Document ID: SEC-2022-0230-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2022-02-15T05:00Z

[Federal Register Volume 87, Number 31 (Tuesday, February 15, 2022)]
[Notices]
[Pages 8625-8628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03142]

[[Page 8625]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94204; File No. SR-CBOE-2021-046]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Amend Cboe 
Rule 5.4 and Make Corresponding Changes to Other Rules

February 9, 2022.

I. Introduction

    On August 6, 2021, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') 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 allow all complex orders to be quoted and 
executed in $0.01 increments and to allow complex orders with any ratio 
equal to or greater than one-to-three and less than or equal to three-
to-one to trade electronically.\3\ The proposed rule change was 
published for comment in the Federal Register on August 25, 2021.\4\ 
The Commission received two comment letters regarding the proposal.\5\ 
Cboe responded to the comments on September 23, 2021.\6\ On September 
28, 2021, pursuant to Section 19(b)(2) of the Act,\7\ 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 approve or disapprove the proposed rule 
change.\8\ On November 1, 2021, the Exchange filed Amendment No. 1 to 
the proposed rule change.\9\ The Commission is publishing this notice 
to solicit comment on Amendment No. 1 and is approving the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``complex order'' means an order involving the 
concurrent execution of two or more different series in the same 
underlying security or index (the ``legs'' or ``components'' of the 
complex order), for the same account, occurring at or near the same 
time and for the purpose of executing a particular investment 
strategy with no more than the applicable number of legs (which 
number the Exchange determines on a class-by-class basis). The 
Exchange determines in which classes complex orders are eligible for 
processing. Unless the context otherwise requires, the term complex 
order includes stock-option orders and security future-option 
orders. For purposes of Exchange Rules 5.33 and 5.85(b)(1), the term 
``complex order'' means a complex order with any ratio equal to or 
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00), an Index Combo order, a stock-option order, or a 
security future-option order. For the purpose of applying these 
ratios to complex orders comprised of legs for both mini-options and 
standard options, ten mini-option contracts represent one standard 
option contract. For the purpose of applying these ratios to complex 
orders comprised of legs for both micro-options and standard 
options, 100 micro-option contracts represent one standard option 
contract. See Exchange Rule 1.1.
    \4\ See Securities Exchange Act Release No. 92709 (August 19, 
2021), 86 FR 47529 (``Notice'').
    \5\ See letter to Vanessa Countryman, Secretary, Commission, 
from Alanna Barton, General Counsel, BOX Exchange LLC, dated 
September 14, 2021 (``BOX Letter''); and letter from Mary Smith, 
dated August 19, 2021 (``Smith Letter''). Comments received 
regarding the proposal are available on the Commission's website at: 
https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm.
    \6\ See letter to Vanessa Countryman, Secretary, Commission, 
from Laura G. Dickman, Vice President and Associate General Counsel, 
Cboe Options, dated September 23, 2021 (``Exchange Response''). The 
Exchange Response is available on the Commission's website at: 
https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm.
    \7\ 15 U.S.C. 78s(b)(2).
    \8\ See Securities Exchange Act Release No. 93159 (September 28, 
2021), 86 FR 54780 (October 4, 2021). The Commission designated 
November 23, 2021, as the date by which the Commission shall approve 
or disapprove, or institute proceedings to determine whether to 
approve or disapprove, the proposed rule change.
    \9\ Amendment No. 1 revises the proposal to provide rationale 
for allowing complex orders with any ratio equal to or greater than 
one-to-three and less than or equal to three-to-one to trade 
electronically; provide data indicating that in August 2021, fewer 
than one third of the complex orders executed on the Exchange's 
trading floor had ratios of greater than three-to-one, so the 
significant majority of the approximately 25% of total executed non-
SPX contracts (approximately 27% of total executed contracts) traded 
during that time would have been eligible to execute in $0.01 
increments; and express the view that the rules of another options 
exchange do not clearly specify the minimum trading increment 
applicable to complex orders traded on that exchange's trading 
floor. Amendment No. 1 is available on the Commission's website at 
https://www.sec.gov/comments/sr-cboe-2021-046/srcboe2021046.htm.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    Currently, Exchange Rule 5.4 provides that, except as provided in 
Exchange Rule 5.33, the minimum increment for bids and offers on 
complex orders with any ratio equal to or greater than one-to-three and 
less than or equal to three-to-one for equity and index options, and 
Index Combo orders, is $0.01 or greater, which the Exchange may 
determine on a class-by-class basis, and the legs may be executed in 
$0.01 increments. The rule further provides that the minimum increment 
for bids and offers on complex orders with any ratio less than one-to-
three or greater than three-to-one for equity and index options (except 
for Index Combo orders) is the standard increment for the class 
pursuant to Exchange Rule 5.4(a), and the legs may be executed in the 
minimum increment applicable to the class pursuant to Exchange Rule 
5.4(a).\10\ The Exchange proposes to amend Exchange Rule 5.4(a) to 
allow complex orders with any ratio to be quoted in increments of $0.01 
or greater, as determined by the Exchange on a class-by-class basis, 
and executed in $0.01 increments.
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    \10\ The minimum increment for bids and offers on complex orders 
in options on the S&P 500 Index (SPX) or on the S&P 100 Index (OEX 
and XEO), except for box/roll spreads, is $0.05 or greater, or any 
increment, which the Exchange may be determine on a class-by-class 
basis. See Exchange Rule 5.4(a).
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    The Exchange states that if complex orders cannot be expressed in 
increments smaller than the increment for the class (such as $0.05), it 
may be difficult for brokers to obtain the desired prices for their 
customers' complex orders because the parties to a trade must perform 
complicated and time-consuming calculations to break down the orders 
into the required contract quantities and prices to fit within the 
constraint of executing the orders at a minimum increment other than 
$0.01.\11\ In addition, the Exchange notes that the calculation process 
for larger-ratio complex orders is time-consuming because these orders 
generally are entered in large quantities with a large number of 
legs.\12\ As a result, brokers executing larger-ratio complex orders on 
active trading days cannot be as efficient in representing other 
customer orders they are holding.\13\ The Exchange states that the 
proposal to allow larger-ratio complex orders to be quoted and executed 
in $0.01 increments will provide market participants with flexibility 
in pricing their investment strategies and allow Trading Permit Holders 
(``TPHs'') to execute these orders more efficiently and at better 
prices for their customers.\14\
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    \11\ See Notice, 86 FR at 47530.
    \12\ See Exchange Response at 4.
    \13\ See Notice, 86 FR at 47530.
    \14\ See id. at 47530-1.
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    The proposal does not extend the complex order priority provisions 
applicable to complex orders with any ratio equal to or greater than 
one-to-three and less than or equal to three-to-one to complex orders 
with any ratio less than one-to-three or greater than three-to-one.\15\ 
To apply to electronic

[[Page 8626]]

trading the priority provisions that currently apply to floor-traded 
complex orders with any ratio less than one-to-three or greater than 
three-to-one,\16\ the proposal amends Exchange Rule 5.33(f)(2)(A)(v) to 
provide that a complex order that has any ratio less than one-to-three 
or greater than three-to-one will not execute at a net price that would 
cause any component of the complex strategy to be executed at a price 
ahead of a Priority Customer order on the Simple Book \17\ without 
improving the BBO \18\ of each component of the complex strategy with a 
Priority Customer order at the BBO.\19\ As a result, the proposal will 
allow a complex order with any ratio less than one-to-three or greater 
than three-to-one to be executed at a net debit or credit price only if 
each leg of the order betters the corresponding bid (offer) of a 
Priority Customer order(s) in the Simple Book.\20\
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    \15\ See Notice, 86 FR at 47530. Exchange Rule 5.33(f)(2)(A)(v) 
currently provides that the Exchange's system does not execute a 
complex order (i.e., a complex order with any ratio equal to or 
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00)) pursuant to Exchange Rule 5.33 at a net price that would 
cause any component of the complex strategy to be executed at a 
price ahead of a Priority Customer Order resting in the Simple Book 
without improving the BBO of at least one component of the complex 
strategy by at least one minimum increment. Exchange Rule 5.85(b)(1) 
states that a complex order (A) with any ratio equal to or greater 
than one-to-three (.333) and less than or equal to three-to-one 
(3.00) or (B) that is an Index Combo order may be executed at a net 
debit or credit price without giving priority to equivalent bids 
(offers) in the individual series legs that are represented in the 
trading crowd or in the Book if the price of at least one leg of the 
order improves the corresponding bid (offer) of a Priority Customer 
order(s) in the Book by at least one minimum trading increment as 
set forth in Rule 5.4(b). Exchange Rule 5.85(b)(2).
    \16\ See Exchange Rule 5.85(b)(2) (stating that a complex order 
with any ratio less than one-to-three (.333) and greater than three-
to-one (3.00) (except for an Index Combo order) may be executed in 
open outcry on the trading floor at a net debit or credit price 
without giving priority to equivalent bids (offers) in the 
individual series legs that are represented in the trading crowd or 
in the Book if each leg of the order betters the corresponding bid 
(offer) of a Priority Customer order(s) in the Book on each leg by 
at least one minimum trading increment as set forth in Rule 5.4(b)).
    \17\ The Simple Book is the electronic book of simple orders and 
quotes maintained by the System, which single book is used during 
both the Regular Trading Hours and Global Trading Hours trading 
sessions. See Exchange Rule 1.1.
    \18\ The BBO is the best bid or offer disseminated on the 
Exchange.
    \19\ Exchange Rule 5.33(f)(2)(A)(v) will continue to provide 
that a complex order that has any ratio equal to or greater than 
one-to-three and less than or equal to three-to-one, or an Index 
Combo order, will not execute at a net price that would cause any 
component of the complex strategy to be executed at a price ahead of 
a Priority Customer Order on the Simple Book without improving the 
BBO of at least one component of the complex strategy.
    \20\ See Notice, 86 FR at 47530.
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    The Exchange asserts that it is unlikely that market participants 
would submit orders with any ratio equal to or greater than one-to-
three and less than or equal to three-to-one that is not a bona fide 
trading strategy solely for the purpose of trading in $0.01 
increments.\21\ First, the Exchange states that adding an extra leg to 
a large order to be able to improve the book by $0.01 would be 
unnecessary because the order could be executed in an AIM Auction in 
$0.01 increments.\22\ Second, the Exchange states that it is unlikely 
that other market participants would be willing to execute against an 
order that is not a bona fide trading strategy, thereby reducing the 
likelihood that a market participant would be able to execute such a 
strategy.\23\ Third, the Exchange notes that these orders would be 
subject to review by the Exchange's regulatory division, which could 
determine that the submission of such orders was in violation of the 
Exchange's rules, including Exchange Rule 8.1, which prohibits TPHs 
from engaging in acts or practices inconsistent with just and equitable 
principles of trade.\24\
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    \21\ See Notice, 86 FR at 47531.
    \22\ See id.
    \23\ See id.
    \24\ See id.
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    Currently, the Exchange permits complex orders with any ratio less 
than one-to-three or greater than three-to-one to trade only on the 
Exchange's trading floor.\25\ The Exchange proposes to allow these 
orders to be traded electronically, as well as in open outcry.\26\ The 
Exchange states that electronic trading of these larger-ratio complex 
orders will provide investors with additional flexibility in executing 
these orders and will increase the investment strategies available to 
investors who prefer to or solely trade electronically.\27\
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    \25\ See Notice, 86 FR at 47529.
    \26\ See id. at n. 6.
    \27\ See Amendment No. 1 at 5.
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III. Summary of Comments and Exchange's Response

    The Commission received two comment letters regarding the 
proposal.\28\ One commenter stated that the proposal would solely 
benefit high-speed traders and result in worse prices for retail 
traders due to decreased quotes.\29\
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    \28\ See supra note 5.
    \29\ See Smith Letter.
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    The Exchange stated that the proposal is designed to increase the 
efficiency of trading larger-ratio, highly complex orders and is not 
intended to benefit high-speed traders.\30\ The Exchange further stated 
that the proposal has minimal relevance to high-speed traders, who 
generally participate in listed options trading as market makers rather 
than as brokers conducting agency businesses.\31\ The Exchange 
concluded that the proposal ``will have minimal impact on either high-
speed traders or retail traders (or on the simple market), as it is 
intended to increase the efficiency and precision available to brokers 
attempting to execute highly complicated yet bona-fide multi-leg option 
strategies on the Exchange, which strategies are not common among high-
speed traders or retail traders.'' \32\ In addition, the Exchange noted 
that the proposal is unrelated to quoting and that the increased number 
of complex orders that would be eligible for more flexible pricing 
under the proposal could increase the number of complex orders entered 
on the Exchange that may leg into the Simple Book, thereby increasing 
execution opportunities for resting customer orders.\33\
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    \30\ See Exchange Response at 1-2.
    \31\ See id. at 2.
    \32\ Id. at 3-4.
    \33\ See id. at 2.
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    Another commenter stated that, contrary to statements made in the 
proposal, each component leg of s of a multi-leg Qualified Open Outcry 
Order (``QOO'') on the BOX Exchange LLC's (``BOX'') trading floor 
respects the minimum trading increment for the series (e.g., $0.01, 
$0.05, $0.10).\34\ The commenter further stated that multi-leg QOO 
Orders do not meet the definition of Complex QOO Order and are treated 
like single-leg QOO Orders for purposes of execution and priority.\35\
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    \34\ See BOX Letter at 1.
    \35\ See id.
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    In its response, the Exchange stated that multiple TPHs who are 
also members of BOX informed the Exchange that multi-legged orders with 
ratios greater than three-to-one or less than one-to-three are executed 
regularly on BOX's trading floor in penny increments.\36\ The Exchange 
also expressed the view that BOX's rules lack clarity regarding the 
increments applicable to QOO Orders that do not satisfy the definition 
of a complex order in BOX Rule 7240(a)(7).\37\
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    \36\ See Exchange Response at 4.
    \37\ See id. at 4-5. See also Amendment No. 1 at 6-7.
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IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\38\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\39\ which requires, among other things, 
that the rules of a

[[Page 8627]]

national securities exchange be designed to prevent fraudulent and 
manipulative acts and 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, and not be 
designed to permit unfair discrimination between customers, issuers, 
brokers or dealers. The proposal to allow complex orders with a with 
any ratio less than one-to-three or greater than three-to-one to be 
quoted and executed in $0.01 increments could provide market 
participants with flexibility in pricing these orders and allow TPHs to 
execute their customers' orders in these larger-ratio strategies at 
better prices. The proposal to allow complex orders with any ratio less 
than one-to-three or greater than three-to-one to trade electronically 
could provide market participants with flexibility in executing these 
orders by providing an additional means for trading them. The proposal 
will protect the priority of Priority Customer orders resting on the 
Simple Book by requiring each component of a complex order with a ratio 
less than one-to-three or greater than three-to-one to execute at a 
price that improves the BBO of each component of the order with a 
Priority Customer order at the BBO.\40\
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    \38\ 15 U.S.C. 78f(b). 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).
    \39\ 15 U.S.C. 78f(b)(5).
    \40\ See proposed Exchange Rule 5.33(f)(2)(A)(v). This 
requirement is consistent with Exchange Rule 5.85(b)(2), which 
provides that a complex order with any ratio less than one-to-three 
(.333) and greater than three-to-one (3.00) (except for an Index 
Combo order) may be executed in open outcry on the trading floor at 
a net debit or credit price without giving priority to equivalent 
bids (offers) in the individual series legs that are represented in 
the trading crowd or in the Book if each leg of the order betters 
the corresponding bid (offer) of a Priority Customer order(s) in the 
Book on each leg by at least one minimum trading increment as set 
forth in Exchange Rule 5.4(b).
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    The Commission does not believe that the proposal will solely 
benefit high-speed traders and result in worse prices for retail 
traders due to decreased quotes. As noted above, the proposal will 
provide all market participants, including retail customers, with 
greater flexibility both in pricing complex orders with any ratio less 
than one-to-three or greater than three-to-one, and in executing these 
orders, which will be allowed to trade electronically as well as on the 
Exchange's floor. With respect to the second comment letter, the 
Commission notes that in approving this proposal it is not relying on 
statements made in the proposal or in any comment letters regarding 
BOX's trading floor.
    Finally, unlike the trading systems of some options exchanges, 
Cboe's trading system does not generate legging orders on behalf of 
complex orders. A legging order (sometimes called a derived order) is 
an exchange-generated single-leg limit order on the exchange's limit 
order book that represents either the bid or the offer of one component 
of a complex order resting on the exchange's complex order book. In 
general, a legging order is generated at a price: (i) That matches or 
improves upon the best displayed bid or offer on the exchange's single-
leg limit order book; and (ii) at which the net price of the complex 
order can be achieved when the other leg is executed against the best 
displayed bid or offer on the exchange's single-leg limit order 
book.\41\ If an exchange generated legging orders in $0.01 increments 
on behalf of complex orders with any ratio less than one-to-three or 
greater than three-to-one in a class with a standard trading increment 
of $0.05, a complex order priced in a $0.01 increment could generate a 
legging order at a price that would not be available to market 
participants trading single-leg orders.\42\ If an options market that 
generates legging orders in $0.01 increments regardless of the trading 
increment for the class wished to allow complex orders with a ratio 
less than one-to-three or greater than three-to-one to trade in $0.01 
increments, the inability of single-leg orders to compete on a level 
playing field with the legging orders generated on behalf of these 
complex orders could raise regulatory concerns.
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    \41\ See e.g., BOX Rule 7240(c); ISE Rule Options 3, Section 
7(k); and MIAX Rule 518(a)(9).
    \42\ For example, if such an exchange received a complex order 
to buy series A and Series B at a net price of $2.13, and there was 
an order on the exchange's single-leg book to sell series B for 
$1.05, the exchange's system could generate a legging order to sell 
series A for $1.08. If the quoting and trading increment for the 
class is $0.05, then a market participant that entered a single-leg 
order to sell series A would be required to enter its order in a 
pricing increment of $0.05 and would not be able to match, or 
better, the legging order's price by entering its order in a $0.01 
increment.
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V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 is consistent with the 
Act. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2021-046 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-2021-046. 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-2021-046, and should be submitted 
on or before March 8, 2022.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. Amendment No. 1 provides rationale for 
allowing complex orders with any ratio equal to or greater than one-to-
three and less than or equal to three-to-one to trade electronically. 
In addition, Amendment No. 1 provides data indicating that in August 
2021, fewer than one third of the complex orders executed on the 
Exchange's trading floor had ratios of greater than three-to-one, so 
the significant majority of the approximately 25% of total

[[Page 8628]]

executed non-SPX contracts (approximately 27% of total executed 
contracts) traded during that time would have been eligible to execute 
in $0.01 increments. Amendment No. 1 raises no novel regulatory issues 
and provides additional analysis that assists the Commission in 
evaluating the Exchange's proposal and determining that it is 
consistent with the Act. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\43\ to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \43\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-CBOE-2021-046), as modified 
by Amendment No. 1, is approved on an accelerated basis.
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    \44\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03142 Filed 2-14-22; 8:45 am]
BILLING CODE 8011-01-P