[Federal Register Volume 86, Number 146 (Tuesday, August 3, 2021)]
[Notices]
[Pages 41877-41880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-16456]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92518; File No. SR-CBOE-2021-042]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance 
and Clarify its Price Adjust Process for Certain Market-Maker Interest, 
Specifically Book Only Orders and Bulk Messages Submitted Through Bulk 
Ports and Modify the Bulk Message Fat Finger Check

July 28, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 16, 2021, Cboe Exchange, Inc. (``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission 
(``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 
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 enhance and clarify its Price Adjust process and modify the bulk 
message fat finger check. 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 enhance its Price Adjust (as defined 
below) process for certain Market-Maker interest--specifically Book 
Only \5\ orders and bulk messages \6\ submitted through bulk ports 
\7\--and clarify other parts of that process, as well as modify the 
bulk message fat finger check.
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    \5\ Rule 5.6(c) defines a ``Book Only'' order as an order the 
System ranks and executes pursuant to Rule 5.32, subjects to the 
Price Adjust process pursuant to Rule 5.32, or cancels, as 
applicable (in accordance with User instructions), without routing 
away to another exchange. Users may designate bulk messages as Book 
Only as set forth in Rule 5.5(c).
    \6\ The term ``bulk message'' means a single electronic message 
a User submits with an M Capacity (for the account of a Market-
Maker) to the Exchange in which the User may enter, modify, or 
cancel up to an Exchange-specified number of bids and offers. A User 
may submit a bulk message through a bulk port as set forth in Rule 
5.6(c)(3). The System handles a bulk message bid or offer in the 
same manner as it handles an order or quote unless the Rules specify 
otherwise. See Rule 1.1.
    \7\ A ``bulk port'' is a dedicated logical port that provides 
Users with the ability to submit bulk messages, single orders, and 
auction responses, each subject to certain restrictions. See Rule 
5.5(c)(3).
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    Rule 5.32(b) describes the Price Adjust process, which applies to 
an order by default or not designated as Cancel Back.\8\ The System 
adjusts the price (``Price Adjust'') of an order designated as Price 
Adjust (or an order not designated as Cancel Back) as follows:
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    \8\ Rule 5.6(c) defines a ``Cancel Back'' order as an order 
(including a bulk message) a User designates to not be subject to 
the Price Adjust Process pursuant to Rule 5.32 that the System 
cancels or rejects (immediately at the time the System receives the 
order or upon return to the System after being routed away) if 
displaying the order on the Book would create a violation of Rule 
5.67, or if the order cannot otherwise be executed or displayed in 
the Book at its limit price.

    (A) If a buy (sell) non-all-or-none (``AON'') order at the time 
of entry, would lock or cross:
    (i) A Protected Quotation of another options exchange or the 
Exchange, the System ranks and displays the order at one minimum 
price variation below (above) the current national best offer 
(``NBO'') (national best bid (``NBB''); or
    (ii) the offer (bid) of a sell (buy) AON order resting on the 
Book at or better than the Exchange's best offer (bid), the System 
ranks the resting AON order one minimum price variation above 
(below) the bid (offer) of the non-AON order.
    (B) Incoming AON Orders. If a buy (sell) AON order, at the time 
of entry, would:
    (i) Cross a Protected Offer (Bid) of another options exchange or 
a sell (buy) AON order resting on the Book at or better than the 
Exchange's best offer (bid), the System ranks the incoming AON order 
at a price equal to the Protected Offer (Bid) or the offer (bid) of 
the resting AON order, respectively; or
    (ii) lock or cross a Protected Offer (Bid) of the Exchange, the 
System ranks the incoming AON order at a price one minimum price 
variation below (above) the Protected Offer (Bid).

    This Price Adjust process applies to Book Only orders and bulk 
messages submitted that are designated as Price Adjust (and not 
designated as Cancel Back). Separately, a Book Only order or bulk 
message bid or offer (or unexecuted portion) is rejected if submitted 
by a Market-Maker with an appointment in the class through a bulk port 
if it would execute against a resting offer or bid, respectively with a 
capacity of M. Therefore, if a Book Only bulk message bid of an 
appointed Market-Maker does not execute upon entry and would rest at 
the same price as an offer not represented by a capacity of M, that bid 
price would be adjusted and rest on the book at one minimum price 
variation below the offer. However, if the offer was represented by a 
capacity of M, the System would reject the bid since it may not execute 
against that resting offer.
    The proposed rule change amends the Price Adjust process so that an 
appointed Market-Maker's Book Only bids and offers submitted through a 
bulk port may have the opportunity to rest on the book if they are 
submitted at the same price as the opposite side of the market when 
represented by Market-Maker interest. Specifically, the proposed rule 
change adds

[[Page 41878]]

subparagraph (C) to Rule 5.32(b)(1), which states if the bid (offer) of 
a Book Only buy (sell) non-AON order or bulk message \9\ submitted 
through a bulk port at the time of entry would lock or cross (1) a 
protected offer (bid) of another options exchange \10\ or a resting 
offer (bid) with a Capacity of M, the System ranks and displays the 
order at one minimum price variation below (above) the better of the 
current away best offer (``ABO'') (away best bid (``ABB'')) or resting 
M-Capacity offer (bid); or (2) the offer (bid) of a sell (buy) AON 
order resting on the Book at or better than the Exchange's best offer 
(bid), the System ranks the resting AON order one minimum price 
variation above (below) the bid (offer) of the non-AON order.\11\ This 
will permit appointed Market-Maker orders and quotes submitted through 
bulk ports (the primary purpose of which is to provide liquidity to the 
Book) that are subject to the Price Adjust process (indicating the 
submitting Market-Makers prefer a price adjustment to rejection) so 
their quotes may rest in the Book if they would otherwise lock interest 
against which they could not execute.
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    \9\ The Exchange notes that pursuant to Rule 5.5(c), only 
appointed Market-Makers may submit such orders and bulk messages 
through a bulk port.
    \10\ This is how these orders and messages are currently handled 
pursuant to Rule 5.32(b)(1)(A)(i).
    \11\ This is how these orders and messages are currently handled 
pursuant to Rule 5.32(b)(1)(A)(ii).
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    The proposed rule change makes nonsubstantive changes to current 
Rules 5.32(b)(1)(A) and (B) to set forth to which orders and bulk 
messages the functionality in each subparagraph will apply; the 
proposed rule change has no impact on how the Price Adjust process 
applies to orders and bulk messages other than Book Only orders and 
bulk messages submitted through a bulk port that would otherwise 
execute against resting M-Capacity interest. Similarly, the proposed 
rule change updates Rule 5.32(c)(6) to indicate that provision will 
only apply to Cancel Back Book Only orders and bulk messages submitted 
through bulk ports. Book Only orders and bulk messages submitted 
through a bulk port may either be Price Adjust or Cancel Back. As Price 
Adjust Book Only orders and bulk messages submitted through a bulk port 
will be handled as described above if they would execute against 
resting M-Capacity interest, this provision will now only apply to 
Cancel Back Book Only bulk messages and orders submitted through bulk 
ports.\12\
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    \12\ The proposed rule change also clarifies in Rule 5.32(c)(6) 
that it applies if the incoming order or bulk message would execute 
against or lock resting M-Capacity interest. It is possible a Cancel 
Back Book Only order or bulk message may otherwise not execute 
against resting M-Capacity interest but would instead lock that 
interest if it rested in the book, so the System would reject that 
order or bulk message to prevent the dissemination of a locked 
market.
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    The proposed rule change also clarifies in Rule 5.32(b)(1) that the 
Price Adjust process applies to an order or remaining portion that does 
not execute upon entry. This is consistent with current functionality, 
as Price Adjust orders may execute upon entry against resting 
interest--the price adjustment applies only to permit any remaining 
interest from an incoming order to rest at a price that would not lock 
or cross opposite side interest in accordance with the linkage plan.
    Additionally, Rule 5.32(b)(2) provides that if the circumstances 
that caused the System to adjust the price of an order pursuant to 
subparagraph (b)(1) change so that it would not lock or cross, as 
applicable, a Protection Quotation or an AON resting on the Book at a 
price at or better than the BBO,\13\ the System gives the Price Adjust 
order a new timestamp. Currently, the rule states the System ranks or 
displays the order at a price that locks or is one minimum price 
variation away from the new Protection Quotation or AON resting on the 
Book at or better than the BBO, as applicable. Pursuant to current 
subparagraph (3), the System adjusts the ranked and displayed price of 
an order subject to Price Adjust once or multiple times depending upon 
the User's instructions and changes to the prevailing NBBO. The 
proposed rule change deletes this subparagraph (3) and moves the 
concept of single or multiple price adjust to subparagraph (2).\14\ The 
proposed rule change clarifies how each of single price adjust and 
multiple price adjust currently function. Specifically, if a User 
designated an order as eligible for single price adjust, the System 
ranks and displays the order at the price of the Protected Quotation 
that was present in the Book at the time of order entry. That is the 
price at which the Price Adjust order would have entered the Book but 
for the presence of that Protected Quotation.
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    \13\ The Exchange notes that a change in the BBO would include a 
change in M-Capacity interest resting at the top of the Book that 
caused a Book Only bulk message or order to have its price adjusted.
    \14\ The proposed rule change also moves the latter part of 
current subparagraph (2) regarding the priority of re-ranked and re-
displayed Price Adjust orders to proposed subparagraph (3).
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    Additionally, the proposed rule change clarifies that bulk message 
bids and offers are only subject to single price adjust. The Exchange 
understands that Market-Makers' automated quote streaming systems 
review their resting interest when the markets change and update as 
appropriate in accordance with their business and risk models. 
Therefore, the Exchange does not believe it is necessary for it also to 
review resting Market-Maker interest continuously and reprice as the 
market changes. The proposed rule change amends proposed subparagraph 
(2)(B) to indicate it applies to orders designated as multiple price 
adjust, and specifies the repricing described in that paragraph may 
occur multiple times as the opposite side of the NBBO changes (up to 
the order's limit price). The proposed rule change has no impact on how 
the System handles order and bulk messages subject to single or 
multiple price adjust; it rather more accurately describes this 
process. The proposed rule change also amends this provision to reflect 
that a Price Adjust bulk message may be re-priced upon entry due to the 
presence of opposite side M Capacity interest (rather than rejected in 
accordance with current functionality).
    With respect to multiple price adjust functionality, the proposed 
rule change clarifies that the price at which the System reprices an 
order is the ranked and displayed price (rather than or), which is 
consistent with the remainder of paragraph (b). Price Adjust orders are 
always ranked and displayed at the same price. Additionally, the 
proposed rule change deletes the concept of the new price locking a new 
Protected Quotation, as the new price will always be one minimum price 
variation away to be consistent with linkage rules. Finally, the 
proposed rule change deletes the concept of repricing a Price Adjust 
order based on the presence of an AON order. As set forth in Rule 
5.32(b)(1), if an incoming order would lock the price of an AON resting 
on the book, the System reprices the AON rather than the incoming 
order. Therefore, if the AON is no longer in the book, there would be 
no reason to reprice the other order, making the reference to AON in 
subparagraph (2) regarding repricing is unnecessary.
    Finally, the proposed rule change enhances the bulk message fat 
finger check set forth in Rule 5.34(a)(5). In accordance with the fat 
finger check, the System cancels or rejects any bulk message bid 
(offer) above (below) the NOB [sic] (NBB) by more than a specified 
amount determined by the Exchange.\15\ The proposed rule change 
indicates that the Exchange may also determine a minimum and maximum 
dollar value for the bulk message fat

[[Page 41879]]

finger check.\16\ The Exchange believes Market-Makers may be willing to 
accept an execution at a price beyond the NBBO at the time of order 
entry, but not too far away. The purpose of the fat finger check is 
intended to reject bulk message bids and offers that on their face are 
likely to be entered at erroneous prices and thus prevent potentially 
erroneous executions. The proposed rule change to permit the Exchange 
to set a minimum and maximum value will provide the Exchange with the 
opportunity to set a meaningful buffer that is not ``too close'' to the 
NBBO (in other words, a de minimis buffer) but not ``too far'' from the 
NBBO (in other words, a buffer that is more likely to accept 
erroneously priced bulk messages). The proposed rule change also 
permits the Exchange to set the relevant amounts for the bulk message 
fat finger check on a class-by-class basis. Option classes have 
different characteristics and trading models, and the proposed 
flexibility will permit the Exchange to apply different parameters to 
address those differences.
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    \15\ This check does not apply to bulk messages submitted prior 
to the conclusion of the opening process or when no NBBO is 
available.
    \16\ The proposed rule change also makes a nonsubstantive change 
to say the System cancels or rejects any bulk message bid (offer) 
more than a buffer amount above (below) the NBO (NBB) to align the 
language with other rules.
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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.\17\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ 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) \19\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ Id.
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    In particular, the proposed rule change to enhance the Price Adjust 
process to adjust the price of Book Only orders and bulk messages 
submitted by Market-Makers through bulk ports will remove impediments 
to and perfect the mechanism of a free and open market. Market-Makers 
that have elected to have their bulk port interest subject to the Price 
Adjust process have indicated their desire to have the prices of that 
interest adjusted rather than have the System reject that interest. The 
proposed rule change is consistent with that election and will cause 
such interest to be repriced rather than rejected in a situation--when 
it would otherwise execute or lock against other M-Capacity interest--
in addition to locking an away market. Therefore, the proposed rule 
change will permit additional Market-Maker interest to enter the book 
rather than be rejected. This additional liquidity may increase 
execution opportunities and tighten spreads, which ultimately benefits 
all investors.
    The Exchange also believes the proposed rule change to codify that 
bulk message bids and offers may only be subject to single price adjust 
will benefit investors by adding transparency to the Rules. The 
Exchange understands that Market-Makers' automated quote streaming 
systems review their resting interest when the markets change and 
update as appropriate in accordance with their business and risk 
models. Therefore, the Exchange does not believe it is necessary for it 
also to review resting Market-Maker interest continuously and reprice 
as the market changes.
    In addition, the Exchange believes the proposed change to the bulk 
message fat finger check will protect investors and the public interest 
as the check will continue to mitigate potential risks associated with 
Market-Makers submitting bulk message bids and offers at unintended 
prices, and risks associated with orders and quotes trading at prices 
that are extreme and potentially erroneous, which may likely have 
resulted from human or operational error. The proposed enhancement that 
the Exchange will apply a minimum and maximum to the fat finger check 
will permit the Exchange to apply the fat finger check to bulk messages 
in a more meaningful way. The Exchange believes class flexibility is 
appropriate to permit the Exchange to apply reasonable buffers to 
classes, which may exhibit different trading characteristics and have 
different market models. The Exchange has other price checks and risk 
controls that permit it to set a minimum and maximum, as well as apply 
parameters on a class basis.\20\
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    \20\ See, e.g., Rule 5.34(a)(2) (market order NBBO width 
protection).
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    The proposed nonsubstantive and clarifying changes will protect 
investors by adding transparency to the Rules.

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, as the proposed changes will apply in the same manner to 
all Book Only orders and bulk messages submitted through a bulk port. 
The proposed rule change to codify that bulk messages will only be 
subject to single price adjust is appropriate given that Market-Makers' 
automated quote streaming systems review their resting interest when 
the markets change and update as appropriate in accordance with their 
business and risk models. Therefore, the Exchange does not believe it 
is necessary for it also to review resting Market-Maker interest 
continuously and reprice as the market changes. The Exchange does not 
believe the proposed rule change will impose any burden on intermarket 
competition, as the proposed rule change applies to functionality that 
applies to incoming interest that may only rest or execute on the 
Exchange's book.

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

[[Page 41880]]

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

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#087a7d646d256b6765656d667c7b487b6d6b266f677e"><span class="__cf_email__" data-cfemail="740601181159171b1919111a0007340711175a131b02">[email protected]</span></a>. Please include 
File Number SR-CBOE-2021-042 on the subject line.

Paper Comments

    <bullet> 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-2021-042. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2021-042 and should be submitted on 
or before August 24, 2021.
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    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-16456 Filed 8-2-21; 8:45 am]
BILLING CODE 8011-01-P


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