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[Federal Register Volume 89, Number 239 (Thursday, December 12, 2024)]
[Notices]
[Pages 100564-100567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29147]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101834; File No. SR-CBOE-2024-052]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Auction Response and Execution Price Cap for AIM and SAM Auctions

December 6, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 22, 2024, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule

[[Page 100565]]

change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rules 5.37 and 5.39. The text of the proposed rule change is 
provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rules 5.37 (Automated Price 
Improvement Mechanism (``AIM'' or ``AIM Auction'') and 5.39 
(``Solicitation Auction Mechanisms (``SAM'' or ``SAM Auction'')) to 
modify the agency side execution price cap to allow for further price 
improvement.
    By way of background, Rule 5.37 contains the requirements 
applicable to the execution of certain customer orders (``Agency 
Orders'') using AIM. An AIM Auction is an electronic auction intended 
to provide an Agency Order with the opportunity to receive price 
improvement (over the National Best Bid or Offer (``NBBO'')). Rule 5.39 
contains the requirements applicable to the execution of Agency Orders 
using SAM. Similarly, a SAM Auction is an electronic auction intended 
to provide a larger-sized Agency Order with the opportunity to receive 
price improvement over the NBBO. Upon submitting an Agency Order into 
an AIM or SAM Auction, the initiating Trading Permit Holder 
(``Initiating TPH'') must also submit a contra-side second order 
(``Initiating Order'') for the same size as the Agency Order. The 
Initiating Order guarantees that the Agency Order will receive an 
execution at no worse than the auction price. Upon commencement of an 
auction, market participants may submit responses to trade against the 
Agency Order.\5\ At the conclusion of an AIM Auction, depending on the 
contra-side interest (including auction responses) available, the 
Initiating Order may be allocated a certain percentage (or more) of the 
Agency Order.\6\ At the conclusion of a SAM Auction, depending on the 
contra-side interest (including auction responses) available, the 
Initiating Order may be allocated the entire Agency Order or none of 
the Agency Order.\7\
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    \5\ See Rules 5.37(c)(5) and 5.39(c)(5).
    \6\ See Rule 5.37(e).
    \7\ See Rule 5.39(e).
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    Rules 5.37(c)(5)(B) and 5.39(c)(5)(B) provide that the System may 
not execute AIM responses (against Agency Orders) outside of the BBO at 
the conclusion of the AIM Auction or the Initial NBBO. Similarly, Rules 
5.37(e) and 5.39(e) provide that the execution price of any Agency 
Order must be not outside the Exchange best bid or offer (``BBO'') at 
the conclusion of the auction or the Initial NBBO.\8\ The Exchange 
proposes to amend Rules 5.37(c)(5)(B) and (e) and 5.39(c)(5)(B) and (e) 
to eliminate the requirement that the execution price of an AIM 
response or Agency Order be at or better than the Initial NBBO.\9\ The 
Exchange believes this may provide Agency Orders with further 
opportunities for price improvement, including in the event the market 
changes during an AIM or SAM Auction.
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    \8\ The term ``Initial NBBO'' means the national best bid or 
national best offer at the time an auction is initiated. See Rules 
5.37 (introductory paragraph) and 5.39 (introductory paragraph). The 
Exchange notes that Rules 5.37(b) and 5.39(b) reference the ``then-
current NBBO'' when describing the stop price conditions. The 
``then-current NBBO'' is the NBBO at the time the System receives 
the Agency Order and contra-order, which (assuming all conditions 
are satisfied) becomes the time at which the auction commences, and 
thus the then-current NBBO is ultimately the NBBO at the 
commencement of the auction, which is also the ``Initial NBBO.''
    \9\ The proposed rule change makes nonsubstantive changes to 
Rule 5.37(e) to delete the redundant phrase ``as follows,'' and 
makes other grammatical changes, which changes have no impact on 
these provisions and merely improve readability. The proposed rule 
change also makes nonsubstantive changes to Rule 5.37(e) to replace 
``better than both sides of'' with ``between,'' as those terms mean 
the same thing with respect to the BBO. This makes the language in 
Rule 5.37(e) consistent with the analogous language in Rule 5.39(e).
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    To illustrate the impact of the proposed rule change, suppose the 
following market exists when an Initiating TPH submits to AIM Auction 
an Agency Order to buy 5 contracts at 1.05 (which is the stop price):

BBO: 0.85-1.20 (no priority customers)
ABBO: 1.00-1.10
Initial NBBO: 1.00-1.10

    After the Auction begins, the ABBO moves to 0.90-1.10 and the 
Exchange receives on its book a non-priority customer order to sell 1 
contract at 0.95. During the Auction, one response to sell one contract 
at 0.75 is submitted. Therefore, when the AIM Auction concludes, the 
following market exists:

BBO: 0.85-0.95 (no priority customers)
ABBO: 0.90-1.10
NBBO: 0.90-0.95

    Under the current rules, the execution price would be capped at the 
Initial NBB of 1.00, and thus the Agency Order would execute as 
follows:

1 contract against the sell response @ 1.00
1 contract against the sell order @ 1.00
3 contracts against the Initiating Order at 1.05

    As proposed, the execution price would be capped at BBO at the 
conclusion of the Auction of 0.85, and thus the Agency Order would 
execute as follows:

1 contract against the sell response @ 0.85
1 contract against the sell order @ 0.95
3 contracts against the Initiating Order @ 1.05

    Therefore, as proposed, the Agency Order is able to buy one 
contract at 0.15 less and another contract at 0.05 less than what 
occurs under the current Rules, which ultimately results in price 
savings for this customer.
    To illustrate what would happen if the away market moved the other 
direction during an AIM Auction, suppose the following market exists 
when an Initiating TPH submits to AIM Auction an Agency Order to buy 5 
contracts at 1.05 (which is the stop price):

BBO: 0.85-1.20 (no priority customers)
ABBO: 1.00-1.10
Initial NBBO: 1.00-1.10

    After the Auction begins, the ABBO moves to 1.10-1.20 and the 
Exchange receives on its book a non-priority customer order to sell 1 
contract at 1.15. During the Auction, one response to sell one contract 
at 0.95 is submitted. Therefore, when the AIM Auction concludes, the 
following market exists:

[[Page 100566]]

BBO: 0.85-1.15 (no priority customers)
ABBO: 1.10-1.20
NBBO: 1.10-1.15

    Under the current rules, the execution price would be capped at the 
Initial NBB of 1.00, and thus the Agency Order would execute as 
follows:

1 contract against the sell response @ 1.00
4 contracts against the Initiating Order at 1.05

    As proposed, the execution price would be capped at BBO at the 
conclusion of the Auction of 0.85, and thus the Agency Order would 
execute as follows:

1 contract against the sell response @ 0.95
4 contracts against the Initiating Order @ 1.05

    Therefore, as proposed, the Agency Order is able to buy one 
contract at 0.05 less than what occurs under the current Rules, which 
ultimately results in price savings for this customer. This example 
also demonstrates that if the Agency Order side of the market crosses 
the auction/stop price, the Agency Order will still not trade at a 
price worse than the auction/stop price.
    Another example illustrates what would happen if the Exchange's 
market moved during an AIM Auction and the Agency Order side of the 
market crossed the auction/stop price, suppose the following market 
exists when an Initiating TPH submits to AIM Auction an Agency Order to 
buy 5 contracts at 1.05 (which is the stop price):

BBO: 0.85-1.20 (no priority customers)
ABBO: 1.00-1.10
Initial NBBO: 1.00-1.10

    After the Auction begins, the Exchange receives on its book a non-
priority customer order to buy 1 contract at 1.15. No responses were 
received prior to the receipt of this order. This would cause the 
Agency Order's stop price of 1.05 to be outside of the BBO of 1.15-
1.20. As a result, pursuant to Rule 5.37(d)(1)(C), the AIM Auction 
would conclude. All five contracts of the Agency Order would execute 
against the Initiating Order at 1.05. The proposed rule change would 
have no impact on this scenario since the execution price is still 
within the Initial NBBO.
    The proposed change will continue to protect interest resting on 
the Exchange's book (including priority customers) and interest at away 
markets in accordance with linkage rules \10\ while providing customers 
with additional opportunities for price improvement. Additionally, 
customers will continue to never receive an execution at a price worse 
than the auction/stop price.
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    \10\ See Rule 5.66(b)(9) (which permits transactions that trade 
through the NBBO if an order was stopped at a price that did not 
constitute a trade-through at the time of the stop).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\11\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    The Exchange believes the proposed rule change will help perfect 
the mechanism of a free and open market, promote just and equitable 
principles of trade and protect investors. In particular, the Exchange 
believes the proposed rule change will provide opportunities for 
further price improvement for Agency Orders in the event an away market 
fades during an auction. The Exchange believes that the proposed rule 
change may permit Agency Orders submitted into AIM and SAM Auctions (or 
parts of them) to execute at better prices, including against Auction 
responses, than they may execute at today. The Exchange believes the 
proposed changes may provide Agency Orders with increased opportunities 
for meaningful price improvement without inadvertently penalizing them 
if markets happen to move during an auction. The Exchange believes the 
proposed rule change will permit customers to take advantage of market 
moves that occur during an auction, which may result in these orders 
receiving further price improvement compared to what they may receive 
under current Rules, which ultimately benefits investors.
    The Exchange further notes that the proposed rule change remains 
consistent with the Options Order Protection and Locked/Crossed Market 
Plan (``Linkage Plan'') approved by the Securities and Exchange 
Commission (the ``Commission'') pursuant to Regulation NMS \14\ and the 
Exchange's Rules adopted in accordance with the Linkage Plan.\15\ In 
particular, the proposed rule change is consistent with the trade-
through exception that permits an order to trade at a price outside of 
the NBBO at the time of execution (i.e., the conclusion of an AIM or 
SAM Auction) if the order was stopped at a price that did not 
constitute a trade-through at the time of the stop (i.e., the Initial 
NBBO).\16\ This stop price is required for AIM and SAM auctions.\17\ 
While this trade-through exception requires a stop price to be at or 
between the Initial NBBO, it does not require an execution price to be 
at or between the Initial NBBO.\18\ When the Commission discussed this 
trade through exception when approving the Linkage Plan, it noted the 
purpose of this exception was to allow for ``price improvement for an 
order, even if the market moves in the interim, and the transaction is 
effected at a price that would trade through the then currently-
displayed market,'' as occurs in price improvement auctions of several 
exchanges.\19\ As proposed, executions will always occur at prices at

[[Page 100567]]

or between the BBO at the conclusion of the Auction, thus respecting 
prices from away markets while providing an Agency Order with the 
opportunity to benefit from any market changes that occur during an 
auction. Additionally, customers will continue to never receive an 
execution at a price worse than the auction/stop price.
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    \14\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (Order Approving the National 
Market System Plan Relating to Options Order Protection and Locked/
Crossed Markets Submitted by the Chicago Board Options Exchange, 
Incorporated, International Securities Exchange, LLC, The NASDAQ 
Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE 
Amex LLC, and NYSE Arca, Inc.) (``Linkage Approval Order'')
    \15\ See Rules 5.65 through 5.67.
    \16\ See Rule 5.66(b)(9).
    \17\ See Rules 5.37(b) and 5.39(b).
    \18\ The Exchange notes at least one other options exchange with 
similar auction mechanisms does not limit executions prices to being 
at or better than the Initial NBBO. See, e.g., Nasdaq ISE, LLC 
(``ISE'') Rulebook Options 3, Section 11(d) (permissible execution 
prices for orders submitted into the solicited order mechanism 
(comparable to SAM) do not take into account prices of away 
markets); and Section 13 (permissible execution prices for orders 
submitted into the price improvement mechanism (comparable to AIM) 
do not take into account prices of away markets).
    \19\ See Linkage Approval Order at 39368. The Commission 
continued by stating that ``[d]uring [an] auction period, the NBBO 
could move from where it was when the order was received. However, 
the Exchange is only required to guarantee a price no worse than the 
NBBO at the time the order was received.'' The Commission found this 
exception to be ``in the public interest, appropriate for the 
protection of investors and the maintenance of fair and orderly 
markets.'' Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act, because it will apply uniformly to AIM and SAM 
orders and responses of all TPHs. Additionally, the Exchange notes that 
participation in the AIM and SAM Auctions is completely voluntary. The 
Exchange believes all market participants may benefit from any 
additional price improvement in the AIM and SAM Auctions that may 
result from the proposed rule change. The Exchange does not believe the 
proposed rule change will impose any burden on intermarket competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act, as the proposed rule change relates to Exchange-specific 
auction mechanisms and, as noted above, will continue to ensure that 
execution prices occur in a manner consistent with linkage rules and 
protect customers on the book. As noted above, at least one other 
options exchange with similar auction mechanisms does not limit 
executions prices to being at or better than the Initial NBBO.\20\
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    \20\ See, e.g., ISE Rulebook Options 3, Section 11(d)(3) 
(permissible execution prices for orders submitted into the 
solicited order mechanism (comparable to SAM) do not take into 
account prices of away markets); and Section 13(d) (permissible 
execution prices for orders submitted into the price improvement 
mechanism (comparable to AIM) do not take into account prices of 
away markets).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not:
    A. significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \21\ and 
Rule 19b-4(f)(6) \22\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CBOE-2024-052 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-2024-052. 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-CBOE-2024-052 and should be 
submitted on or before January 2, 2025.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-29147 Filed 12-11-24; 8:45 am]
BILLING CODE 8011-01-P
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