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[Federal Register Volume 85, Number 243 (Thursday, December 17, 2020)]
[Notices]
[Pages 82005-82008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27723]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90642; File No. SR-CBOE-2020-115]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
the Fees Schedule With Respect to Certain Fees Related to Qualified 
Contingent Cross Transactions the Exchange's LMM Incentive Programs

December 11, 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 4, 2020, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend the Fees Schedule with respect to certain fees related to 
Qualified Contingent Cross transactions the Exchange's LMM incentive 
programs. The text of the proposed rule change is attached [sic] as 
Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 Fees Schedule with respect to 
Qualified Contingent Cross (``QCC'') transaction fees and the 
Exchange's Lead Market-Maker (``LMM'') programs.\3\
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    \3\ The Exchange initially filed the proposed fee changes 
December 1, 2020 (SR-CBOE-2020-113). On December 4, 2020, the 
Exchange withdrew that filing and submitted this proposal.
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    The Exchange first notes that it operates in a highly competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. More specifically, the 
Exchange is only one of 16 options venues to which market participants 
may direct their order flow. Based on publicly available information, 
no single options exchange has more than 15% of the market share.\4\ 
Thus, in such a low-concentrated and highly competitive market, no 
single options exchange possesses significant pricing power in the 
execution of option order flow. The Exchange believes that the ever-
shifting market share among the exchanges from month to month

[[Page 82006]]

demonstrates that market participants can shift order flow or 
discontinue to reduce use of certain categories of products in response 
to fee changes. Accordingly, competitive forces constrain the 
Exchange's transaction fees, and market participants can readily trade 
on competing venues if they deem pricing levels at those other venues 
to be more favorable. In response to competitive pricing, the Exchange, 
like other options exchanges, offers rebates and assesses fees for 
certain order types executed on or routed through the Exchange.
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    \4\ See Cboe Global Markets U.S. Options Monthly Market Volume 
Summary (November 25, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
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QCC Fees
    By way of background, a QCC order is comprised of an `initiating 
order' to buy (sell) at least 1,000 contracts, coupled with a contra-
side order to sell (buy) an equal number of contracts and that for 
complex QCC transactions, the 1,000 contracts minimum is applied per 
leg. Currently, the Exchange assesses no fee for Customer (``C'' 
capacity) QCC transactions and $0.17 per contract side for non-Customer 
transactions. In addition, the Exchange provides a $0.10 per contract 
credit for the initiating order side, regardless of origin code. The 
Exchange proposes to eliminate the $0.17 transaction fee for 
Professional (``U'' capacity) QCC orders (i.e., such transactions would 
be free).\5\ The Exchange similarly proposes to provide that the $0.10 
per contract credit for the initiating order side would not apply to 
(i) Professional to Professional executions or (ii) Professional to 
Customer executions, in light of the fact that the Exchange is 
proposing to waive the transaction fee for Professional QCC Orders. 
More specifically, since the Exchange is proposing to eliminate the fee 
for Professional QCC transactions, and since Customers already aren't 
assessed a fee for such transactions, the Exchange does not wish to 
provide a credit for transactions that do not generate any fees. The 
proposed change is consistent with the current Fees Schedule which 
provides that the QCC credit is not applied to Customer to Customer QCC 
executions. The purpose of the proposed change to waive fees for 
Professional QCC orders is to incentivize the sending of QCC orders to 
the Exchange by these market participants and compete with other 
Exchanges that similarly do not assess fees to QCC orders from 
Professional Customers.\6\
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    \5\ Pursuant to this proposal, Professional Customer (Capacity 
U) QCC orders would receive fee code QC instead of fee code QN.
    \6\ See e.g., BOX Options Fee Schedule, Section 1(D), Qualified 
Contingent Cross (``QCC'') Transactions, which provides that no fees 
are assessed for Customer and Professional Customer QCC 
transactions. See also NYSE American Options Fee Schedule, Section 
1(F), QCC Fees and Credits, which also provides that no fees are 
assessed for Customer and Professional Customer QCC transactions.
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LMM Programs
    The Exchange next proposes to amend each of its LMM Programs (i.e., 
the MSCI LMM Incentive Program, the GTH VIX/VIXW LMM Incentive 
Programs, the GTH SPX/SPXW LMM Incentive Program and the RTH SPESG LMM 
Incentive Programs (collectively ``LMM Programs'')). The LMM Programs 
each currently provide a specified rebate where the LMM(s) in the 
respective classes meet certain prescribed heightened quoting standards 
as specified in the respective LMM Program tables in the Fees Schedule. 
The Exchange notes that the LMMs for each program are not currently 
obligated to satisfy the respective heightened quoting standards 
detailed in the Fees Schedule, but rather, are eligible to receive the 
respective rebates if they satisfy the prescribed heightened quoting 
standards, which the Exchange believes encourage LMMs to provide 
liquidity in their appointed classes. The Exchange also notes that the 
notes section for each LMM Program provides that the Exchange may 
consider exceptions to the prescribed quoting standards based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances. The Exchange proposes to adopt and codify another 
exception to the prescribed quoting standards for each LMM Program. 
Particularly, the Exchange wishes to provide that for each program, in 
calculating whether an LMM meets the heightened quoting standard each 
month, the Exchange will exclude from the calculation the LMM's worst 
quoting day in that month (i.e., the business day on which the LMM met 
or exceeded the heightened quoting standard in the least amount of 
series).\7\ The Exchange proposes to adopt this exception to provide 
further flexibility for LMMs. For example, the Exchange notes that 
there may be certain circumstances, such as a day of extreme volatility 
or where the LMM has a system issue, that may impact an LMM's ability 
to meet the heightened quoting standards for that day, which could 
result in the LMM no longer being able to satisfy the heightened 
quoting standard for the remainder of the month. The Exchange believes 
this proposed change will further encourage LMMs to continue to quote 
aggressively in a class throughout the entire month despite one poor 
performing day. For example, absent the proposed rule change, if an LMM 
has a poor performing day early in the month, the LMM may no longer 
have an incentive to continue to quote at the prescribed heightened 
levels for the remainder of the month as it would know it would no 
longer be eligible to receive the LMM rebate for that month even if it 
continued to meet or exceed the prescribed quoting standards. 
Accordingly, the Exchange believes the proposed rule change would 
eliminate the potential disincentive that could occur if one poor 
performing day prevented an LMM from meeting the heightened quoting 
standards.
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    \7\ An LMM's ``worst'' quoting day will be based on the highest 
number of series missed and not the percentage of series missed. As 
an example, assume an LMM met the heightened quoting standard for 
all series every day of a given month except for two days. On ``day 
1'' there were 100 available series and the LMM didn't meet the 
heightened quoting standard for 40 of those series (i.e., missed 40% 
of the available series) and on ``day 2'' there were 50 available 
series and the LMM didn't meet the heightened quoting standard for 
25 of those series (i.e., missed 50% of the available series). In 
this scenario, the Exchange would omit from its calculation ``day 
1'', because it missed a higher number of series (40 vs 25) even 
though the LMM missed a lower percentage of available series (40% vs 
50%). The Exchange notes that if an LMM misses the same number of 
series on more than one day, it will still omit only one day to 
eliminate from the calculation.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Act,\8\ in general, and 
furthers the objectives of Section 6(b)(4),\9\ in particular, as it is 
designed to provide for the equitable allocation of reasonable dues, 
fees and other charges among its Trading Permit Holders (``TPHs'') and 
issuers and other persons using its facilities. The Exchange also 
believes that the proposed rule change is consistent with the 
objectives of Section 6(b)(5) \10\ 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, 
and, particularly, is not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4).
    \10\ 15 U.S.C. 78f.(b)(5).

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[[Page 82007]]

    The Exchange believes that the proposed amendments to the Fees 
Schedule are reasonable, equitable and not unfairly discriminatory. In 
particular, the Exchange believes the proposal to not assess a fee for 
Professional QCC orders is reasonable because such market participants 
would not be subject to a transaction fee for such transactions. The 
Exchange notes other Exchanges also waive fees for Professional QCC 
transactions.\11\ Additionally, the proposed change would apply to all 
Professional alike and the proposed fee changes reflect a competitive 
pricing structure designed to compete with other exchanges that 
similarly do not assess fees on these market participants. The Exchange 
believes the proposed rule change will also incentivize Professionals 
to direct their QCC order flow to the Exchange, which the Exchange 
believes would enhance market quality to the benefit of all TPHs.
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    \11\ See e.g., BOX Options Fee Schedule, Section 1(D), Qualified 
Contingent Cross (``QCC'') Transactions, which provides that no fees 
are assessed for Customer and Professional Customer QCC 
transactions. See also NYSE American Options Fee Schedule, Section 
1(F), QCC Fees and Credits, which also provides that no fees are 
assessed for Customer and Professional Customer QCC transactions.
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    The Exchange believes it's reasonable to eliminate the credit on 
the initiating order side of a QCC transaction for (i) Professional to 
Professional and (ii) Professional to Customer QCC executions as the 
Exchange will no longer receive any transaction fees for such 
transactions in light of its proposal to eliminate a transaction fee 
for Professional QCC orders. The Exchange notes another exchange 
similarly waives QCC-related credits for similar transactions.\12\ The 
Exchange believes the elimination of the proposed credit is equitable 
and not unfairly discriminatory because it applies to all Professionals 
and because such market participants will no longer be subject to 
transaction fees for QCC transactions.
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    \12\ See NYSE American Options Fee Schedule, Section 1(F), QCC 
Fees and Credits, which provides Floor Brokers will not receive a 
credit for QCC trades that have a Customer or Professional Customer, 
or both, on both sides of the trade.
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    The Exchange believes the proposed rule change to omit an LMM's 
worst quoting day each month is reasonable because it will encourage 
LMMs to quote aggressively in a class throughout the entire month 
despite one poor performing day. As discussed above, there may be days 
on which an LMM cannot quote aggressively (e.g., LMM has a system 
issue) and in certain months, one poor performing day can prevent an 
LMM from meeting the heightened quoting standard required to receive 
the rebate under the LMM Program. Moreover, in such months where an LMM 
has a poor performing day, an LMM may be discouraged from quoting 
aggressively the remainder of the month if it knows it were no longer 
eligible to receive the rebate that month. This can be especially 
problematic if a poor performing day occurs early in the month. The 
Exchange notes that it adopted each of its LMM programs and 
corresponding financial incentives to ensure there was sufficient 
incentive for a TPH to undertake an obligation to quote at heightened 
levels, without which could result in lower levels of liquidity in the 
LMM Program classes. Accordingly, the Exchange believes the proposed 
rule change will encourage LMMs to quote aggressively in a class 
throughout the entire month (and thereby ensure sufficient liquidity), 
notwithstanding a poor performing day. The Exchange also notes that 
another exchange similarly omits a Market-Maker's worst quoting day 
each month under from one of its financial incentive programs.\13\ The 
Exchange believes the proposed change is equitable and not unfairly 
discriminatory as it applies equally to all appointed LMMs.
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    \13\ See Nasdaq ISE LLC, Options 7 Pricing Schedule, Section 3, 
Regular Order Fees and Rebates, Footnote 5.
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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. First, the Exchange notes 
that the proposed changes apply uniformly to similarly-situated TPHs. 
The Exchange believes the proposed rule change serves to increase 
intramarket competition by incentivizing Professionals to direct their 
QCC orders to the Exchange, which will bring greater volume and 
liquidity, thereby benefitting all market participants by providing 
more trading opportunities and tighter spreads. Further, the Exchange 
notes that other Exchanges don't assess fees to Professional (or 
Customer) QCC transactions. The Exchange does not believe that the 
proposed rule change related to LMM Programs will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because it applies uniformly to 
any LMM appointed under these programs, which market participants play 
a crucial role in providing active and liquid markets in their 
respective assigned products.
    Next, the Exchange believes the proposed rule change does not 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As previously 
discussed, the Exchange operates in a highly competitive market. TPHs 
have numerous alternative venues they may participate on and direct 
their order flow, including 15 other options exchanges. Additionally, 
the Exchange represents a small percentage of the overall market. Based 
on publicly available information, no single options exchange has more 
than 15% of the market share. Therefore, no exchange possesses 
significant pricing power in the execution of order flow. Indeed, 
participants can readily choose to send their orders to other exchanges 
and off-exchange venues if they deem fee levels at those other venues 
to be more favorable. As noted above, the Exchange believes that the 
proposed QCC transaction fee change is comparable to that of other 
exchanges offering similar QCC functionality. Also, while the proposed 
change to the LMM Programs applies only to the Exchange, another 
exchange provides for a similar exception as proposed for one of its 
financial incentive programs. Moreover, the Commission has repeatedly 
expressed its preference for competition over regulatory intervention 
in determining prices, products, and services in the securities 
markets. Specifically, in Regulation NMS, the Commission highlighted 
the importance of market forces in determining prices and SRO revenues 
and, also, recognized that current regulation of the market system 
``has been remarkably successful in promoting market competition in its 
broader forms that are most important to investors and listed 
companies.'' The fact that this market is competitive has also long 
been recognized by the courts. In NetCoalition v. Securities and 
Exchange Commission, the D.C. Circuit stated as follows: ``[n]o one 
disputes that competition for order flow is `fierce.' . . . As the SEC 
explained, `[i]n the U.S. national market system, buyers and sellers of 
securities, and the broker-dealers that act as their order-routing 
agents, have a wide range of choices of where to route orders for 
execution'; [and] `no exchange can afford to take its market share 
percentages for granted' because `no exchange possesses a monopoly, 
regulatory or otherwise, in the execution of order flow from broker 
dealers'. . . .''. Accordingly, the Exchange does not believe its 
proposed fee change imposes any burden on

[[Page 82008]]

competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \14\ and paragraph (f) of Rule 19b-4 \15\ 
thereunder. 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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f).
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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-CBOE-2020-115 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2020-115. 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. 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-CBOE-2020-115 and should be 
submitted on or before January 7, 2021.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-27723 Filed 12-16-20; 8:45 am]
BILLING CODE 8011-01-P
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