Federal Register / Vol. 83, No. 126 / Friday, June 29, 2018 / Notices 30795 

10 15 U.S.C. 78s(b)(3)(A). 

11 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– 

4(f)(6)(iii) requires the Exchange to give the 

Commission written notice of the Exchange’s intent 

to file the proposed rule change along with a brief 

description and the 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 pre-filing requirement. 

12 17 CFR 240.19b–4(f)(6). 

13 17 CFR 240.19b–4(f)(6). 

14 17 CFR 240.19b–4(f)(6)(iii). 

15For purposes only of waiving the operative 

delay for this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 16 17 CFR 200.30–3(a)(12). 

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). 

Section 19(b)(3)(A) of the Act 10 and 

Rule 19b–4(f)(6)(iii) thereunder.11

A proposed rule change filed under 

Rule 19b–4(f)(6) 12 normally does not 

become operative prior to 30 days after 

the date of the filing.13 However, 

pursuant to Rule 19b–4(f)(6)(iii),14 the 

Commission may designate a shorter 

time if such action is consistent with the 

protection of investors and the public 

interest. Without a waiver of 30-day 

operative delay, the Exchange’s Pilot 

Program will expire before the extension 

of the Pilot Program is operative. The 

Commission believes that waiving the 

30-day operative delay for the instant 

filing is consistent with the protection 

of investors and the public interest 

because doing so will allow the Pilot 

Program to continue without 

interruption in a manner that is 

consistent with the Commission’s prior 

approval of the extension and expansion 

of the Pilot Program and will allow the 

Exchange and the Commission 

additional time to analyze the impact of 

the Pilot Program. Accordingly, the 

Commission designates the proposed 

rule change as operative upon filing 

with the Commission.15

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 rule-comments@

sec.gov. Please include File Number SR– 

NYSEArca–2018–48 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–NYSEArca–2018–48. 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 20549–1090 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–NYSEArca–2018–48 and 

should be submitted on or before July 

20, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.16

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–13984 Filed 6–28–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83504; File No. SR–CBOE– 

2018–045] 

Self-Regulatory Organizations; Cboe 

Exchange, Inc.; Notice of Filing and 

Immediate Effectiveness of a Proposed 

Rule Change Relating to Exchange 

Rule 6.2., Hybrid Opening (and 

Sometimes Closing) System (‘‘HOSS’’) 

June 25, 2018. 

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 June 15, 

2018, 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 and II below, which Items have 

been prepared by the Exchange. The 

Exchange filed the proposal 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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Rule 6.2., Hybrid Opening (and 

Sometimes Closing) System (‘‘HOSS’’). 

(additions are italicized; deletions are 

[bracketed]) 

* * * * * 

Cboe Exchange, Inc. Rules 

* * * * * 

Rule 6.2. Hybrid Opening (and 

Sometimes Closing) System (‘‘HOSS’’) 

(a)–(h) (No change). 

. . . Interpretations and Policies: 

.01 Modified Opening Procedure for 

Series Used to Calculate the Exercise/ 

Final Settlement Values of Volatility 

Indexes. All provisions set forth in Rule 

6.2 remain in effect unless superseded 

or modified by this Interpretation and 

Policy .01. On the dates on which the 

exercise and final settlement values are 

calculated for options (as determined 

under Rule 24.9(a)(5) or (6)) or (security) 

futures contracts on a volatility index 

(i.e., expiration and final settlement 

dates), the Exchange utilizes the 

modified opening procedure described 

below for all series used to calculate the 

exercise/final settlement value of the 

volatility index for expiring options and 

(security) futures contracts (these option 

series referred to as ‘‘constituent 

options’’). 

(a) Strategy Orders. All orders for 

participation in the modified opening 

procedure that are related to positions 

in, or a trading strategy involving, 

expiring volatility index options or 

(security) futures (‘‘strategy orders’’), 

and any change to or cancellation of any 

such order: 

(i)–(ii) (No change). 

Whether orders are strategy orders for 

purposes of this Rule 6.2.01 depends 


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5These volatility indexes include the Cboe 

Volatility Index (‘‘VIX’’) and the Russell 2000 

Volatility Index (‘‘RVX’’). Options expire on an 

expiration date and settle to an exercise settlement 

value, and futures settle on a final settlement date 

to a final settlement value. For ease of reference, the 

Exchange will use the options terminology 

throughout this filing when referring to the 

‘‘expiration/final settlement date’’ and ‘‘expiration/ 

final settlement value’’ for volatility index 

derivatives. 

6 ‘‘Constituent options’’ are the series used to 

calculate the exercise/final settlement value of the 

volatility index for expiring options and (security) 

futures contracts. 

7See Rule 6.2, Interpretation and Policy .01. 

8Strategy orders are all orders (defined in Rule 

1.1(ooo) as a firm commitment to buy or sell option 

contracts) for participation in the modified opening 

procedure that are related to positions in, or a 

trading strategy involving, volatility index options 

or (security) futures (as discussed below, the 

proposed rule change is adding ‘‘expiring’’ to this 

definition). In general, the Exchange considers 

orders to be strategy orders if they are for (a) option 

series with the expiration that will be used to 

calculate the exercise or final settlement value of 

the applicable volatility index option or futures 

contract; (b) option series spanning the full range 

of strike prices for the appropriate expiration for 

option series that will be used to calculate the 

exercise or final settlement value of the applicable 

volatility index option or futures contract (not 

necessarily every available strike price); and (c) put 

options with strike prices at or less than the ‘‘atthe-money’’ strike price and for call options with 

strike prices greater than or at the ‘‘at-the-money’’ 

strike price. Whether orders are strategy orders 

depends upon specific facts and circumstances. The 

Exchange may also deem order types other than 

those provided above as strategy orders if the 

Exchange determines that to be the case based upon 

the applicable facts and circumstances. The strategy 

order cut-off time may be no earlier than 8:00 a.m. 

and no later than the opening of trading in the 

series, and is currently 8:20 a.m. Chicago time. See 

Rule 6.2, Interpretation and Policy .01. 

upon specific facts and circumstances. 

The Exchange may also deem order 

types other than those provided above 

as strategy orders if the Exchange 

determines that to be the case based 

upon the applicable facts and 

circumstances. 

(b) Non-Strategy Orders. All other 

orders for participation in the modified 

opening procedure[s] (‘‘non-strategy 

orders’’), and any change to or 

cancellation of any such order, must be 

received prior to the applicable cut-off 

time (as determined by the Exchange on 

a class-by-class basis) in order to 

participate at the opening price for the 

applicable series, which may be no 

earlier than 8:25 a.m. and no later than 

the opening of trading in the option 

series. The Exchange will announce all 

determinations regarding changes to the 

applicable non-strategy order cut-off 

time at least one day prior to 

implementation. 

(c) Market-Makers. A Market-Maker 

with an appointment in a class with 

constituent option series may submit 

bids and offers in those series for bona 

fide market-making purposes in 

accordance with Rule 8.7 and the 

Exchange Act for its market-maker 

account prior to the open of trading for 

participation in the modified opening 

procedure. The Exchange will deem 

these bids and offers to be non-strategy 

orders, and will not deem them to be 

changes to or cancellations of 

previously submitted strategy orders, if: 

(i) The Trading Permit Holder with 

which the Market-Maker is affiliated has 

established, maintains, and enforces 

reasonably designed written policies 

and procedures (including information 

barriers, as applicable), taking into 

consideration the nature of the Trading 

Permit Holder’s business and other facts 

and circumstances, to prevent the 

misuse of material nonpublic 

information (including the submission 

of strategy orders); and 

(ii) when submitting these bids and 

offers, the Market-Maker has no actual 

knowledge of any previously submitted 

strategy orders. 

* * * * * 

The text of the proposed rule change 

is also available on the Exchange’s 

website (http://www.cboe.com/About

CBOE/CBOELegalRegulatory

Home.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 

Cboe Options and Cboe Futures 

Exchange, LLC (‘‘CFE’’) list options and 

futures, respectively, on different 

volatility indexes that are calculated 

using prices of options traded on Cboe 

Options.5 The final settlement value for 

these derivatives is determined on the 

morning of their expiration date through 

a special opening quotation (‘‘SOQ’’) of 

the volatility index using the opening 

prices of a portfolio of options (for 

example, the settlement value of VIX 

options and futures uses the opening 

prices of a portfolio of S&P 500 Index 

options (‘‘SPX options’’) that expire 

approximately 30 days later). On the 

days when the settlement values for 

these contracts are determined, Cboe 

Options opens the constituent options 6

for these volatility indexes using the 

modified Hybrid Opening System 

(‘‘HOSS’’) procedure.7 The main feature 

of the modified HOSS procedure used to 

calculate the exercise/final settlement 

value of volatility indexes for expiring 

options and (security) futures that 

distinguishes it from the normal 

opening procedure used on all other 

days is a cutoff time for the entry of 

strategy orders.8 By providing market 

participants with a mechanism to buy 

and sell constituent options at prices 

used to calculate the final settlement 

value of the volatility index derivatives, 

the volatility index settlement process is 

‘‘tradable.’’ 

The volatility index settlement 

process is patterned after the process 

used to settle SPX options. On the days 

SPX options expire, S&P calculates an 

SOQ of the S&P 500 Index using the 

opening prices of the component stocks 

in their primary markets. Market 

participants can replicate the exposure 

of their expiring SPX options by 

entering orders to buy and sell the 

component stocks of the S&P 500 Index 

at their opening prices. If they are 

successful, market participants can 

effectively construct a portfolio that 

matches the value of the SOQ. At this 

point, the derivatives and cash markets 

converge. 

In a very similar way, the exercise 

settlement value for volatility index 

derivatives is an SOQ of the volatility 

index using opening prices of the 

constituent options used to determine 

the value of the index. With respect to 

VIX, the VIX exercise settlement value 

is calculated using the opening prices of 

SPX options that expire approximately 

30 days later. Analogous to the 

settlement process for SPX options, 

market participants can replicate the 

exposure of their expiring VIX 

derivatives by entering buy and sell 

orders in constituent SPX options. If 

they are successful, market participants 

can effectively construct a portfolio of 

SPX options whose value matches the 

value of the VIX SOQ. By doing so, 

market participants may make or take 

delivery of the SPX options that will be 

used to settle VIX derivatives. 

A tradable settlement creates the 

opportunity to convert the exposure of 

an expiring VIX derivative into the 

portfolio of SPX options that will be 

used to settle the expiring contract. 

Specifically, some market participants 


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9See Securities Exchange Act Release Nos. 52367 

(August 31, 2005), 70 FR 53401 (September 8, 2005) 

(SR–CBOE–2004–86) (established initially for rapid 

opening system procedure, which is no longer 

used). 

10Pursuant to Rule 6.2, Interpretation and Policy 

.01(b), the Exchange may determine a non-strategy 

order cut-off time, which may be no earlier than 

8:25 a.m. and no later than the opening of trading. 

The current non-strategy order cut-off time is the 

opening of trading. 

11See, e.g., Rules 8.15 and 8.85 (describing 

obligations of Lead-Market-Makers and Designated 

Primary Market-Makers, respectively). 12See Rule 6.2(d). 

may desire to maintain the vega, or 

volatility, risk exposure of expiring VIX 

derivatives. Since VIX derivatives 

expire 30 days prior to the SPX options 

used to calculate their settlement value, 

a market participant may have a vega 

risk from its portfolio of index positions 

that the participant wants to continue to 

hedge after the participant’s VIX 

derivatives expire. To continue that 

vega coverage following expiration of a 

VIX derivative, a market participant 

may determine to trade the portfolio of 

SPX options used to settle an expiring 

VIX derivative, since those SPX options 

still have 30 more days to expiration. 

This trade essentially replaces the 

uncovered vega exposure ‘‘hole’’ created 

by an expiring VIX derivative. 

Since the VIX settlement value 

converges with the value of the portfolio 

of SPX options used to calculate the 

settlement value of VIX derivatives, 

trading this SPX option portfolio 

mitigates settlement risk. This is 

because, if done properly, the vega 

exposure obtained in the SPX option 

portfolio will replicate the vega 

exposure of the expiring VIX derivative 

(i.e., elimination of slippage). Because a 

market participant is converting vega 

exposure from one instrument (expiring 

VIX derivative) to another (portfolio of 

SPX options expiring in 30 days), the 

market participant is likely to be 

indifferent to the settlement price 

received for the expiring VIX derivative. 

Importantly, trading the next VIX 

derivative expiration (i.e., rolling) will 

not accomplish the conversion of vega 

exposure since that VIX derivative 

contract would necessarily cover a 

different period of expected volatility 

and would be based on an entirely 

different portfolio of SPX options. 

To replicate expiring volatility index 

derivatives on their expiration dates 

with portfolios of constituent options, 

market participants generally submit 

strategy orders to participate in the 

modified HOSS procedure on volatility 

index settlement dates. The Exchange 

understands that the entry of strategy 

orders may lead to order imbalances in 

the option series being used to 

determine the final settlement value. To 

the extent (1) market participants 

seeking to replicate an expiring VIX 

derivative position are on one side of 

the market (e.g., strategy order to buy 

SPX options) and (2) those market 

participants’ orders predominate over 

other orders during the modified HOSS 

procedure, those trades may contribute 

to an order imbalance prior to the open. 

To provide market participants with 

time to enter additional orders and 

quotes to offset any such imbalances 

prior to the opening of these series, the 

Exchange established a strategy order 

cut-off time.9 The time period after this 

cut-off time also permits market 

participants to, among other things, 

update prices of orders and quotes in 

response to changing market conditions 

until the open of trading.10 Generally, if 

a series (1) has a market order 

imbalance, or (2) is at a price that is 

outside the Exchange prescribed 

opening width (as described in Rule 

6.2(d)), the series will not open for 

trading. Prior to the open, the Exchange 

disseminates messages to market 

participants indicating the expected 

opening price for a series or imbalance 

information for that series (as 

applicable) to further encourage market 

participants to enter orders and quotes 

to offset any imbalances, to submit 

competitively priced bids and offers, 

and to promote a fair and orderly 

opening. 

In the options market, it is important 

for Market-Makers to provide liquidity 

to execute against orders submitted by 

other market participants. Pursuant to 

Rule 8.7, a Market-Maker has general 

obligations to, among other things, 

engage (to a reasonable degree under 

existing circumstances) in dealings for 

the Market-Maker’s own account when 

there exists, or it is reasonably 

anticipated that there will exist, a lack 

of price continuity, a temporary 

disparity between the supply of and 

demand for an option (i.e., an 

imbalance), to compete with other 

Market-Makers to improve markets in its 

appointed classes, and to update market 

quotations in response to changed 

market conditions in its appointed 

classes. Certain types of Market-Makers 

have obligations to facilitate resolution 

of imbalances and make competitive 

markets, and the proposed rule change 

is consistent with those obligations.11

As described above, the entry of strategy 

orders may lead to order imbalances in 

the option series used to determine the 

final settlement value for expiring 

volatility index derivatives. In order for 

the Exchange’s system to open these 

series for trading (i.e., to resolve order 

imbalances) and achieve the most 

competitive pricing in these series, 

Market-Maker participation in the 

modified HOSS procedure is important 

for adding liquidity and promoting a fair 

and orderly opening and settlement 

process. 

The Exchange understands that some 

Market-Makers may hesitate to provide 

liquidity that could resolve order 

imbalances, out of a concern that adding 

such liquidity after the strategy order 

cut-off time could be deemed either a 

new strategy order or a modification to 

or cancellation of an existing strategy 

order. As a result, this perceived risk 

may lead to reduced liquidity and may 

exacerbate the time it takes to open a 

series at a competitive price.12 The 

proposed rule change encourages 

Market-Makers to provide liquidity on 

volatility index derivative settlement 

days by explicitly stating in Rule 6.2, 

Interpretation and Policy .01 that bona 

fide Market-Maker activity does not 

constitute either a strategy order or a 

modification to or cancellation of a 

previously submitted strategy order 

during the modified HOSS procedure. 

The Exchange believes Market-Maker 

liquidity is important to the resolution 

of order imbalances on volatility index 

settlement days and to the orderly 

opening of series on such days, due to 

the fact that a series cannot open if there 

is a market order imbalance. Also, 

Market-Maker liquidity is desirable to 

advance the opening of series at 

competitive prices on volatility index 

settlement days. The Exchange’s system 

also relies on Market-Maker liquidity to 

open series for trading. Pursuant to Rule 

6.2(d), the Exchange’s system will not 

open a series for trading if there are no 

Market-Maker quotes present. 

Additionally, the width of the best 

Market-Maker quotes on the Exchange 

must be within a certain price range for 

the System to open a series for trading. 

The Exchange believes the proposed 

rule change will incentivize MarketMaker liquidity on volatility settlement 

days by explicitly stating in the Rules 

that providing such liquidity will not be 

deemed to constitute either submission 

of a strategy order or modification to or 

cancellation of a previously submitted 

strategy order. 

Specifically, proposed Rule 6.2, 

Interpretation and Policy .01(c) states a 

Market-Maker with an appointment in a 

class with constituent option series may 

submit bids and offers in those series for 

bona fide market-making purposes in 

accordance with Rule 8.7 and the 

Securities Exchange Act of 1934 (the 

‘‘Act’’), for its market-maker account 

prior to the open of trading for 

participation in the modified opening 


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13 15 U.S.C. 78c(a)(38); see also 12 U.S.C. 

1851(d)(1)(B) (market-making is intended to service 

‘‘the reasonably expected near-term demand’’ of 

other parties). 

14Rule 6.2, Interpretation and Policy .02 permits 

the Exchange to set different minimum quote size 

and bid-ask differential requirements for opening 

quotes as those for intraday quotes. 

15See, e.g., Rule 8.7, Interpretation and Policy 

.03. 

16See supra note 9. 

procedure. The Exchange will deem 

these bids and offers to be non-strategy 

orders, and will not deem them to be 

changes to or cancellations of 

previously submitted strategy orders, if: 

(i) The Trading Permit Holder with 

which the Market-Maker is affiliated has 

established, maintains, and enforces 

reasonably designed written policies 

and procedures (including information 

barriers, if applicable), taking into 

consideration the nature of the business 

of the Trading Permit Holder and other 

facts and circumstances, to prevent the 

misuse of material nonpublic 

information (including the submission 

of strategy orders); and 

(ii) when submitting these bids and 

offers, the Market-Maker has no actual 

knowledge of any previously submitted 

strategy orders. 

In other words, if a Market-Maker 

submits bids or offers in constituent 

options on a volatility index derivative 

settlement day, and if such bids and 

offers are for its market-maker account 

and submitted for purposes of its 

market-making activities on the 

Exchange (including in accordance with 

Market-Maker obligations, such as to 

offset imbalances or provide 

competitive pricing), the Market-Maker 

may submit those bids and offers any 

time prior to the open of trading, 

including both before and after the 

strategy order cut-off time. As long as 

the Trading Permit Holder has 

appropriate procedures in place both to 

prevent the Market-Maker from knowing 

about the submission of strategy orders 

by other persons within the Trading 

Permit Holder organization with which 

it is affiliated, and to prevent other 

persons from knowing about the MarketMaker’s submission of bids and offers, 

the Exchange will not review such bids 

and offers for either potential 

impermissible entry of strategy orders, 

or cancellations of or modifications to 

previously submitted strategy orders. 

Bona fide Market-Maker activity is 

generally activity consistent with 

Market-Maker requirements under the 

Act and Cboe Options Rules: 

• Pursuant to the Act, a market-maker 

is a specialist permitted to act as a 

dealer, any dealer acting in the capacity 

of block positioner, and any dealer who, 

with respect to a security, holds himself 

out (by entering quotations in an interdealer communications system or 

otherwise) as being willing to buy and 

sell such security for his own account 

on a regular or continuous basis.13

• Pursuant to Rule 8.7, a MarketMaker appointed to a class must, among 

other things, engage to a reasonable 

degree under existing circumstances in 

dealings for the Market-Maker’s own 

account when there exists, or it is 

reasonably anticipated that there will 

exist, a lack of price continuity, a 

temporary disparity between the supply 

of and demand for an option (i.e., an 

imbalance), to compete with other 

Market-Makers to improve markets in its 

appointed classes, and to update market 

quotations in response to changed 

market conditions in its appointed 

classes. Additionally, pursuant to Rule 

8.7, all quotes a Market-Maker submits, 

including prior to the opening, must 

comply with all requirements, including 

applicable bid-ask differential and 

minimum size requirements.14 Rule 8.7, 

Interpretation and Policy .01 imposes an 

ongoing price continuity requirement on 

Market-Makers that applies through the 

opening of trading, as well as during 

regular trading hours. 

• In addition to these obligations, 

Market-Makers also effect transactions 

for the purpose of hedging, reducing 

risk of, rebalancing, or liquidating their 

open positions.15

As noted above, the Exchange 

implemented the strategy order cut-off 

time for the operational purpose of 

providing market participants with time 

to enter additional orders and quotes to 

offset any such imbalances prior to the 

opening of these series.16 The 

Exchange’s surveillance procedures to 

determine market participants’ 

compliance with the strategy order cutoff time are separate and distinct from 

the Exchange’s surveillance procedures 

to identify potentially manipulative 

behavior. Therefore, from the 

Exchange’s perspective, whether a 

Market-Maker’s bids and offers 

constitute strategy orders is distinct 

from whether the submitting MarketMaker is attempting to engage in 

manipulative behavior. The 

classification of bona fide Market-Maker 

activity as non-strategy orders will have 

no impact on the Exchange’s 

surveillance procedures to detect 

activity intended to manipulate the 

settlement value or violate other Rules. 

Additionally, all Market-Maker bids and 

offers, even though not considered 

strategy orders pursuant to the proposed 

rule change, will continue to be subject 

to Exchange surveillance procedures 

that monitor trading in the option series 

used to calculate volatility index 

settlement values on expiration dates, as 

well as surveillance procedures that 

monitor Market-Maker activity for 

compliance with Market-Maker 

obligations in the Rules. This activity 

will merely be excepted from Exchange 

surveillance procedures determining 

compliance with the operational 

strategy order cut-off time. 

The Exchange believes Market-Makers 

are more likely to interact with and 

resolve order imbalances on volatility 

index settlement days if they can be 

confident that their bids and offers 

submitted for that purpose will not be 

deemed strategy orders or cancellations 

of or modifications to previously 

submitted strategy orders. As discussed 

above, the purpose of the strategy order 

cut-off time is to provide market 

participants, including Market-Makers, 

with sufficient time to address 

imbalances created by strategy orders. 

Additionally, as discussed above, 

pursuant to Rule 6.2(d), whether a series 

opens depends on the presence of 

Market-Maker quotes at prices no wider 

than an acceptable price range. MarketMakers are an important source of 

liquidity on the Exchange, and also have 

various obligations with which they 

must comply. The proposed rule change 

will provide a Market-Maker with an 

opportunity to provide liquidity on 

volatility settlement dates and to satisfy 

their Market-Maker obligations, without 

concern that the Exchange may consider 

such activity to constitute the placing 

of, or cancellations to or modifications 

of, strategy orders, even if the Trading 

Permit Holder organization with which 

the Market-Maker is affiliated submitted 

a strategy order. 

The purpose of this proposed change 

is to accommodate the fact that the 

Trading Permit Holder with which the 

Market-Maker is affiliated may submit a 

strategy order while the Market-Maker 

may also be submitting bids and offers 

to accommodate a fair and orderly 

opening process, by among other things, 

resolving market order imbalances and 

submitting competitively priced bids 

and offers. 

For example, a Trading Permit Holder 

organization may have an SPX MarketMaker and a separate volatility trading 

desk. During the modified opening 

procedure on a volatility settlement day, 

the trading strategy of the SPX MarketMaker is to provide markets in SPX 

options (both before and after the 

strategy order cut-off time), and the 

trading strategy of the volatility trading 

desk may be to replicate Vega exposure 

by replacing its expiring VIX options 

positions with positions in the SPX 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 126 / Friday, June 29, 2018 / Notices 30799 

17As noted above, the Exchange’s system will not 

open a series if there is no quote or if the opening 

quote or price is outside an acceptable price range. 

18 15 U.S.C. 78f(b). 

19 15 U.S.C. 78f(b)(5). 

20 Id. 

constituent series. To replicate its Vega 

exposure, the volatility trading desk 

may enter strategy orders prior to the 

strategy order cut-off time. These are 

separate and distinct trading strategies. 

If the Trading Permit Holder 

organization has reasonable policies and 

procedures in place such that the SPX 

Market-Maker has no knowledge of the 

volatility trading desk’s submission of 

strategy orders, and that the volatility 

trader has no knowledge of the SPX 

Market-Maker’s submission of bids and 

offers, the Exchange believes it is 

appropriate for the SPX Market-Maker’s 

bids and offers to not be deemed 

strategy orders, or the modification to or 

cancellation of the strategy order 

submitted by its affiliated volatility 

trading desk. 

The Exchange does not believe it is 

necessary to restrict the bona fide 

market-making activities of a MarketMaker within its appointed classes due 

to other unrelated trading activities that 

may involve submissions of orders 

deemed to be strategy orders of which 

the Market-Maker has no actual 

knowledge. The proposed rule change 

expressly provides that activity related 

to a Market-Maker’s market-making 

activity in an appointed class will not 

constitute the submission of a strategy 

order or the cancellation of or 

modification to a previously submitted 

strategy order. 

The proposed rule change makes clear 

that a Market-Maker’s submission of 

bids and offers for bona fide marketmaking purposes in constituent series is 

permitted on volatility settlement days 

through the open of trading in the same 

manner as it is permitted in all in series 

in its appointed classes at all other 

times. This will encourage MarketMakers to continue to submit bids and 

offers through the open, despite other 

trading activity within the Trading 

Permit Holder organization. This will 

also ensure Market-Makers can respond 

to imbalances and update their quotes 17

in accordance with their market-making 

dealings and obligations. The Exchange 

believes this will contribute to price 

transparency and liquidity in the option 

series at the open, and thus will 

promote a fair and orderly opening on 

volatility index settlement days. The 

Exchange continuously evaluates the 

modified HOSS procedure to identify 

potential enhancements, and intends to 

modify the procedure as it deems 

appropriate to contribute to a fair and 

orderly opening process. A fair and 

orderly opening in these series benefits 

all market participants who trade in the 

volatility index derivatives and the 

constituent options. 

The proposed rule change would not 

eliminate a Market-Maker’s 

requirements to abide by Exchange 

Rules 4.1 (Just and Equitable Principles 

of Trade), 4.7 (Manipulation), and 4.18 

(Prevention of the Misuse of Material, 

Nonpublic Information). The 

requirement in the proposed rule 

change that the Trading Permit Holder 

with which a Market-Maker is affiliated 

must establish, maintain, and enforce 

policies and procedures reasonably 

designed to ensure the Market-Maker 

will not have knowledge of the 

submission of strategy orders is 

consistent with requirements of Rule 

4.18. The Exchange will continue to 

conduct surveillance to monitor trading 

in the option series used to calculate 

volatility index settlement values on 

expiration dates, including but not 

limited to, monitoring entry of strategy 

orders, or modifications to strategy 

orders, following the cut-off time, as 

well as compliance with other Rules. 

The proposed rule change also makes 

nonsubstantive changes to add 

paragraph headings and numbering. 

Additionally, the proposed rule 

change modifies Interpretation and 

Policy .01(a) to state that ‘‘strategy 

orders’’ means all orders for 

participation in the modified opening 

procedure that are related to positions 

in, or a trading strategy involving, 

expiring volatility index options or 

(security) futures. The addition of the 

word ‘‘expiring’’ is a codification of the 

Exchange’s longstanding interpretation 

of the term strategy order. As discussed 

above, to replicate expiring volatility 

index derivatives on their expiration 

dates with options portfolios, market 

participants generally submit strategy 

orders to participate in the modified 

HOSS opening process on volatility 

index settlement dates. The addition of 

the word ‘‘expiring’’ is consistent with 

the introductory paragraph in 

Interpretation and Policy .01, which 

states the modified HOSS procedure 

applies to series used to calculate the 

exercise/final settlement value of the 

volatility index for expiring options and 

(security) futures, and demonstrates the 

rule is meant to refer to orders that 

relate to strategies involving expiring 

volatility index derivatives. Therefore, 

the proposed codification is consistent 

with this general practice, as well as the 

current rule. 

2. Statutory Basis 

The Exchange believes the proposed 

rule change is consistent with the Act 

and the rules and regulations 

thereunder applicable to the Exchange 

and, in particular, the requirements of 

Section 6(b) of the Act.18 Specifically, 

the Exchange believes the proposed rule 

change is consistent with the Section 

6(b)(5) 19 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) 20 requirement that 

the rules of an exchange not be designed 

to permit unfair discrimination between 

customers, issuers, brokers, or dealers. 

In particular, the Exchange believes 

the proposed change will increase 

liquidity on volatility index settlement 

dates, as it will remove an impediment 

that may discourage Market-Makers 

from submitting bids and offers to offset 

imbalances and update the prices of 

their quotes in response to changing 

market conditions prior to the open. The 

Exchange believes this additional 

liquidity may contribute to a fair and 

orderly opening by increasing execution 

opportunities, reducing imbalances in 

constituent options, and increasing the 

presence of quotes within the acceptable 

price range, which would benefit all 

market participants who trade in the 

volatility index derivatives and the 

constituent options. The Exchange does 

not believe it is necessary to restrict the 

bona fide market-maker activities of a 

Market-Maker due to other unrelated 

trading activities by the Trading Permit 

Holder organization with which it is 

affiliated. The Exchange notes that the 

proposed rule change would not impact 

a Market-Maker’s requirements to abide 

by Exchange Rules 4.1 (Just and 

Equitable Principles of Trade), 4.7 

(Manipulation), and 4.18 (Prevention of 

the Misuse of Material, Nonpublic 

Information). The requirement in the 

proposed rule change that the Trading 

Permit Holder with which a MarketMaker is affiliated must establish, 

maintain, and enforce policies and 

procedures reasonably designed to 

ensure the Market-Maker will not have 

knowledge of the submission of strategy 

orders is consistent with requirements 


sradovich on DSK3GMQ082PROD with NOTICES
30800 Federal Register / Vol. 83, No. 126 / Friday, June 29, 2018 / Notices 

21 15 U.S.C. 78s(b)(3)(A)(iii). 

22 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. 

of Rule 4.18. As a result, the Exchange 

does not believe that proposed rule 

change will be burdensome on MarketMakers. 

The Exchange believes the proposed 

rule change will contribute to price 

transparency and liquidity in the option 

series at the open, and thus a fair and 

orderly opening on volatility index 

settlement days. A fair and orderly 

opening in these series benefits all 

market participants who trade in the 

volatility index derivatives and the 

constituent options. 

The proposed rule change to add the 

term ‘‘expiring’’ to the definition of 

strategy orders is merely a codification 

of a current Exchange interpretation and 

is consistent with the definition of 

constituent options in the current rule. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

Cboe Options 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. Because of 

the importance of Market-Maker 

liquidity in the options market and the 

Exchange’s need for competitive quotes 

to open a series, the Exchange believes 

it is appropriate for Market-Makers’ bids 

and offers prior to the opening of 

trading, including after the strategy 

order cut-off time, not be considered 

strategy orders, or cancellations to or 

modifications of previously submitted 

strategy orders. As discussed above, 

Market-Makers are subject to various 

obligations under the Rules, and the 

proposed rule change provides them 

with the ability to satisfy these 

obligations without the risk of their 

market-making activity being deemed to 

constitute strategy orders or 

modifications to or cancellations of 

strategy orders. The requirement in the 

proposed rule change that the Trading 

Permit Holder with which a MarketMaker is affiliated must establish, 

maintain, and enforce policies and 

procedures reasonably designed to 

ensure the Market-Maker will not have 

knowledge of the submission of strategy 

orders is consistent with requirements 

of Rule 4.18. As a result, the Exchange 

does not believe the proposed rule 

change will be burdensome on MarketMakers. The Exchange does not believe 

it is necessary to restrict the bona fide 

market-maker activities of a Trading 

Permit Holder organization due to its 

other unrelated trading activities. The 

proposed rule change has no impact on 

intermarket competition, as it applies to 

orders and quotes submitted to an SOQ 

process the Exchange conducts prior to 

the open of trading in certain classes. 

Cboe Options believes that the 

proposed rule change will relieve any 

burden on, or otherwise promote, 

competition. The Exchange believes the 

proposed rule change will contribute to 

price transparency and liquidity in 

constituent options at the open on 

volatility index settlement days, and 

thus to a fair and orderly opening on 

those days. A fair and orderly opening, 

and increased liquidity, in these series 

benefits all market participants who 

trade in the volatility index derivatives 

and the constituent options. 

The proposed rule change to add the 

term ‘‘expiring’’ to the definition of 

strategy orders has no impact on 

competition, as it is merely a 

codification of a current Exchange 

interpretation and is consistent with the 

definition of constituent options in the 

current rule. 

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)(iii) of the Act 21 and 

subparagraph (f)(6) of Rule 19b–4 

thereunder.22

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: (i) Necessary or appropriate in 

the public interest; (ii) for the protection 

of investors; or (iii) 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 

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 rule-comments@

sec.gov. Please include File Number SR– 

CBOE–2018–045 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–2018–045. 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–CBOE–2018–045 and 

should be submitted on or before July 

20, 2018. 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 126 / Friday, June 29, 2018 / Notices 30801 

23 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Recently, the Exchange added a shell structure 

to its Rulebook with the purpose of improving 

efficiency and readability and to align its rules 

closer to those of its five sister exchanges: The 

Nasdaq Stock Exchange, LLC; Nasdaq BX, Inc.; 

Nasdaq PHLX, LLC; Nasdaq ISE, LLC; and Nasdaq 

GEMX, LLC (together with MRX, the ‘‘Affiliated 

Exchanges’’). See Securities Exchange Act Release 

No. 82172 (November 29, 2017), 82 FR 57495 

(December 5, 2017) (SR–MRX–2017–26). 

4The Exchange notes that as a consequence of 

this proposal, it will list its fees, in part, in Section 

VI of the Rulebook and, in part, in General 8. 

5 15 U.S.C. 78f(b). 

6 15 U.S.C. 78f(b)(5). 

7 15 U.S.C. 78s(b)(3)(A). 

8 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 

Continued 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.23

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–13977 Filed 6–28–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83516; File No. SR–MRX– 

2018–21] 

Self-Regulatory Organizations; Nasdaq 

MRX, LLC; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change To Relocate the 

Exchange’s Rules Pertaining to CoLocation and Direct Connectivity 

June 25, 2018. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on June 13, 

2018, Nasdaq MRX, LLC (‘‘MRX’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to relocate the 

Exchange’s rules pertaining to colocation and direct connectivity, which 

are presently at Section VI, subsections 

A (co-location) and B–D (direct 

connectivity) of the Exchange’s 

Schedule of Fees, to the Exchange’s new 

rulebook shell, entitled ‘‘General 

Rules,’’ at new General 8 

(‘‘Connectivity’’), Sections 1 and 2, 

respectively. 

The text of the proposed rule change 

is available on the Exchange’s website at 

http://nasdaqmrx.cchwallstreet.com/, at 

the principal office of the Exchange, 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 relocate its 

rules governing co-location and direct 

connectivity services, which presently 

comprise Section VI, subsections A (colocation) and B–D (direct connectivity) 

of the Exchange’s Schedule of Fees. The 

Exchange proposes to establish, within 

its new rulebook shell,3 a new General 

8 heading, entitled ‘‘Connectivity,’’ to 

renumber Section VI, subsection A as 

Section 1 thereunder, and to renumber 

Section VI, subsections B, C, and D as 

Section 2(a), (b), and (c) thereunder.4

The Exchange also proposes to update 

internal cross-references in the 

renumbered Rules. 

The Exchange considers it appropriate 

to relocate these Rules to better organize 

its Rulebook. The other Affiliated 

Exchanges intend to propose similar 

reorganizations of their co-location and 

direct connectivity rules so that these 

rules will be harmonized among all of 

the Affiliated Exchanges. 

The relocation of the co-location and 

direct connectivity rules is part of the 

Exchange’s continued effort to promote 

efficiency and conformity of its 

processes with those of its Affiliated 

Exchanges. The Exchange believes that 

moving the co-location and direct 

connectivity rules to their new location 

will facilitate the use of the Rulebook by 

Members of the Exchange who are 

members of other Affiliated Exchanges. 

Moreover, the proposed changes are of 

a non-substantive nature and will not 

amend the relocated rules other than to 

update their numbers and make 

conforming cross-reference changes. 

2. Statutory Basis 

The Exchange believes that its 

proposal is consistent with Section 6(b) 

of the Act,5 in general, and furthers the 

objectives of Section 6(b)(5) of the Act,6

in particular, in that it is designed to 

promote just and equitable principles of 

trade, 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, by 

improving the way its Rulebook is 

organized, providing ease of reference in 

locating co-location and direct 

connectivity rules, and harmonizing the 

Exchange’s Rules with those of the other 

Affiliated Exchanges. As previously 

stated, the proposed Rule relocation is 

non-substantive. 

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 intermarket or intramarket competition that is not necessary 

or appropriate in furtherance of the 

purposes of the Act. The proposed 

changes do not impose a burden on 

competition because, as previously 

stated, they (i) are of a non-substantive 

nature, (ii) are intended to harmonize 

the Exchange’s rules with those of its 

Affiliated Exchanges, and (iii) are 

intended to organize the Rulebook in a 

way that it will ease the Members’ 

navigation and reading of the rules 

across the Affiliated Exchanges. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

No written comments were either 

solicited or received. 

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 7 and Rule 19b– 

4(f)(6) thereunder.8


sradovich on DSK3GMQ082PROD with NOTICES