Document ID: SEC-2020-1371-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2020-08-27T04:00Z

[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Notices]
[Pages 53045-53051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18830]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89638; File No. SR-CBOE-2020-052]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Instituting Proceedings To 
Determine Whether to Approve or Disapprove 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

August 21, 2020.

I. Introduction

    On June 3, 2020, 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 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replaced and superseded the proposed rule change in its entirety.\4\ On 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,

[[Page 53046]]

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\ The 
Commission is publishing this notice and order to solicit comment on 
the proposed rule change, as modified by Amendment No. 1, from 
interested persons and to institute proceedings pursuant to 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.
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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. 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).
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II. Exchange's Description of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Exchange proposes to amend Rule 5.38 and Rule 5.73 regarding 
the minimum increment for Complex Automated Improvement Mechanism (``C-
AIM'') and FLEX AIM Auction responses, respectively, in connection with 
Index Combo Orders in SPX,\8\ as well as Rule 5.37, Rule 5.38, and Rule 
5.73 in connection with dissemination of the stop price in auction 
notification messages for auctions in SPX.
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    \8\ Amendment No. 1 clarifies throughout the Form 19b-4 and in 
the Exhibit 5 that the proposed rule change is applicable to Index 
Combo Orders in SPX.
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    By way of background, the Exchange recently activated the Automated 
Improvement Mechanism (``AIM'') and C-AIM Auctions in S&P 500 Index 
(``SPX'') options.\9\ When submitting an Agency Order into a C-AIM 
Auction, the Initiating Member must also submit a contra-side second 
order for the same size as the Agency Order. This second order 
guarantees that the Agency Order will receive an execution (i.e., it 
acts as a stop). Upon commencement of a C-AIM Auction, market 
participants submit responses to trade against the Agency Order. At the 
end of an auction, depending on the contra-side interest available, the 
contra order may be allocated a certain percentage of the Agency 
Order.\10\
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    \9\ The Exchange notes FLEX AIM in SPX had been activated prior 
to March 16, 2020.
    \10\ See generally Rule 5.38(e). The Exchange notes, too, that 
the same process applies to the FLEX AIM Auction pursuant to the 
FLEX Rules. See generally Rule 5.73(e).
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    When the Exchange is operating in its normal trading environment, 
the Exchange has not activated C-AIM (or AIM) in SPX,\11\ thus all non-
FLEX crossing transactions in SPX were previously only able to occur on 
the trading floor. Therefore, Trading Permit Holders may cross orders 
only in open outcry on the trading floor. Pursuant to Rule 5.87(f), a 
floor broker holding an order for the eligible order size is entitled 
to cross a certain percentage \12\ of the order with facilitated (and 
solicited orders, if designated by the Exchange for a class) after 
satisfying public customer orders \13\ if the order trades at or 
between the best bid or offer given by the crowd in response to the 
floor broker's initial request for a market. Specifically, a floor 
broker representing an order of the eligible order size or greater that 
he wishes to cross (and the percentage of which he is entitled to 
cross) must request bids and offers for such option series and make all 
persons in the trading crowd, including the PAR Official, aware of his 
request. In this way, the crossing mechanism on the trading floor 
allows for the trading crowd to control the price of a crossing order 
and indicates to responding TPHs and the crossing floor broker a 
reasonable range at which the market is willing to buy (sell) at that 
point in time. This provision is subject to the crossing rules in Rule 
5.86 (subject to certain exceptions), which require disclosure of all 
terms and conditions to the crowd (including the price) prior to 
executing a cross.\14\
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    \11\ 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 and operated in an 
all-electronic configuration beginning March 16, 2020 through June 
15, 2020, when the trading floor reopened. The Exchange intends to 
activate AIM and C-AIM in SPX as electronic crossing mechanisms 
available for Users while the trading floor is open, subject to 
approval of this proposed rule change and separate proposed rule 
changes regarding AIM and C-AIM.
    \12\ Currently, the Exchange has set the percentage as 40% (the 
same crossing entitlement percentage as on AIM, C-AIM, and FLEX 
AIM). See CBOE Regulatory Circular RG16-179, Participation 
Entitlement Applicable to Crossing Orders in Open Outcry (November 
18, 2016) available at https://www.cboe.com/publish/RegCir/RG16-179.pdf.
    \13\ Similarly, the AIM and C-AIM percentage applies after 
public customer orders are satisfied. See Rules 5.37(e) and 5.38(e).
    \14\ See Rule 5.87, Interpretation and Policy .05.
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    Moreover, orders in SPX generally take on greater risk than in 
other option classes. SPX options tend to have a higher notional value 
than options in other classes (e.g., they are ten times the notional 
size of SPY options), trade much larger size than in other options 
classes (indeed, even smaller sized orders in SPX would be considered 
fairly large size in other classes), and effect increasingly more 
complex strategies than executed in other classes (e.g., Index Combo 
orders are more frequently submitted) or executed electronically (e.g., 
in open outcry complex orders trade with larger ratios that may be 
negotiated by the trading crowd). Given these factors, SPX Market-
Makers on the floor 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 and a Market-Maker may thus more confidently base 
response on the market of other members of the trading crowd. The 
Exchange notes, too, that these unique factors and more complex 
characteristics of SPX have contributed to the Exchange's historical 
determination to not activate AIM and C-AIM in SPX when the floor is 
open, whereas the auctions have historically been activated in all 
other options classes.\15\
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    \15\ Amendment No. 1 adds additional clarification regarding the 
differences between SPX and other classes and the role of such 
differences in the Exchange's historical determination not to 
activate AIM and C-AIM for SPX, whereas AIM and C-AIM have 
historically been activated in all other classes.
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    Pursuant to Rules 5.4(b) and 5.33(f)(1)(A), the minimum increment 
for bids and offers on complex orders in options on SPX \16\ is $0.05 
or greater, or in any increment determined by the Exchange. When 
seeking to cross SPX complex orders on the trading floor, a floor 
broker generally identifies the legs of the complex order and their 
relative sizes to each other with a net package price. The Exchange 
understands the trading crowd then generally provides a market based on 
the strategy's theoretical value in an increment of $0.05 rather than 
the value of the net package (which equals the strategy times the 
ratio), which is particularly true when the complex order represented 
is a delta neutral order that includes a combo. The Exchange has 
observed that Index Combos in SPX comprise a significant portion of 
crosses in SPX,\17\ and when the Exchange

[[Page 53047]]

activated C-AIM for SPX options, a significant amount of SPX volume 
executed through C-AIM. 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. Specifically, an ``Index 
Combination'' is a purchase (sale) of an index option call and a sale 
(purchase) of an index option put with the same expiration date and 
strike price, and ``delta'' is the positive (negative) number of Index 
Combinations that must be sold (bought) to establish a market neutral 
hedge with one or more series of the same index option.\18\ A combo 
often used in SPX is an at-the-money series in the quarterly expiration 
that coincides with the CME E-mini S&P 500 futures contract expiration. 
In order to hedge fully, the number of combos required is equal to the 
number of units of the non-combo portion times the delta divided by 
100. For example, 800 units of a 12.5-delta option would require 100 
combos to be fully hedged (800 *12.5)/100 = 100 combos.
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    \16\ Except for box/roll spreads.
    \17\ In April 2020, Index Combos in SPX comprised 60.5% of 
crossed volume executed in SPX via AIM while the trading floor was 
inoperable.
    \18\ See Rule 5.33(b).
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    In open outcry, the trading crowd generally prices the combo hedge 
portion separately. The price of the combo and the rest of the order 
are ultimately packaged and sent out as a net package price for the 
entire order on the customer fill report. If the crowd improves the 
price on the non-combo leg by a minimum increment, or greater, that 
price is given on each contract. For example, if the trading crowd 
improves $0.10 on 800 contracts, the $0.10 improvement is on each of 
the 800 contracts.\19\
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    \19\ Amendment No. 1 adds clarity around the use of Index Combo 
Orders in SPX as well as the price improvement process on such 
orders when submitted for open outcry trading.
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    Currently, Rule 5.38(c)(5)(A) and Rule 5.38(a)(4) 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, as described above, is $0.05 in SPX 
options.\20\ The Exchange notes that the corresponding FLEX AIM Rules 
5.73(c)(5)(A) and 5.73(a)(4) provide the same for FLEX AIM Auctions. 
However, unlike on the trading floor, market participant responses 
using this increment have generally improved the net package price 
(based on then-current leg markets) by the minimum increment of $0.05. 
More specifically, in an electronic auction the improvement increment 
is given on each strategy unit. That is, if the order (per the example 
above) is for 800:100:100 total quantity, the system treats this as 100 
units of an 8:1:1 ratio strategy. If $0.05 of improvement is given, the 
$0.05 applies to each of the 100 strategy units.\21\ While 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 under the Rules, that is not the common practice, as 
noted above. The Exchange believes this is because the parties to an 
electronic complex order trade may compete only with respect to the net 
price and are not able to negotiate the leg prices.
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    \20\ The System rejects a C-AIM response or Agency or Initiating 
Order that is not in the applicable minimum increment.
    \21\ Amendment No. 1 adds clarity regarding the price 
improvement process for Index Combo Orders in SPX when submitted for 
execution in an electronic auction.
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    Using the example above, consider, specifically, an Index Combo in 
SPX to buy 800 SPX NOV 3650 calls, ``tied'' (meaning hedged by combos), 
with a 12.5 delta. Systematized, the order has an 8:1:1 ratio, 100 
times, and is as follows:
     Leg 1 = Buy 800 SPX NOV 3650 Calls.
     Leg 2 = Sell 100 SPX SEP 3210 Calls.
     Leg 3 = Buy 100 SPX SEP 3210 Puts.
    Consider, too, that the current quotes are as follows:
     SPX NOV 3650 Call = $20.40 - $21.00
     SPX SEP 3210 Call $120.00-$120.70.
     SPX SEP 3210 Put $127.30-$128.00.

If the entire order were to trade at the implied/BBO prices, the 
premium and total cash outlay would be as follows:

----------------------------------------------------------------------------------------------------------------
                   Option                        Premium          Ratio                   Total cash
----------------------------------------------------------------------------------------------------------------
NOV 3650 Call..............................          $21.00         $168.00  $1,680,000.00 debit ($21*800*100).
SEP 3210 Call..............................          120.00          120.00  1,200,000.00 credit (120*100*100).
SEP 3210 Put...............................          128.00          128.00  1,280,000.00 debit (128*100*100).
Net package................................             N/A          176.00  1,760,000.00 debit (176*100*100).
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    As described above, the trading crowd would generally price the 
non-combo portion separately and, per the example above, if the crowd 
improves the non-combo portion (Leg 1) by the minimum increment of 
$0.10, prices would be as follows:

----------------------------------------------------------------------------------------------------------------
                   Option                        Premium          Ratio                   Total cash
----------------------------------------------------------------------------------------------------------------
NOV 3650 Call..............................          $20.90         $167.20  $1,672,000.00 debit
                                                                              ($20.90*800*100).
SEP 3210 Call..............................          120.00          120.00  1,200,000.00 credit (120*100*100).
SEP 3210 Put...............................          128.00          128.00  1,280,000.00 debit (128*100*100).
Net package................................             N/A          175.20  1,752,000.00 debit
                                                                              (175.20*100*100).
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    As stated, if submitted for execution in an electronic auction, the 
minimum improvement increment is $0.05 for complex orders in SPX. If 
the electronic auction results in the minimum improvement increment of 
$0.05, $0.05 of improvement would be given to each strategy unit (i.e., 
each of the 100 units would receive $0.05 of improvement). The prices 
would be as follows: \22\
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    \22\ The Exchange notes that the System uses an algorithm to 
determine how price improvement is distributed on a multi-leg 
strategy. This example shows one possibility. The $0.05 improvement 
cannot not be applied to Leg 1 because the ratio on that leg is `8', 
therefore, there are not enough pennies to distribute given there 
are only five pennies ($0.05) worth of improvement. This, then, 
leaves the other two legs, both of which have a ratio of `1', in 
which the System may distribute the five pennies of improvement per 
strategy unit. In sum, the price improvement given is always 
distributed in a manner that improves the leg market.

[[Page 53048]]

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                   Option                        Premium          Ratio                   Total cash
----------------------------------------------------------------------------------------------------------------
NOV 3650 Call..............................          $21.00         $168.00  $1,680,000.00 debit ($21*800*100).
SEP 3210 Call..............................          120.03          120.03  1,200,300.00 credit
                                                                              (120.03*100*100).
SEP 3210 Put...............................          127.98          127.98  1,279,800.00 debit
                                                                              (127.98*100*100).
Net package................................             N/A          175.95  1,759,500.00 debit
                                                                              (175.95*100*100).
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    Therefore, as demonstrated in the example, the difference between 
pricing the combo and non-combo portions of the order separately when 
trading in open outcry (where the example order would have received a 
total price improvement of $0.80) and as a net package when trading in 
an electronic auction (where the example order would have received a 
total price improvement of only $0.05), may result in a significant 
difference between the price improvement received.\23\
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    \23\ Amendment No. 1 replaces the example and explanation of the 
differences between the price improvement process in open outcry 
trading and in the electronic auctions, simplifying and clarifying 
the example explanation as well as providing for additional detail.
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    In addition to this, 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, options series 
(additionally, in the case of C-AIM Auctions, complex strategy, and in 
the case of FLEX AIM Auctions, length of the auction period and complex 
strategy, as applicable) of the Agency Order to all Users that elect to 
receive AIM, C-AIM, or FLEX AIM Auction notification messages. AIM, C-
AIM, and FLEX AIM Auction notification messages are not included in the 
disseminated BBO (in connection with AIM Auctions) or OPRA. As such, 
the stop price of an Agency Order is not currently included in auction 
notification messages. The Exchange believes that lack of an indication 
of where an auction is set to begin, like the ballpark figure provided 
by the trading crowd when crossing on the trading floor, may cause 
apprehension in pricing competitive responses during the electronic 
auctions in SPX, which may reduce liquidity and price improvement 
during such auctions.
    The Exchange is considering activating AIM and C-AIM in SPX when it 
reopens the trading floor. To better align the C-AIM process for SPX 
complex strategies with the open outcry crossing process for those 
strategies, 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 (as defined in Rule 5.33(b)) \24\ 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). Also, to better align the 
AIM and C-AIM pricing process generally for responses 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 AIM and C-AIM Auction notification messages, 
respectively, in SPX.\25\ If the stop price is enabled for SPX in AIM 
or C-AIM, respectively, it will apply to all AIM auctions in SPX.\26\ 
Like all other information disseminated in an AIM and C-AIM Auction 
notification message, the stop price will be available to all Users 
that elect to receive auction notification messages. The Exchange notes 
that the FLEX AIM Rules in connection with the auction process for FLEX 
complex orders are substantially similar to the AIM and C-AIM Rules. 
Therefore, to maintain consistency within the Rules between the FLEX 
and non-FLEX auctions, the Exchange also proposes to amend the FLEX AIM 
process for SPX complex strategies (i.e. for FLEX C-AIM) and for FLEX 
AIM Auction notification messages in the same manner.\27\
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    \24\ Amendment No. 1 corrects this cross reference in the 
Exhibit 5 to reflect the appropriate Rule that contains the 
definition of Index Combo Orders.
    \25\ Amendment No. 1 add this footnote to clarify that the 
Exchange will notify its TPHs 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 are posted on the Exchange's website, 
electronic message, or other communication method as provided in the 
Rules.
    \26\ Amendment No. 1 adds this language to Rule 5.37(c)(2) and 
Rule 5.38(c)(2) in the Exhibit 5.
    \27\ See proposed Rules 5.73(c)(2) and 5.73(c)(5)(A).
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    The Exchange believes that the proposed rule changes will create 
similar price competition for these orders in electronic and open 
outcry trading. Particularly, the Exchange believes that the current 
manner in which de minimis price improvement may occur via C-AIM, as 
well as FLEX C-AIM, Auctions in connection with Index Combo Orders in 
SPX (i.e., potentially only improved in sub-penny increments) may 
discourage market participants from providing contra-side interest at 
the best prices and liquidity providers from joining or improving at 
meaningful increments. As such, the proposed rule change is intended to 
provide for substantially the same price improvement opportunities at 
meaningful increments on SPX complex strategies submitted to C-AIM and 
FLEX C-AIM that occur for the same strategies on the trading floor. To 
illustrate by using the same complex strategy example above, if a User 
buys 800 of the November 3650 SPX Calls tied to 100 September 3210 
Combos, using a delta of 12.5, pursuant to the proposed rules, the 
System would calculate the minimum increment by the ratio of the non-
combo leg (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. In this way, 
by tying the minimum increment to the legs of the order, as opposed to 
the package price inclusive of the combos, the Exchange believes the 
proposed rule would require market participants to respond to the C-AIM 
or FLEX C-AIM Auctions for SPX complex strategies at prices more 
aligned with the prices at which responses generally occur in open 
outcry, i.e. prices in response to a broker's corresponding bids 
(offers) based off of the market per leg at which the trading crowd 
indicates it is willing to buy (sell). If market participants may 
participate in C-AIM or FLEX C-AIM executions in connection with SPX 
complex strategies by providing de minimis price improvement compared 
to price improvement that may occur on the floor, the Exchange believes 
there may be less interest by market participants to take on the risk 
of participating as a contra and may negatively impact liquidity 
available on the trading floor. As a result, the Exchange believes this 
potentially reduces price improvement opportunities for customers. 
Particularly, if the Exchange determines to activate C-AIM in SPX when 
the trading floor re-opens, the Exchange believes the proposed rule 
change may provide customers with additional opportunities for more 
meaningful price improvement and may encourage

[[Page 53049]]

market participants to provide more liquidity for C-AIM transactions in 
SPX while also mitigating any potential disincentive to provide 
liquidity on the trading floor in SPX by better aligning electronic and 
open outcry crossing of SPX complex orders that include a combo.
    The Exchange notes that the proposed rule change does not alter the 
minimum increment as determined by the Exchange for SPX complex 
strategies and is consistent with the ability of the Exchange to 
determine the minimum increment for SPX (the proposed minimum increment 
will be in multiples of $0.05). Additionally, it would not alter the 
manner in which the System caps responses pursuant to Rule 
5.38(c)(5)(B), wherein, if the BBO of any component of the complex 
strategy or the resting complex order, respectively, is a Priority 
Customer order, a response is capped at 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 Complex Order Book (``COB''). 
The System would simply use the minimum increment determined pursuant 
to the proposed calculation for any response submitted in connection 
with an Index Combo Order in SPX.\28\ Instead, the proposed rule change 
provides that price improvement opportunities for such orders submitted 
into C-AIM, as well FLEX AIM, occur at the same meaningful increments 
that market participants reasonably would expect to occur on such 
orders pursuant to the current Rules and practice on the trading floor. 
The Exchange believes this may encourage a potential increase in 
participation in the C-AIM and FLEX AIM Auctions in SPX without a 
corresponding negative impact on participation or liquidity in open 
outcry auctions once the trading floor reopens. The Exchange believes 
that without the proposed rule change, market participants may improve 
the displayed auction price by only a trivial amount, thereby, 
potentially enabling liquidity providers to ``step ahead'' of those 
that are willing to trade with customer orders at the auction price. 
Such activity, in turn, may discourage market participants from 
providing liquidity at meaningful prices to commence an auction. As 
such, the Exchange believes that the proposed rule change to provide 
price improvement at more significant increments that are better 
aligned with those received on the trading floor would encourage market 
participants to provide meaningful responses to customer orders in 
electronic auctions.\29\
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    \28\ Amendment No. 1 adds language to clarify how the System 
would cap responses that were submitted in connection with an Index 
Combo Order in SPX and received the minimum price improvement 
pursuant to proposed Rule 5.38(c)(5)(A).
    \29\ Amendment No. 1 adds additional detail regarding the 
purpose of adopting the proposed minimum increments for responses in 
connection with Index Combo Orders in SPX.
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    In the same way, the Exchange believes that the proposed rule 
change to allow the System to disseminate the initial price of an SPX 
AIM and C-AIM Auction, as well as FLEX AIM Auction, would more 
generally align the trading of SPX options submitted for execution into 
the electronic auctions with those crossed on the trading floor. The 
Exchange believes that the proposed rule change would allow the 
Exchange to address any uncertainties market participants may have when 
pricing SPX responses, given the more complicated market models, 
greater risk, higher notional value, larger sizes, and increasingly 
more complex strategies in SPX, by including the Agency Order stop 
price in the auction notification messages. This, in turn, may 
facilitate market participants' confidence in pricing meaningful, 
competitive responses during electronic auctions in SPX in a manner 
substantially similar to which the trading crowd's market allows for 
market participants to more confidently price their responses 
accordingly. As a result, this proposed rule change is intended to 
incentivize continued, competitive responses to SPX electronic auctions 
in substantially the same manner in which responses may be priced on 
the trading floor, thus, providing for potentially improved liquidity 
and price improvement opportunities for orders being executed through 
those auctions. The Exchange also notes that its affiliated options 
exchange, Cboe EDGX Exchange, Inc. (``EDGX Options'') corresponding 
rules \30\ governing the AIM and C-AIM auction notification messages on 
EDGX Options provide that its system initiates the AIM or C-AIM auction 
processes by sending an auction notification message detailing the 
price, along with the same fields currently detailed pursuant to Cboe 
Options Rules 5.37(c)(2) and 5.38(c)(2) as well as 5.73(c)(2). Also, 
pursuant to Exchange Rule 5.33(d)(1), C2 Rule 6.13(d)(1), and EDGX 
Options Rule 21.20(d)(1), the Exchange and its affiliated options 
exchanges may currently determine to include in similar notification 
messages the limit price of an order that initiates a Complex Order 
Auction (``COA''), much like that of the stop price of an AIM, C-AIM, 
or FLEX AIM Agency order that initiates these auctions. The Exchange 
further notes that similar electronic auctions on other options 
exchanges disseminate the price in their initial auction messages.\31\
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    \30\ See EDGX Options Rules 21.19(c)(2) and 21.22(c)(2).
    \31\ See MIAX Options Rule 5.18(d)(2), which governs the 
commencement of a Complex Auction on MIAX Options, and Rules 
515A(a)(2)(i)(B) and 515A.12, which govern the request for response 
message disseminated during MIAX Options' electronic crossing 
auctions, PRIME and complex PRIME; substantially similar to AIM and 
C-AIM; see also NYSE American Options Rule 903G(a)(2), which governs 
the information required in FLEX Request for quotes.
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    The Exchange believes that providing similar response and execution 
opportunities across these trading facilities will serve to maintain 
meaningful levels of liquidity, price competition, and price 
improvement opportunities in SPX during both electronic and open outcry 
auctions upon the reopening of the trading floor if the Exchange 
determines to activate AIM and C-AIM for SPX at that time. As a result, 
the proposed rule change is designed to ensure that C-AIM for complex 
SPX strategies remains a viable additional means of execution for SPX 
complex orders, and that market participants maintain the same 
confidence in pricing their responses to AIM and C-AIM Auctions in SPX 
as they have during open outcry auctions, and thus, will continue to 
provide more execution and price improvement opportunities for 
customers. Likewise, the proposed rule change would align the FLEX AIM 
and C-AIM Auction process with the non-FLEX AIM and C-AIM Auction 
process, potentially providing the similar opportunities for execution 
and price improvement in connection with the same complex strategies 
and similar meaningfully price responses submitted into FLEX AIM and 
providing investors with continued consistency in the Exchange's 
auction rules, thus, mitigating any confusion for those participating 
in both non-FLEX and FLEX SPX trading.

III. Summary of Comment Letter Received

    To date the Commission has received one comment letter on the 
proposal.\32\ The commenter supported the proposal and agreed with 
Cboe's assertion that ``providing appointed Market-Makers with an 
additional way to participate in electronic auctions will expand 
available liquidity for these auctions, which may increase execution 
and price improvement opportunities for

[[Page 53050]]

customers' orders.'' \33\ The commenter also believed that the proposed 
rule change ``would further align open outcry and electronic crossing 
auctions and the execution and price improvement opportunities in both 
auctions by permitting the same participants to be solicited as contras 
in both types of auctions across all classes at all times.'' \34\ The 
commenter agreed with Cboe that ``there is no reason to restrict 
Market-Makers ability to provide liquidity into electronic auctions 
when they are able to similarly provide that liquidity in open outcry 
trading.'' \35\
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    \32\ 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.
    \33\ See id. at 3.
    \34\ See id.
    \35\ See id.
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IV. Proceedings To Determine Whether to Approve or Disapprove SR-CBOE-
2020-052, as Modified by Amendment No. 1, and Grounds for Disapproval 
Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \36\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as stated below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the proposed rule change, as modified by 
Amendment No. 1, to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
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    \36\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\37\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulate 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 to protect investors and the public interest, and 
not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers; \38\ and Section 6(b)(8) of the Act, 
which requires that the rules of the Exchange do not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act.\39\
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    \37\ 15 U.S.C. 78s(b)(2)(B).
    \38\ 15 U.S.C. 78f(b)(5).
    \39\ 15 U.S.C. 89f(b)(8).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \40\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding,\41\ and any failure of a self-
regulatory organization to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Act and the 
applicable rules and regulations.\42\
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    \40\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \41\ See id.
    \42\ See id.
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    The Commission is instituting proceedings to allow for additional 
consideration and comment on the issues raised herein, including as to 
whether the proposal is consistent with the Act.

V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of 
the Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4 under the Act,\43\ 
any request for an opportunity to make an oral presentation.\44\
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    \43\ 17 CFR 240.19b-4.
    \44\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by September 17, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 1, 2020. Commission may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2020-052 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2020-052. 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

[[Page 53051]]

to make available publicly. All submissions should refer to File Number 
SR-CBOE-2020-052, and should be submitted on or before September 17, 
2020. Rebuttal comments should be submitted by October 1, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18830 Filed 8-26-20; 8:45 am]
BILLING CODE 8011-01-P