Document ID: SEC-2020-0395-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2020-03-19T04:00Z

[Federal Register Volume 85, Number 54 (Thursday, March 19, 2020)]
[Notices]
[Pages 15823-15829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05703]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88386; File No. SR-CBOE-2020-019]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Rule 5.24

March 13, 2020.
    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 March 13, 2020, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ 
and Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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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

    The Exchange proposes to amend Rule 5.24.

(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe Exchange, Inc.

* * * * *

Rule 5.24. Disaster Recovery

    (a)-(d) No change.
    (e) Loss of Trading Floor. If the Exchange trading floor becomes 
inoperable, the Exchange will continue to operate in a screen-based 
only environment using a floorless configuration of the System that 
is operational while the trading floor facility is inoperable. The 
Exchange will operate using this configuration only until the 
Exchange's trading floor facility is operational. Open outcry 
trading will not be available in the event the trading floor becomes 
inoperable, except in accordance with paragraph (2) below and 
pursuant to Rule 5.26, as applicable.
    (1) Applicable Rules. In the event that the trading floor 
becomes inoperable, trading will be conducted pursuant to all 
applicable System Rules, except that open outcry Rules will not be 
in force, including but not limited to the Rules (or applicable 
portions of the Rules) in Chapter 5, Section G, and as follows 
(subparagraphs (A) through (C) will until May 15, 2020):[.]
    (A) notwithstanding the introductory paragraphs of Rules 5.37 
and 5.73, an order for the account of a Market-Maker with an 
appointment in the applicable class on the Exchange may be solicited 
for the Initiating Order submitted for execution against an Agency 
Order in any exclusively listed index option class into a simple AIM 
Auction pursuant to Rule 5.37 or a simple FLEX AIM Auction pursuant 
to Rule 5.73;
    (B) with respect to complex orders in any exclusively listed 
index option class:
    (1) notwithstanding Rule 5.4(b), the minimum increment for bids 
and offers on complex orders with any ratio equal to or greater than 
one-to-twenty-five (0.04) and equal to or less than twenty-five-to-
one (25.00) is $0.01 or greater, which may be determined by the 
Exchange on a class-by-class basis, and the legs may be executed in 
$0.01 increments; and

[[Page 15824]]

    (2) notwithstanding the definition of ``complex order'' in Rule 
1.1, for purposes of Rule 5.33, the term ``complex order'' means a 
complex order with any ratio equal to or greater than one-to-twenty-
five (0.04) and equal to or less than twenty-five-to-one (25.00); 
and
    (3) the contract volume a Market-Maker trades electronically 
during a time period in which the Exchange operates in a screen-
based only environment will be excluded from determination of 
whether a Market-Maker executes more than 20% of its contract volume 
electronically in an appointed class during any calendar quarter, 
and thus is subject to the continuous electronic quoting obligation, 
as set forth in Rule 5.52(d).
    All non-trading rules of the Exchange will continue to apply.
* * * * *
    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 Rule 5.24 regarding the Exchange's 
business continuity and disaster recovery plans. Rule 5.24 describes 
which Trading Permit Holders (``TPHs'') are required to connect to the 
Exchange's backup systems as well as certain actions the Exchange may 
take as part of its business continuity plans so that it may maintain 
fair and orderly markets if unusual circumstances occurred that could 
impact the Exchange's ability to conduct business. This includes what 
actions the Exchange would take if its trading floor became inoperable. 
Specifically, Rule 5.24(d) states if the Exchange trading floor becomes 
inoperable, the Exchange will continue to operate in a screen-based 
only environment using a floorless configuration of the System that is 
operational while the trading floor facility is inoperable. The 
Exchange would operate using that configuration only until the 
Exchange's trading floor facility became operational. Open outcry 
trading would not be available in the event the trading floor becomes 
inoperable.\5\ Rule 5.24(e)(1) also currently states in the event that 
the trading floor becomes inoperable, trading will be conducted 
pursuant to all applicable System Rules, except that open outcry Rules 
would not be in force, including but not limited to the Rules (or 
applicable portions) in Chapter 5, Section G,\6\ and that all non-
trading rules of the Exchange would continue to apply.
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    \5\ Pursuant to Rule 5.26, the Exchange may enter into a back-up 
trading arrangement with another exchange, which could allow the 
Exchange to use the facilities of a back-up exchange to conduct 
trading of certain of its products. The Exchange currently has no 
back-up trading arrangement in place with another exchange.
    \6\ Chapter 5, Section G of the Exchange's rulebook sets forth 
the rules and procedures for manual order handling and open outcry 
trading on the Exchange.
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    The Exchange has been closely monitoring the current situation 
regarding the novel coronavirus, and has reviewed its pandemic planning 
procedures in connection with this situation. While the Exchange's 
trading floor is currently operating normally, the Exchange proposes 
certain amendments to Rule 5.24, which the Exchange believes are 
necessary to maintain a fair and orderly market in the event the 
Exchange suspended open outcry trading. Specifically, the proposed rule 
change amends Rule 5.24(e)(1) to provide that, in the event that the 
trading floor becomes inoperable, trading will be conducted pursuant to 
all applicable System Rules, except that open outcry Rules will not be 
in force, including but not limited to the Rules (or applicable 
portions of the Rules) in Chapter 5, Section G, and as follows:

    (1) Notwithstanding the introductory paragraphs of Rules 5.37 
and 5.73,\7\ an order for the account of a Market-Maker with an 
appointment in the applicable class on the Exchange may be solicited 
for the Initiating Order submitted for execution against an Agency 
Order in any exclusively listed index option class into a simple AIM 
Auction pursuant to Rule 5.37 or a simple FLEX AIM Auction pursuant 
to Rule 5.73;
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    \7\ Rules 5.37 and 5.73 describe the Exchange's automatic 
improvement mechanism (``AIM'') for simple orders in non-flexible 
options and in flexible options (``FLEX Options''), respectively.
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    (2) with respect to complex orders in exclusively listed index 
option classes:
    (a) Notwithstanding Rule 5.4(b), the minimum increment for bids 
and offers on complex orders with any ratio equal to or greater than 
one-to-twenty-five (0.04) and equal to or less than twenty-five-to-
one (25.00) is $0.01 or greater, which may be determined by the 
Exchange on a class-by-class basis, and the legs may be executed in 
$0.01 increments;
    (b) notwithstanding the definition of ``complex order'' in Rule 
1.1, for purposes of Rule 5.33, the term ``complex order'' means a 
complex order with any ratio equal to or greater than one-to-twenty-
five (0.04) and equal to or less than twenty-five-to-one (25.00); 
and
    (3) the contract volume a Market-Maker trades electronically 
during a time period in which the Exchange operates in a screen-
based only environment will be excluded from determination of 
whether a Market-Maker executes more than 20% of its contract volume 
electronically in an appointed class during any calendar quarter, 
and thus is subject to the continuous electronic quoting obligation, 
as set forth in Rule 5.52(d).\8\
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    \8\ As proposed, these changes would be in place for 
approximately nine weeks (through May 15, 2020). In the event the 
trading floor becomes inoperable during that timeframe, the Exchange 
would monitor electronic trading given these proposed changes. If 
the trading floor is inoperable beyond May 15, 2020, based on that 
review, the Exchange may submit a separate rule filing to extend the 
effectiveness of these rules.

    The Exchange believes the proposed rule change will allow it to 
maintain fair and orderly markets and facilitate trading in as 
continuous manner as possible in the event extraordinary circumstances 
cause the trading floor to become inoperable. These proposed changes 
would apply only during times when the Exchange's trading floor was 
inoperable. The current Rules would continue to apply when normal 
conditions exist, and the Exchange offers both electronic and open 
outcry trading. All non-trading rules of the Exchange, including 
business conduct rules, would continue to apply.
    The Exchange first proposes to permit Market-Makers with an 
appointment in the applicable class to be solicited for the Initiating 
Order submitted for execution against an Agency Order in a proprietary 
index option class into an AIM Auction pursuant to Rule 5.37 or a 
simple FLEX AIM Auction pursuant to Rule 5.73. Currently, the 
introductory paragraphs of Rules 5.37 and 5.73 prohibit Market-Makers 
with an appointment in the applicable class from being solicited to 
execute against the Agency Order in an AIM or simple FLEX AIM Auction, 
respectively. No similar restriction applies to crossing transactions 
in open outcry trading. Brokers seeking liquidity to execute against 
customer orders, particularly large customer orders, on the trading 
floor regularly solicit Market-Makers with an appointment in the 
applicable

[[Page 15825]]

class for this liquidity, as they are generally the primary source of 
liquidity in a class. For example, during the last week of February 
2020, over 70% of open outcry trades (consisting of over 50% of open 
outcry volume) in exclusively listed index options included a Market-
Maker on one side of an open outcry crossing transaction that occurred 
on the Exchange's trading floor. The Exchange believes it will be 
necessary and appropriate to permit Market-Makers to be solicited for 
electronic crossing transactions in its exclusively listed index 
options if the Exchange's trading floor was inoperable, as it will help 
ensure the same sources of liquidity for customer orders that currently 
execute in open outcry will continue to be available for these orders 
in an electronic-only environment. If this restriction were to remain 
in place while the trading floor was inoperable, the Exchange believes 
there would be a risk that brokers may have difficulty finding 
sufficient liquidity to fill their customer orders that may currently 
be traded against orders from solicited Market-Makers appointed in the 
applicable class. For example, when operating normally, if a customer 
order is not fully executable against electronic bids and offers, a 
floor broker can attempt to execute the order, or remainder thereof, on 
the trading floor, where the liquidity to trade with this remainder is 
generally provided by Market-Makers in the open outcry trading crowd. 
Additionally, brokers may solicit liquidity from upstairs Market-Maker 
firms. If the trading floor is inoperable, without the proposed rule 
change, this liquidity would not be available, which could 
significantly reduce execution opportunities for such orders and have 
potentially negative impact on the prices at which customer orders 
could be executed.
    The second proposed change would permit complex orders in 
exclusively listed index options with any ratio up to a ratio of up to 
25-to-1 to execute electronically and be eligible for certain complex 
order benefits. Currently, the Exchange's System does not accept 
complex orders with a ratio of less than one-to-three or greater than 
three-to-one for electronic processing.\9\ Pursuant to Rules 5.4(b) and 
5.33(f)(1)(A), 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 is $0.01 or greater, which may be 
determined by the Exchange on a class-by-class basis, and the legs may 
be executed in $0.01 increments. Pursuant to Rule 5.33(f)(2)(A), a 
complex order my not execute at a net price (1) that would cause any 
component of the complex strategy to be executed at a price of zero; 
(2) worse than the synthetic best bid or offer (``SBBO'') or equal to 
the SBBO when there is a priority customer order at the SBBO; \10\ (3) 
that would cause any component of the complex strategy to be executed 
at a price worse than the individual component prices on the simple 
book; (4) worse than the price that would be available if the complex 
order legged into the simple book; or (5) 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 best 
bid or offer (``BBO'') of at least one component of the complex 
strategy.
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    \9\ See Rules 1.1 and 5.33(a) (definition of complex order).
    \10\ All-or-none complex orders may only execute at prices 
better than the SBBO.
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    The Exchange currently accepts complex orders in any class with 
ratios less than one-to-three and greater than three-to-one for manual 
handling and open outcry execution.\11\ Rule 5.4(b) 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 is the standard 
increment for the class (pursuant to Rule 5.4(a)), and the legs may be 
executed in the minimum increment applicable to the class. Pursuant to 
Rule 5.85(b), a complex order with any ratio greater than or equal to 
one-to-three or less than or equal to three-to-one 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 in the book by at least one minimum trading increment as set 
forth in Rule 5.4(b) (which complex order priority is similar to the 
priority afforded to electronic complex orders pursuant to Rule 
5.34(f)(2) as described above). A complex order with any ratio less 
than one-to-three and greater than three-to-one 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 in the book on each leg by at least one minimum trading 
increment as set forth in Rule 5.4(b).
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    \11\ See Rules 1.1 and 5.83(b).
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    If the Exchange's trading floor was inoperable, under current 
Rules, there would be no opportunity for complex orders in exclusively 
listed index options with ratios greater than three-to-one and less 
than or equal to 25-to-1 to execute on the Exchange. During the last 
week of February 2020, there were over 4,000 complex orders in those 
classes with such ratios that executed on the trading floor,\12\ for 
nearly 4,500,000 contracts across those classes. This represents nearly 
40% of contract volume of all complex orders executed on the trading 
floor that week. Given the significant volume represented by these 
complex orders, the Exchange believes it is appropriate to make 
electronic processing available to these orders if the trading floor 
were to become unavailable. Complex orders with ratios of greater than 
three-to-one and less than 25-to-1 submitted for electronic processing 
will receive the complex order benefits described above currently 
available to complex orders with a ratio less than or equal to three-
to-one, as the System is currently unable to handle complex orders with 
different ratios in separate manners. The Exchange has observed that 
many of the complex strategies submitted for execution in the 
Exchange's exclusively listed index options are ``delta neutral,'' 
often hedged with a ``combo'' of other SPX options (which is a 
synthetic future). A ratio of 25:1 will permit customers to continue to 
submit hedged orders of 4-delta options while the Exchange operates in 
an all-electronic environment. The Exchange has also reviewed recent 
data, which demonstrates that while there are a significant number of 
contracts that execute as part of orders with ratios greater than 25-
to-1, the Exchange believes a maximum ratio of 25-to-1 will permit the 
majority of transactions with ratios greater than 3-to-1 in exclusively 
listed index options to execute in an all-electronic environment if the 
trading floor inoperable. Unlike in open outcry trading, the parties to 
an electronic complex order trade compete only with respect to the net 
price and are not able to negotiate the leg prices to ensure the legs 
trade in the standard increment, as the System determines the price of 
these legs using $0.01 increments.
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    \12\ The Exchange notes there were 727 trades consisted of 
complex orders in these classes with ratios greater than 25-to-1, 
which will not be permitted to trade electronically pursuant to this 
proposed rule change.
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    It is possible to modify the System to require complex orders with 
ratios greater than three-to-one to trade pursuant to an allocation 
algorithm and increment consistent with what is currently required in 
open outcry

[[Page 15826]]

trading for these orders. However, the Exchange has determined it would 
be a multi-month project given the necessary resources and testing to 
modify the System in this manner. Given the proposed rule change would 
only apply in unlikely, extraordinary circumstances that caused the 
trading floor to be inoperable, and only temporarily, the Exchange does 
not believe it is appropriate to expend the resources and take on 
additional system risk associated with such a change.\13\ The Exchange 
has determined this change to be necessary and appropriate to permit 
the uninterrupted trading of complex orders with larger ratios and 
legitimate investment strategies that are regularly executed on the 
Exchange's trading floor, and thus maintain a fair and orderly market 
in the event of an inoperable trading floor.
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    \13\ If the trading floor became inoperable for a significant 
period of time, the Exchange would consider implementing the change 
or would submit a rule filing to allow the proposed rule change to 
apply in all circumstances rather than only when the trading floor 
is inoperable.
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    The Exchange understands that the simple order market may be 
somehow disadvantaged by allowing certain multi-legged orders that have 
ratios larger than three-to-one to receive the complex order benefits 
described above. One concern appears to be that if the ratios are too 
greatly expanded, market participants will, for example, enter multi-
legged strategies designed primarily to gain priority over orders on 
the limit order book or in the trading crowd, rather than to effectuate 
a bona fide trading or hedging strategy. Since the Exchange is 
proposing to permit complex orders with ratios no greater than 25-to-1 
to be electronically processed if the trading floor were inoperable, 
similar to the practice today, this will be systematically enforced for 
electronic trading.
    Additionally, the Exchange understands that permitting more complex 
orders to avail themselves of the complex order priority currently only 
available to complex orders with ratios less than or equal to three-to-
one may result in more legs trading at the same price as resting 
priority customer orders. As noted above, the System will not execute 
any complex order, regardless of ratio, at a price that would cause a 
component of the complex strategy to trade at a price ahead of a 
priority customer order on the book without improving the BBO of at 
least one component. While the proposed rule change may result in legs 
of more complex orders trading at the same price as resting priority 
customer orders, the Exchange believes priority customer orders are 
resting on the simple book at the BBO a minimal amount of the time, 
thus making this risk de minimis. The Exchange notes that during the 
last week of February 2020, across all classes, approximately 84% of 
contracts executed as parts of complex trades occurred inside the BBO 
for the applicable legs. This includes orders with ratios equal to 
three-to-one or less, which would only have to improve the BBO of one 
leg if there was a priority customer order resting at the BBO in the 
complex strategy. In other words, the vast majority of legs executed as 
part of complex trades execute at a price better than the BBO of the 
applicable leg, and thus at a price better than required by the rules. 
The Exchange believes this further demonstrates the likely de minimis 
nature of the perceived risk.
    Based on the number of orders submitted to, and trades that occur 
on, the trading floor, the Exchange believes it has sufficient system 
capacity to handle any additional traffic that may result from the 
proposed rule change during a time when the trading floor is 
inoperable. The Exchange's Regulatory Division will continue its 
standard routine surveillance reviews for electronic trading as it does 
today, and has put together a regulatory plan to surveil the additional 
changes being proposed when operating in a screen-based only 
environment.
    Cboe Options (and its designated TPHs pursuant to Rule 5.24) 
participates in the annual Reg SCI/SIFMA BCP test from its disaster 
recovery data center in accordance with Rule 1004 under Regulation SCI. 
Additionally, Cboe Options conducted an internal test (in which no TPHs 
participated) of an all-electronic configuration in preparation for the 
October 2019 System migration. The Exchange recently made available 
testing of the all-electronic configuration in a certification 
environment beginning Thursday, March 12, 2020, and plans to provide 
customers with a testing opportunity of the all-electronic 
configuration on Saturday, March 14, 2020. At least seven TPHs have 
submitted orders into this certification environment as of the time of 
this rule filing.
    The third proposed change would exclude any contract volume by a 
Market-Maker during a time when the Exchange's trading floor was 
inoperable from the determination of whether the Market-Maker would be 
subject to continuous quoting obligations in Rule 5.52(d). Currently, 
if a Market-Maker executes more than 20% of its contract volume 
electronically during a calendar quarter, it is obligated to quote 
electronically in a designated percentage of series within that class 
for a designated percentage of time. Once a Market-Maker becomes 
subject to that continuous electronic quoting obligation, the Market-
Maker will continue to be subject to it, even if there is a subsequent 
calendar quarter in which it executes less than 20% of its contract 
volume electronically. While most Market-Makers are currently subject 
to that continuous electronic quoting obligation, there are certain 
Market-Makers who execute at least 80% of their contract volume in open 
outcry. If the trading floor were inoperable, those Market-Makers would 
execute a larger percentage of their contract volume electronically as 
a result. Depending on the length of time for which the trading floor 
were inoperable, it is possible those Market-Makers would exceed that 
20% threshold, which would subject them to continuous electronic 
quoting obligations beginning the following calendar quarter (even if 
open outcry trading has resumed). The Exchange believes it would be 
unduly burdensome to subject a Market-Maker to additional obligations 
because of the unavailability of the Exchange facility where that 
Market-Maker conducts most of its business under normal trading 
circumstances, including after the extraordinary circumstances that 
caused the suspension of open outcry trading no longer exist.
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.\14\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \15\ 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) \16\ requirement that

[[Page 15827]]

the rules of an exchange not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, the Exchange believes the proposed rule change 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 creating an all-electronic trading 
environment that permits continued trading in an uninterrupted manner 
as much as practicable if extraordinary circumstances cause the trading 
floor to become inoperable. The Exchange believes the proposed rule 
change will create an all-electronic trading environment similar to the 
otherwise unavailable open outcry trading environment. The Exchange 
believes the proposed rule change is necessary and appropriate to 
provide continued execution opportunities in such a situation for 
orders that generally execute in open outcry trading.
    With respect to the proposed rule change to permit appointed 
Market-Makers to be solicited to trade against an Agency Order 
submitted into a simple AIM Auction (both for FLEX and non-FLEX Options 
in exclusively listed index option classes), the majority of liquidity 
provided to orders executed as part of an open outcry cross is provided 
by appointed Market-Makers. If this liquidity was not available to TPHs 
in an all-electronic environment, there would be significant risk that 
these orders may not receive full execution in a timely manner (or at 
all), and may trade at worse prices than would have otherwise been 
available on the trading floor. The Exchange believes this proposed 
rule change will minimize this risk and provide electronic execution 
and price improvement opportunities for these orders, similar to the 
opportunities that are generally available to them on the trading 
floor, which protects customers seeking execution of these orders. As 
set forth in the Rules, all TPHs may submit responses to AIM Auctions, 
all Agency Orders will continue to have an opportunity for price 
improvement, and priority customer orders will continue to have 
priority at each price level.
    The Exchange believes the proposed rule change to permit complex 
orders with ratios greater than three-to-one and less than or equal to 
25-to-one to execute electronically and receive complex order benefits 
otherwise provided to complex orders with ratios less than or equal to 
three-to-one will also 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. As discussed above, 
the System is currently unable to apply a different allocation 
algorithm and increment to complex orders with different ratios, and 
would need a significant amount of time and resources to do so. Given 
that significant contract volume executes on the trading floor as part 
of complex trades with ratios greater than three-to-one as part of 
their investment and hedging strategies, the Exchange believes it will 
protect investors looking to execute those orders as part of their 
overall strategies to provide electronic execution opportunities during 
a time when the trading floor is not available. As noted above, the 
complex order priority that would apply to these complex orders with 
larger ratios would be the same as the priority applied today to 
complex orders with ratios no greater than three-to-one, which the 
Exchange believes will continue to protect customers. Since the 
Exchange is proposing to permit complex orders with ratios no greater 
than 25-to-1 to be electronically processed if the trading floor were 
inoperable, similar to the practice today, this will be systematically 
enforced for electronic trading. The Exchange appreciates the 
Commission's concerns described above; however, the Exchange believes 
the risks of harm to investors by not permitting these orders to 
execute at all when the trading floor is unavailable (which may be 
occurring due to extraordinary circumstances causing volatility in the 
markets) significantly outweighs the potential risks associated with 
these concerns.
    The Exchange's Regulatory Division will continue its standard 
routine surveillance reviews for electronic trading as it does today 
and has put together a regulatory plan to surveil the additional 
changes being proposed when operating in a screen-based only 
environment.
    The Exchange believes the proposed rule change to exclude volume 
executed during a time when the trading floor is inoperable from the 
determination of whether a Market-Maker is subject to continuous 
electronic quoting obligations will promote just and equitable 
principles of trade. If this volume were included in this 
determination, a Market-Maker not otherwise subject to these 
obligations may become subject to them for reasons outside of the 
Market-Maker's control. As a result, a Market-Maker may become subject 
to additional obligations that would not apply during normal 
circumstances. This proposed rule change will have no impact on Market-
Makers currently subject to continuous electronic quoting obligations, 
as once a Market-Maker becomes subject to that obligation, it remains 
subject to that obligation, even if it executes less than 20% of its 
contract volume electronically in a subsequent calendar quarter. The 
proposed rule change is solely intended to impact those Market-Makers 
who currently are not subject to continuous electronic quoting 
obligations. Without this rule change, depending on the length of time 
the trading floor is inoperable, a Market-Maker that has not previously 
exceeded the 20% contract volume threshold and thus is not currently 
subject to continuous electronic quoting obligation could exceed that 
threshold for a calendar quarter, which would then subject it to a new 
obligation that was not in place when the trading floor was operable. 
The Exchange believes it would be unduly burdensome to impose 
obligations on a Market-Maker that are inconsistent with the Market-
Maker's standard business practices as a result of extraordinary 
circumstances outside of the Market-Maker's control, particularly when 
the Exchange expects those circumstances to be temporary. The Exchange 
notes all Market-Makers must comply with the other obligations set 
forth in Rules 5.51 and 5.52, including the obligations related to 
size, two-sided quotes, and competitive quotes.

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 proposed rule change is 
not intended as a competitive filing, but rather is proposed as part of 
its business continuity plans intended to allow it to maintain fair and 
orderly markets if unusual circumstances cause the Exchange's trading 
floor to become inoperable. The Exchange does not believe the proposed 
rule change related to AIM contra-parties will impose any burden on 
intramarket competition, as it will permit all market participants to 
be solicited to participate in AIM transactions in exclusively listed 
index options. The Exchange also does not believe the proposed rule 
changes related to complex orders will impose any burden on intra 
market competition, as all market participants will be able to submit 
complex orders in exclusively listed index options with ratios no 
greater than 25-to-1. Additionally, the Exchange does not believe these 
proposed rule change will impose any burden on intermarket competition, 
as they both apply only to exclusively listed index options, which are 
available

[[Page 15828]]

for trading solely on the Exchange. By limiting these proposed rule 
changes to exclusively listed index options, the Exchange believes 
these proposed rule changes will permit competition with other options 
exchange with respect to multi-listed options to continue in the same 
manner as it occurs during normal trading circumstances. The Exchange 
believes the proposed rule change is necessary and appropriate to allow 
it to provide trading in these products (which are only able to trade 
on the Exchange) in an uninterrupted manner to the extent practicable 
under extraordinary circumstances.
    The proposed rule change to exclude contract volume executed during 
a time when the trading floor is inoperable from the determination of 
whether a Market-Maker is subject to continuous quoting obligations is 
not intended for competitive purposes. The Exchange believes this 
proposed rule change will not burden intramarket competition, as it 
will apply in the same manner to all Market-Makers. As noted above, the 
proposed rule change will have no impact on Market-Makers currently 
subject to continuous electronic quoting obligations, as those will 
continue to apply. The proposed rule change will prevent Market-Makers 
not currently subject to continuous electronic quoting obligations who 
could exceed the 20% threshold triggering those obligations solely 
because the trading floor was inoperable. The Exchange believes it 
would be unduly burdensome to subject a Market-Maker to additional 
obligations because of the unavailability of the Exchange facility 
where that Market-Maker conducts the vast majority of its business 
under normal trading circumstances. The Exchange believes this proposed 
rule change will not burden intermarket competition, as it applies 
solely to continuous electronic quoting obligations applicable to 
Market-Makers of the Exchange.

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 Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b- 4(f)(6)(iii) 
under the Act, the Exchange is required to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has requested that the Commission waive the five-day 
pre-filing notice requirement in Rule 19b-4(f)(6)(iii). The 
Commission has determined to waive the five day pre-filing notice 
requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \21\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\22\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become operative immediately. Waiver of the operative 
delay would allow the proposed changes, which are designed to minimize 
disruptions in the market and to facilitate the continued trading of 
index options that trade exclusively on the Exchange, to be in effect 
on Monday, March 16, 2020, the date when the Exchange announced that it 
will temporarily close its floor. For these reasons, the Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest. Accordingly, the 
Commission hereby waives the 30-day operative delay and designates the 
proposal operative upon filing.\23\
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    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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 shall 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2020-019 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-2020-019. 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-2020-019, and

[[Page 15829]]

should be submitted on or before April 9, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12), (59).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-05703 Filed 3-18-20; 8:45 am]
 BILLING CODE 8011-01-P