Document ID: SEC-2020-1496-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2020-09-17T04:00Z

[Federal Register Volume 85, Number 181 (Thursday, September 17, 2020)]
[Notices]
[Pages 58096-58099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20473]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89831; File No. SR-CBOE-2020-084]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend Its Fees Schedule With Respect to Its Strategy Fee Cap

September 11, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 1, 2020, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the

[[Page 58097]]

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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

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

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

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

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

1. Purpose
    The Exchange proposes to amend its Fees Schedule in connection with 
its strategy fee cap, 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.\3\ 
Thus, in such a low-concentrated and highly competitive market, no 
single options 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 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. In response to the competitive environment, the 
Exchange offers specific rates and credits in its fees schedule, like 
that of other options exchanges' fees schedules, which the Exchange 
believes provide incentive to Trading Permit Holders (``TPHs'') to 
increase order flow of certain qualifying orders.
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    \3\ See Cboe Global Markets U.S. Options Market Volume Summary 
(August 25, 2020), available at https://markets.cboe.com/us/options/market_statistics/.
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    Currently, pursuant to footnote 13 of the Fees Schedule, Market-
Maker, Clearing TPH, Joint-Back Office (``JBO''), broker-dealer and 
non-TPH market-maker transaction fees are capped at (1) $1,000 for all 
(i) merger strategies and (ii) short stock interest strategies and at 
(2) $700 for all reversals, conversions and jelly roll strategies 
executed on the same trading day in the same option class for options 
on equities, ETFs and ETNs. Such transaction fees for these strategies 
are further capped at $25,000 per month per initiating TPH or TPH 
organization (excluding Clearing TPHs). Additionally, surcharge fees 
are not included in the calculation of the $1,000 per day per class fee 
cap or the $25,000 per month fee cap for merger and short stock 
interest strategies.
    The Exchange proposes to amend footnote 13 to provide that market-
maker, Clearing Trading Permit Holder, JBO participant, broker-dealer 
and non-Trading Permit Holder market-maker transaction fees are capped 
at $0.00 for all merger, short stock interest, reversal, conversion and 
jelly roll strategies executed in open outcry on the same trading day 
in the same option class across all symbols. Essentially, the proposed 
rule change removes the three different strategy fee cap amounts, 
including the language in connection with calculation of surcharges and 
the caps, and, instead, applies a $0.00 cap for strategies executed in 
open outcry in all classes. In other words, all strategies transacted 
on the trading floor will be free.\4\ The proposed rule change also 
clarifies that the proposed $0.00 cap applies to all symbols by 
denoting footnote 13 at the top of ``Rate Table--All Products Excluding 
Underlying Symbol List A'' \5\ and ``Rate Table--Underlying Symbol List 
A''. The proposed change is designed to incentivize Trading Permit 
Holders to increase the number of strategy orders executed in open 
outcry.
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    \4\ The Exchange notes that it maintains the current cap 
language so that it may raise the cap, if it chooses, in a future 
rule filing without causing any potential confusion.
    \5\ The proposed change moves the current location of the 
footnote 13 notation from inside the table's heading to the list of 
footnotes appended to ``Options Transactions'' directly above the 
table.
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    Additionally, the proposed rule change to footnote 13 adds that the 
strategies defined in footnote 13 will not be eligible for an ORS/CORS 
subsidy. Participating TPHs or Participating Non-Cboe TPHs in the ORS 
and CORS Programs receive a payment from the Exchange for every 
executed contract routed to the Exchange through their system in 
certain classes. The Exchange notes that program participants do not 
receive payment for contracts executed in the Automated Improvement 
Mechanism (``AIM'') or for contracts executed as QCC orders because 
these contracts already have an opportunity to earn various rebates and 
discounts. Similarly, contracts executed as defined strategies on the 
trading floor would now have other opportunities to earn a full 
discount pursuant to proposed footnote 13.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\6\ in general, and furthers the requirements 
of Section 6(b)(4),\7\ in particular, as it is designed to provide for 
the equitable allocation of reasonable dues, fees and other charges 
among its facilities and does not unfairly discriminate between 
customers, issuers, brokers or dealers. As stated 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. The proposed fee changes reflect a competitive pricing 
structure designed to incentivize market participants to direct their 
order flow to the Exchange's trading floor, which the Exchange believes 
would enhance market quality to the benefit of all TPHs.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(4).

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[[Page 58098]]

    The Exchange believes that its proposed adoption of a $0.00 
strategy order cap for contracts executed in open outcry is consistent 
with Section 6(b)(4) of the Act in that the proposal is reasonable, 
equitable and not unfairly discriminatory. As noted above, the Exchange 
operates in highly competitive market. The Exchange is only one of 
several options venues to which market participants may direct their 
order flow, and it represents a small percentage of the overall market. 
The Exchange believes that the proposed fees are reasonable, equitable, 
and not unfairly discriminatory in that competing options exchanges, 
and the Exchange itself, offer fees and credits in connection with 
transactions in open outcry \8\ or strategy executions,\9\ as the 
Exchange now proposes. 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 or reduce use 
of certain categories of products, in response to fee changes. 
Accordingly, competitive forces constrain options exchange transaction 
fees. Stated otherwise, changes to exchange transaction fees can have a 
direct effect on the ability of an exchange to compete for order flow. 
To respond to this competitive marketplace, the Exchange has 
established incentives to facilitate the execution of orders via open 
outcry, which promotes price discovery on the public markets. To the 
extent that these incentives succeed, the increased liquidity on the 
Exchange would result in enhanced market quality for all participants.
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    \8\ See NYSE American Options Fee Schedule, Section III(E), 
``Floor Broker Incentive and Rebate Programs''; and Cboe Options 
Fees Schedule, ``Floor Broker ADV Discount''; footnote 8, which 
waives the transaction fee for public customer (``C'' capacity code) 
orders in all ETF and ETN options that are executed in open outcry; 
and footnote 11, which provides that for facilitation orders 
executed in open outcry, Cboe Options will assess no Clearing 
Trading Permit Holder Proprietary transaction fees.
    \9\ See e.g., BOX Options Market LLC (``BOX'') fee schedule, 
Section II.D (Strategy QOO Order Fee Cap and Rebate). BOX caps fees 
for each participant at $1,000 for strategies executed on the same 
trading day, and Floor Brokers, particularly, are eligible to 
receive a $500 rebate per customer for presenting certain Strategy 
QOO Orders on the Trading Floor; see also NYSE American Options Fee 
Schedule, Section I(J), ``Strategy Execution Fee Cap'', which 
assesses a $1,000 cap on transaction fees for all options Strategy 
Executions on the same trading day involving reversals and 
conversions, box spreads, short stock interest spreads, merger 
spreads, and jelly rolls.
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    Particularly, the Exchange believes that the proposed $0.00 
strategy cap for all options executed in open outcry is reasonable 
because it is designed to incentivize Trading Permit Holders to 
increase their strategy orders submitted to and executed on the 
Exchange's trading floor. The Exchange offers a hybrid market system 
and aims to balance incentives for its Trading Permit Holders to 
continue to contribute to deep liquid markets for investors on both its 
electronic and open outcry platforms. As such, the Exchange believes 
the proposed strategy caps for executions in open outcry is a 
reasonable means to continue to encourage open outcry liquidity, and 
the Exchange provides other opportunities in its Fees Schedule for 
Trading Permit Holders to receive reduced fees or enhanced rebates for 
orders executed electronically.\10\ The Exchange notes that all market 
participants stand to benefit from any increase in volume transacted on 
the trading floor, which promotes market depth, facilitates tighter 
spreads and enhances price discovery, and may lead to a corresponding 
increase in order flow from other market participants.
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    \10\ See e.g., Cboe Options Fees Schedule, ``Volume Incentive 
Program'' and footnote 36, which credits each Trading Permit Holder 
the per contract amount resulting from each public customer (``C'' 
capacity code) order transmitted by that Trading Permit Holder which 
is executed electronically on the Exchange (with some exceptions).
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    The Exchange believes the proposed rule change is an equitable 
allocation of fees because the $0.00 cap applies to all strategy orders 
executed on the trading floor equally and, in addition to this, because 
the Exchange believes that facilitating the execution of orders via 
open outcry encourages and supports increased liquidity and execution 
opportunities via open outcry, which functions as an important price-
improvement mechanism. Likewise, the proposed rule change is not 
unfairly discriminatory because the proposed strategy cap is uniformly 
available to all similarly situated market participants, that is, all 
market-makers, Clearing Trading Permit Holders, JBO participants, 
broker-dealers and non-Trading Permit Holders that execute strategies 
in any class in open outcry will be eligible to for the cap, thus, will 
equally not be assessed a charge on such orders.
    Additionally, the Exchange believes that the proposal to not apply 
an ORS/CORS subsidy to strategy orders that are eligible for the $0.00 
cap is reasonable, equitable and not unfairly discriminatory because 
such strategy orders will already have the opportunity to receive a 
full discount pursuant to proposed footnote 13 and all such strategy 
orders will equally not receive an ORS/CORS subsidy. This is consistent 
with the manner in which ORS/CORS program participants currently do not 
receive payment for contracts executed in AIM or as QCC orders as these 
transactions also already have an opportunity to earn various rebates 
and discounts.

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 to 
auctions of a public exchange, thereby promoting market depth, price 
discovery and transparency and enhancing order execution and price 
improvement opportunities for all TPHs. 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.'' \11\
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    \11\ Securities Exchange Act Release No. 51808, 70 FR 37495, 
37498-99 (June 29, 2005) (S7-10-04) (Final Rule).
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    The Exchange does not believe that the proposed rule change will 
impose any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because the 
proposed changes (both the strategy cap as well as the non-application 
of ORS/CORS subsidies for eligible strategy orders) will apply 
uniformly to all market-makers, Clearing Trading Permit Holders, JBO 
participants, broker-dealers and non-Trading Permit Holders that 
execute strategies in open outcry, respectively. As described above, 
the Exchange aims to offer a hybrid market system in which it balances 
incentives for its Trading Permit Holders to contribute to deep liquid 
markets for investors on both its electronic and open outcry platforms. 
As such, the proposal will continue to encourage Trading Permit Holders 
to provide liquidity on the Exchange's trading floor, while Trading 
Permit Holders may continue to take other opportunities afforded by the 
Fees Schedule to receive reduced fees or enhanced rebates for their 
orders executed electronically. The proposed fee changes serve to 
enhance order flow directed to open outcry for execution, and the 
resulting increase in volume transacted on the trading floor promotes

[[Page 58099]]

market depth, facilitates tighter spreads and enhances price discovery, 
and may lead to a corresponding increase in order flow from other 
market participants, which, in turn, benefits all market participants.
    The Exchange also does not believe that the proposed fees will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the Act because, as noted above, 
competing options exchanges, and the Exchange, currently have 
substantially similar fees in place in connection with strategy orders 
\12\ and orders executed in open outcry.\13\ Additionally, and as 
previously discussed, the Exchange operates in a highly competitive 
market. TPHs have numerous alternative venues that they may participate 
on and direct their order flow, including 15 other options exchanges, 
many of which offer substantially similar price improvement auctions. 
Based on publicly available information, no single options exchange has 
more than 16% of the market share.\14\ 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, additionally 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.'' \15\ 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'. . . .''.\16\ 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.
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    \12\ See supra note 9.
    \13\ See supra note 8.
    \14\ See supra note 3.
    \15\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
    \16\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

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

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 \18\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2020-084 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-2020-084. 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-2020-084 
and should be submitted on or before October 8, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20473 Filed 9-16-20; 8:45 am]
BILLING CODE 8011-01-P