Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices 89771 

26See Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005). 27NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. 

Cir. 2010) (quoting Securities Exchange Act Release 

No. 59039 (December 2, 2008), 73 FR 74770, 74782– 

83 (December 9, 2008) (SR–NYSEArca–2006–21)). 

28 15 U.S.C. 78s(b)(3)(A). 

29 17 CFR 240.19b–4(f). 

30 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

pay the least, and highest bandwidth 

consuming members pays the most. 

The Exchange’s proposed fee is also 

still lower than some fees for similar 

connectivity on other exchanges and 

therefore may stimulate intermarket 

competition by attracting additional 

firms to connect to the Exchange or at 

least should not deter interested 

participants from connecting directly to 

the Exchange. Further, if the changes 

proposed herein are unattractive to 

market participants, the Exchange can, 

and likely will, see a decline in 

connectivity via 10 Gb physical ports as 

a result. The Exchange operates in a 

highly competitive market in which 

market participants can determine 

whether or not to connect directly to the 

Exchange based on the value received 

compared to the cost of doing so. 

Indeed, market participants have 

numerous alternative venues that they 

may participate on and direct their 

order flow, including 12 non-Cboe 

affiliated equities markets, as well as 

off-exchange venues, where competitive 

products are available for trading. 

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.’’ 26 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 brokerdealers 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’. . . .’’.27 Accordingly, the 

Exchange does not believe its proposed 

change imposes any burden on 

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 neither solicited nor 

received comments on the proposed 

rule change. 

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 28 and paragraph (f) of Rule 

19b–4 29 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. 

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 (https://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include file number SR– 

CboeBZX–2023–103 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to file 

number SR–CboeBZX–2023–103. 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 (https://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 

a.m. and 3 p.m. Copies of the filing also 

will be available for inspection and 

copying at the principal office of the 

Exchange. Do not include personal 

identifiable information in submissions; 

you should submit only information 

that you wish to make available 

publicly. We may redact in part or 

withhold entirely from publication 

submitted material that is obscene or 

subject to copyright protection. All 

submissions should refer to file number 

SR–CboeBZX–2023–103 and should be 

submitted on or before January 18, 2024. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.30

Christina Z. Milnor, 

Assistant Secretary. 

[FR Doc. 2023–28605 Filed 12–27–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–99222; File No. SR–CBOE– 

2023–018] 

Self-Regulatory Organizations; Cboe 

Exchange, Inc.; Notice of Filing of 

Amendment No. 3 and Order Granting 

Accelerated Approval of a Proposed 

Rule Change, as Modified by 

Amendment No. 3, To Make Permanent 

the Operation of its Flexible Exchange 

Options Pilot Program Regarding 

Permissible Exercise Settlement 

Values for FLEX Index Options 

December 21, 2023. 

I. Introduction 

On April 10, 2023, Cboe Exchange, 

Inc. (‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 


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89772 Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices 

3A third-Friday-of-the month expiration is 

referred to as ‘‘Expiration Friday’’. Prior to the Pilot 

Program, Exchange rules prohibited PM-settled 

FLEX Index Options to expire on any business day 

that falls on or within two business days of an 

Expiration Friday. During the Pilot Program, PMsettled FLEX Index Options are permitted on or 

within two business days of an Expiration Friday. 

4See Securities Exchange Act Release No. 97368 

(April 24, 2023), 88 FR 26353 (‘‘Notice’’). 

5 15 U.S.C. 78s(b)(2). 

6See Securities Exchange Act Release No. 97672, 

88 FR 38930 (June 14, 2023). 

7 15 U.S.C. 78s(b)(2)(B). 

8See Securities Exchange Act Release No. 97950, 

88 FR 47930 (July 25, 2023). 

9Amendment No. 1 superseded and replaced the 

original proposal in its entirety. Amendment No. 1 

was subsequently superseded and replaced in its 

entirety by Amendment No. 2. 

10See Securities Exchange Act Release No. 98557, 

88 FR 68236 (October 3, 2023). The Commission 

designated December 24, 2023, as the date by which 

the Commission shall approve or disapprove the 

proposed rule change. 

11Amendment No. 2 superseded and replaced 

Amendment No. 1 in its entirety. Amendment No. 

2 was subsequently superseded and replaced in its 

entirety by Amendment No. 3. 

12Amendment No. 3, which supersedes and 

replaces Amendment No. 2 in its entirety, provides 

additional support and data for the Exchange’s 

assertion that listing and trading of FLEX PM Third 

Friday Index Options under the Pilot Program has 

had no negative impact on the market and price 

volatility of underlying indexes and their 

underlying component stocks or related products or 

negatively impacts options market quality. 

Amendment No. 3 is available at https://

www.sec.gov/comments/sr-cboe-2023-018/ 

srcboe2023018-308519-794402.pdf. 

13This Section II reproduces Amendment No. 3, 

as filed by the Exchange. 

14Securities Exchange Act Release No. 61439 

(January 28, 2010), 75 FR 5831 (February 4, 2010) 

(SR–CBOE–2009–087) (‘‘Approval Order’’). The 

initial pilot period was set to expire on March 28, 

2011, which date was added to the rules in 2010. 

See Securities Exchange Act Release No. 61676 

(March 9, 2010), 75 FR 13191 (March 18, 2010) (SR– 

CBOE–2010–026). 

15See Securities Exchange Act Release Nos. 

64110 (March 23, 2011), 76 FR 17463 (March 29, 

2011) (SR–CBOE–2011–024); 66701 (March 30, 

2012), 77 FR 20673 (April 5, 2012) (SR–CBOE– 

2012–027); 68145 (November 2, 2012), 77 FR 67044 

(November 8, 2012) (SR–CBOE–2012–102); 70752 

(October 24, 2013), 78 FR 65023 (October 30, 2013) 

(SR–CBOE–2013–099); 73460 (October 29, 2014), 79 

FR 65464 (November 4, 2014) (SR–CBOE–2014– 

080); 77742 (April 29, 2016), 81 FR 26857 (May 4, 

2016) (SR–CBOE–2016–032); 80443 (April 12, 

2017), 82 FR 18331 (April 18, 2017) (SR–CBOE– 

2017–032); 83175 (May 4, 2018), 83 FR 21808 (May 

10, 2018) (SR–CBOE–2018–037); 84537 (November 

5, 2018), 83 FR 56113 (November 9, 2018) (SR– 

CBOE–2018–071); 85707 (April 23, 2019), 84 FR 

18100 (April 29, 2019) (SR–CBOE–2019–021); 

87515 (November 13, 2020), 84 FR 63945 

(November 19, 2019) (SR–CBOE–2019–108); 88782 

(April 30, 2020), 85 FR 27004 (May 6, 2020) (SR– 

CBOE–2020–039); 90279 (October 28, 2020), 85 FR 

69667 (November 3, 2020) (SR–CBOE–2020–103); 

91782 (May 5, 2021), 86 FR 25915 (May 11, 2021) 

(SR–CBOE–2021–031); 93500 (November 1, 2021), 

86 FR 61340 (November 5, 2021) (SR–CBOE–2021– 

064); 94812 (April 28, 2022), 87 FR 26381 (May 4, 

2022) (SR–CBOE–2022–020); 96239 (November 4, 

2022), 87 FR 67985 (November 10, 2022) (SR– 

CBOE–2022–053); 97452 (May 8, 2023), 88 FR 

30821 (May 12, 2023) (SR–CBOE–2023–025); and 

98637 (September 28, 2023), 88 FR 68819 (October 

4, 2023) (SR–CBOE–2023–057). At the same time 

the permissible exercise settlement values pilot was 

established for FLEX Index Options, the Exchange 

also established a pilot program eliminating the 

minimum value size requirements for all FLEX 

Options. See Approval Order, supra note 3. The 

pilot program eliminating the minimum value size 

requirements was extended twice pursuant to the 

same rule filings that extended the permissible 

exercise settlement values (for the same extended 

periods) and was approved on a permanent basis in 

a separate rule change filing. See id.; and Securities 

Exchange Act Release No. 67624 (August 8, 2012), 

77 FR 48580 (August 14, 2012) (SR–CBOE–2012– 

040) (Order Granting Approval of Proposed Rule 

Change Related to Permanent Approval of Its Pilot 

on FLEX Minimum Value Sizes). 16The seller of a ‘‘cash-settled’’ index option pays 

out the cash value of the applicable index on 

expiration or exercise. A ‘‘physically settled’’ 

option, like equity and ETF options, involves the 

transfer of the underlying asset rather than cash. 

See Characteristics and Risks of Standardized 

Options, available at: https://www.theocc.com/ 

Company-Information/Documents-and-Archives/ 

Options-Disclosure-Document. 

17The close of trading on the quarterly expiration 

Friday (i.e., the third Friday of March, June, 

September and December), when options, index 

futures, and options on index futures all expire 

simultaneously, became known as the ‘‘triple 

witching hour.’’ 

make permanent the operation of its 

Flexible Exchange Options (‘‘FLEX 

Options’’) pilot program that permits 

PM-settled Flexible Exchange Index 

Options (‘‘FLEX PM Third Friday 

Options’’) to expire on or within two 

business days of the third-Friday-of-themonth expirations for non-FLEX 

Options (‘‘Pilot Program’’).3 The 

proposed rule change was published for 

comment in the Federal Register on 

April 28, 2023.4

On June 8, 2023, pursuant to section 

19(b)(2) of the Act,5 the Commission 

designated a longer period within which 

to approve the proposed rule change, 

disapprove the proposed rule change, or 

institute proceedings to determine 

whether to disapprove the proposed 

rule change.6 On July 19, 2023, the 

Commission instituted proceedings 

under section 19(b)(2)(B) of the Act 7 to 

determine whether to approve or 

disapprove the proposed rule change.8

On September 26, 2023, CBOE filed 

Amendment No. 1 to the proposed rule 

change.9 On September 27, 2023, the 

Commission designated a longer period 

for Commission action on the proposed 

rule change.10 On November 20, 2023, 

CBOE filed Amendment No. 2 to the 

proposed rule change.11 On December 7, 

2023, CBOE filed Amendment No. 3 to 

the proposed rule change.12 The 

Commission is publishing this notice to 

solicit comments on Amendment No. 3 

from interested persons, and is 

approving the proposed rule change, as 

modified by Amendment No. 3, on an 

accelerated basis. 

II. Self-Regulatory Organization’s 

Description of the Proposal, as 

Modified by Amendment No. 3 13

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 the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to make 

permanent its Pilot Program that 

permits the Exchange to list FLEX 

Options overlying indexes (‘‘FLEX 

Index Options’’) whose exercise 

settlement value is derived from closing 

prices on the last trading day prior to 

expiration that expire on or within two 

business days of a third Friday-of-themonth expiration day for a non-FLEX 

Option (other than QIX options) (‘‘FLEX 

PM Third Friday Options’’). The 

Securities and Exchange Commission 

(the ‘‘Commission’’) approved a Cboe 

Options rule change that, among other 

things, established a pilot program 

regarding permissible exercise 

settlement values for FLEX Index 

Options on January 28, 2010.14 The 

Exchange has extended the pilot period 

nearly 20 times since the Commission 

initially approved the Pilot Program in 

2010, with the pilot period currently set 

to expire on the earlier of May 6, 2024 

or the date on which the pilot program 

is approved on a permanent basis.15 The 

Exchange hereby requests that the 

Commission approve the Pilot Program 

on a permanent basis. 

By way of background, when cashsettled 16 index options were first 

introduced in the 1980s, settlement was 

based on the closing value of the 

underlying index on the option’s 

expiration date. The Commission later 

became concerned about the impact of 

P.M.-settled, cash-settled index options 

on the markets for the underlying stocks 

at the close on expiration Fridays. 

Specifically, certain episodes of price 

reversals around the close on quarterly 

expiration dates attracted the attention 

of regulators to the possibility that the 

simultaneous expiration of index 

futures, futures options, and options 

might be inducing abnormal volatility in 

the index value around the close.17

Academic research at the time provided 


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18See Securities and Exchange Commission, 

Division of Economic Risk and Analysis, 

Memorandum, Cornerstone Analysis of PM CashSettled Index Option Pilots (February 2, 2021) 

(‘‘DERA Staff PM Pilot Memo’’ or ‘‘Pilot Memo’’) at 

5, available at: https://www.sec.gov/files/Analysis_

of_PM_Cash_Settled_Index_Option_Pilots.pdf. 19The exercise settlement value for an A.M.- 

settled index option is determined by reference to 

the reported level of the index as derived from the 

opening prices of the component securities on the 

business day before expiration. 20See Securities Exchange Act Release No. 24367 

(April 17, 1987), 52 FR 13890 (April 27, 1987) (SR– 

CBOE–87–11) (noting that CME moved S&P 500 

futures contract’s settlement value to opening prices 

on the delivery date). 

21See id. 

22See Securities Exchange Act Release No. 30944 

(July 21, 1992), 57 FR 33376 (July 28, 1992) (SR– 

CBOE–92–09). Thereafter, the Commission 

approved proposals by the options markets to 

transfer most of their cash-settled index products to 

A.M. settlement. 

23See Securities Exchange Act Release No. 31800 

(February 1, 1993), 58 FR 7274 (February 5, 1993) 

(SR–CBOE–92–13). 

24Securities Exchange Act Release Nos. 54123 

(July 11, 2006), 71 FR 40558 (July 17, 2006) (SR– 

CBOE–2006–65) (notice of filing of proposed rule 

change to list quarterly option series on up to five 

indexes or exchange-traded funds with p.m.- 

settlement); see also Securities Exchange Act 

Release No. 60164 (June 23, 2009), 74 FR 31333 

(June 30, 2009) (SR–CBOE–2009–029) (order 

permanently approving the program to list quarterly 

option series on up to five indexes or exchangetraded funds with p.m.-settlement). 

25See Approval Order, supra note 14. 

26See Securities Exchange Act Release Nos. 

62911 (September 14, 2010), 75 FR 57539 

(September 21, 2010) (SR–CBOE–2009–075); 76529 

(November 30, 2015), 80 FR 75695 (December 3, 

2015) (SR–CBOE–2015–106); 78132 (June 22, 2016), 

81 FR 42018 (June 28, 2016) (SR–CBOE–2016–046); 

and 78531 (August 10, 2016), 81 FR 54643 (August 

16, 2016) (SR–CBOE–2016–046). 

27See Securities Exchange Act Release No. 68888 

(February 8, 2013), 78 FR 10668 (February 14, 2013) 

(SR–CBOE–2012–120) (the ‘‘SPXPM Approval 

Order’’). Pursuant to Securities Exchange Act 

Release No. 80060 (February 17, 2017), 82 FR 11673 

(February 24, 2017) (SR–CBOE–2016–091), the 

Exchange moved third-Friday P.M.-settled options 

into the S&P 500 Index options class, and as a 

result, the trading symbol for P.M.-settled S&P 500 

Index options that have standard third Friday-ofthe-month expirations changed from ‘‘SPXPM’’ to 

‘‘SPXW.’’ This change went into effect on May 1, 

2017, pursuant to Cboe Options Regulatory Circular 

RG17–054. 

28See Securities Exchange Act Release Nos. 

70087 (July 31, 2013), 78 FR 47809 (August 6, 2013) 

(SR–CBOE–2013–055); and 91067 (February 5, 

2021) 86 FR 9108 (February 11, 2021) (SR–CBOE– 

2020–116). 

29See Securities Exchange Act Release Nos. 

98454 (September 20, 2023) (SR–CBOE–2023–005) 

(order approving proposed rule change to make 

permanent the operation of a program that allows 

the Exchange to list p.m.-settled third Friday-of-themonth SPX options series) (‘‘SPXPM Approval’’); 

98455 (September 20, 2023) (SR–CBOE–2023–019) 

(order approving proposed rule change to make 

permanent the operation of a program that allows 

the Exchange to list p.m.-settled third Friday-of-themonth XSP and MRUT options series) (‘‘XSP and 

MRUT Approval’’); and 98456 (September 20, 2023) 

(SR–CBOE–2023–020) (order approving proposed 

rule change to make the nonstandard expirations 

pilot program permanent) (‘‘Nonstandard 

Approval’’). 

30See Securities Exchange Act Release No. 31920 

(February 24, 1993), 58 FR 12280 (March 3, 1993) 

(SR–CBOE–92–17). 

31See id. at 12281. 

at least some evidence suggesting that 

futures and options expirations 

contributed to excess volatility and 

reversals around the close on those 

days.18 In light of the concerns with 

P.M.-settlement and to help ameliorate 

the price effects associated with 

expirations of P.M.-settled, cash-settled 

index products, in 1987, the Commodity 

Futures Trading Commission (‘‘CFTC’’) 

approved a rule change by the Chicago 

Mercantile Exchange (‘‘CME’’) to 

provide for A.M. settlement 19 for index 

futures, including futures on the S&P 

500 Index.20 The Commission 

subsequently approved a rule change by 

Cboe Options to list and trade A.M.- 

settled SPX options.21 In 1992, the 

Commission approved Cboe Options’ 

proposal to transition all of its 

European-style cash-settled options on 

the S&P 500 Index to A.M.-settlement 22; 

however, in 1993, the Commission 

approved a rule allowing Cboe Options 

to list P.M.-settled options on certain 

broad-based indices, including the S&P 

500 Index, expiring at the end of each 

calendar quarter (‘‘Quarterly Index 

Expirations’’).23 Starting in 2006, the 

Commission noticed or approved 

numerous rule changes, on a pilot basis, 

permitting the Cboe Options to 

introduce other index options with 

P.M.-settlement.24 These include the 

Pilot Program,25 P.M.-settled index 

options expiring weekly (other than the 

third Friday of the month) and at the 

end of each month (‘‘EOM’’),26 P.M.- 

settled options on the S&P 500 Index 

that expire on the third Friday-of-themonth (‘‘SPXPM’’),27 as well as P.M.- 

settled Mini-SPX Index (‘‘XSP’’) options 

and Mini-Russell 2000 Index (‘‘MRUT’’) 

options expiring on the third Friday of 

the month.28 The Commission recently 

approved proposed rule changes to 

make these other pilot programs to list 

P.M.-settled index options permanent.29

FLEX Index Options have traded on 

the Exchange since February 1993.30

The Exchange began offering FLEX 

Index options in response to the 

development of an over-the-counter 

(‘‘OTC’’) market in customized index 

options, in which participants could 

designate basic option features, 

including size, expiration date, exercise 

style, and certain exercise prices.31

FLEX Index Options provide investors 

with the ability to customize these basic 

options terms in order to meet their 

individual investment needs. The 

Exchange understands that participants 

in the FLEX market are typically 

sophisticated portfolio managers, 

insurance companies, and other 

institutional investors who buy and sell 

options in larger-sized transactions. The 

Exchange continues to believe that 

market participants benefit from the 

trading of FLEX Index Options in 

several ways, including, but not limited 

to the following: (1) enhanced efficiency 

in initiating and closing out positions; 

(2) increased market transparency; and 

(3) heightened contra-party 

creditworthiness due to the role of the 

Options Clearing Corporation (‘‘OCC’’) 

as issuer and guarantor of FLEX Index 

Options. Further, the Exchange believes 

providing investors—institutional 

investors in particular—that require 

increased flexibility with respect to the 

terms of index options with the ability 

to customize basic options terms, 

including whether an option is A.M.- 

settled or P.M.-settled, is essential to 

meeting the needs of these investors so 

they can satisfy particular investment 

objectives that cannot otherwise be met 

by standard listed options. 

In recent years, the Exchange has 

heard from numerous institutional 

investors—insurance companies, in 

particular—who use index options to 

hedge their portfolio risk need those 

options to provide them with a level of 

precision not available in standard 

options. They have expressed their 

preference to transact on the Exchange 

to eliminate the counterparty risk they 

must incur by trading in the OTC 

market. The Exchange understands that 

it is a critical and regular part of an 

insurance company’s business to hedge 

their risk, which many do with index 

options. When insurance companies 

issue policies to their customers, those 

companies accumulate liabilities for the 

payouts they may need to make to their 

customers pursuant to those policies. 

Insurance companies regularly hedge 

the notional amount of these liabilities 

to protect against downturns in the 

market. Because they are looking to 

protect against broad market downturns, 

broad-based index options are a tool 

insurance companies often use for this 

protection. Given the size of insurance 

companies’ portfolios, which can be in 

the tens of billions of dollars, these 

portfolios translate to index options 

with an aggregate notional value of 

billions of dollars being transacted 

annually. The Exchange understands 

these companies often have to trade in 

the nontransparent, unregulated, and 

riskier OTC market (where there is 

counterparty risk and no price 

protection exists for these customers) 

because standard listed options do not 

often provide them with the precision 

they need to execute their hedges. 


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32For example, if an insurance company has a 

$40,000,000,000 portfolio, 1% of that portfolio 

equates to $400,000,000. 

33The Exchange notes the total unhedged risk 

across the insurance industry would be multiplied 

if each insurance company were unable to hedge 

the full notional value of its portfolio. 

34See Approval Order, supra note 14. 

35Available at https://www.cboe.com/aboutcboe/ 

legal-regulatory/national-market-system-plans/pmsettlement-spxpm-data. 

36The Exchange also notes it is unaware of any 

concerns raised to it by market participants or of 

any public comments expressing concerns about the 

Pilot Program, including with respect to the current 

rule filing (which was noticed for public comment 

on April 28, 2023 and for which no public 

comments were submitted). 

37See DERA Staff PM Pilot Memo, at 13 (‘‘Option 

settlement quantity data for A.M.- and P.M.-settled 

options were obtained from the Cboe, including the 

number of contracts that settled in-the-money for 

each exchange-traded option series on the S&P 500 

index . . . on expiration days from January 20, 

2006 through December 31, 2018. Daily open 

interest and volume data for [SPX] option series 

were also obtained from Cboe, including open 

interest data from January 3, 2006 through 

December 31, 2018 and trading volume data from 

January 3, 2006 through December 31, 2018.’’) 

38The DERA staff study reviewed and provided 

statistics for market share, median notional value of 

open interest and median volume in 2007 and in 

2018. The Exchange provides updated statistics for 

market share, median notional value of open 

interest and median volume in 2021, replacing the 

2018 statistics provided in the Commission staff 

study. 

Whether an insurance company is able 

to precisely hedge the notional value of 

its portfolio ultimately impacts its 

customers. If an insurance company, for 

example, ‘‘underhedges’’ the notional 

value of its portfolio (which, again, is 

generally at least tens of billions of 

dollars), even 1% of such ‘‘slippage’’ 

would leave hundreds of millions of 

dollars of that portfolio unhedged,32

which creates significant risk for that 

company.33 Alternatively, if an 

insurance company ‘‘overhedges’’ the 

notional value of its portfolio, that 

would unnecessarily tie up some of its 

financial resources, as the difference in 

value of the options and the value of the 

portfolio is serving no purpose. Either 

case will likely result in higher 

premiums or reduced benefits for 

customers. Therefore, the Exchange 

believes providing insurance companies 

with the continued ability to hedge with 

p.m.-settled index options on all days, 

including the third Friday-of-the-month, 

is critical so that insurance companies, 

in addition to other institutional 

investors, can choose FLEX Index 

Options terms that provide them with 

the precision they need to implement 

their hedging strategies on the Exchange 

as opposed to the unregulated, riskier 

OTC market. 

The benefits of the Exchange’s FLEX 

market are demonstrated by the 

continued increase volume of FLEX 

Options executed on the Exchange. In 

2012, just under 9 million FLEX 

Options contracts (nearly 1.7 million of 

which were FLEX Index Options 

contracts) executed on the Exchange, 

compared to approximately 38.9 million 

FLEX Options contracts (over 2.8 

million of which were FLEX Index 

Options contracts) that executed on the 

Exchange in 2023 (through August). The 

Exchange has attributed much of the 

growth in the FLEX Options markets in 

recent years to the entrance into the 

FLEX market of new institutional 

investors. Institutional investors often 

use FLEX Options to execute their 

volatility strategies using exercise 

values and expiration dates not 

available in the standard market. 

Additionally, issuers of exchange-traded 

funds (‘‘ETFs’’) have recently increased 

their usage of FLEX Options. FLEX 

Options are particularly useful in ETFs 

as opposed to standardized options 

contracts because they enable the 

issuers to have more granular control 

over the options exposure within a 

portfolio. In particular, ETFs that are 

designed to provide a ‘‘defined 

outcome’’ (i.e., a defined upside and 

downside risk to a particular index or 

underlying ETF) use FLEX Options 

because they can be used to tailor the 

options exposure in the portfolio by 

strike and date in such a way that is not 

possible with standardized options 

contracts. 

As stated above, since its inception in 

2010, the Exchange has continuously 

extended the Pilot Program period and, 

during the course of the Pilot Program 

and in support of the extensions of the 

Pilot Program, the Exchange has 

submitted reports to the Commission 

regarding the Pilot Program that detail 

the Exchange’s experience with the Pilot 

Program, pursuant to the Pilot Program 

requirements.34 Specifically, the 

Exchange provided the Commission 

with annual reports analyzing volume 

and open interest for each broad-based 

FLEX Index Options class overlying a 

third Friday-of-the-month expiration 

day, P.M.-settled FLEX Index Options 

series. The annual reports also 

contained certain pilot period and prepilot period analyses of volume and 

open interest for third Friday-of-themonth expiration days, A.M.-settled 

FLEX Index series and third Friday-ofthe-month expiration day Non-FLEX 

Index series overlying the same index as 

a third Friday-of-the-month expiration 

day, P.M.-settled FLEX Index option. 

The annual reports also contained 

information and analysis of FLEX Index 

Options trading patterns, and index 

price volatility and underlying share 

trading activity for each broad-based 

index class overlying an Expiration 

Friday, P.M.-settled FLEX Index Option 

that exceeds certain minimum open 

interest parameters. The Exchange also 

provided the Commission, on a periodic 

basis, interim reports of volume and 

open interest. 

Also, during the course of the Pilot 

Program, the Exchange provided the 

Commission with any additional data or 

analyses the Commission requested if it 

deemed such data or analyses necessary 

to determine whether the Pilot Program 

was consistent with the Exchange Act. 

The Exchange has made public on its 

website all data and analyses previously 

submitted to the Commission under the 

Pilot Program,35 and will continue to 

make public any data and analyses it 

submits to the Commission while the 

Pilot Program is still in effect. 

The Exchange has concluded that 

FLEX PM Third Friday Options have 

not resulted in increased market and 

price volatility in the underlying 

component stocks, negatively impacted 

market quality, or raised any unique or 

prohibitive regulatory concerns. The 

Exchange has identified no evidence 

from the pilot data indicating that the 

trading of FLEX PM Third Friday 

Options had any adverse impact on fair 

and orderly markets on Expiration 

Fridays for broad-based indexes or the 

underlying securities comprising those 

indexes and has observed no abnormal 

market movements attributable to FLEX 

PM Third Friday Options from any 

market participants that have come to 

the attention of the Exchange.36

Based on a study conducted by the 

Commission’s Division of Economic and 

Risk Analysis (‘‘DERA’’) staff on the 

pilot data from 2006 through 2018,37

and the Exchange’s review of the pilot 

data from 2019 through 2021, the size of 

the market for P.M.-settled SPX options 

(including quarterly, weekly, EOM and 

third Friday expirations) since 2007 has 

grown from a trivial portion of the 

overall market to a substantial share 

(from around 0.1% of open interest in 

2007 to 30% in 2021).38 Notional value 

of open interest in P.M.-settled SPX 

options increased from approximately a 

median of $1.5 billion in 2007 to $1.9 

trillion in 2021, approximately 1260 

times its value in 2007. Notional open 

interest in A.M.-settled SPX options was 

already hovering around a median of 

$1.4 trillion in 2007, and it has since 

increased to approximately $4.4 trillion 

in 2021. It is also important to note that 

open interest on expiring P.M.-settled 

SPX options, as compared to A.M.- 


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39See DERA Staff PM Pilot Memo, at 2. 40The Exchange notes that the DERA staff study 

used two-sided volume data for the median volume 

in 2007 and in 2018; therefore, the Exchange 

provides two-sided volume data for the median 

volume in 2021. 

41Futures on the S&P 500 experience high 

volume and liquidity both before and after the close 

of the underlying market. Therefore, futures are a 

useful measure of abnormal volatility surrounding 

the close and the open. See DERA Staff PM Pilot 

Memo, at 14. The Exchange agrees with this 

approach. 

42Standard deviation applied to a rate of return 

(in this case, one-minute) of an instrument can 

indicate that instrument’s historical volatility. The 

greater the standard deviation, the greater the 

variance between price and the mean, which 

indicates a larger price range, i.e., higher volatility. 

43For example, if on a particular day the standard 

deviation of one-minute returns between 3:45 p.m. 

ET and 4:00 p.m. ET is 0.004 and the standard 

deviation of returns from 9:45 a.m. ET to 3:45 p.m. 

ET is 0.002, this metric would take on a value of 

2 for that day, indicating that volatility during the 

last 15 minutes of the trading day was twice as high 

as it was during the rest of the trading day. See 

DERA Staff PM Pilot Memo, at 15; see also DERA 

Staff PM Pilot Memo, at Section V, which discusses 

in detail the metrics used to measure, for the 

purposes of the study, the extent to which the 

market may experience abnormal volatility 

surrounding SPXPM option settlement. 

44See DERA Staff PM Pilot Memo, at Section V, 

which discusses in detail the metrics used to 

measure, for the purposes of the study, the extent 

to which the market may experience abnormal 

volatility surrounding SPXPM option settlement. 45See supra note 42. 

46The Exchange also notes that the study did not 

identify any evidence that less liquid S&P 500 

constituent securities experienced any greater 

impact from the settlement of P.M.-settled SPX 

options. 

47Total SPX open interest volumes were 

examined for expiration dates over a roughly twoyear period between October 2019 and November 

2021. 

settled options, is spread out across a 

greater number of expiration dates, 

which results in a smaller percentage of 

open interest expiring on any one date, 

thus mitigating concerns that SPXPM 

option expiration may have a disruptive 

effect on the market.39 Daily trading 

volume in P.M.-settled SPX options has 

increased from a median of about 700 

contracts in 2007 to nearly 1.9 million 

contracts in 2021,40 and now exceeds 

trading volume in A.M.-settled SPX 

options. 

Moreover, the DERA staff study of the 

P.M.-settled SPX options pilot data 

(2006 through 2018) did not identify 

any significant economic impact on S&P 

500 futures,41 the S&P 500 Index, or the 

underlying component securities of the 

S&P 500 Index surrounding the close. 

For purposes of the study, volatility was 

by and large measured by using the 

standard deviation 42 of one-minute 

returns of S&P 500 futures values and 

the index value during regular hours on 

each day reviewed (excluding the first 

and last 15 minutes of trading) and then 

compared with the standard deviation 

of one-minute returns (for S&P 500 

futures, the S&P 500 Index, and the 

underlying component securities of the 

S&P 500 Index) over the last 15 minutes 

of a trading day.43 Using this as a 

general measure,44 the DERA staff study 

then reviewed whether, and to what 

extent, the settlement quantity of 

SPXPM options and the levels of open 

interest in SPXPM options on expiration 

days (as compared to non-expiration 

days) may be associated with general 

price volatility and price reversals for 

S&P 500 futures, the S&P 500 Index, and 

the underlying component securities of 

the S&P 500 Index near the close. From 

its review of the study, the Exchange 

agrees that, although volatility before 

the market close is generally higher than 

during the rest of the trading day, there 

is no evidence of any significant adverse 

economic impact to the futures, index, 

or underlying index component 

securities markets as a result of the 

quantity of P.M.-settled SPX options 

that settle at the close or the amount of 

expiring open interest in P.M.-settled 

SPX options. For example, the largest 

settlement event that occurred during 

the time period of the study (a 

settlement of $100.4 billion of notional 

on December 29, 2017) had an estimated 

impact on the futures price of only 

approximately 0.02% (a predicted 

impact of $0.54 relative to a closing 

futures price of $2,677). 

In particular, the DERA staff study 

found that an additional P.M.-settled 

SPX options settlement quantity equal 

to $10 billion in notional value is 

associated with a marginal impact on 

futures prices during the last 15 minutes 

of the trading day of only about $0.06 

(where the hypothetical index level is 

2,500), additional expiring open interest 

in P.M.-settled SPX options equal to $10 

billion in notional value is associated 

with a marginal impact on futures prices 

during the last 15 minutes of the trading 

day of only about $0.05 (assumed index 

level is 2,500). Also, an additional 

increase in settlement quantity or in 

expiring open interest, each equal to $20 

million in notional value, did not result 

in any meaningful futures price 

reversals near the close (neither was 

found to cause a price reversal of over 

one standard deviation.45) 

Likewise, the study identified that an 

additional total P.M.-settled SPX 

options settlement quantity equal to $10 

billion in notional value corresponds to 

price movement in the S&P 500 of only 

about $0.08 (assuming an index level of 

2,500) during the last 15 minutes of the 

trading day, and that additional expiring 

open interest equal to $10 billion in 

notional value corresponds to a price 

movement in the S&P 500 of only about 

$0.06 (assuming an index level of 2,500) 

during the last 15 minutes of the trading 

day. The study also identified that it 

would take an increase of $34 billion in 

notional value of total settlement 

quantity and of expiring open interest 

for one additional S&P 500 price 

reversal of greater than two standard 

deviations to occur in the last 15 

minutes before the market close. Also, 

regarding potential impact to S&P 500 

component securities, it would take an 

increase in total P.M.-settled SPX 

options settlement quantity equal to $20 

billion to effect a price movement of 

only approximately $0.03 for a $200 

stock, an increase in expiring open 

interest in P.M.-settled SPX options 

equal to $10 billion to effect a price 

movement less than half a standard 

deviation, and an increase in total P.M.- 

settled SPX settlement quantity equal to 

$7 billion to achieve a price reversal 

greater two standard deviations. 

The study employed the same metrics 

to determine whether there is greater 

price volatility for S&P 500 futures, the 

S&P 500, and the component securities 

of the S&P 500 related to SPXPM option 

settlements during an environment of 

high market volatility (i.e., on days in 

which the VIX Index was in the top 

10% of closing index values) and did 

not identify indicators of any significant 

economic impact on these markets near 

the close as a result of the P.M.-settled 

SPX options settlement.46 In addition to 

this, the DERA staff study, applying the 

same metrics and analysis as for P.M.- 

settled SPX options to A.M.-settled SPX 

options, did not identify any evidence 

of a statistically significant relationship 

between settlement quantity or expiring 

open interest of A.M.-settled options 

and volatility near the open. 

Upon review of the results of the 

DERA staff study, the Exchange agrees 

that each of the above-described 

marginal price movements in S&P 500 

futures, the S&P 500, and the S&P 500 

component securities affected by 

increases in P.M.-settled SPX options 

settlement quantity and expiring open 

interest appear to be de minimis pricing 

changes from those that occur over 

regular trading hours (outside of the last 

15 minutes of the trading day). Further, 

the Exchange has not observed any 

significant economic impact or other 

adverse effects on the market from 

similar reviews of its pilot reports and 

data submitted after 2018.47 In its 

review of a sample of the pilot data from 

2019 through 2021, the Exchange 

similarly measured volatility over the 

final fifteen minutes of each trading day 

by taking the standard deviation of 


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48Calculated at every tick for the prior minute. 

49November 2015 through November 2021. 

50See S&P Dow Jones Indices, Equity Indices 

Policies & Practices, Methodology (August 2021), at 

15, available at https://www.spglobal.com/spdji/en/ 

documents/methodologies/methodology-sp-equityindices-policies-practices.pdf. 

51See DERA Staff PM Pilot Memo, at 10–12. 

52MOC orders allow a market participant to trade 

at the closing price. Market participants generally 

utilize MOC orders to ensure they exit positions at 

the end of the trading day. 

rolling one-minute returns of the S&P 

500 level (excluding the first and last 

fifteen minutes of trading) and 

comparing such with the standard 

deviation of one-minute returns 48 of the 

S&P 500 level, over the last 15 minutes 

of a trading day. The Exchange 

identified an average standard deviation 

ratio of 1.42 for the S&P 500 on nonexpiration days and an average standard 

deviation ratio of 1.54 for the S&P 500 

on expiration days (a ratio between 

expiration days and non-expiration days 

of 1.09). The Exchange also notes that, 

using the same methodology, it 

observed that, from 2015 through 

2019,49 the average standard deviation 

ratio for the S&P 500 on non-expiration 

days was 1.11 and the average standard 

deviation ratio for the S&P 500 on 

expiration days was 1.22 (a ratio 

between expiration days and nonexpiration days of 1.10). While the 

average standard deviation ratio on both 

expiration and non-expiration days was 

higher in 2019 through 2021 due to 

overall market volatility, the ratios 

between the standard deviation ratios 

on expiration days and non-expirations 

days remained nearly identical between 

the 2015 through 2019 timeframe and 

the 2019 through 2021. The Exchange 

believes this shows that, in cases where 

overall market volatility may increase, 

the normalized impact on expiration 

days to non-expiration days generally 

remains consistent. 

In addition to this, the Exchange notes 

that the S&P 500 Index is rebalanced 

quarterly. The changes resulting from 

each rebalancing coincide with the third 

Friday of the quarterly rebalancing 

month (i.e., March, June, September, 

October and December) 50 and generally 

drive an increase in trading activity 

from investors that seek to track the S&P 

500. As such, the Exchange measured 

volatility on quarterly rebalancing dates 

and found that the average standard 

deviation ratio was 1.62, which suggests 

more closing volatility on quarterly 

rebalance dates compared to nonquarterly expiration dates (for which the 

average standard deviation ratio was 

1.22), thus indicating that the impact 

rebalancing may have on the S&P 500 

Index is greater than any impact that 

P.M.-settled SPX options may have on 

the S&P 500 Index. 

The Exchange additionally focused its 

study of the post-2018 sample pilot data 

on reviewing for potential correlation 

between excess market volatility and 

price reversals and the hedging activity 

of liquidity providers. As explained in 

the DERA staff study, potential impact 

of P.M.-settled SPX options on the 

correlated equity markets is thought to 

stem from the hedging activity of 

liquidity providers in such options.51 To 

determine any such potential 

correlation, the Exchange studied the 

expected action of liquidity providers 

that are the primary source of the 

hedging on settlement days. These 

liquidity providers generally deltahedge their S&P 500 Index exposure via 

S&P 500 futures and on settlement day 

unwind their futures positions that 

correspond with the delta of their inthe-money (ITM) expiring P.M.-settled 

SPX options. Assuming such behavior, 

the Exchange estimated the Market-OnClose (‘‘MOC’’) 52 volume for the shares 

of the S&P 500 component securities 

(i.e., ‘‘MOC share volume’’) that could 

ultimately result from the unwinding of 

the liquidity providers’ futures positions 

by equating the notional value of the 

futures positions that correspond to 

expiring ITM open interest to the 

number S&P 500 component security 

contracts (based on the weight of each 

S&P 500 component security). That is, 

the Exchange calculated (an estimate) of 

the amount of MOC volume in the S&P 

500 component markets attributable 

hedging activity as a result of expiring 

ITM P.M.-settled SPX options (i.e., 

‘‘hedging MOC’’). The Exchange then: 

(1) compared the hedging MOC share 

volume to all MOC share volume on 

expiration days and non-expiration 

trading days; and (2) compared the 

notional value of the hedging futures 

positions (i.e., that correspond to 

expiring ITM P.M.-settled SPX options 

open interest) to the notional value of 

expiring ITM P.M.-settled SPX options 

open interest, the notional value of all 

expiring P.M.-settled SPX options open 

interest and the notional value of all 

P.M.-settled SPX options open interest. 

The Exchange observed that, on 

average, there were approximately 25% 

more MOC shares executed on 

expiration days (332 expiration days) 

than non-expiration days (209 nonexpiration days). While, at first glance, 

the volume of MOC shares executed on 

expiration days seems much greater 

than the volume executed on nonexpiration days, the Exchange notes that 

much of this difference is attributable to 

just eight expiration days—the quarterly 

index rebalancing dates captured within 

the scope of the post-2018 sample pilot 

data. The average MOC share volume on 

the eight quarterly rebalancing dates 

was approximately 4.8 times the average 

MOC share volume on the non-quarterly 

rebalancing expiration dates; again, 

indicating that the impact rebalancing 

may have on the S&P 500 Index is 

greater than any impact that P.M.-settled 

SPX options may have on the S&P 500 

Index. That is, the Exchange observed 

that the majority of closing volume on 

quarterly rebalance dates is driven by 

rebalancing of shares in in the S&P 500, 

and not by P.M.-settled SPX options 

expiration-related hedging activity. 

Notwithstanding the MOC share volume 

on quarterly rebalancing dates, the 

volume of MOC shares executed on 

expiration days (324 expiration days) 

was only approximately 13% more than 

that on non-expiration days, 

substantially less than the increase in 

volume over non-expiration days 

wherein the eight index rebalancing 

dates are included in expiration day 

volume. In addition to this, the 

Exchange observed that the hedging 

MOC share volume (i.e., the expected 

MOC share volume resulting from 

hedging activity in connection with 

expiring ITM P.M.-settled SPX options) 

was, on average, less than the MOC 

share volume on non-expiration days, 

and was only approximately 20% of the 

total MOC share volume on expiration 

days, indicating that other sources of 

MOC share volume generally exceed the 

volume resulting from hedging activity 

of expiring ITM P.M.-settled SPX 

options and would more likely be a 

source of any potential market volatility. 

The Exchange also observed that, 

across all third-Friday expirations, the 

notional value of the hedging futures 

positions was approximately 25% of the 

notional value of expiring ITM P.M.- 

settled SPX options, approximately 

3.8% of the notional value of all 

expiring P.M.-settled SPX options, and 

approximately only 0.5% of the notional 

value of all P.M.-settled SPX options. As 

such, the estimated hedging activity 

from liquidity providers on expiration 

days is a fraction of the expiring open 

interest in P.M.-settled SPX options, 

which, the Exchange notes, is only 14% 

of the total open interest in P.M.-settled 

SPX options; thus, indicating negligible 

capacity for hedging activity to increase 

volatility in the underlying markets. 

At the request of the Commission in 

connection with proposed rule changes 

to make other p.m.-settled options pilot 

programs permanent, the Exchange 

recently completed an analysis intended 

to evaluate whether the introduction of 

P.M.-settled options impacted the 


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53The Exchange calculated for each of SPXW 

options (with Monday, Wednesday, and Friday 

expirations) and SPY Weekly options (with 

Monday, Wednesday, and Friday expirations) the 

daily time-weighted bid-ask spread on the Exchange 

during its regular trading hours session, adjusted for 

the difference in size between SPXW options and 

SPY options (SPXW options are approximately ten 

times the value of SPY options). 

54The Exchange calculated the volume-weighted 

average daily effective spread for simple trades for 

each of SPXW options (with Monday, Wednesday, 

and Friday expirations) and SPY Weekly options 

(with Monday, Wednesday, and Friday expirations) 

as twice the amount of the absolute value of the 

difference between an order execution price and the 

midpoint of the national best bid and offer at the 

time of execution, adjusted for the difference in size 

between SPXW options and SPY options. 

55For purposes of comparison, the Exchange 

paired SPXW options and SPY options with the 

same moneyness and same days to expiration. 

56The Exchange observed comparable market 

volatility levels during the pre-intervention and 

post-intervention time ranges. 

57 In any series in which the Exchange observed 

an increase in the market quality indicators, the 

Exchange notes any such increase was also 

statistically insignificant. 

58Exhibit 3 begins at page 72 of 85 of Amendment 

No. 3 and is available at https://www.sec.gov/ 

comments/sr-cboe-2023-018/srcboe2023018- 

308519-794402.pdf. 

59The Exchange acknowledges that, while FLEX 

PM Third Friday Options has historically 

represented a very small percentage of overall 

volume, it is possible trading in these options may 

grow in the future. 

60The Exchange believes it is reasonable to 

consider only these large trades, because if large 

trades had no significant impact on market quality, 

then the Exchange believe it is unlikely that smaller 

trades would have had a significant impact on 

market quality. As noted below, the vast majority 

of FLEX PM Third Friday Options executed as parts 

of trades smaller than 500 contracts (which would 

have a notional value of 225,000). See Amendment 

No. 3, at 29–30. 

61The Exchange believes it is reasonable to use 

data from this time period as representative of the 

entire pilot period given that volume in FLEX PM 

Third Friday Options remained consistently low 

throughout the entire pilot period. The Exchange 

notes this sampling of data points may not cover 

different market conditions, such as volatility levels 

(e.g., high volatility days), which may impact quote 

spreads and sizes of index options. 

62All of these trades were SPX options. During 

the time period reviewed, there were no trades of 

more than 500 contracts for FLEX PM Third Friday 

Options in any other index class. The Exchange 

believes it is reasonable to limit this analysis to SPX 

options trades given that the vast majority of FLEX 

Continued 

quality of the A.M.-settled option 

market. Specifically, the Exchange 

compared values of key market quality 

indicators (specifically, the bid-ask 

spread 53 and effective spread 54) in 

SPXW options both before and after the 

introduction of Tuesday expirations and 

Thursday expirations for SPXW options 

on April 18 and May 11, 2022, 

respectively.55 Options on the Standard 

& Poor’s Depositary Receipts S&P 500 

ETF (‘‘SPY’’) were used as a control 

group to account for any market factors 

that might influence key market quality 

indicators. The Exchange used data 

from January 3, 2022 through March 4, 

2022 (the two-month period prior to the 

introduction of SPXW options with 

Tuesday expirations) and data from May 

11, 2022 to July 10, 2022 (the twomonth period following the 

introduction of SPXW options with 

Thursday expirations).56

As a result of this analysis, the 

Exchange believes the introduction of 

SPX options with Tuesday and 

Thursday options had no significant 

impact on the market quality of SPXW 

options with Monday, Wednesday, and 

Friday expirations. With respect to the 

majority of series analyzed, the 

Exchange observed no statistically 

significant difference in the bid-ask 

spread or the effective spread of the 

series in the period prior to introduction 

of the Tuesday and Thursday 

expirations and the period following the 

introduction of the Tuesday and 

Thursday expirations. While 

statistically insignificant, the Exchange 

notes that in many series, particularly as 

they were closer to expiration, the 

Exchange observed that the values of 

these spreads decreased during the 

period following the introduction of the 

Tuesday and Thursday expirations.57

The full analysis is included in Exhibit 

3 of this Amendment No. 3.58

Given the time that as passed since 

the introduction of FLEX PM Third 

Friday Options, the Exchange is unable 

to analyze whether the introduction of 

those options significantly impacted the 

market quality of non-FLEX A.M.- 

settled options at the time the FLEX PM 

Third Friday Options began trading. 

Additionally, the Exchange is unable to 

analyze whether the introduction of the 

FLEX P.M.-settled options significantly 

impacted the market quality of A.M.- 

settled FLEX options, as there is no 

book for FLEX options (and thus no 

quoted spreads), as FLEX options are 

listed only if and when market 

participants create them for trading. The 

Exchange acknowledges the above 

analysis, due to the type of study 

performed, may not be used as a direct 

substitute to demonstrate that the 

introduction of FLEX PM Third Friday 

Options did not significantly impact the 

market quality of non-FLEX A.M.- 

settled options. However, the Exchange 

believes the analysis is relevant. Since 

2013, approximately 400,000 contracts 

in FLEX PM Third Friday Options have 

executed on the Exchange, compared to 

156 million total FLEX Options 

contracts; 14.2 billion total options 

contracts; 5.6 billion index option 

contracts; 3.8 billion total SPX options 

contracts; and 2.3 billion A.M.-settled 

SPX options contracts in the same time 

period. This equates to an ADV of under 

150 contracts for FLEX PM Third Friday 

Options compared to an ADV of over 

800,000 contracts for SPX options over 

that time. As noted above, the 

Exchange’s analysis demonstrated the 

introduction of SPXW options with 

Tuesday and Thursday expirations did 

not significantly impact the market 

quality of non-FLEX SPX P.M.-options. 

Given that the Exchange determined, 

based on its above analysis, that the 

introduction of SPXW options with 

Tuesday and Thursday expirations had 

no significant impact on the market 

quality of non-FLEX SPX A.M.-settled 

options, the Exchange believes it is 

logical and reasonable to conclude that 

it is unlikely that the introduction of 

FLEX PM Third Friday Options (which 

has an ADV of approximately 0.04% the 

size of the ADV of SPXW Tuesday and 

Thursday expirations) 59 would have 

any impact on the market quality of 

non-FLEX SPX A.M.-settled options. 

The Exchange believes it is fair to 

assume FLEX PM Third Friday Options 

likely had no measurable impact on that 

market of non-FLEX SPX options with 

A.M.-settlement for several reasons: (1) 

as noted above, the volume in the FLEX 

PM Third Friday Options is a minute 

fraction (0.02%) of SPX options with 

A.M.-settlement; (2) FLEX Options are 

not quoted on a continuous basis, so 

Market-Makers do not need to estimate 

the risk associated with the potential 

trade as they do with options they are 

continuously quoting in the non-FLEX 

Options market; and (3) the FLEX 

market requires either verbal responses 

on the trading floor or auction responses 

electronically to represented orders, 

which provides Market-Makers with 

time to decide whether to trade, 

something which does not occur for the 

thousands of series they continuously 

quote in the non-FLEX Options market. 

To further support the Exchange’s 

view that FLEX PM Third Friday 

Options did not materially impact the 

market quality of corresponding nonFLEX options, the Exchange evaluated 

each FLEX PM Third Friday Options 

trade for more than 500 contracts 60 that 

occurred on the Exchange during the 

last two years 61 and analyzed the 

market quality (specifically, the average 

time-weighted quote spread and size 30 

minutes prior to the trade and the 

average time-weighted quote spread and 

size 30 minutes after the trade) of series 

of non-FLEX a.m.-settled options 

overlying the same index with similar 

terms as the FLEX PM Third Friday 

Option that traded (time to expiration, 

type (call or put), and strike price) as set 

forth in the table below: 62


khammond on DSKJM1Z7X2PROD with NOTICES
89778 Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices 

PM Third Friday Options trade were in SPX 

options, and the limited number of trades in 

options FLEX PM Third Friday Options 

(particularly given the smaller size of such trades) 

would have created sampling difficulties for 

designing a meaningful analysis of the impact of 

such trades on market quality of the corresponding 

non-FLEX a.m.-settled options. 

63The Exchange acknowledges that, while FLEX 

PM Third Friday Options has historically 

represented a very small percentage of overall 

volume, it is possible trading in these options may 

grow in the future. 

64 15 U.S.C. 78f(b). 

65 15 U.S.C. 78f(b)(5). 

Date Time Number of 

contracts 

Average timeweighted 

quote price 

spread prior 

to trade 

($) 

Average timeweighted 

quote price 

spread after 

trade 

($) 

Average timeweighted 

quote size 

prior to trade 

(contracts) 

Average timeweighted 

quote 

contract size 

after to trade 

(contracts) 

10/25/22 ................................................................................................ 11:57 660 9.89 9.08 16.4 16.7 

3/21/23 .................................................................................................. 13:07 660 9.40 9.76 13.8 13.9 

12/20/22 ................................................................................................ 12:23 655 10.29 10.28 27.2 27.5 

11/22/22 ................................................................................................ 12:49 635 9.85 9.78 25.6 25.8 

9/20/22 .................................................................................................. 12:50 615 10.16 10.23 15.4 15.0 

4/25/23 .................................................................................................. 13:05 610 11.66 11.54 20.1 19.9 

5/23/23 .................................................................................................. 12:24 610 9.65 9.77 18.6 18.7 

5/24/22 .................................................................................................. 11:44 590 8.99 8.87 15.1 15.6 

3/22/22 .................................................................................................. 12:36 575 10.44 10.39 19.2 19.1 

6/27/23 .................................................................................................. 11:58 560 9.57 9.61 13.9 14.3 

7/25/23 .................................................................................................. 14:12 550 10.87 10.85 22.1 22.8 

8/23/23 .................................................................................................. 13:48 535 11.41 11.44 15.6 15.2 

1/24/23 .................................................................................................. 12:16 535 9.54 9.43 21.6 22.0 

2/21/23 .................................................................................................. 13:01 515 10.20 10.22 18.61 18.65 

6/21/22 .................................................................................................. 12:47 510 11.12 11.08 14.2 14.8 

7/26/22 .................................................................................................. 12:23 510 10.66 10.67 16.8 16.8 

As this table demonstrates, the 

average time-weighted quote spread and 

size did not materially change after the 

FLEX PM Third Friday Options trade. 

Specifically, the average time-weighted 

quoted spread was never more than 0.36 

wider in the time period after the trade 

compared to before the trade, and the 

average time-weighted size was never 

more than 0.7 contracts different in the 

time period after the trade compared to 

before the trade. Further, given that the 

spreads were relatively stable before and 

after large trades, the Exchange believes 

this demonstrates that large FLEX PM 

Third Friday Options trades had no 

material negative impact (and the 

Exchange believes likely no impact) on 

quote quality of non-FLEX a.m.-settled 

options overlying the same index with 

similar terms as the FLEX PM Third 

Friday Option. The Exchange believes 

this evaluation effectively demonstrates 

it is likely that FLEX PM Third Friday 

Options have had no significant 

negative impact on the market quality of 

non-FLEX Options with A.M.- 

settlement.63

To further note, given the significant 

changes in the closing procedures of the 

primary markets in recent decades, 

including considerable advances in 

trading systems and technology, the 

Exchange believes that the risks of any 

potential impact of FLEX PM Third 

Friday Options on the underlying cash 

markets are also de minimis. 

The Exchange proposes to make the 

Pilot Program permanent as P.M.-settled 

index products have become an integral 

part of the Exchange’s product offerings, 

providing investors with greater trading 

opportunities and flexibility. As 

indicated by the significant growth in 

the size of the market for P.M.-settled 

options, as well as the significant 

growth in FLEX Options, such options 

have been, and continue to be, wellreceived and widely used by market 

participants. Therefore, the Exchange 

wishes to be able to continue to provide 

investors with the ability to trade FLEX 

PM Third Friday Options on a 

permanent basis. The Exchange believes 

that the permanent continuation of the 

Pilot Program will serve to maintain the 

status quo by continuing to offer a 

product to which investors have become 

accustomed and have incorporated into 

their business models and day-to-day 

trading methodologies for nearly 14 

years. As such, the Exchange also 

believes that ceasing to offer FLEX PM 

Third Friday Options may result in 

market disruption and investor 

confusion. The Exchange has not 

identified any significant impact on 

market quality nor any unique or 

prohibitive regulatory concerns as a 

result of the Pilot Program, and, as such, 

the Exchange believes that the 

continuation of the Pilot Program as a 

pilot, including the use of time and 

resources to compile and analyze 

quarterly and annual pilot reports and 

pilot data, is no longer necessary and 

that making the Pilot Program 

permanent will allow the Exchange to 

otherwise allocate time and resources to 

other industry initiatives. 

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.64 Specifically, 

the Exchange believes the proposed rule 

change is consistent with the section 

6(b)(5) 65 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. 

In particular, the Exchange believes 

that the making the Pilot Program 

permanent will allow the Exchange to 

be able to continue to offer FLEX PM 

Third Friday Options on a continuous 

and permanent basis. These products 

have been, and continue to be, wellreceived and widely used by market 

participants, providing investors with 

greater trading opportunities and 

flexibility. The Exchange believes that 

the permanent continuation of the Pilot 

Program will remove impediments to 

and perfect the mechanism of a free and 

open market and a national market 

system, and, in general, protect 

investors and the public interest by 

continuing to offer a product to which 

investors have become accustomed and 

have incorporated into their business 

models and day-to-day trading strategies 


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Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices 89779 

66See supra note 29. 

67See supra notes 37–51. 

68The Exchange acknowledges that, while FLEX 

PM Third Friday Options has historically 

represented a very small percentage of overall 

volume, it is possible trading in these options may 

grow in the future. 

for nearly 14 years. The Exchange notes 

the Commission recently approved 

proposals to make other pilots 

permitting P.M.-settlement of index 

options permanent after finding those 

pilots were consistent with the Act and 

the options subject to those pilots had 

no significant impact on the market.66

The Exchange believes ceasing to offer 

the Pilot Program may result in market 

disruption and investor confusion, as 

P.M.-settled index products, particularly 

SPX options, have become an integral 

part of the Exchange’s product offerings, 

providing investors with greater trading 

opportunities and flexibility. 

The Exchange further believes that 

making the Pilot Program permanent 

will remove impediments to and perfect 

the mechanism of a free and open 

market and a national market system 

and protect investors, while maintaining 

a fair and orderly market, as the 

Exchange believes that previous 

concerns (arising in the 1980s) regarding 

options expirations potentially 

contributing to excess volatility and 

reversals around the close have been 

adequately diminished. As described in 

detail above, the Exchange has observed 

no significant adverse market impact or 

identified any meaningful regulatory 

concerns during the nearly 14-year 

operation of the FLEX PM Third Friday 

Program as a pilot nor during the 15 

years since P.M.-settled index options 

(SPX) were reintroduced to the 

marketplace.67 Notably, the Exchange 

did not identify any significant 

economic impact (including on pricing 

or volatility or in connection with 

reversals) on related futures, the 

underlying indexes, or the underlying 

component securities of the underlying 

indexes surrounding the close as a 

result of the quantity of FLEX PM Third 

Friday Options or the amount of 

expiring open interest in FLEX PM 

Third Friday Options, nor any 

demonstrated capacity for options 

hedging activity to impact volatility in 

the underlying markets. While the 

DERA staff study and corresponding 

Exchange study described above 

specifically evaluated SPX options, 

FLEX PM Third Friday Options overlay 

broad-based indexes (including the S&P 

500 Index), the Exchange believes it is 

appropriate to extrapolate the data to 

apply to FLEX PM Third Friday 

Options. This is particularly true given 

that the data and reports submitted by 

the Exchange during the pilot period 

have similarly demonstrated no 

significant economic impact on the 

respective underlying indexes or other 

products. As set forth in the data and 

reports the Exchange provided to the 

Commission during the pilot period and 

noted above, since 2013, approximately 

400,000 contracts in FLEX PM Third 

Friday Options executed on the 

Exchange (the vast majority of which 

were SPX options). Given that this 

represented approximately 0.01% of all 

SPX options volume executed on the 

exchange during that time, the Exchange 

believes the chance that such a small 

number of contracts 68 could have 

measurably impacted the underlying 

index or other products is near zero. 

This is consistent with the findings in 

the DERA staff study set forth above 

regarding the impact of certain notional 

amounts of SPX options on the 

underlying index and related futures. 

For example, if you assume an index 

value for the S&P 500 Index of 4500, the 

notional value of one SPX option 

contract is 450,000. If 400,000 FLEX PM 

Third Friday Option contracts executed 

since 2013, that results in an average 

annual volume of approximately 36,300 

FLEX PM Third Friday Options, with 

the notional value of this total annual 

volume (the vast majority of which 

executed as parts of trades smaller than 

500 contracts (which would have a 

notional value of 225,000), as 

demonstrated by the table above) of just 

over $16 billion. As discussed above, 

the DERA staff study demonstrated that 

a similar amount of notional value of 

P.M.-settled SPX options had only a 

marginal impact on the underlying 

index and related futures. 

The DERA staff study and 

corresponding Exchange study 

concluded that a significantly larger 

amount of non-FLEX p.m.-settled index 

options had no significant adverse 

market impact and caused no 

meaningful regulatory concerns. 

Therefore, the Exchange believes it is 

reasonable to conclude that the 

relatively small amount of FLEX Index 

Option volume subject to the current 

Pilot Program would similarly have no 

significant adverse market impact or 

cause no meaningful regulatory 

concerns. Additionally, these studies 

measured any impact on related futures, 

the underlying indexes, or the 

underlying component securities of the 

underlying indexes surrounding the 

close. Despite FLEX SPX options (which 

represent approximately half of the 

year-to-date 2023 volume of FLEX Index 

Options but only approximately 0.3% of 

total SPX volume) not being included in 

the DERA staff study and corresponding 

Exchange study, those studies 

concluded that during the time periods 

covered (which included the period of 

time in which the Pilot Program has 

been operating), there was no significant 

economic impact on the underlying 

index or related products. Therefore, the 

Exchange believes it is reasonable to 

conclude that any FLEX SPX Options 

that executed during the timeframes 

covered by the studies had no 

significant impact on the underlying 

index or related products, as neither 

DERA staff nor the Exchange observed 

any significant economic impact on the 

underlying index or related product. 

The Exchange also believes the 

introduction of FLEX PM options had 

no significant impact on the market 

quality of corresponding A.M.-settled 

options or other options. As discussed 

above, the Exchange’s analysis 

conducted after the introduction of 

SPXW options with Tuesday and 

Thursday expirations demonstrated no 

statistically significant impact on the 

bid-ask or effective spreads of SPXW 

options with Monday, Wednesday, and 

Friday expirations after trading in the 

SPXW options with Tuesday and 

Thursday expirations began. As noted 

above, the Exchange acknowledges the 

above analysis, due to the type of study 

performed, may not be used as a direct 

substitute to demonstrate that the 

introduction of FLEX PM Third Friday 

Options did not significantly impact the 

market quality of non-FLEX A.M.- 

settled options. However, the Exchange 

believes the analysis is relevant. Since 

2013, approximately 400,000 contracts 

in FLEX PM Third Friday Options have 

executed on the Exchange, compared to 

156 million total FLEX Options 

contracts; 14.2 billion total options 

contracts; 5.6 billion index option 

contracts; 3.8 billion total SPX options 

contracts; and 2.3 billion A.M.-settled 

SPX options contracts in the same time 

period. This equates to an ADV of under 

150 contracts for FLEX PM Third Friday 

Options compared to an ADV of over 

800,000 contracts for SPX options over 

that time. As noted above, the 

Exchange’s analysis demonstrated the 

introduction of SPXW options with 

Tuesday and Thursday expirations did 

not significantly impact the market 

quality of non-FLEX SPX P.M.-options. 

Given that the Exchange determined 

that the introduction of SPXW options 

with Tuesday and Thursday expirations 

had no significant impact on the market 

quality of non-FLEX SPX A.M.-settled 

options, the Exchange believes it is 

logical and reasonable to conclude that 


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89780 Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices 

69The Exchange acknowledges that, while FLEX 

PM Third Friday Options has historically 

represented a very small percentage of overall 

volume, it is possible trading in these options may 

grow in the future. 

70The Exchange believes it is reasonable to 

consider only these large trades, because if large 

trades had no significant impact on market quality, 

then it is unlikely that smaller trades would have 

had a significant impact on market quality. 

71The Exchange believes it is reasonable to use 

data from this time period as representative of the 

entire pilot period given that volume in FLEX PM 

Third Friday Options remained consistently low 

throughout the entire pilot period. 

72The Exchange acknowledges that, while FLEX 

PM Third Friday Options has historically 

represented a very small percentage of overall 

volume, it is possible trading in these options may 

grow in the future. 

73 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

74 15 U.S.C. 78f(b)(5). 

it is unlikely that the introduction of 

FLEX PM Third Friday Options (which 

has an ADV of approximately 0.04% the 

size of the ADV of SPXW Tuesday and 

Thursday expirations) 69 would have 

any impact on the market quality of 

non-FLEX SPX A.M.-settled options. 

The Exchange believes it is fair to 

assume there is likely no measurable 

impact on that market for several 

reasons: (1) as noted above, the volume 

in the FLEX PM Third Friday Options 

is a minute fraction (0.02%) of SPX 

options with A.M.-settlement; (2) FLEX 

Options are not quoted on a continuous 

basis, so Market-Makers do not need to 

estimate the risk associated with the 

potential trade as they do with options 

they are continuously quoting in the 

non-FLEX Options market; and (3) the 

FLEX market requires either verbal 

responses on the trading floor or auction 

responses electronically to represented 

orders, which provides Market-Makers 

with time to decide whether to trade, 

something which does not occur for the 

thousands of series they continuously 

quote in the non-FLEX Options market. 

The Exchange evaluated each FLEX 

PM Third Friday Options trade for more 

than 500 contracts 70 that occurred on 

the Exchange during the last two 

years 71 and analyzed the market quality 

(specifically, the average time-weighted 

quote spread and size 30 minutes prior 

to the trade and the average timeweighted quote spread and size 30 

minutes after the trade) of series nonFLEX a.m.-settled options overlying the 

same index with similar terms as the 

FLEX PM Third Friday Option that 

traded (time to expiration, type (call or 

put), and strike price) as set forth in the 

table above. Given that the above-table 

shows that the spreads were relatively 

stable before and after large trades, the 

Exchange believes this demonstrates 

that large FLEX PM Third Friday 

Options trades had no material negative 

impact (and the Exchange believes 

likely no impact) on quote quality of 

non-FLEX a.m.-settled options overlying 

the same index with similar terms as the 

FLEX PM Third Friday Option. 

Therefore, the Exchange believes this 

evaluation effectively demonstrates it is 

likely that FLEX PM Third Friday 

Options have had no significant 

negative impact on the market quality of 

non-FLEX Options with A.M.- 

settlement.72

As discussed above, the Exchange 

believes that evaluation effectively 

demonstrates that FLEX PM Third 

Friday Options have had no significant 

negative impact on the market quality of 

non-FLEX Options with A.M.- 

settlement. 

Additionally, the significant changes 

in the closing procedures of the primary 

markets in recent decades, including 

considerable advances in trading 

systems and technology, has 

significantly minimized risks of any 

potential impact of FLEX PM Third 

Friday Options on the underlying cash 

markets. As such, the Exchange believes 

that a permanent Pilot Program does not 

raise any unique or prohibitive 

regulatory concerns and that such 

trading has not, and will not, adversely 

impact fair and orderly markets on 

Expiration Fridays for the underlying 

indexes or their component securities. 

Further, as the Exchange has not 

identified any significant impact on 

market quality or any unique or 

prohibitive regulatory concerns as a 

result of offering FLEX PM Third Friday 

Options, the Exchange believes that the 

continuation of the Pilot Program as a 

pilot, including the gathering, 

submission and review of the pilot 

reports and data, is no longer necessary 

and that making the Pilot Program 

permanent will allow the Exchange to 

otherwise allocate time and resources to 

other industry initiatives. 

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. The 

Exchange does not believe that making 

the Pilot Program permanent will 

impose any unnecessary or 

inappropriate burden on intramarket 

competition because FLEX PM options 

will continue to be available to all 

market participants who wish to 

participate in the FLEX PM options 

market. The Exchange believes that the 

growth that the P.M.-settled options 

market, including FLEX PM options, has 

experienced since their reintroduction 

through pilot programs indicates strong, 

continued investor interest and demand, 

warranting a permanent Pilot Program. 

The Exchange believes that, for the 

period that P.M.-settled FLEX options 

have been in operation as pilot 

programs, they have provided investors 

with a desirable product with which to 

trade and wishes to permanently offer 

this product to investors. Furthermore, 

during the pilot period, the Exchange 

has not observed any significant adverse 

market effects nor identified any 

regulatory concerns as a result of the 

Pilot Program, and, as such, the 

continuation of the Pilot Program as a 

pilot, including the gathering, 

submission and review of the pilot 

reports and data, is no longer 

necessary—a permanent Pilot Program 

will allow the Exchange to otherwise 

allocate time and resources to other 

industry initiatives. 

The Exchange further does not believe 

that making the Pilot Program 

permanent will impose any burden on 

intermarket competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act because it 

applies to a class of options listed only 

for trading on Cboe Options. The 

Exchange notes that other exchanges are 

free to and do offer competing products. 

To the extent that the permanent 

offering and continued trading of FLEX 

PM Third Friday Options may make 

Cboe Options a more attractive 

marketplace to market participants at 

other exchanges, such market 

participants may elect to become Cboe 

Options market participants. 

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. Discussion and Commission 

Findings 

After careful review, the Commission 

finds that the proposed rule change, as 

modified by Amendment No. 3, is 

consistent with the Act and the rules 

and regulations thereunder applicable to 

a national securities exchange.73 In 

particular, the Commission finds that 

the proposed rule change, as modified 

by Amendment No. 3, is consistent with 

section 6(b)(5) of the Act,74 which 

requires, among other things, that the 

Exchange’s rules be designed to prevent 

fraudulent and manipulative acts and 


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Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices 89781 

75Certain studies cited by the Exchange do not 

include, as part of their analysis, FLEX Options. See 

Amendment No. 3. However, the Commission 

acknowledges that the market for FLEX Options is 

small and the products included as part of those 

studies, while much larger than the FLEX market, 

did not have a disruptive impact on the underlying 

indexes or the underlying components. As a result, 

the Commission recognizes that it is not 

unreasonable for the Exchange to infer that since 

the FLEX PM Third Friday Options market is 

significantly smaller than the SPX PM market, 

FLEX PM Third Friday Options are unlikely to 

adversely impact the market. 

76See Amendment No. 3, at 12–13. 

77 Id. at 17. 

78 Id. at 13. The Exchange states that although its 

analysis specifically evaluated SPX options, the 

Exchange believes it is appropriate to extrapolate 

the data to apply to FLEX PM Third Friday Options. 

See Amendment No. 3, at 29. The Commission 

agrees it is appropriate to extrapolate the data to 

FLEX PM Third Friday Options, as the Exchange’s 

analysis examines liquidity and volatility dynamics 

around the market close, which may be associated 

with typical hedging activities tied to expiring p.m.- 

settled index option. 

79See Pilot Memo at 2. 

80See Amendment No. 3, at 13. Specifically, 

since 2007, PM-settled SPX options grew from 0.1% 

of open interest to 30% of open interest in 2021. 

Id. 

81See Pilot Memo at 3. 

82See id. 

83See Amendment No. 3, at 17–19. 

84See id. 

85See id. 

86See id. 87See id. 88See Amendment No. 3, at 20. 89See id. 90See Amendment No. 3, at 29. 91See id. 92See Amendment No. 3, at 30. 93See Amendment No. 3, at 26. 

practices, 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. In its proposal to make 

the Pilot Program permanent, the 

Exchange addressed whether the Pilot 

Program negatively impacts markets or 

impacted options market quality.75 Each 

of these elements is discussed in greater 

detail below. As stated above, no 

comments were received on the 

proposed rule change. 

Market Impact Considerations 

The Exchange states it has not 

identified any evidence from the pilot 

data indicating that the trading of PMsettled FLEX options has any adverse 

impact on fair and orderly markets on 

Expiration Fridays for broad-based 

indexes or the underlying securities 

comprising those indexes and has 

observed no abnormal market 

movements attributable to FLEX PM 

Third Friday Options from any market 

participants that have come to the 

attention of the Exchange.76 In order to 

support its overall assessment of the 

Program, the Exchange included a 

review and analysis of pilot data.77

Among other things, the Exchange’s 

analysis includes end of day volatility 

as well as a comparison of the impact 

of quarterly index rebalancing versus 

PM-settled expirations.78

In addition to reviewing the data and 

analysis provided by the Exchange, the 

Commission reviewed the analysis in 

the Pilot Memo, which evaluates 

whether higher levels of expiring open 

interest in PM-settled index options 

results in increased volatility and price 

reversals around the close. The Pilot 

Memo shows that the market share for 

PM-settled options on the S&P 500 has 

grown substantially since 2007.79 The 

Exchange’s review of pilot data also 

showed this trend continuing from 2019 

through 2021.80

The Pilot Memo examines whether 

and to what extent expiring open 

interest in PM-settled index options is 

empirically related with the tendency of 

the corresponding index futures, the 

underlying index, or index components 

to experience increased transitory 

volatility and price reversals around the 

time of market close on expiration dates. 

The Pilot Memo concludes that, 

although expiring PM-settled index 

option open interest may have a 

statistically significant relationship with 

volatility and price reversals of the 

underlying index, index futures, and 

index component securities around the 

market close, the magnitude of the effect 

is economically very small.81 For 

example, the largest settlement event 

that occurred during the time period 

studied in the Pilot Memo (a settlement 

of $100.4 billion of notional on 

December 29, 2017) had an estimated 

impact on the futures price of only 

approximately 0.02% (a predicted 

impact of $0.54 relative to a closing 

futures price of $2,677).82

The Exchange further reviewed a 

sample of pilot data from 2019 through 

2021, and measured the volatility of the 

S&P 500 over the final fifteen minutes 

of each trading day and compared 

expiration days to non-expiration 

days.83 Generally volatility was slightly 

higher on expiration days, but in cases 

where overall market volatility 

increased, the normalized impact on 

expiration days versus non-expiration 

days remained consistent.84 The 

Exchange further analyzed volatility on 

days when the S&P 500 was rebalanced, 

and states its results suggest more 

closing volatility on rebalance dates 

compared to non-rebalance expiration 

dates, indicating that rebalancing of the 

S&P 500 may have a greater impact on 

S&P 500 volatility than p.m.-settled 

option expirations.85

The Exchange also reviewed a sample 

of post-2018 pilot data for potential 

correlation between excess market 

volatility and price reversals and the 

hedging activity of liquidity providers.86

To determine whether there is a 

correlation, the Exchange calculated an 

estimate of the amount of MOC volume 

in the S&P 500 component markets 

attributable to expected hedging activity 

as a result of expiring in-the-money 

options.87 The Exchange states its 

results indicate that other sources of 

MOC share volume generally exceed the 

volume resulting from hedging activity 

for PM-settled SPX options.88 Further, 

the Exchange also compared hedging 

futures positions that would correspond 

to expiring in-the-money PM-settled 

SPX options and concludes the data 

indicate negligible capacity for hedging 

activity to increase volatility in the 

underlying markets.89

The Exchange acknowledged in its 

proposal that the Commission’s Pilot 

Memo and corresponding Exchange 

studies discussed above specifically 

evaluated SPX options rather than FLEX 

PM Third Friday Options.90 To support 

its reliance on these studies, the 

Exchange states that there have been 

approximately 400,000 contracts in 

FLEX PM Third Friday Options 

executed on the Exchange since 2013, 

that vast majority of which were on 

SPX, representing approximately 0.01% 

of all SPX options volume during that 

time.91 The Exchange further states that 

given that the Pilot Memo and other 

Exchange studies concluded that PM 

settlements of a significantly larger 

amount of non-FLEX PM-settled index 

options had no significant adverse 

market impact on the underlying index 

or related products, it is reasonable to 

conclude that the small amount of 

expiring PM settled FLEX index options 

under the Pilot Program, ‘‘. . .would 

similarly have no significant adverse 

market impact.’’ 92

Finally, the Exchange states that the 

significant changes in the closing 

procedures of the primary markets in 

recent decades, including considerable 

advances in trading systems and 

technology, have significantly 

minimized risks of any potential impact 

of PM-, cash-settled SPX options on the 

underlying cash markets.93

Market Quality Considerations 

The Exchange also completed an 

analysis intended to evaluate whether 

the Pilot Program impacted the quality 

of the SPX options market. Specifically, 


khammond on DSKJM1Z7X2PROD with NOTICES
89782 Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices 

94The Exchange calculated for each of SPXW 

options (with Monday, Wednesday, and Friday 

expirations) and SPY Weekly options (with 

Monday, Wednesday, and Friday expirations) the 

daily time-weighted bid-ask spread on the Exchange 

during its regular trading hours session, adjusted for 

the difference in size between SPXW options and 

SPY options (SPXW options are approximately ten 

times the value of SPY options). 

95The Exchange calculated the volume-weighted 

average daily effective spread for simple trades for 

each of SPXW options (with Monday, Wednesday, 

and Friday expirations) and SPY Weekly options 

(with Monday, Wednesday, and Friday expirations) 

as twice the amount of the absolute value of the 

difference between an order execution price and the 

midpoint of the national best bid and offer at the 

time of execution, adjusted for the difference in size 

between SPXW options and SPY options. 

96For purposes of comparison, the Exchange 

paired SPXW options and SPY options with the 

same moneyness and same days to expiration. 

97See Amendment No. 3, at 56. 

98 Id. at 23 

99 Id. 

100 Id. 

101The Exchange acknowledged certain 

limitations related to its analysis. See Amendment 

No. 3, at notes 47–49. 102See Amendment No. 3, at 25. 103 Id. 104 Id. 

105While the Exchange recognized certain 

limitations as to its analysis, given the totality and 

scope of the studies described above and the 

current size of the FLEX PM Third Friday Options 

market it is not unreasonable for the Exchange to 

infer from those studies that it is unlikely FLEX PM 

Third Friday Options adversely impacted the 

options or other markets. 

106 15 U.S.C. 78f(b)(5). 

the Exchange compared values of key 

market quality indicators (specifically, 

the bid-ask spread 94 and effective 

spread 95) in PM-settled SPX weekly 

(‘‘SPXW’’) options both before and after 

the introduction of Tuesday expirations 

and Thursday expirations for SPXW 

options on April 18 and May 11, 2022, 

respectively.96 The Exchange concludes 

from this analysis that the introduction 

of SPX options with Tuesday and 

Thursday options had no significant 

impact on the market quality of SPXW 

options with Monday, Wednesday, and 

Friday expirations. For a majority of the 

series analyzed, the Exchange observed 

no statistically significant difference in 

bid-ask spread or effective spread.97

While the Exchange acknowledges that 

this analysis may not be a direct 

substitute to demonstrate that the 

introduction of FLEX PM Third Friday 

Options did not significantly impact the 

market quality of non-FLEX AM-settled 

options the Exchange believes the 

analysis is still relevant.98

Specifically, the Exchange states the 

data shows that 400,000 FLEX PM Third 

Friday Options have executed on the 

Exchange since 2013; compared to 156 

million total FLEX Options contracts; 

14.2 billion total options contracts; 5.6 

billion index option contracts; 3.8 

billion total SPX options contracts; and 

2.3 billion AM-settled SPX options 

contracts in the same time period.99 The 

Exchange states that since FLEX PM 

Third Friday Options have an averagedaily-volume of approximately 0.04% of 

the average-daily-volume of SPXW 

Tuesday and Thursday expirations, it is 

reasonable to conclude that it is 

unlikely that FLEX PM Third Friday 

Options would have any impact on the 

market quality of non-FLEX SPX AMsettled options.100

As part of its filing, to further analyze 

the impact FLEX PM Third Friday 

Options had on market quality, the 

Exchange provided additional data and 

evaluated each FLEX PM Third Friday 

Options trade for more than 500 

contracts that occurred on the Exchange 

during the last two years and analyzed 

the market quality (specifically, the 

average time-weighted quote spread and 

size 30 minutes prior to the trade and 

the average time-weighted quote spread 

and size 30 minutes after the trade) of 

non-FLEX AM-settled SPX option series 

with similar terms as the FLEX PM 

Third Friday Option that traded (time to 

expiration, type (call or put), and strike 

price) as set forth in the table above. 

The Exchange’s analysis shows that 

the average time-weighted quote spread 

and size of non-FLEX AM-settled SPX 

option did not materially change after 

the FLEX PM Third Friday Options 

trade.101 Specifically, the average timeweighted quoted spread was never more 

than $0.36 wider in the time period after 

the trade compared to before the trade, 

and the average time-weighted size was 

never more than 0.7 contracts different 

in the time period after the trade 

compared to before the trade.102 The 

Exchange also stated that the observed 

spreads were relatively stable before and 

after large trades. The Exchange states 

that this demonstrates that large FLEX 

PM Third Friday Options trades had no 

material negative impact on quote 

quality of non-FLEX AM-settled SPX 

options with similar terms as the FLEX 

PM Third Friday Options.103 Therefore, 

the Exchange concludes that this 

evaluation effectively shows that it is 

likely FLEX PM Third Friday Options 

have had no significant negative impact 

on the market quality of non-FLEX 

Options with AM-settlement.104

Conclusion 

The Commission believes that the 

evidence contained in the Exchange’s 

filing, and the Exchange’s pilot data and 

reports, demonstrate that the Pilot 

Program has benefitted investors and 

other market participants by providing 

more flexible trading and hedging 

opportunities using FLEX options under 

the Pilot Program, while also having 

observed no evidence of an adverse 

impact on the market. The market for 

FLEX PM Third Friday Options has 

grown in size over the course of the 

Pilot Program, but remains relatively 

small compared to non-FLEX PM-settled 

index options, and analysis of the pilot 

data did not identify any significant 

economic impact, nor did it indicate a 

deterioration in market quality (as 

measured by average time weighted 

quote spreads and average time 

weighted quote size) for series of nonFLEX AM-settled SPX option series 

with similar terms as the FLEX PM 

Third Friday Options. Additionally, the 

Pilot Memo and Exchange studies 

analyzing the non-Flex options market 

did not identify any adverse market 

impact on the underlying indexes, 

components of those indexes or related 

products or any significant impact on 

market quality of AM-settled index 

options.105 Further, significant changes 

in closing procedures in the decades 

since index options moved to AM 

settlement may also serve to mitigate the 

potential impact of PM-settled index 

options on the underlying cash markets. 

Accordingly, the Commission finds 

that the proposed rule change, as 

modified by Amendment No. 3, is 

consistent with section 6(b)(5) of the 

Act 106 and the rules and regulations 

thereunder applicable to a national 

securities exchange. 

IV. Solicitation of Comments on 

Amendment No. 3 to the Proposed Rule 

Change 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether Amendment No. 3 is 

consistent with the Act. Comments may 

be submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include file number SR– 

CBOE–2023–018 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–2023–018. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 


khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 88, No. 248 / Thursday, December 28, 2023 / Notices 89783 

107See supra note 12. 

108 15 U.S.C. 78s(b)(2). 

109 17 CFR 200.30–3(a)(12). 

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

2 15 U.S.C. 78a. 

3 17 CFR 240.19b–4. 

4As discussed infra, Professional Customer 

volume is not eligible to be included on a 

Customer-to-Customer Cross submitted pursuant to 

Rule 934NY(a). See Rule 900.2NY (providing in 

relevant part that, for purposes of Rule 934NY 

(Crossing), Professional Customers are treated as 

Broker/Dealers). 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (https://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 

a.m. and 3 p.m. Copies of the filing also 

will be available for inspection and 

copying at the principal office of the 

Exchange. Do not include personal 

identifiable information in submissions; 

you should submit only information 

that you wish to make available 

publicly. We may redact in part or 

withhold entirely from publication 

submitted material that is obscene or 

subject to copyright protection. All 

submissions should refer to file number 

SR–CBOE–2023–018 and should be 

submitted on or before January 18, 2024. 

V. Accelerated Approval of 

Amendment No. 3 

The Commission finds good cause to 

approve the proposed rule change, as 

modified by Amendment No. 3, prior to 

the thirtieth day after the date of 

publication of notice of the filing of 

Amendment No. 3 in the Federal 

Register. As noted above, Amendment 

No. 3 makes no substantive changes to 

the proposal. Amendment No. 3 

provides additional analysis and data to 

support certain assertions made by the 

Exchange and provides greater clarity 

to, and justification for, the proposal.107

The additional analysis and information 

in Amendment No. 3 assist the 

Commission in evaluating the 

Exchange’s proposal and in determining 

that it is consistent with the Act. 

Amendment No. 3 also raises no new 

novel issues. Accordingly, the 

Commission finds good cause, pursuant 

to section 19(b)(2) of the Act,108 to 

approve the proposed rule change, as 

modified by Amendment No. 3, on an 

accelerated basis. 

VI. Conclusion 

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act, that 

proposed rule change SR–CBOE–2023– 

018, as modified by Amendment No. 3, 

be, and hereby is, approved on an 

accelerated basis. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.109

Christina Z. Milnor, 

Assistant Secretary. 

[FR Doc. 2023–28608 Filed 12–27–23; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–99231; File No. SR– 

NYSEAMER–2023–66] 

Self-Regulatory Organizations; NYSE 

American LLC; Notice of Filing and 

Immediate Effectiveness of Proposed 

Change To Modify Rule 900.3NYP 

December 22, 2023. 

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

Securities Exchange Act of 1934 

(‘‘Act’’) 2 and Rule 19b–4 thereunder,3

notice is hereby given that, on December 

19, 2023, NYSE American LLC (‘‘NYSE 

American’’ 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 self-regulatory 

organization. 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 modify 

Rule 900.3NYP (Orders and Modifiers) 

to adopt electronic Customer Cross 

Order and Complex Customer Cross 

Order functionality and to amend Rule 

900.2NY (Definitions) to specify the 

treatment of certain Professional 

Customer interest. The proposed rule 

change is available on the Exchange’s 

website at www.nyse.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 

self-regulatory organization 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 those 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 parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to modify 

Rule 900.3NYP (Orders and Modifiers) 

to adopt electronically-entered 

Customer Cross (‘‘C2C’’) Orders and 

Complex Customer Cross (‘‘Complex 

C2C’’) Orders (collectively, ‘‘Customer 

Cross Orders’’). The Exchange also 

proposes to amend the definition of 

Professional Customer (Rule 900.2NY) 

to specify that, for purposes of proposed 

Rule 900.3NYP(g)(2) and Rule 

971.1NYP, Professional Customer 

interest would be treated in the same 

manner as Broker/Dealers (nonCustomers). 

Proposed Rule 900.3NYP(g)(2): 

Customer Cross Orders 

Rule 934NY(a) describes Customer-toCustomer Cross orders on the Trading 

Floor wherein ‘‘[a] Floor Broker who 

holds a Customer order to buy and a 

Customer order to sell the same option 

contract may cross such orders,’’ 

provided that the Floor Broker proceeds 

in the manner set forth in paragraphs 

(1)–(3) of Rule 934NY(a).4 The Exchange 

proposes to adopt rules governing 

electronically-entered Customer Cross 

Orders, which allow ATP Holders to 

conduct this type of crossing transaction 

electronically and without having to 

utilize a Floor Broker. Although the 

proposed Customer Cross Orders are 

conceptually the same as the existing 

Customer-to-Customer Cross, the latter 

order type differs in that it must adhere 


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