Document ID: SEC-2021-0242-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2021-02-19T05:00Z

[Federal Register Volume 86, Number 32 (Friday, February 19, 2021)]
[Notices]
[Pages 10364-10367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03339]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91122; File No. SR-CBOE-2020-052]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, To 
Amend Rules 5.37, 5.38, and 5.73 Related to Auction Notification 
Messages and Index Combo Orders in SPX in the Automated Improvement 
Mechanism, Complex Automated Improvement Mechanism, and FLEX Automated 
Improvement Mechanism

February 12, 2021.

I. Introduction

    On June 3, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'') 
filed with the Securities and Exchange Commission

[[Page 10365]]

(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Rules 5.37, 5.38, and 5.73 to (1) allow 
the Exchange to determine to disseminate the stop price in auction 
notification messages for Automated Improvement Mechanism (``AIM''), 
Complex Automated Improvement Mechanism (``C-AIM''), and FLEX AIM 
auctions in S&P 500[supreg] Index options (``SPX''); and (2) modify the 
minimum increment for C-AIM and FLEX AIM auction responses for Index 
Combo Orders in SPX. The proposed rule change was published for comment 
in the Federal Register on June 18, 2020.\3\ On July 22, 2020, the 
Exchange submitted Amendment No. 1 to the proposed rule change, which 
replaced and superseded the proposed rule change in its entirety.\4\ On 
July 27, 2020, pursuant to Section 19(b)(2) of the Act,\5\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\6\ On August 21, 2020, the Commission published notice of 
Amendment No. 1 and instituted proceedings under Section 19(b)(2)(B) of 
the Act \7\ to determine whether to approve or disapprove the proposed 
rule change, as modified by Amendment No. 1.\8\ On December 8, 2020, 
pursuant to Section 19(b)(2) of the Act,\9\ the Commission designated a 
longer period within which to approve or disapprove the proposed rule 
change, as modified by Amendment No. 1.\10\ This order approves the 
proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89063 (June 12, 
2020), 85 FR 36923 (``Notice''). Comments received on the proposed 
rule change are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-052/srcboe2020052.htm.
    \4\ In Amendment No. 1, the Exchange amended the proposal to: 
(1) To add that, when the proposed stop price dissemination in 
auction notification messages is enabled for AIM, C-AIM, or FLEX AIM 
auctions in SPX, it would apply to all such AIM, C-AIM, or FLEX AIM 
auctions; (2) specify that the proposed minimum increment 
modification would apply to Index Combo Orders in SPX, and to 
correct an internal cross-reference in the proposed rules; (3) 
provide additional detail to the description and examples of the 
proposed modification to the minimum increment for Index Combo 
Orders in SPX; and (4) provide additional justification and support 
for the proposed rule change. The full text of Amendment No. 1 is 
available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-052/srcboe2020052-7464403-221166.pdf.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 89400, 85 FR 46202 
(July 31, 2020). The Commission designated September 16, 2020 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 89638, 85 FR 53045 
(August 27, 2020).
    \9\ 15 U.S.C. 78s(b)(2).
    \10\ See Securities Exchange Act Release No. 90592, 85 FR 80863 
(December 14, 2020). The Commission designated February 13, 2021 as 
the date by which the Commission shall approve or disapprove the 
proposed rule change, as modified by Amendment No. 1.
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II. Description of the Proposal, as Modified by Amendment No. 1

A. Background

    The AIM, C-AIM, and FLEX AIM are electronic auctions intended to 
provide an agency order with the opportunity to receive price 
improvement (over the National Best Bid or Offer in AIM, or the 
synthetic best bid or offer on the Exchange in C-AIM).\11\ Upon 
submitting an agency order into one of these auctions, the initiating 
Trading Permit Holder must also submit a contra-side second order for 
the same size as the agency order. The contra-side order guarantees 
that the agency order will receive an execution. Upon commencement of 
an auction, market participants submit responses to trade against the 
agency order. At the conclusion of the auction, depending on the 
contra-side interest available, the contra-side order may be allocated 
a certain percentage of the agency order.\12\
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    \11\ See Rules 5.38 (AIM), 5.38 (C-AIM), and 5.73 (FLEX AIM).
    \12\ See Rules 5.37(e), 5.38(e), and 5.73(e).
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    On March 16, Cboe activated the AIM and C-AIM in SPX options, so 
that trading in SPX could continue while the trading floor was 
closed.\13\ Once the trading floor re-opened on June 15, 2020, the 
Exchange disengaged AIM and C-AIM for SPX. Prior to the trading floor 
closure, the Exchange had not activated C-AIM (or AIM) in SPX and thus 
all non-FLEX crossing transactions in SPX were previously only able to 
occur on the trading floor.
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    \13\ The Exchange had activated C-AIM and AIM in SPX for the 
first time as a result of the March 16, 2020 trading floor 
suspension to help prevent the spread of COVID-19. According to the 
Exchange, FLEX AIM in SPX had been activated prior to March 16, 
2020.
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B. Minimum Increment for Index Combo Orders in SPX

    The Exchange proposes to amend Rules 5.38 and 5.73 to modify the 
minimum increment for C-AIM and FLEX AIM auction responses, 
respectively, in which the agency order complex strategy is comprised 
of an Index Combo Order (as defined in Rule 5.33(b)) in SPX.\14\ When 
submitting an agency order into a C-AIM auction, the initiating member 
must also submit principal or solicited contra-side complex order(s) 
for the same size as the agency order, which guarantees that the agency 
order will receive an execution.\15\ Upon commencement of a C-AIM 
auction, market participants submit responses to trade against the 
agency order and at the conclusion of an auction, depending on the 
contra-side interest available, the contra order may be allocated a 
certain percentage of the agency order.\16\
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    \14\ An Index Combo Order is an order to purchase or sell one or 
more index option series and the offsetting number of Index 
Combinations defined by the delta. For purposes of an Index Combo 
order, the following terms have the following meanings: (1) An 
``Index Combination'' is a purchase (sale) of an index option call 
and sale (purchase) of an index option put with the same underlying 
index, expiration date, and strike price; (2) A ``delta'' is the 
positive (negative) number of Index Combinations that must be sold 
(purchased) to establish a market neutral hedge with one or more 
series of the same index option; and (3) An Index Combo order may 
not have a ratio greater than eight options to one Index Combination 
(8.00), and will be subject to all provisions applicable to complex 
orders (excluding the one-to-three/three-to-one ratio) in the Rules. 
See Rule 5.33(b).
    \15\ See Rule 5.38.
    \16\ See generally Rule 5.38(e). The same process applies to the 
FLEX AIM auction pursuant to the FLEX Rules. See generally Rule 
5.73(e).
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    Rules 5.38(c)(5)(A) and 5.38(a)(4) currently provide that the 
minimum price increment for C-AIM responses and agency and initiating 
orders, respectively, must be in an increment the Exchange determines 
on a class basis, which is $0.05 in SPX options.\17\ The corresponding 
FLEX AIM Rules 5.73(c)(5)(A) and 5.73(a)(4) provide the same treatment 
for FLEX AIM auctions. Thus, under current rules market participant 
responses in the C-AIM and FLEX AIM auctions must improve the net 
package price (i.e., each strategy unit) based on then-current leg 
markets by at least the minimum increment of $0.05.\18\ Because of the 
differences between the quoting practices on floor and the quoting 
practices in the C-AIM and FLEX AIM auctions with respect to Index 
Combo Orders in SPX,\19\ however,

[[Page 10366]]

applying the $0.05 minimum increment to auction responses in both floor 
trading and the electronic C-AIM and FLEX AIM auctions could result in 
a significant difference in the price improvement that an order 
receives depending on whether the Index Combo Order in SPX is traded in 
the electronic auctions or on the trading floor.\20\ A floor broker 
seeking to cross SPX complex orders on the trading floor generally 
identifies the legs of the complex order and their relative sizes to 
each other with a net package price.\21\ The trading crowd then 
generally provides a market based on the strategy's theoretical value, 
rather than on the value of the net package (which equals the strategy 
times the ratio), particularly when the complex order represented is a 
delta neutral order that includes a combo.\22\ In open outcry trading, 
the trading crowd generally prices the combo hedge portion separately 
from the non-combo portion of the order.\23\ If the crowd improves the 
price of the non-combo leg of the order by a minimum increment, or 
greater, that price is given on each contract.\24\ The proposed changes 
are intended to provide for substantially the same price improvement 
opportunities at meaningful increments for Index Combo Orders in SPX, 
whether they are submitted to the C-AIM or FLEX AIM electronic auctions 
or executed on the trading floor.\25\
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    \17\ The System rejects a C-AIM response or agency or initiating 
order that is not in the applicable minimum increment.
    \18\ Although members of the trading crowd on the trading floor 
are permitted to improve the net package price (based on then-
current leg markets) by the minimum increment of $0.05, the Exchange 
states that this is not the common practice. See Amendment No. 1, 
supra note 4, at 9.
    \19\ An Index Combo Order in SPX is a complex order that 
includes one or more SPX legs, hedged by an SPX combo, or synthetic 
future, defined by the delta. The Exchange states that Index Combo 
Orders in SPX comprise a significant portion of crosses in SPX and 
that a significant amount of SPX volume was executed through C-AIM 
when the Exchange activated C-AIM for SPX options. See id. at 7 and 
n.10 (stating that in April 2020, Index Combo Orders in SPX 
comprised 60.5% of crossed volume executed in SPX via AIM while the 
trading floor was inoperable).
    \20\ See id. at 9-11, for examples of these pricing distinctions 
in practice.
    \21\ See id. at 7.
    \22\ See id.
    \23\ The price of the combo and the rest of the order are 
ultimately packaged and appear as a net package price for the entire 
order on the customer fill report. See id. at 8.
    \24\ See id.
    \25\ See id. at 13.
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    Accordingly, to better align the C-AIM and FLEX AIM electronic 
auction crossing processes and the open outcry crossing process for 
Index Combo Orders in SPX, the Exchange proposes to amend Rule 
5.38(c)(5)(A) to provide that the minimum price increment for a C-AIM 
response in which the agency order complex strategy is comprised of an 
Index Combo Order in SPX will be the ratio of the non-combo portion of 
the strategy to the number of combos, multiplied by the minimum price 
increment the Exchange determines for options on SPX agency orders 
pursuant to Rule 5.38(a)(4).\26\ The Exchange also proposes to amend 
Rule 5.73(c)(5)(A) to revise the FLEX AIM process for Index Combo 
Orders in SPX in the same manner.\27\
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    \26\ For example, if a market participant buys 800 November 3650 
SPX Calls tied to 100 September 3210 Combos, using a delta of 12.5, 
the System would calculate the minimum increment by multiplying the 
ratio of the non-combo leg of the order (800) to the number of 
combos (100) by the minimum increment of $0.05. Therefore, (800/100) 
x 0.05 = $0.40 as the starting point for price improvement during 
the C-AIM or FLEX C-AIM auction. See id.
    \27\ See id. at 12-13.
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C. Auction Stop Price Dissemination in SPX

    Current Rules 5.37(c)(2), 5.38(c)(2), and 5.73(c)(2) provide that 
the system initiates the AIM, C-AIM, and FLEX AIM auction processes, 
respectively, by sending an auction notification message detailing the 
side, size, auction ID, and options series (and, for C-AIM auctions, 
complex strategy, or, for FLEX AIM auctions, length of the auction 
period and options series or complex strategy, as applicable) of the 
agency order to all users that elect to receive AIM, C-AIM, or FLEX AIM 
auction notification messages. Because AIM, C-AIM, and FLEX AIM auction 
notification messages are not included in the disseminated BBO (in 
connection with AIM auctions) or OPRA, the Exchange does not currently 
include the stop price of an agency order in auction notification 
messages.\28\ To better align the AIM and C-AIM pricing process in SPX 
with the open outcry process, the Exchange proposes to amend Rules 
5.37(c)(2) and 5.38(c)(2) to provide that the Exchange may also 
determine to include the stop price in SPX AIM and C-AIM auction 
notification messages.\29\ As with all other information disseminated 
in an AIM and C-AIM auction notification message, the disseminated stop 
price for SPX auctions will be available to all users that elect to 
receive auction notification messages.\30\ Because the FLEX AIM rules 
are similar to the AIM and C-AIM rules, the Exchange also proposes to 
maintain this consistency by amending Rule 5.73(c)(2) to similarly 
provide that the Exchange may determine to include the stop price in 
FLEX AIM auction notification messages for all FLEX AIM auctions in 
SPX.\31\
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    \28\ See id. at 11.
    \29\ The Exchange represents that it will notify its trading 
permit holders of a determination to include the stop price in 
auction notification messages, pursuant to Rule 1.5, via a 
specification, notice, or regulatory circular with appropriate 
advanced notice, which will be posted on the Exchange's website, 
electronic message, or other communication method as provided in the 
Rules. See id. at 12 n.18.
    \30\ See proposed Rules 5.37(c)(2) and 5.38(c)(2).
    \31\ See Amendment No. 1, supra note 4, at 12-13.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\32\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act,\33\ which requires, among other things, that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest. The 
Commission also finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 6(b)(8) of the Act,\34\ 
which requires that the rules of a national securities exchange do not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \32\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \33\ 15 U.S.C. 78f(b)(5).
    \34\ 15 U.S.C. 78f(b)(8).
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    As discussed above, the Exchange proposes to publish the stop price 
of SPX AIM auctions. As previously noted, according to the Exchange, 
orders in SPX generally take on greater risk, have a higher notional 
value, trade in much larger size, and effect increasingly more complex 
strategies than options in other classes.\35\ Therefore, the Exchange 
believes that this proposed change may address any uncertainties market 
participants may have when pricing SPX responses.\36\ The Exchange 
further states that, for SPX orders crossed on the trading floor in 
open outcry, market makers generally have more confidence in the 
pricing of their responses as the crosses start with a request for 
market and the trading crowd then provides a ``ballpark'' of the prices 
at which they are willing to trade, which the market maker may then use 
to more confidently price its responses.\37\ The Exchange believes that 
its proposal, therefore, has been designed to incentivize continued, 
competitive responses to SPX electronic auctions in substantially the 
same manner in which responses may be

[[Page 10367]]

priced on the trading floor, thereby providing for potentially improved 
liquidity and price improvement opportunities for orders being executed 
through those auctions, as the dissemination of the stop price may 
facilitate market participants' confidence in pricing meaningful, 
competitive responses during electronic auctions in SPX in a manner 
substantially similar to that which occurs on the trading floor.\38\
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    \35\ See Amendment No. 1, supra note 4, at 16.
    \36\ See id.
    \37\ See id. at 6.
    \38\ See id. at 16. The Exchange also states that its affiliated 
options exchange, Cboe EDGX Exchange, Inc. (``EDGX Options'') 
currently includes the price, along with the other fields the 
Exchange currently disseminates, in the auction notification 
messages disseminated at the initiation of its AIM and C-AIM 
auctions. See EDGX Options Rules 21.19(c)(2) and 21.22(c)(2).
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    The Exchange also proposes to revise the minimum increment for 
auction responses for Index Combo Orders in SPX that trade in 
electronic auctions. For these orders, the Exchange proposes to base 
the minimum auction response increment on the ratio of the non-combo 
portion of the strategy to the number of combos, multiplied by the 
minimum price increment the Exchange determines for options on SPX 
agency orders pursuant to Rule 5.38(a)(4). The Exchange believes that 
without the proposed change, responders to C-AIM and FLEX AIM auctions 
of Index Combo Orders in SPX could ``step ahead'' of market 
participants who are willing to trade with customer orders at the 
auction price by providing only a trivial amount of price 
improvement.\39\ The Exchange believes that this could discourage 
market participants from providing contra-side interest at the best 
prices and liquidity providers from joining or improving at meaningful 
increments, resulting in fewer price improvement opportunities for 
customers.\40\ By tying the minimum auction response increment to the 
legs of the order, as opposed to the package price inclusive of the 
combos, the Exchange believes the proposed rule will require market 
participants to respond to the C-AIM or FLEX AIM auctions for Index 
Combo Orders in SPX at prices more aligned with the prices at which 
responses for these orders generally occur in open outcry.\41\ One 
commenter agreed with Cboe stating that the proposed rule change should 
provide investors in SPX with enhanced execution and price improvement 
opportunities for agency orders submitted into the AIM auctions.\42\
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    \39\ See Amendment No. 1, supra note 4, at 15.
    \40\ See id. at 13-14 (providing an additional example to 
illustrate the Exchange's arguments).
    \41\ See id. The Exchange states that the proposal will not 
alter the manner in which the system caps responses pursuant to Rule 
5.38(c)(5)(B). Under Rule 5.38(c)(5)(B), C-AIM buy (sell) responses 
are capped at the following prices that exist at the conclusion of 
the C-AIM Auction: (i) The better of the synthetic best offer 
(``SBO'') (synthetic best bid (``SBB'')) or the offer (bid) of a 
resting complex order at the top of the complex order book 
(``COB''); or (ii) one minimum increment lower (higher) than the 
better of the SBO (SBB) or the offer (bid) of a resting complex 
order at the top of the COB if the BBO of any component of the 
complex strategy or the resting complex order, respectively, is a 
Priority Customer order. See id. at 14-15.
    \42\ See letter to Vanessa Countryman, Secretary, Commission, 
from Ellen Greene, Managing Director, Equities & Options Market 
Structure, The Securities Industry and Financial Markets 
Association, dated July 9, 2020.
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    According to the Exchange, orders in SPX generally take on greater 
risk than in other option classes, as SPX options tend to have a higher 
notional value than options in other classes, trade much larger size 
than in other options classes, and effect increasingly more complex 
strategies than executed in other classes.\43\ The proposed change to 
the minimum auction response increment for Index Combo Orders in SPX 
could help to ensure that market participants seeking to trade with an 
agency order at a price better than the auction price will be required 
to provide meaningful price improvement. Because liquidity providers 
responding to a C-AIM or FLEX AIM auction for an Index Combo Order in 
SPX will not be able to gain allocation priority over solicited contra 
side interest by providing only minimal price improvement over the 
auction price, the proposal could help to ensure that market 
participants solicited to participate as the contra side to an Index 
Combo Order in SPX will continue to provide liquidity for these orders. 
The proposed auction response increment also could help to ensure that 
an Index Combo Order in SPX that is executed in a C-AIM or FLEX AIM 
auction receives an amount of price improvement comparable to the 
amount of price improvement that the order might receive if it traded 
in open outcry. The proposed change to the minimum auction response 
increment for Index Combo Orders in SPX is also consistent with Section 
6(b)(8) of the Act because it may promote competition on the Exchange 
by more closely aligning the electronic crossing process with the open 
outcry crossing process, and thus provide similar execution and price 
improvement opportunities to customers whether their orders are 
submitted for electronic or open outcry execution.
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    \43\ See Notice, supra note 3, at 36923.
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    The Commission further believes that the Exchange's proposal to 
allow for the dissemination of the stop price in auction notification 
messages for AIM, C-AIM, and FLEX AIM auctions in SPX is consistent 
with the Act.\44\ As described above, providing potential auction 
responders with more information about an upcoming SPX AIM auction may 
encourage market participants to submit more competitive responses, 
particularly given the large and complex nature of orders in SPX. 
Accordingly, the Commission believes the Exchange's proposal may result 
in increased liquidity in AIM auctions and therefore increased price 
improvement opportunities for SPX agency orders in the AIM auctions.
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    \44\ One commenter supported the proposal, highlighting 
specifically the stop price dissemination aspect of the proposal and 
stating that it would better align the AIM and C-AIM pricing 
processes for responses with the open outcry process. See letter to 
Vanessa Countryman, Secretary, Commission, from Ellen Greene, 
Managing Director, Equities & Options Market Structure, The 
Securities Industry and Financial Markets Association, dated July 9, 
2020, at 3.
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    The Commission is also aware that other options exchanges currently 
disseminate the stop price of an agency order in similar auction 
mechanisms and does not believe this aspect of the proposed rule change 
raises any novel regulatory issues.\45\ The Commission believes that 
providing similar additional information in its electronic price 
improvement auction notification messages should make the Cboe 
electronic price improvement auctions competitive with other options 
exchanges and encourage the submission of more responses to these 
auctions. For this reason, the Commission believes that the proposed 
rule change is also consistent with Section 6(b)(8) of the Act.
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    \45\ See, e.g., BOX Exchange LLC Rule 7150(f); EDGX Options 
Rules 21.19(c)(2) and 21.22(c)(2); MIAX International Securities 
Exchange, LLC Rule 515A(a)(2)(i)(B); and Nasdaq ISE, LLC Options 3, 
Section 13(c).
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    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the requirements of the 
Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\46\ that the proposed rule change, as modified by Amendment No. 1 
(SR-CBOE-2020-052), be, and hereby is, approved.
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    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-03339 Filed 2-18-21; 8:45 am]
BILLING CODE 8011-01-P