Document ID: SEC-2023-0655-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2023-06-22T04:00Z

[Federal Register Volume 88, Number 119 (Thursday, June 22, 2023)]
[Notices]
[Pages 40878-40883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13212]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97738; File No. SR-CBOE-2022-051]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment Nos. 1 and 2, and Order Granting Accelerated 
Approval of Proposed Rule Change as Modified by Amendment Nos. 1 and 2 
Relating to the Processing of Auction Responses

June 15, 2023.

I. Introduction

    On October 3, 2022, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'') 
filed with the Securities and Exchange Commission (``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 Cboe Rule 5.25 relating to the processing of auction responses. 
The proposed rule change was published for comment in the Federal 
Register on October 20, 2022.\3\ On November 23, 2022, pursuant to 
Section 19(b)(2) of the Act,\4\ 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.\5\ On January 18, 2023, the 
Commission instituted proceedings under Section 19(b)(2)(B) of the Act 
\6\ to determine whether to approve or disapprove the proposed rule 
change.\7\ On April 10, 2023, the Exchange submitted Amendment No. 1 to 
the proposed rule change, which replaced and superseded the proposed 
rule change in its entirety.\8\ On April 14, 2023, 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\ On May 16, 2023, the Exchange 
submitted Amendment No. 2 to the proposed rule change, which replaced 
and superseded the proposed rule change as modified by Amendment No. 1 
in its entirety.\11\ The Commission is publishing notice of the filing 
of Amendment Nos. 1 and 2 to solicit comment from interested persons, 
and is approving the proposed rule change, as modified by Amendment 
Nos. 1 and 2, on an accelerated basis.
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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. 96081 (October 14, 
2020), 87 FR 63830.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 96380, 87 FR 73366 
(November 29, 2022). The Commission designated January 18, 2023 as 
the date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 96684, 88 FR 4243 
(January 24, 2023).
    \8\ In Amendment No. 1, the Exchange amended Cboe Rule 5.25 by: 
(1) eliminating the Priority Queue functionality; (2) specifying in 
the rule text the auctions to which the proposed new auction 
response processing functionality would apply; and (3) stating that 
the Exchange will announce the length of the proposed additional 
auction response processing period via Exchange Notice. The Exchange 
also provided additional detail regarding the order and auction 
response process and further justification, and support for its 
proposal. The full text of Amendment No. 1 is available on the 
Commission's website at: https://www.sec.gov/comments/sr-cboe-2022-051/srcboe2022051-20163989-333985.pdf.
    \9\ 15 U.S.C. 78s(b)(2).
    \10\ See Securities Exchange Act Release No. 97306, 88 FR 24455 
(April 20, 2023). The Commission designated June 17, 2023 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove 
the proposed rule change, as modified by Amendment No. 1.
    \11\ In Amendment No. 2, the Exchange amended Cboe Rule 5.25 to 
explicitly state that the System will continue to process any 
messages in its inbound queue that were received by the System 
before the end of such period. The Exchange also amended the text of 
Cboe Rule 5.25 to state that the Exchange-determined period of time 
for additional processing shall be announced with reasonable advance 
notice via Exchange Notice. The full text of Amendment No. 2 is 
available on the Commission's website at https://www.sec.gov/comments/sr-cboe-2022-051/srcboe2022051-190759-376922.pdf.
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II. Self-Regulatory Organization's Description of the Proposal, as 
Modified by Amendment Nos. 1 and 2

    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 seeks to amend its rules related to its auction 
responses.
Background
    The Exchange currently offers a variety of auction mechanisms, 
which provide price improvement opportunities for eligible orders. 
Particularly, the Exchange offers the following auction mechanisms: 
Complex Order Auction (``COA''),\12\ Step Up Mechanism (``SUM''),\13\ 
Automated Improvement Mechanism (``AIM''),\14\ Complex AIM (``C-
AIM''),\15\ Solicitation Auction Mechanism (``SAM''),\16\ Complex SAM 
(``C-SAM''),\17\ FLEX Auction Process,\18\ FLEX AIM \19\ and FLEX 
SAM.\20\ The Exchange notes that eligible orders (``auctioned order'') 
are electronically exposed for an Exchange-determined period 
(collectively referred to herein as ``auction response period'') in 
accordance with the applicable Exchange Rule, during which time Users 
may submit responses (collectively referred to herein as ``auction 
responses'' or ``auction response messages'') to an auction message. An 
auction response may only execute in the applicable auction and is 
cancelled if it does not execute during an auction. If an auction 
response is unable to be processed by the System during the auction 
response period, that auction response is unable to receive any 
execution opportunity or provide liquidity (and possible price 
improvement) on the Exchange.\21\
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    \12\ See Rule 5.33(d).
    \13\ See Rule 5.35.
    \14\ See Rule 5.37.
    \15\ See Rule 5.38.
    \16\ See Rule 5.39.
    \17\ See Rule 5.40.
    \18\ See Rule 5.72(c).
    \19\ See Rule 5.73.
    \20\ See Rule 5.74.
    \21\ The Exchange notes that its review of auction responses 
during July 2022 indicated that approximately 55% of auction 
responses had no opportunity to execute in their respective 
auctions, notwithstanding being submitted within the auction 
response period.
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    By way of further background, Trading Permit Holders (``TPHs'') may 
submit auction responses via logical port connectivity.\22\ Each 
logical port

[[Page 40879]]

corresponds to a single running order handler application.\23\ Each 
order handler application processes the messages it receives from the 
connected TPH. This processing includes determining whether the message 
contains the required information to enter the System and where to send 
that message within the System (i.e., to which matching engine). 
Messages are sent from an order handler application to a matching 
engine via User Datagram Protocol (``UDP''). The Exchange has multiple 
matching engines, each of which controls the book for one or more 
classes of options listed for trading on the Exchange. The Exchange may 
run multiple matching engine applications on a single server. Once at a 
matching engine, the message is received at a server Network Interface 
Card (``NIC''), which timestamps each message upon arrival and places 
it in a queue. Currently, each matching engine processes all messages 
it receives from a single queue from the NIC and prioritizes the 
processing of all message traffic, including auction responses, in the 
order in which the NIC received each message (i.e., in time priority).
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    \22\ A User connects to the Exchange using a logical port 
available through an API, such as the industry-standard FIX or BOE 
protocol. Logical ports represent a technical port established by 
the Exchange within the Exchange's trading system for the delivery 
and/or receipt of trading messages, including orders, cancels, and 
auction responses.
    \23\ The Exchange has numerous order handlers and uses an 
algorithm to determine at random which ports connect to which order 
handlers This algorithm attempts to spread out a single TPH's ports 
across order handlers as well as balance the number of ports that 
connect to a single order handler.
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    Auction response messages historically have waited in the same 
queue as all other order and quote message traffic. As such, if an 
auction response is submitted at a time where there is a deep queue of 
other message traffic such as mass cancellation messages or other 
orders and quotes, it is possible that the auction response may not be 
``processed'' by the System in sufficient time (i.e., prior to the end 
of the auction response period).\24\ Particularly, the queued auction 
response may not be able to participate in the applicable auction 
mechanism because the System had unprocessed (queued) messages at the 
time of the auction execution despite the fact that the User submitted 
the auction response prior to the end of the auction response period. 
Auctioned orders may therefore be missing out on potential price 
improvement that may have otherwise resulted if queued timely auction 
response(s) were able to participate in the auction.
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    \24\ For example, it takes the Exchange's system approximately 
10 microseconds to process a single order/quote or auction response 
message and, on average, approximately 190 microseconds to process a 
mass cancel message. As such, under the current system, an auction 
response that is entered after a mass cancel message is more likely 
to be detrimentally delayed as compared to a mass cancel message 
that is entered after an auction response (i.e., a 190 microsecond 
``wait time'' versus a 10 microsecond ``wait time'').
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    In 2020, the Exchange submitted a proposed rule change to adopt 
``Priority Queue'' functionality under Rule 5.25 to address the issue 
of missed auction responses and increase the likelihood that submitted 
auction responses would have the opportunity to participate in auctions 
notwithstanding any potential deep queue of pending message 
traffic.\25\ The Priority Queue functionality provides that auction 
response messages are to be processed through one queue (i.e., the 
Priority Queue), and all remaining messages are to be processed through 
another queue (i.e., the General Queue). The System would process a 
certain number of messages, as determined by the Exchange, from each 
queue on an alternating basis and prioritize processing messages in 
each respective queue in the order in which the System receives them 
(i.e., in time priority). Although the System would alternate between 
the two queues, the Priority Queue would offer reduced latency as the 
Priority Queue would consist only of auction responses, as compared to 
the General Queue which would consist of all other message traffic, 
(i.e., new orders/quote messages, cancel messages (including mass 
cancel messages) and modify messages). The Exchange notes however, that 
under the Priority Queue functionality auction responses not processed 
by the conclusion of the auction response period would still be 
canceled. As such, the Exchange ultimately determined to not implement 
Priority Queue functionality and pursue alternative functionality that 
it believed would provide a more efficient and streamlined approach and 
further increase the likelihood that timely submitted auction responses 
are able to participate in an applicable auction.
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    \25\ See Securities Exchange Act Release No. 90173 (October 14, 
2020), 85 FR 66673 (October 20, 2020) (SR-CBOE-2020-072).
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    Particularly, the Exchange now proposes to adopt new functionality 
under Rule 5.25 which would apply across all of its auction mechanisms 
to increase the likelihood that timely submitted auction responses may 
participate in the applicable auction, even during periods of high 
message traffic.\26\ Under the proposed functionality, at the time an 
auction response period ends, the System will continue to process its 
inbound queue for any messages that were received by the System before 
the end of the auction period (including auction messages) for up to an 
Exchange-determined period of time, not to exceed 100 milliseconds 
(which the Exchange may determine on a class-by-class basis which would 
apply to all auction mechanisms and which would be announced with 
reasonable advanced notice via Exchange Notice). That is, any auction 
responses that were in the queue before the conclusion of the auction 
(as identified by the NIC timestamp on the message) would be processed 
as long as the Exchange-determined time on a class-by-class basis (not 
to exceed 100 milliseconds) is not exceeded. Only auction messages 
received prior to the execution of the applicable auction are eligible 
to be processed for that auction. The applicable auction will execute 
once all messages, including auction responses, received before the end 
time of the auction response period have been processed or the 
Exchange-determined maximum time limit of up to 100 milliseconds has 
elapsed, whichever occurs first. This continuation of processing the 
queue for an additional amount of time for messages that were received 
before the end of the auction allows for auction responses that would 
otherwise have been canceled due to the conclusion of the auction 
response period to still have an opportunity to participate in the 
auction. This provides such responses with increased opportunities to 
participate in the auction, even during periods of high message 
traffic, thereby potentially providing customers with additional 
opportunities for price improvement, while still providing a processing 
cut off time to ensure auction executions aren't unduly delayed.
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    \26\ Particularly, the proposed functionality would apply to the 
following Exchange auction mechanisms: COA, SUM, AIM, C-AIM, SAM, C-
SAM, Flex Auction Process, FLEX AIM and FLEX SAM.
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    By way of an example, if an auction with an auction response period 
set to 100 milliseconds were to start at 9:00:00 a.m., only auction 
responses that were able to be processed by the System by the 
conclusion of the auction at 9:00:100 would participate in the auction. 
Accordingly, if, for example, an auction response that was submitted at 
9:00:090 (within the auction time response period), is still in the 
message queue at 9:00:100, that response under the current System 
functionality would be canceled and not eligible to participate in the 
auction. Under the proposal, at 9:00:100, because the System continues 
to process all messages timestamped

[[Page 40880]]

before 9:00:100, that same auction response submitted at 9:00:090 would 
not automatically be canceled but rather included in the auction as 
long as it was able to be processed within an additional 50 
milliseconds, which is the additional processing time set by the 
Exchange and announced to market participants with reasonable advance 
notice via Exchange Notice for that class in this example. Once that 
auction response is up for processing (because the System processes 
messages sequentially in time order sequence), the response will be 
able to participate in the auction so long as it's processed by 
9:00:150, notwithstanding such processing would occur after the 100-
millisecond auction response period has concluded. Any auction 
responses for the pending auction that are still pending after the 
execution of the auction would be canceled.\27\ The Exchange notes that 
using the same example, if an auction response was submitted at 
9:00:120, it would not be eligible for processing because the timestamp 
would identify it as being submitted outside the auction response 
period which was otherwise set to conclude at 9:00:100.
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    \27\ If, for example, the System processed all messages received 
before 9:00:100 by 9:00:110, then the auction would execute at 
9:00:110 (i.e., the System does not need to wait until 9:00:150 to 
execute an auction if all messages submitted prior to the end time 
of the auction have been processed).
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    The Exchange believes the proposed rule change will result in 
increased execution opportunities for liquidity providers that submit 
auction responses and enhance the potential for price improvement for 
orders submitted to each mechanism to the benefit of investors and 
public interest. Indeed, the Exchange believes the proposed 
functionality will increase the possibility that timely submitted 
auction responses are processed by the Exchange and have an opportunity 
for execution in the applicable auction mechanism, even if there is a 
deep pending message queue. The Exchange believes the proposed maximum 
amount of additional time for processing (i.e., 100 milliseconds) is 
both an adequate amount of time to provide pending auction responses 
with such execution opportunity, but also an amount minimal enough that 
impact to other message traffic, if any, would be de minimis. The 
Exchange also notes that it discussed the proposed maximum amount with 
market participants who indicated that 100 milliseconds was acceptable 
to them. The Exchange anticipates that in the vast majority of cases, 
the additional time needed after the conclusion of auction response 
period, if any, to process all pending auction responses will be 
shorter than the maximum 100 milliseconds. To the extent the Exchange 
determines a lesser amount of time would be sufficient, the Exchange 
could implement an additional amount of time for processing auction 
responses that is less than 100 milliseconds, which time would be 
announced with reasonable advance notice to market participants via 
Exchange Notice. Additionally, all message traffic (including auction 
responses) will continue to be processed in time-priority.
    The Exchange also believes the proposal will continue to allow the 
Exchange to set each auction response period to an amount of time that 
provides TPHs submitting responses with sufficient time to respond to, 
compete for, and provide price improvement for orders, but also 
continues to provide auctioned orders with quick executions that may 
reduce market and execution risk. Further, the Exchange believes some 
market participants choose to submit auction responses towards the end 
of an auction response period to better ensure the response is at a 
price that the market participant is willing to trade given the market 
at the time the auction response period concludes. As such, merely 
extending the auction response period in each auction would not itself 
prevent auction responses from continuing to miss the auction 
notwithstanding being timely submitted.
    Finally, in light of the proposed change, the Exchange proposes to 
modify Rule 5.25 to eliminate the Priority Queue functionality under 
current subparagraph (c) as the Exchange proposes to implement the 
proposed functionality in lieu of the Priority Queue functionality. As 
discussed above, the Exchange adopted the Priority Queue for similar 
purposes as this proposal, which is to increase the likelihood that 
submitted auction responses would have the opportunity to participate 
in auctions notwithstanding any potential deep queue of pending message 
traffic. The Exchange believes however, that the proposed new 
functionality is a more streamlined approach and would further increase 
the likelihood that timely submitted auction responses are able to 
participate in an applicable auction. Particularly, under the Priority 
Queue functionality, auction responses not processed by the conclusion 
of the auction response period would still be canceled, whereas, under 
the proposal, timely submitted auction responses would have the 
opportunity to be processed for up to an additional 100 milliseconds 
following the conclusion of the auction response period. As noted 
above, the Exchange never implemented the Priority Queue (nor did it 
ever make any announcement to market participants as to if and when it 
would be implemented) because it believed the functionality being 
proposed herein would be a better approach in addressing missed auction 
responses. Accordingly, the Exchange proposes to eliminate the now 
obsolete language in order to avoid potential confusion as to how the 
Exchange is processing auction responses.
Implementation Date
    The Exchange proposes to announce the implementation date of the 
proposed rule change in an Exchange Notice, to be published no later 
than thirty (30) days following the approval date. The implementation 
date will be no later than sixty (60) days following the approval date.
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.\28\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \29\ 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) \30\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
    \30\ Id.
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    In particular, the Exchange believes modifying its System to allow 
it to potentially process more, if not all, timely submitted auction 
responses may provide further opportunities for auctioned orders to 
receive price improvement, which removes impediments to a free and open 
market

[[Page 40881]]

and ultimately protects and benefits investors. In particular, the 
proposed rule change will continue to provide investors with timely 
processing of their options quote and order messages, while providing 
investors who submit auction orders with additional auction liquidity. 
Indeed, the proposed rule change may allow more investors additional 
opportunities to receive price improvement through an auction 
mechanism. Additionally, because the proposed functionality may provide 
liquidity providers that submit auction responses with additional 
execution opportunities in auctions, the Exchange believes they may be 
further encouraged to submit more auction responses, which may 
contribute to a deeper, more liquid auction process that provides 
investors with additional price improvement opportunities.
    The Exchange believes the proposed rule change will result in 
increased execution opportunities for liquidity providers that submit 
auction responses and enhance the potential for price improvement for 
orders submitted to each mechanism to the benefit of investors and 
public interest. As described above, the Exchange believes the proposed 
functionality will increase the possibility that timely submitted 
auction responses are processed by the Exchange and have an opportunity 
for execution in the applicable auction mechanism, even if there is a 
deep pending message queue. The Exchange believes the proposed maximum 
amount of additional time for processing (i.e., 100 milliseconds) is 
both an adequate amount of time to provide pending auction responses 
with such execution opportunity, but also an amount minimal enough that 
impact to other message traffic, if any, would be de minimis. The 
Exchange also discussed the proposed maximum amount of time with market 
participants who indicated that 100 milliseconds was acceptable to 
them. As represented above, the Exchange anticipates that in the vast 
majority of cases, the additional time needed after the conclusion of 
auction response period, if any, to process all pending auction 
responses will be shorter than the maximum 100 milliseconds. To the 
extent the Exchange determines a lesser amount of time would be 
sufficient, the Exchange could implement an additional amount of time 
for processing auction responses that is less than 100 milliseconds, 
which time would be announced with reasonable advance notice to market 
participants via Exchange Notice. Additionally, all message traffic 
(including auction responses) will continue to be processed in time-
priority.
    While the Exchange may increase the length of auction response 
periods to accommodate more auction responses, the Exchange believes 
the proposed functionality better addresses the issue of missed auction 
responses. Particularly, the Exchange believes the proposed rule change 
will accommodate more auction responses while also mitigating market 
risk that may accompany a longer auction period by setting the length 
of an auction response period to a timeframe that allows an adequate 
amount of time for TPHs to respond to an auction message and provides 
the auctioned order with fast executions. Additionally, the Exchange 
believes TPHs may wait until the end of an auction response period 
regardless of how long the Exchange sets it to in order to ensure they 
are comfortable with the price the response may execute at the 
conclusion of such auction. As such, extending the auction response 
period in each auction would not itself prevent auction responses from 
continuing to miss the auction notwithstanding being timely submitted.
    The Exchange believes adopting the proposed functionality for 
auction responses would also better provide customers with additional 
opportunities for price improvements with little to no impact to non-
auction response message traffic. Currently, auction responses account 
for an incredibly small fraction of message traffic submitted to the 
Exchange. Indeed, based on the Exchange's analysis in July 2022, 
auction response messages accounted for a mere 0.04% of all message 
traffic submitted to the Exchange. The Exchange believe the processing 
of such a small amount of message traffic, even after the conclusion of 
an auction response period, would therefore have de minimis, if any, 
impact on the processing of non-auction response messages waiting in 
the queue. The Exchange also notes that all messages are currently 
processed one at a time by the System. Therefore, the System still 
needs to ``process'' all pending auction responses, regardless of 
whether that processing involves canceling the pending auction response 
because it wasn't processed in time to participate in the auction or 
actually processing the response to participate in the auction. Either 
way, the non-auction response messages will still have to wait for 
processing of any pending responses ahead of it. Conversely, the 
current system may cause investors to miss out on opportunities to 
receive price improvement through the Exchange's auction mechanisms as 
the System is configured to cancel pending auction responses that 
``miss'' the auction execution, even if such responses were timely 
submitted but not processed due to the System being otherwise occupied 
processing messages in queue ahead of it. The Exchange therefore 
believes its proposal will make it more likely that the System 
processes timely submitted auction responses and includes them in 
applicable auctions, thus providing them with more opportunities to 
execute against auctioned orders, even during periods of high message 
traffic.
    The Exchange believes the proposed rule change is not designed to 
permit unfair discrimination between market participants as all market 
participants are allowed to submit auction responses. Additionally, the 
Exchange believes it's reasonable to adopt the proposed functionality 
for auction responses as compared to other messages because auction 
responses are submitted only for the purpose of executing (and possibly 
providing price improvement) in auctions with short durations, whereas 
other messages are generally submitted to rest in or execute against 
the book (and generally not used to submit liquidity into auctions). As 
discussed above, the Exchange believes the benefits that result from 
the adoption of the proposed functionality for auction responses would 
outweigh any potential negative impact to other message traffic, 
including customer orders, which have an incredibly low chance of being 
affected by the proposed change as discussed above and which continue 
to receive priority allocation in any event.
    The Exchange lastly believes eliminating the Priority Queue 
functionality provision in Rule 5.25 avoids potential confusion and 
maintains clarity in the rules as to how the Exchange processes auction 
responses. As discussed, the Exchange has not implemented such 
functionality and does not have any foreseeable plans to do so. The 
Exchange also has never announced any implementation date for Priority 
Queue functionality to market participants. Further, for the reasons 
described above, the Exchange believes the proposed functionality is a 
better alternative to provide timely submitted auction responses with 
opportunities to participate in an applicable auction as compared to 
the Priority Queue functionality. Particularly, under the Priority 
Queue functionality, the System may still be unable to process all 
submitted auction responses since the System will not include any 
auction responses that are still in the Priority Queue at the 
conclusion of the auction

[[Page 40882]]

response period in the auction, even if they were submitted in a timely 
manner. Under the proposed functionality, the System identifies and 
looks to process all auction responses timely submitted and will 
process such messages even after the conclusion of the auction response 
period, up to 100 milliseconds, thereby providing a better chance that 
more auction responses are in fact able to participate in the auction.

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 changes will impose any burden on intra-
market competition that is not necessary or appropriate in furtherance 
of the purposes of the Act, as the proposed rule change would apply 
equally to all TPHs that submit auction responses. As noted above, all 
market participants are able to submit auction responses. Additionally, 
the Exchange believes the adoption of the proposed functionality for 
auction responses would have little to no impact on non-auction 
response message traffic. As discussed, auction response messages 
account for an incredibly small fraction of message traffic submitted 
to the Exchange. The Exchange therefore believes the processing of such 
a small amount of message traffic by using the functionality would have 
a de minimis, if any, impact on the processing of non-auction response 
messages. Moreover, the Exchange believes it's reasonable to adopt the 
proposed functionality for auction responses as compared to other 
messages because auction responses are submitted only for the purpose 
of executing (and possibly providing price improvement) in auctions 
with short durations, whereas other messages are generally submitted to 
rest in or execute against the book (and generally not used to submit 
liquidity into auctions). Lastly, the Exchange does not believe the 
proposed rule change will impose any burden on inter-market competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act, as the proposed change affects how the System processes 
auction responses that may only participate in auctions that occur on 
the Exchange.

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

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

III. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1 and 2, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\31\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 1 and 2, is consistent with 
Section 6(b)(5) of the Act,\32\ 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 Nos. 1 and 2, is consistent with Section 6(b)(8) of the 
Act,\33\ 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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    \31\ 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).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ 15 U.S.C. 78f(b)(8).
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    In particular, the Commission finds that the proposed auction 
response processing functionality is reasonably designed to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system. The Commission believes that the proposed 
rule change could incentivize competition in the Exchange's auctions by 
increasing the likelihood of all timely submitted responses 
participating in an execution at the end of an auction, especially 
during periods of high message traffic. Increasing the number of 
competitive responses in an auction could also increase price 
improvement opportunities for any order submitted into an auction. As 
noted earlier, the Exchange discussed the proposed maximum amount of 
time with market participants who indicated that 100 milliseconds was 
acceptable to them. The time period would be announced with reasonable 
advance notice to market participants via Exchange Notice. 
Additionally, all message traffic (including auction responses) will 
continue to be processed in time-priority. The Commission emphasizes 
that the extension of processing time is only available to TPH Holders 
that have submitted an auction response within the currently 
established response period for each auction.
    Finally, the Commission believes that the Exchange's proposal to 
eliminate the Priority Queue is consistent with the Act. The proposed 
auction response processing functionality is designed to achieve the 
same goal as the former Priority Queue of increasing the number of 
submitted auction responses that participate in auctions where there is 
a deep queue of message traffic. Moreover, the Exchange stated that 
under the Priority Queue functionality, auction responses not processed 
by the conclusion of the auction response period would be 
cancelled.\34\ The Commission believes that the proposed auction 
response processing functionality may be a preferable alternative to 
the Priority Queue, because providing additional processing time for 
timely submitted auction responses offers them a greater likelihood of 
participating in an applicable auction.\35\
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    \34\ See id.
    \35\ The Exchanges notes that instead of the instant proposal, 
it could have proposed to increase the length of established auction 
response periods to accommodate more auction responses. However, the 
Exchange believes that TPHs may wait until the end of an auction 
response period to submit an auction response, regardless of how 
long the Exchange sets it, in order to ensure they are comfortable 
with the price the response may execute at the conclusion of such 
auction. See Amendment No. 1, supra note 8. The Commission agrees 
that under such circumstances, extending the auction response period 
in each auction may not prevent timely submitted auction responses 
from continuing to miss the auction.
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    Accordingly, the Commission finds that the proposed rule change, as 
modified by Amendment Nos. 1 and 2, is consistent with the requirements 
of the Act.

IV. Solicitation of Comments on Amendment Nos. 1 and 2 to the Proposed 
Rule Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment Nos. 1 
and 2, are consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 40883]]

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CBOE-2022-051 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-2022-051. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-CBOE-2022-051 and should be 
submitted on or before July 13, 2023.

V. Accelerated Approval of Amendment Nos. 1 and 2

    As discussed above, in Amendment Nos. 1 and 2, the Exchange amended 
the proposed rule change by eliminating the Priority Queue 
functionality. The Exchange also amended Cboe Rule 5.25 by specifying 
in the rule text the auctions to which the proposed auction response 
processing functionality would apply and stating that the Exchange will 
announce the length of the proposed additional auction response 
processing period with reasonable advance notice via Exchange Notice. 
The Exchange also provided additional detail regarding the order and 
auction response process and further justification and support for its 
modified proposal. Finally, the Exchange made a grammatical change to 
the proposed rule text to make clear that at the conclusion of an 
auction response or exposure period, the System will continue to 
process any messages in its inbound queue that were received by the 
system before the end of such period.
    The Commission believes that the Exchange's proposal to eliminate 
the Priority Queue, which the Exchange has never implemented, is 
reasonable because the proposed auction response processing 
functionality is designed to achieve the same goal of increasing the 
number of submitted auction responses that participate in auctions 
where there is a deep queue of message traffic. The Commission also 
believes that stating in the text of Rule 5.25 (1) the auctions to 
which the proposed auction response processing functionality would 
apply; (2) that at the end of an auction response or exposure period, 
the System will continue to process any messages in its inbound queue 
that were received before the end of such period; and (3) that the 
Exchange will provide reasonable advance notice of the Exchange-
determined period of time of additional processing via Exchange Notice 
should provide additional clarity to the proposed rule text and 
additional transparency to TPHs. The Commission therefore believes that 
Amendment Nos. 1 and 2 provide useful specificity to the proposal 
regarding its application and notice to TPH Holders. Accordingly, the 
Commission finds good cause, pursuant to Section 19(b)(2) of the 
Act,\36\ to approve the proposed rule change, as modified by Amendment 
Nos. 1 and 2, on an accelerated basis.
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    \36\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-CBOE-2022-051), as modified 
by Amendment Nos. 1 and 2, be, and hereby is, approved on an 
accelerated basis.
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    \37\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-13212 Filed 6-21-23; 8:45 am]
BILLING CODE 8011-01-P