to
achieve their intended purpose. As stated, Stop Limit Orders are
intended to increase User price control and flexibility, particularly
in the face of price swings and market volatility, by resting in the
System until the market reaches a certain price level. Thus, they are
not intended to execute upon entry. Conversely, the primary purpose of
the fat finger check is to prevent limit orders from executing at
potentially erroneous prices upon entry, because the limit prices are
``too far away'' from the then-current NBBO. By excluding Stop Limit
Orders from the fat finger check, which would currently cancel/reject a
Stop Limit Order if its buy (sell) limit price was above (below) the
NBO (NBB) upon activation of its stop limit price, the proposed rule
change removes impediments to and perfects the mechanism of a free and
open market and national market system by allowing Users the control
and flexibility to set the limit prices on Stop Limit Orders so as to
capture significant market fluctuations, which, as stated, result in
corresponding significant adjustments in the NBBO. Therefore, the
proposed rule change is designed to protect investors by allowing their
Stop Limit Orders to execute as intended without being canceled or
rejected in connection with the NBBO that existed at the time of their
activation, and instead to consider rapid price movements and
corresponding NBBO adjustments. The Exchange notes that the proposed
rule change will not affect the protection of investors or the
maintenance of a fair and orderly market because the drill-through
price controls would apply to Stop Limit Orders when their stop prices
are activated and they become limit orders.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change
will not impose any burden on intramarket competition that is not
necessary or appropriate in furtherance of the purposes of the Act
because all Users' Stop Limit Orders will be excluded from the fat
finger check in the same manner. Also, all Users' Stop Limit Orders
will continue to be subject to other specific price controls in place
once their stop prices are activated and they become limit orders. The
proposed rule change will not impose any burden on intermarket
competition that that is not necessary or appropriate in furtherance of
the purposes of the Act because the proposed change is merely designed
to allow Users' Stop Limit Orders to execute in a manner that achieves
their intended purpose by updating a price protection mechanism already
in place on the Exchange and applicable only to trading on the
Exchange.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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 \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-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.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \13\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ 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. The
Exchange believes that waiver of the operative delay is appropriate
because, as the Exchange discussed above, excluding Stop Limit Orders
from the fat finger check, which would currently cancel/reject a Stop
Limit Order if its buy (sell) limit price was above (below) the NBO
(NBB) upon activation of its stop limit price, will benefit market
participants by ensuring that they are able to use Stop Limit Orders to
achieve their intended purpose. Thus, the Exchange believes that the
proposed rule change is designed to protect investors by allowing their
Stop Limit Orders to execute as intended without being canceled or
rejected due to the application of the fat finger check provision.
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\13\ 17 CFR 240.19b-4(f)(6).
\14\ 17 CFR 240.19b-4(f)(6)(iii).
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The Commission believes that waiver of the 30-day operative delay
is consistent with the protection of
[[Page 64602]]
investors and the public interest because the proposal will permit Stop
Limit Orders to execute as intended and not be inadvertently cancelled
in certain situation, as discussed above, by the fat finger check
provision. Therefore, the Commission hereby waives the operative delay
and designates the proposal as operative upon filing.\15\
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\15\ 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).
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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-CboeBZX-2019-096 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-CboeBZX-2019-096. 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, 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-CboeBZX-2019-096 and should be submitted
on or before December 13, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25318 Filed 11-21-19; 8:45 am]
BILLING CODE 8011-01-P