Document ID: SEC-2020-1494-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe C2 Exchange, Inc.
Posted Date: 2020-09-17T04:00Z

[Federal Register Volume 85, Number 181 (Thursday, September 17, 2020)]
[Notices]
[Pages 58078-58081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20476]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89828; File No. SR-C2-2020-013]

Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend its Fees Schedule

September 11, 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 September 1, 2020 Cboe C2 Exchange, Inc. (the ``Exchange'' or 
``C2'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') is filing with 
the Securities and Exchange Commission (``Cboe Commission'') a proposed 
rule change to amend the Fees Schedule. 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://markets.cboe.com/us/options/regulation/rule_filings/ctwo/), 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 its Fee Schedule to amend certain 
standard transaction fees for SPY transactions. Specifically, the 
Exchange proposes to (1) amend the transaction fee for public customer 
SPY orders that remove liquidity, (2) amend the rebate for C2 market-
maker SPY orders that add liquidity, (3) amend the rebate for non-
customer, non-market-maker SPY orders that add liquidity and (4) adopt 
an enhanced rebate for C2 market-maker SPY orders that are NBBO Joiners 
or NBBO Setters. The proposed changes will be effective September 1, 
2020.
    The Exchange first notes that it operates in a highly competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. More specifically, the 
Exchange is only one of 16 options venues to which market participants 
may direct their order flow. Based on publicly available information, 
no single options exchange has more than 16% of the market share and 
currently the Exchange represents approximately 3% of the market 
share.\3\ Thus, in such a low-concentrated and highly competitive 
market, no single options exchange, including the Exchange, possesses 
significant pricing power in the execution of option order flow. The 
Exchange believes that the ever-shifting market share among the 
exchanges from month to month demonstrates that market participants can 
shift order flow or discontinue to reduce use of certain categories of 
products, in response to fee changes. Accordingly, competitive forces 
constrain the Exchange's transaction fees, and market participants can 
readily trade on competing venues if they deem pricing levels at those 
other venues to be more favorable.
---------------------------------------------------------------------------

    \3\ See Cboe Global Markets U.S. Options Market Volume Summary 
by Month (August 31, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
---------------------------------------------------------------------------

    First, the exchange proposes to amend the transaction fee for 
public customer SPY orders that remove liquidity. Currently, public 
customer orders in all equity, multiply-listed index, ETF and ETN 
options classes, including SPY, that remove liquidity are assessed a 
standard transaction fee of $0.43 per contract and yield fee code 
``PC''. The Exchange proposes to reduce the fee assessed for public 
customer SPY orders that remove liquidity to $0.39 per contract and 
adopt new fee code ``SC'' for such orders (and remove SPY orders from 
fee code ``PC'').
    The Exchange next proposes to amend the rebate for C2 market-maker 
SPY orders that add liquidity. Currently, C2 market-makers orders in 
all equity, multiply-listed index, ETF and ETN options classes, 
including SPY, that add liquidity are provided a rebate of $0.41 per 
contract and yield fee code ``PM''. The Exchange proposes to reduce the 
rebate provided for market-maker SPY orders that add liquidity to $0.26 
per contract per contract and adopt new fee code ``SM'' for such orders 
(and remove SPY orders from fee code ``PM'').
    The Exchange also proposes to amend the rebate for non-market-
maker, non-customer SPY orders that add liquidity. Currently, non-
market-maker, non-

[[Page 58079]]

customer orders (i.e., Professional Customer, Firm, Broker/Dealer, non-
C2 Market-Maker, JBO, etc.) in all equity, multiply-listed index, ETF 
and ETN options classes, including SPY, that add liquidity are provided 
a rebate of $0.36 per contract and yield fee code ``PN''. The Exchange 
proposes to reduce the rebate provided for non-market-maker, non-
customer SPY orders that add liquidity to $0.20 per contract per 
contract and adopt new fee code ``SN'' for such orders (and remove SPY 
orders from fee code ``PN'').
    The Exchange also proposes to adopt a new rebate of $0.31 per 
contract for C2 market-maker SPY orders that are a National Best Bid or 
Offer (``NBBO'') Joiner or NBBO Setter and adopt new fee code ``SL'' 
for such orders. Particularly, to qualify as a NBBO Joiner, a C2 
market-maker order must improve the C2 Best Bid or Offer (``BBO'') and 
result in C2 joining an existing NBBO. Only the first order received 
that results in C2 BBO joining the NBBO at a new price level will 
qualify for the enhanced rebate. If C2 is at the NBBO, the order will 
not qualify. Alternatively, C2 market-makers may receive the enhanced 
rebate if they are a NBBO Setter. To qualify as a NBBO Setter and 
receive the enhanced rebate, a C2 market-maker order must set the NBBO. 
The Exchange believes the proposed enhanced rebate for C2 market-makers 
that are NBBO Joiners or Setters will incentivize liquidity providers 
to provide more aggressively priced liquidity in SPY options.
    The Exchange lastly proposes to adopt a new table in the Fees 
Schedule to set forth SPY-specific pricing, similar to pricing tables 
adopted for RUT and DJX. The Exchange also proposes to clarify that the 
first transaction fee table does not apply to SPY or DJX.\4\ The 
Exchange notes that transaction fees and rebates that apply to (1) 
public customer SPY orders that add liquidity, (2) C2 market-maker SPY 
orders that remove liquidity, (3) non-market-maker, non-customer SPY 
orders that remove liquidity, (4) SPY orders that trade at the open and 
(5) resting SPY orders that trades with resting complex orders are not 
changing, nor are the associated fee codes. Rather the Exchange is just 
copying those current fee codes and rates into the new SPY pricing 
table to make the Fees Schedule easy to follow.
---------------------------------------------------------------------------

    \4\ The Exchange notes that when it adopted the DJX pricing 
table, it inadvertently omitted adding DJX to the list of excepted 
products for the rates provided in the standard transaction fee 
table. See Securities Exchange Release No. 85855 (May 14, 2019) 84 
FR 22916 (May 20, 2019) (SR-C2-2019-010).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the objectives of Section 6 of the Act,\5\ in general, and 
furthers the objectives of Section 6(b)(4),\6\ in particular, as it is 
designed to provide for the equitable allocation of reasonable dues, 
fees and other charges among its Members and issuers and other persons 
using its facilities. The Exchange also believes that the proposed rule 
change is consistent with the objectives of Section 6(b)(5) \7\ 
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, and, particularly, is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(4).
    \7\ 15 U.S.C. 78f.(b)(5).
---------------------------------------------------------------------------

    As described above, the Exchange operates in a highly competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive or incentives to be insufficient. In particular, the proposed 
changes to Exchange execution fees and rebates for certain SPY orders 
are intended to attract order flow to the Exchange by continuing to 
offer competitive pricing while also creating additional incentives to 
providing aggressively priced displayed liquidity, which the Exchange 
believes would enhance market quality to the benefit of all market 
participants.
    The Exchange believes its proposed changes are reasonable as they 
are competitive and in line with SPY-specific pricing at other 
exchanges.\8\ The Exchange believes it's reasonable to reduce the 
transaction fee for public customer SPY orders that remove liquidity 
because market participants will be subject to lower fees for such 
orders. The Exchange believes the proposed amendment will also 
encourage market participants to increase retail SPY order flow to the 
Exchange. The Exchange believes it's reasonable to reduce the rebates 
for both C2 market-maker and non-market-maker, non-customer SPY orders 
that add liquidity because such market participants will still receive 
rebates for such orders, albeit at a lower amount. Additionally, 
market-makers that are NBBO Joiners or Setters would be eligible to 
receive an enhanced rebate. The Exchange believes that the proposed 
NBBO Joiner and Setter rebates are reasonable as C2 market-makers would 
be eligible to receive enhanced rebates for orders that add liquidity 
in return for improving the C2 BBO resulting in C2 joining an existing 
NBBO or setting a new NBBO. The Exchange believes the proposed new 
rebate will incentivize the entry on the Exchange by C2 market-makers 
of more aggressive SPY orders that will maintain tight spreads, 
benefitting both Trading Permit Holders and public investors.
---------------------------------------------------------------------------

    \8\ See e.g., MIAX Pearl Fee Schedule, Section 1 Transaction 
Rebates/Fees, which provides for a fee of $0.46 per contract for 
priority customer SPY orders that remove liquidity. See also Nasdaq 
ISE Pricing Schedule, Section 3, Footnote 5, which provides for 
tiered rebates for market-maker SPY orders that add liquidity 
between $0.05-$0.26 per contract.
---------------------------------------------------------------------------

    The Exchange also believes it is reasonable, equitable and not 
unfairly discriminatory to adopt SPY-specific pricing as the Exchange 
already maintains product-specific pricing for other products, such as 
RUT and DJX.\9\ Additionally, as noted above, other exchanges similarly 
provide for SPY-specific pricing.\10\ The Exchange also believes that 
it is equitable and not unfairly discriminatory to assess a lower fee 
for public customer SPY orders as compared to other market participants 
because customer order flow enhances liquidity on the Exchange for the 
benefit of all market participants. Specifically, customer liquidity 
benefits all market participants by providing more trading 
opportunities, which attracts Market-Makers. An increase in the 
activity of these market participants in turn facilitates tighter 
spreads, which may cause an additional corresponding increase in order 
flow from other market participants. Moreover, the options industry has 
a long history of providing preferential pricing to customers, and the 
Exchange's current Fee Schedule currently does so in many places, as do 
the fees structures of multiple other

[[Page 58080]]

exchanges.\11\ The Exchange notes that the proposed fee change will be 
applied equally to all public customers.
---------------------------------------------------------------------------

    \9\ See Cboe C2 Options Exchange Fees Schedule, Transaction 
Fees.
    \10\ See e.g., MIAX Pearl Fee Schedule, Section 1 Transaction 
Rebates/Fees, which provides for a fee of $0.46 per contract for 
priority customer SPY orders that remove liquidity. See also Nasdaq 
ISE Pricing Schedule, Section 3, Footnote 5, which provides for 
tiered rebates for market-maker SPY orders that add liquidity 
between $0.05-$0.26 per contract.
    \11\ See Cboe C2 Options Exchange Fees Schedule, Transaction 
Fees. See also BZX Options Fee Schedule, Fee Codes and Associated 
Fees.
---------------------------------------------------------------------------

    Additionally, the Exchange believes that it is equitable and not 
unfairly discriminatory to assess higher rebates to market-makers that 
add liquidity as compared to other market participants, other than 
customers, because market-makers, unlike other market participants, 
take on a number of obligations, including quoting obligations, which 
other market participants do not have. Further, these rebates are 
intended to incent market-makers to quote and trade more on C2 Options, 
thereby providing more trading opportunities for all market 
participants. The Exchange notes that the proposed changes to C2 
market-maker rebates for SPY options will be applied equally to all C2 
market-makers. Similarly, the Exchange believes it's equitable and not 
unfairly discriminatory to provide C2 market-makers that are NBBO 
Joiners or Setters an enhanced rebate because such market participants 
are providing more aggressively priced liquidity in SPY options. 
Additionally, increased add volume order flow, particularly by 
liquidity providers, contributes to a deeper, more liquid market, 
which, in turn, provides for increased execution opportunities and thus 
overall enhanced price discovery and price improvement opportunities on 
the Exchange. As such, this benefits all market participants by 
contributing towards a robust and well-balanced market ecosystem, 
offering additional flexibility for all investors to enjoy cost 
savings, supporting the quality of price discovery, promoting market 
transparency and improving investor protection. The Exchange believes 
the proposed change to the rebate for non-market-maker, non-customer 
SPY orders is also equitable and not unfairly discriminatory because it 
will be applied equally to all non-market-makers, non-customers.
    Finally, the Exchange believes that the proposal to adopt a pricing 
table specific to SPY executions will further simplify the fee schedule 
and alleviate potential confusion in light of the proposed changes, 
thereby removing impediments to, and perfecting the mechanism of a free 
and open market and a national market system, and, in general, 
protecting investors and the public interest.

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 intramarket or intermarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. 
Rather, as discussed above, the Exchange believes that the proposed 
change would encourage the submission of additional liquidity in SPY to 
a public exchange, thereby promoting market depth, price discovery and 
transparency and enhancing order execution opportunities for all 
Trading Permit Holders. As a result, the Exchange believes that the 
proposed change furthers the Commission's goal in adopting Regulation 
NMS of fostering competition among orders, which promotes ``more 
efficient pricing of individual stocks for all types of orders, large 
and small.''
    The Exchange believes the proposed rule change does not impose any 
burden on intramarket competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. Particularly, the proposed 
change applies to all similarly situated Trading Permit Holders 
equally. Overall, the proposed change is designed to attract additional 
SPY public customer orders that remove liquidity and SPY market-maker 
and non-market-maker, non-customer orders that add liquidity to the 
Exchange. The Exchange believes that the new C2 market-maker rebate for 
SPY orders that are NBBO Joiners or Setters would incentivize entry on 
the Exchange of more aggressive SPY orders that will maintain tight 
spreads, benefitting both Trading Permit Holders and public investors 
criteria and, as a result, provide for deeper levels of liquidity, 
increasing trading opportunities for other market participants, thus 
signaling further trading activity, ultimately incentivizing more 
overall order flow and improving price transparency on the Exchange.
    Next, the Exchange believes the proposed rule change does not 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As previously 
discussed, the Exchange operates in a highly competitive market. 
Members have numerous alternative venues that they may participate on 
and director their order flow, including 15 other options exchanges and 
off-exchange venues. Additionally, the Exchange represents a small 
percentage of the overall market. Based on publicly available 
information, no single options exchange has more than 16% of the market 
share. Therefore, no exchange possesses significant pricing power in 
the execution of option order flow. Indeed, participants can readily 
choose to send their orders to other exchange and off-exchange venues 
if they deem fee levels at those other venues to be more favorable. 
Moreover, the Commission has repeatedly expressed its preference for 
competition over regulatory intervention in determining prices, 
products, and services in the securities markets. Specifically, in 
Regulation NMS, the Commission highlighted the importance of market 
forces in determining prices and SRO revenues and, also, recognized 
that current regulation of the market system ``has been remarkably 
successful in promoting market competition in its broader forms that 
are most important to investors and listed companies.'' The fact that 
this market is competitive has also long been recognized by the courts. 
In NetCoalition v. Securities and Exchange Commission, the D.C. Circuit 
stated as follows: ``[n]o one disputes that competition for order flow 
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .''. Accordingly, the Exchange 
does not believe its proposed fee change imposes any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

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

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \12\ and paragraph (f) of Rule 19b-4 \13\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the

[[Page 58081]]

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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

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-C2-2020-013 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-C2-2020-013. 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-C2-2020-013 and should be submitted on 
or before October 8, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20476 Filed 9-16-20; 8:45 am]
BILLING CODE 8011-01-P