Document ID: SEC-2020-1713-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2020-10-27T04:00Z

[Federal Register Volume 85, Number 208 (Tuesday, October 27, 2020)]
[Notices]
[Pages 68111-68114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23684]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90240; File No. SR-CboeBZX-2020-075]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Enhance 
Its Drill-Through Protections and Make Other Clarifying Change

October 21, 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 October 9, 2020, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II 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 BZX Exchange, Inc. (the ``Exchange'' or ``BZX Options'') 
proposes to enhance its drill-through protections and make other 
clarifying changes. 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/equities/regulation/rule_filings/bzx/), 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 enhance its drill-through protections for 
orders and make other clarifying changes. Currently, pursuant to Rule 
21.17(d), the System will execute a marketable buy (sell) order, 
respectively, up to a buffer amount above (below) the limit of the 
Opening Collar or the national best offer (``NBO'') (national best bid 
(``NBB'')), as applicable (the ``drill-through price''). The System 
enters any order (or unexecuted portion) into the BZX Options Book at 
the drill-through price for a specified period of time (determined by 
the Exchange).\3\ At the end of the time period, the System cancels any 
portion of the order not executed during that time period.
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    \3\ The current time period is two seconds, and the current 
default amounts are available in the technical specifications 
available at https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf. Upon implementation of the 
proposed rule change, the Exchange will likely reduce the length of 
the time period and maintain the same buffer amounts.
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    The Exchange proposes to permit orders to rest in the BZX Options 
Book for multiple time periods and at more

[[Page 68112]]

aggressive displayed prices during each time period.\4\ Specifically, 
the System enters the order in the BZX Options Book with a displayed 
\5\ price equal to the drill-through price (as discussed below, if an 
order's limit price is less aggressive than the drill-through price, 
the order will rest in the BZX Options Book at its limit price and 
subject to the User's instructions, and the drill-through mechanism as 
proposed to be amended would no longer apply to the order).\6\ The 
order (or unexecuted portion) will rest in the BZX Options Book until 
the earlier to occur of the order's full execution or the end of the 
duration of the number of time periods.\7\ Following the end of each 
period prior to the final period, the System adds (if a buy order) or 
subtracts (if a sell order) one buffer amount to the drill-through 
price displayed during the immediately preceding period (each new price 
becomes the ``drill-through price'').\8\ The order (or unexecuted 
portion) rests in the BZX Options Book at that new drill-through price 
for the duration of the subsequent period. Following the end of the 
final period, the System cancels the order (or unexecuted portion) not 
executed during any time period. The Exchange has received feedback 
from Users that the current application of the drill-through mechanism 
is too limited. The Exchange believes this proposed rule change will 
provide additional execution opportunities for these orders (or 
unexecuted portions) while providing protection against execution at 
prices that may be erroneous.
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    \4\ The Exchange will announce to Trading Permit Holders the 
buffer amount, the number of time periods, and the length of the 
time periods in accordance with the introductory paragraph of Rule 
21.17. The Exchange notes that each time period will be the same 
length (as designated by the Exchange), and the buffer amount 
applied for each time period will be the same.
    \5\ Currently, the drill-through price is the price of orders in 
the book. The proposed rule change clarifies that the drill-through 
price is displayed, which is consistent with current functionality.
    \6\ See proposed Rule 21.17(d)(2).
    \7\ The Exchange will determine on a class-by-class basis the 
number of time periods, which may not exceed five, and the length of 
the time period, which may not exceed three seconds. See proposed 
Rule 21.17(d)(2)(A). The proposed rule change adds class flexibility 
so that the Exchange may determine different time periods and buffer 
amounts for different classes, which may exhibit different trading 
characteristics and have different market models.
    \8\ The System will apply a timestamp to the order (or 
unexecuted portion) based on the time it enters or is re-priced in 
the book for priority purposes. See proposed Rule 21.17(d)(2)(C). 
This is consistent with the current drill-through functionality, 
pursuant to which the System applies a timestamp to the order (or 
unexecuted portion) based on the time it enters the book, modified 
to reflect the multiple price levels at which an order may rest. See 
current Rule 21.17(d).
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    For example, suppose the Exchange's market for a series in a class 
with a 0.05 minimum increment is 0.90-1.00, represented by a quote for 
10 contracts on each side (the quote offer is Quote A). The following 
sell orders or quote offers for the series also rest in the BZX Options 
Book:
     Order A: 10 contracts at 1.05;
     Quote B: 10 contracts at 1.10;
     Order B: 10 contracts at 1.15; and
     Order C: 20 contracts at 1.25.
    The market for away exchanges is 0.80-1.45. The Exchange's buffer 
amount for the class is 0.10, the drill-through resting time period is 
one second, and the number of time periods is three. The System 
receives an incoming order to buy 100 at 1.40, which executes against 
resting orders and quotes as follows: 10 Against Quote A at 1.00 (which 
is the national best offer), 10 against Order A at 1.05, and 10 against 
Quote B at 1.10. The System will not automatically execute any of the 
remaining 70 contracts from the incoming buy order against Order B, 
because 1.15 is more than 0.10 away from the national best offer at the 
time of order entry of 1.00 and thus exceeds the drill-through price 
check. The 70 unexecuted contracts then rest in the BZX Options Book 
for one second at a price of 1.10 (the initial drill-through price). No 
incoming orders are entered during that one-second time period to trade 
against the remaining 70 contracts. The System then re-prices the buy 
order in the BZX Options Book at a new drill-through price of 1.20 
(drill-through price plus one buffer of 0.10). Ten contracts 
immediately execute against Order B at a price of 1.15 (the buy order 
is still handled as the ``incoming order'' that executes against the 
resting Order B, and thus receives price improvement to 1.15). An 
incoming order to sell 20 contracts at 1.20 enters the BZX Options Book 
and executes against 20 of the resting contracts at that price. At the 
end of the second one-second time period, there are 40 remaining 
contracts. These contracts then rest in the BZX Options Book at a price 
of 1.30 for the final one second time period. Twenty contracts 
immediately execute against Order C at a price of 1.25. No incoming 
orders are entered during that time period to trade against the 
remaining 20 contracts. At the end of the final one-second time period, 
the System cancels the remaining 20 contracts.
    The proposed rule change also makes certain clarifying and 
nonsubstantive changes, including movement of certain terms and 
provisions within Rule 21.17(d) due to the proposed rule changes 
described above. First, the proposed rule change combines the 
provisions in current subparagraphs (1) and (2) of Rule 21.17(d) into 
proposed subparagraph (1). The drill-through protection in the 
following subparagraphs of Rule 21.17(d) (currently and as proposed) 
apply to orders that enter the BZX Options Book at the conclusion of 
the opening auction and intraday in the same manner. Therefore, current 
(and proposed) subparagraph (d)(2) apply to all orders that enter the 
BZX Options Book as described in proposed subparagraph (d)(1) (current 
subparagraphs (d)(1) and (2)). The proposed rule change clarifies that 
the drill-through protection applies to all orders that would enter the 
BZX Options Book at prices worse than the drill-through price, 
including orders not executed during the opening auction and orders 
entered intraday. This is consistent with and a clarification of 
current functionality.
    Second, the proposed rule change adds clarifying language regarding 
how the System handles orders for which the limit price is equal to or 
less than (if a buy order) or greater than (if a sell order) the drill-
through price. Current Rule 21.17(d) contemplates that orders with 
limit prices equal to or less aggressive than the drill-through price 
will not be subject to the mechanism pursuant to which orders will rest 
in the BZX Options Book for a time period and then be cancelled. 
Specifically, Rule 21.17(d) states if a buy (sell) order would execute 
or post to the BZX Options Book at a price higher (lower) than the 
drill-through price, the System enters the order into the BZX Options 
Book with a price equal to the drill-through price and rests for the 
time period in accordance with the drill-through mechanism. Therefore, 
currently, if the limit price of an order is less aggressive than or 
equal to the drill-through price (i.e., if a buy (sell) order (or 
unexecuted portion) would execute or enter the BZX Options Book at a 
price lower (higher) than or equal to the drill-through price), the 
order will rest in the BZX Options Book and the drill-through mechanism 
stops (i.e., the time period will not occur and the System will not 
cancel the order).
    The proposed rule change clarifies that notwithstanding the 
provisions described above regarding an order resting in the BZX 
Options Book for brief time periods at drill-through prices, if a buy 
(sell) order's limit price equals or is less (greater) than the drill-
through price at any time during application of the drill-through 
mechanism, the order rests in the BZX Options Book, subject to a User's

[[Page 68113]]

instructions,\9\ at its limit price and any remaining time period(s) 
described above do not occur.\10\ If the drill-through price is equal 
to or more aggressive than the order's limit price, the additional 
protection of having the order rest in the BZX Options Book for a short 
time period is not necessary given that the order will rest at the 
limit price entered by the User (and thus an acceptable execution price 
for that User). Additionally, displaying an order at a drill-through 
price (a price at which execution is possible) worse than the limit 
price of the order would be inconsistent with the terms of the order. 
This is consistent with current functionality (updated to reflect the 
proposed rule change to allow multiple time periods) and the definition 
of limit orders and merely clarifies this in the Rules.
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    \9\ For example, the order will remain in force subject to any 
time-in-force instruction applied to the order by the User upon 
entry.
    \10\ See proposed Rule 21.17(d)(2)(D).
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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.\11\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    In particular, the Exchange believes the proposed enhancement to 
the drill-through mechanism removes impediments to and perfects the 
mechanism of a free and open market and a national market system, and, 
in general, protects investors and the public interest. The proposed 
rule change will permit orders (or unexecuted portions) to rest in the 
BZX Options Book at different displayed prices for a brief but overall 
longer period of time, which will provide market participants' orders 
with additional execution opportunities while continuing to protect 
them against execution at potentially erroneous prices. The proposed 
enhancement to the drill-through protection is similar to current 
drill-through functionality. The Exchange may determine the buffer 
amount for orders and the time period in which orders may rest in the 
BZX Options Book. The proposed rule change permits an order to rest at 
multiples of the buffer amount, which would have the same effect as the 
Exchange setting a larger buffer amount. For example, if the Exchange 
set a buffer amount of $0.75, that would allow orders to execute at any 
price no further than $0.75 away from the NBBO at the time of order 
entry (including at prices $0.25 and $0.50 away from the NBBO at the 
time of order entry). This allows for the same potential execution 
prices that would be possible if the Exchange set a buffer of $0.25 and 
three time periods under the proposed rule change. While the overall 
time period for which an order may rest in the BZX Options Book may be 
longer than the currently permissible time period, the longer time 
period will still be relatively brief (maximum of 15 seconds). The 
Exchange notes it may maintain the same buffer amounts that are in 
place today. However, rather than increase the buffer amount at one 
time, the proposed rule change adds the overall larger buffer amount 
incrementally over a potentially overall longer time period. While this 
may permit executions at prices farther away from the NBBO at the time 
of order entry, it will still never permit executions at prices through 
orders' limit prices. This will provide execution opportunities for 
orders at incremental amounts away from the NBBO over a slightly longer 
time period and thus against a potentially larger number of orders. 
Users also have the ability to cancel orders prior to the completion of 
the time periods if they do not want the orders resting for a longer 
period of time.
    The Exchange believes the proposed clarifying and nonsubstantive 
changes to the drill-through protection rules protect investors by 
adding transparency to the rules regarding the drill-through 
functionality. These changes are consistent with current functionality 
and thus do not impact the applicability of the drill-through mechanism 
to orders.

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 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 enhanced drill-
through protection will apply to all marketable orders in the same 
manner. Users may cancel orders resting on the BZX Options Book during 
the drill-through time periods.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because it 
relates solely to how and when marketable orders will rest on the BZX 
Options Book. The proposed enhancement to the drill-through protection 
is consistent with the current protection and provides orders subject 
to the protection with additional execution opportunities while 
providing continued protection against execution against potentially 
erroneous prices.
    The Exchange believes the proposed rule change would ultimately 
provide all market participants with additional execution opportunities 
when appropriate while providing protection from erroneous execution. 
The Exchange believes the proposal will enhance risk protections, the 
individual firm benefits of which flow downstream to counterparties 
both at the Exchange and at other options exchanges, which increases 
systemic protections as well. The Exchange believes enhancing risk 
protections will allow Users to enter orders and quotes with further 
reduced fear of inadvertent exposure to excessive risk, which will 
benefit investors through increased liquidity for the execution of 
their orders. Without adequate risk management tools, such as the one 
proposed to be enhanced in this filing, Trading Permit Holders could 
reduce the amount of order flow and liquidity they provide. Such 
actions may undermine the quality of the markets available to customers 
and other market participants. Accordingly, the proposed rule change is 
designed to encourage Trading Permit Holders to submit additional order 
flow and liquidity to the Exchange. The proposed flexibility may 
similarly provide additional execution opportunities, which further 
benefits liquidity in potentially volatile markets. In addition,

[[Page 68114]]

providing Trading Permit Holders with more tools for managing risk will 
facilitate transactions in securities because, as noted above, Trading 
Permit Holders will have more confidence protections are in place that 
reduce the risks from potential system errors and market events.
    The proposed clarifying and nonsubstantive changes are consistent 
with current functionality and are intended to add clarity to the 
Rules, and thus the Exchange expects those changes to have no 
competitive impact.

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

    Because the foregoing 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, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \14\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization 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 satisfied this requirement.
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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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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 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 SRCboeBZX-2020-075 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-CboeBZX-2020-075. 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-CboeBZX-2020-075 and should be submitted 
on or before November 17, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23684 Filed 10-26-20; 8:45 am]
BILLING CODE 8011-01-P