[Federal Register Volume 84, Number 241 (Monday, December 16, 2019)]
[Notices]
[Pages 68517-68520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26992]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87705; File No. SR-C2-2019-026]
Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
the Maximum Composite Width Check of the Opening Rotation as Provided
in Subparagraph (e)(1) of Exchange Rule 6.11
December 10, 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 December 4, 2019, Cboe C2 Exchange, Inc. (the ``Exchange'' or
``C2'') 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 C2 Exchange, Inc. (the ``Exchange'' or ``C2'') proposes to
amend the Maximum Composite Width Check of the opening rotation as
provided in subparagraph (e)(1) of Exchange Rule 6.11. 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/options/regulation/rule_filings/ctwo/), 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
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
2. Purpose
Exchange Rule 6.11 sets forth the Exchange's opening auction
process. Paragraph (e) of the Rule provides the opening rotation
process, during which the System will determine whether the Composite
Market \5\ for a series is not wider than a maximum width, will
determine the opening price, and open the series. Subparagraph (e)(1)
provides that the System will determine whether the Composite Market
for a series is not wider than a maximum width, as follows:
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\5\ The term ``Composite Market'' means the market for a series
comprised of (1) the higher of the then-current best appointed
Market-Maker bulk message bid on the Exchange and the ABB (if there
is an ABB) and (2) the lower of the then-current best appointed
Market-Maker bulk message offer on the Exchange and the ABO (if
there is an ABO). The term ``Composite Bid (Offer)'' means the bid
(offer) used to determine the Composite Market. See Exchange Rule
6.11(a).
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If the Composite Width \6\ of a series is less than or
equal to the Maximum Composite Width,\7\ the series is eligible to open
(and the System determines the Opening Price).\8\
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\6\ The term ``Composite Width'' means the width of the
Composite Market (i.e., the width between the Composite Bid and the
Composite Offer) of a series. See Exchange Rule 6.11(a).
\7\ The term ``Maximum Composite Width'' means the amount that
the Composite Width of a series may generally not be greater than
for the series to open (subject to certain exceptions set forth in
subparagraph (e)(1)). The Exchange determines this amount on a class
and Composite Bid basis, which amount the Exchange may modify during
the opening auction process (which modifications the Exchange
disseminates to all subscribers to the Exchange's data feeds that
deliver opening auction updates). See Exchange Rule 6.11(a).
\8\ See Exchange Rule 6.11(e)(1)(A).
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If the Composite Width of a series is greater than the
Maximum Composite Width, but there are no non-M Capacity \9\ market
orders or buy (sell) limit orders with prices higher (lower) than the
Composite Bid (Offer) and there are no locked or crossed orders or
quotes, the series is eligible to open (and the System determines the
Opening Price).\10\
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\9\ Capacity M is used for orders for the account of a Market-
Maker (with an appointment in the class), thus ``non-M Capacity''
orders refer to orders entered for the accounts of non-Market-Makers
(e.g., Customer or Firm accounts). See U.S. Options Binary Order
Entry Specifications, at 28 (definition of Capacity), available at
http://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf.
\10\ See Exchange Rule 6.11(e)(1)(B).
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If neither of the conditions above are satisfied for a
series, or if the Composite Market of a series is crossed, the series
is ineligible to open. The Queuing Period \11\ for the series continues
(including the dissemination of opening auction updates) until one of
the above conditions for the series is satisfied, or the Exchange opens
the series pursuant to paragraph (h).\12\
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\11\ The term ``Queuing Period'' means the time period prior to
the initiation of an opening rotation during which the System
accepts orders and quotes in the Queuing Book for participation in
the opening rotation for the applicable trading session. See
Exchange Rule 6.11(a).
\12\ See Exchange Rule 6.11(e)(1)(C).
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The Exchange implemented the price protection measure of
subparagraph (e)(1)(B) in order to conservatively protect non-M
capacity orders from executing in the Opening Auction Process at an
extreme price. While it is possible for Market-Makers to submit orders
to the Exchange at an extreme price, the Exchange believes there is
less risk of a Market-Maker inputting an order at an extreme price
given that Market-Makers are generally responsible for pricing the
market. The following example shows the application of the Maximum
Composite Width check provided for in subparagraph (e)(1)(B)
[[Page 68518]]
and the type of extreme trade price for which the check is intended to
limit.
Example #1
Suppose the Maximum Composite Width for a class is 1.00, and the
Composite Market is 5.00 x 20.00 comprised of an appointed Market-Maker
bulk message bid of 5.00 and an appointed Market-Maker bulk message
offer of 20.00. There is a non-M capacity limit order to buy for 18.00
in the Queuing Book. Prior to the open, the Exchange does not know the
market value of the option series; however, assume that the intrinsic
value of the option series is 6.00. In this case, the series would not
be eligible to open because the width of the Composite Market is
greater than the Maximum Composite Width, and there is a non-M Capacity
order at a price inside of the Composite Market. If the Exchange
permitted the option series to open in this circumstance, the non-M
capacity limit order may execute in the Opening Auction Process at its
limit price, which the Exchange would consider an extreme price given
that the intrinsic value of the option series is 6.00. Therefore,
subparagraph (e)(1)(B) is designed to protect the non-M capacity order
from executing at such an extreme price by not opening the option
series in such a scenario.
However, in certain instances where the Composite Market is wide,
the Exchange believes the conditions of subparagraph (e)(1)(B) may be
overly conservative and unnecessarily prevent the opening of a series
when the risk of execution at the open at an extreme price is minimal.
The following example shows the application of the Maximum Composite
Width check provided for in subparagraph (e)(1)(B) and the type of non-
extreme trade price for which the check will limit.
Example #2
Suppose the Maximum Composite Width for a class is 1.00, and the
Composite Market is 5.00 x 7.00 comprised of an appointed Market-Maker
bulk message bid of 5.00 and an appointed Market-Maker bulk message
offer of 7.00. There is a non-M capacity limit order to buy for 5.75 in
the Queuing Book.\13\ Prior to the open, the Exchange does not know the
market value of the option series; however, assume that the intrinsic
value of the option series is 5.75. In this case, the series would not
be eligible to open because the width of the Composite Market is
greater than the Maximum Composite Width, and there is a non-M Capacity
order at a price inside of the Composite Market.
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\13\ The term ``Queuing Book'' means the book into which Users
may submit orders and quotes (and onto which Good-til-Cancelled
(``GTC'') and Good-til-Date (``GTD'') orders remaining on the Book
from the previous trading session or trading day, as applicable, are
entered) during the Queuing Period for participation in the
applicable opening rotation. Orders and quotes on the Queuing Book
may not execute until the opening rotation. The Queuing Book for the
Global Trading Hours (``GTH'') opening auction process may be
referred to as the ``GTH Queuing Book,'' and the Queuing Book for
the Regular Trading Hours (``RTH'') opening auction process may be
referred to as the ``RTH Queuing Book.'' See Exchange Rule 6.11(a).
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As demonstrated in Example #2, subparagraph (e)(1)(B) provides no
circumstance under which a non-M capacity order may improve the
Composite Market when the Composite Width is greater than the Maximum
Composite Width that would allow the Exchange to open the series, even
when such non-M capacity order is not entered at an extreme limit
price. Given this, the Exchange proposes to amend subparagraph
(e)(1)(B) to allow the Exchange to open a series if the Composite Width
is greater than the Maximum Composite Width and there are non-M
Capacity limit orders at a price better than the Composite Bid (Offer)
in certain circumstances. Specifically, the proposed amendment will
allow the Exchange to open a series if the Composite Width of a series
is greater than the Maximum Composite Width, but there are no non-M
Capacity market orders or buy (sell) limit orders with prices higher
(lower) than the Composite Market midpoint and there are no locked or
crossed orders or quotes. Thus, under proposed subparagraph (e)(1)(B),
the Exchange would allow the option series to open in Example #2 above
as the non-M capacity limit bid was entered at a price lower than the
Composite Market midpoint. The proposed amendment would continue to
limit the risk of a non-M capacity order executing at an extreme price
in Example #1 as the non-M capacity limit bid was entered at a price
higher than the Composite Market midpoint.
The Exchange believes the proposed amendment strikes a reasonable
balance between protecting non-M capacity orders from executing at
extreme prices and encouraging the submission of non-M capacity orders
at prices that improve the Composite Market, which will allow the
Exchange to open series earlier and also allow for more trading
opportunities on the Exchange throughout the trading day. The Exchange
believes the proposed amendment is reasonable, as it will allow the
Exchange to open series on a less restrictive basis and potentially
earlier, while still limiting the risk of a non-M capacity order
executing at an extreme price on the open. If the width of the
Composite Market (which the Exchange believes represents the prices
most reflective of the market, as it is comprised of the better of
Market-Maker bulk messages on the Exchange or any away market quotes)
is no greater than the Maximum Composite Width, the Exchange will open
the series because there is minimal risk of execution at an extreme
price. Further, the Exchange notes that there are other price
protections available to limit the risk of executions at an extreme
price (e.g., drill-through protection).\14\ However, if the Composite
Width is greater than the Maximum Composite Width but there are no non-
M Capacity bids (offers) higher (lower) than the midpoint of the
Composite Market (and thus better than the best Composite Bid (Offer)
but still not marketable at a price at which the Exchange would open),
there is minimal risk of an order executing at an extreme price on the
open. Because the risk that the Maximum Composite Width Check is
intended to address is limited in this situation and also because any
such orders would be subject to other price protections to further
limit this risk, and that the Exchange believes such minimal risk is
outweighed by the benefits of additional trading opportunities by
opening these series earlier, the Exchange believes it is appropriate
to open a series in either of these conditions. Therefore, if neither
the (1) Composite Width of a series is less than or equal to the
Maximum Composite Width, nor (2) if the Composite Width of a series is
greater than the Maximum Composite Width, but there are no non-M
Capacity \15\ market orders or buy (sell) limit orders with prices
higher (lower) than the Composite Market midpoint and there are no
locked or crossed orders or quotes, the Exchange continues to believe
there may be higher risk that orders would execute at an extreme price
if the series opened, and therefore the Exchange will continue to not
open a series.
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\14\ The Exchange notes that drill-through protection is
designed to limit a marketable non-bulk message bid (offer) from
executing a certain amount higher (lower) than the National Best
Offer (National Best Bid) or the Opening Collar. See Exchange Rule
6.14(a)(4).
\15\ Capacity M is used for orders for the account of a Market-
Maker (with an appointment in the class), thus ``non-M Capacity''
orders refer to orders entered for the accounts of non-Market-Makers
(e.g., Customer or Firm accounts). See Exchange Rule 1.1.
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[[Page 68519]]
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.\16\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \17\ 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) \18\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Id.
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The Exchange believes proposed Rule 6.11(e) will protect investors,
because it will continue to limit the risk of execution of orders at
extreme prices at the open in a manner similar to the existing Rule.
The Exchange also believes the proposed amendment will benefit market
participants as it may encourage the submission of orders at prices
that improve the Composite Market in the Opening Auction Process on the
Exchange, and allow the Exchange to open series earlier, which may also
allow for more trading opportunities on the Exchange throughout the
trading day.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed amendment will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, because it will apply to orders
and quotes of all market participants in the same manner. Further, the
proposed amendment would allow trading in options series to open
sooner, which would benefit all market participants in these series.
The Exchange notes that the protections of Rule 6.11(e)(1)(B) are not
applied to Market-Maker orders because the Exchange believes there is
less risk of a Market-Maker inputting an order at an extreme price
given that Market-Makers are generally responsible for pricing the
market.
The Exchange does not believe that the proposed rule change to
amend the Maximum Composite Width Check of the opening rotation will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, because the
proposed rule change only impacts the conditions under which a series
will open on the Exchange. The proposed amendment may increase
participation in the Opening Auction Process and further allow more
series to open on the Exchange to the benefit of all Exchange Trading
Permit Holders.
The Exchange believes the proposed rule change may enhance
intermarket competition by encouraging the submission of orders at
improved prices in the Opening Auction Process and allowing more series
to open on the Exchange in a more timely manner. Further, the proposed
amendment will continue to limit the risk of orders executing at
extreme prices at the open in a similar manner as set forth under
current Rule 6.11(e).
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 \19\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\20\
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 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 \21\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \22\ 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 believes
that the proposed rule change may encourage submission of orders at
improved prices in the Opening Auction Process on the Exchange and
allow the Exchange to open series earlier, which will allow for more
trading opportunities on the Exchange throughout the trading day. In
addition, as noted above, the Exchange believes the Maximum Composite
Width Check will continue to limit the risk of executions at extreme
prices, and executions will be subject to other price protections on
the Exchange. Accordingly, the Commission hereby waives the operative
delay and designates the proposed rule change operative upon filing so
that the benefits of this proposed rule change can be realized
immediately.\23\
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\21\ 17 CFR 240.19b-4(f)(6).
\22\ 17 CFR 240.19b-4(f)(6)(iii).
\23\ 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
[[Page 68520]]
Send an email to [email protected]. Please include
File Number SR-C2-2019-026 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-C2-2019-026. 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-C2-2019-026 and should be submitted on
or before January 6, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-26992 Filed 12-13-19; 8:45 am]
BILLING CODE 8011-01-P