Document ID: SEC-2019-1451-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-10-07T04:00Z

[Federal Register Volume 84, Number 194 (Monday, October 7, 2019)]
[Notices]
[Pages 53525-53534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21725]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87192; File No. SR-CBOE-2019-063]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
to the Solicitation Auction Mechanism (``SAM'' or ``SAM Auction'')

October 1, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 24, 2019, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend the Solicitation Auction Mechanism (``SAM'' or ``SAM 
Auction''). The text of the proposed rule change is provided in Exhibit 
5.

[[Page 53526]]

    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc. 
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also 
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe 
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or 
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX 
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with 
Cboe Options, C2, EDGX, EDGA, and BZX, the ``Cboe Affiliated 
Exchanges''). The Cboe Affiliated Exchanges are working to align 
certain system functionality, retaining only intended differences 
between the Cboe Affiliated Exchanges, in the context of a technology 
migration. Cboe Options intends to migrate its trading platform to the 
same system used by the Cboe Affiliated Exchanges, which the Exchange 
expects to complete on October 7, 2019. Cboe Options believes offering 
similar functionality to the extent practicable will reduce potential 
confusion for market participants.
    In connection with this technology migration, the Exchange has a 
shell Rulebook that resides alongside its current Rulebook, which shell 
Rulebook will contain the Rules that will be in place upon completion 
of the Cboe Options technology migration. The Exchange proposes to 
delete Rule 6.74B in the current Rulebook and add the provisions 
regarding SAM Auctions for simple orders, as proposed to be modified in 
this rule filing, to Rule 5.39 in the shell Rulebook.\5\
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    \5\ Current Rule 6.74B, Interpretation and Policy .01 permits 
complex orders to be executed through a SAM Auction. The Exchange 
intends to adopt a separate rule regarding the execution of complex 
orders in SAM Auctions in a separate rule filing.
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    The proposed rule change moves the introductory paragraph of 
current Rule 6.74B to the introductory paragraph of proposed Rule 5.39 
in the shell Rulebook and adds to the introductory paragraph \6\ of 
Rule 5.39 that the Solicited Order may consist of one or more solicited 
orders.\7\ This accommodates multiple contra-parties and increases the 
opportunities for customer orders to be submitted into a SAM Auction 
with the potential for price improvement, since the Solicited Order 
must stop the full size of the Agency Order. This has no impact on the 
execution of the Agency Order, which may already trade against multiple 
contra-parties depending on the final auction price, as set forth in 
proposed paragraph (e). The Exchange notes that with regard to order 
entry, the first order submitted into the system is marked as the 
initiating/agency side and the second order is marked as the contra-
side. Additionally, the Solicited Order will always be entered as a 
single order, even if that order consists of multiple contra-parties 
who are allocated their portion of the trade in a post-trade 
allocation.\8\
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    \6\ The proposed rule change also adds to the proposed 
introductory paragraph that for purposes of proposed Rule 5.39, the 
term ``NBBO'' means the national best bid or offer at the particular 
point in time applicable to the reference, and the term ``Initial 
NBBO'' means the national best bid or national best offer at the 
time a SAM Auction is initiated. This is merely an addition of 
terminology used throughout the Rule, but has no impact on 
functionality.
    \7\ The Solicited Order cannot have a Capacity F for the same 
executing firm ID (``EFID'') as the Agency Order or for the account 
of any Market-Maker with an appointment in the applicable class on 
the Exchange. See current Rule 6.74B, Interpretation and Policy .03. 
Cboe Options Rule 6.74B does not contain a similar provision, but 
enforces the requirement that the contra-side order be a 
solicitation rather than a facilitation through surveillance. The 
proposed rule change adds this functionality, which will help with 
the enforcement of this requirement, in addition to surveillance. 
The Agency Order and Solicited Order cannot both be for the accounts 
of a customer. Current Rule 6.74B does not contain a similar 
prohibition. However, the Exchange believes it is appropriate for 
such customer-to-customer crosses to be submitted to an AIM Auction 
pursuant to Rule 5.37 in the shell Rulebook, as that rule contains a 
provision for Customer-to-Customer Immediate AIM Crosses.
    \8\ The Exchange notes that while other exchange rules do not 
specify whether the contra-side order in a solicitation auction 
mechanism may consist of multiple orders, the contra-side order for 
Qualified Contingent Cross Orders (see Rule 6.53 of the current 
Rulebook and Rule 5.6(c) of the shell Rulebook), which similarly 
have a minimum quantity requirement and are fully crossed against an 
Solicited Order that must be for a minimum number of contracts, may 
consist of multiple contra-side orders. However, Nasdaq ISE, LLC 
(``ISE'') Regulatory Information Circular 2014-013 states that the 
contra-side order submitted into a crossing mechanism (including the 
ISE solicited order mechanism) may consist of one or more parties.
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    Proposed Rule 5.39(a) lists the SAM Auction eligibility 
requirements: \9\
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    \9\ With respect to the existing SAM Auction eligibility 
requirements that the proposed rule change retains but moves from 
Rule 6.74B in the current Rulebook to Rule 5.39 in the shell 
Rulebook, the proposed rule change makes nonsubstantive changes, 
including to make the rule provision more plain English, to simplify 
the provisions, to delete any redundant language, and to conform 
language to corresponding rules of applicable Cboe Affiliated 
Exchanges. Unless otherwise specified in this rule filing, the 
proposed rule change makes no substantive changes to these 
provisions.
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     The proposed rule change moves the requirement that the 
Agency Order must be in any class of options the Exchange designates as 
eligible for SAM Auctions from current Rule 6.74B(a)(1) to proposed 
Rule 5.39(a)(1).
     The proposed rule change moves the requirement that the 
Initiating TPH mark an Agency Order for SAM Auction processing from 
current Rule 6.74B(b)(1)(A) to proposed Rule 5.39(a)(2).
     The proposed rule change moves the requirement that the 
Agency Order must be for at least the minimum size designated by the 
Exchange (which may not be less than 500 standard option contracts or 
5,000 mini-option contracts) from current Rule 6.74B(a)(1) to proposed 
Rule 5.39(a)(3). Proposed Rule 5.39(a)(3) also states the Solicited 
Order must be for (or must total, if the Solicited Order is comprised 
of multiple solicited orders) the same size as the Agency Order. While 
not explicitly stated in current Rule 6.74B, this proposed provision 
clarifies current functionality and is consistent with the current 
Rules.\10\
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    \10\ See current Rule 6.74B(a)(2) (which requires the Agency 
Order to be stopped with a solicited order, and that those orders be 
all-or-none (``AON'')); and (b)(2)(A) (which provides the Agency 
Order will be executed against the solicited order (in full per the 
introductory paragraph of (b)(2)).
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    The proposed rule change deletes the requirement that the 
Initiating TPH must designate each of the Agency Order and Solicited 
Order as AON from current Rule 6.74B(a)(2). The Exchange's new system 
has been designed to automatically handle any orders submitted into a 
SAM Auction (using the appropriate messaging) as all-or-none, so the 
Initiating TPH will no longer be required to add any specific AON 
designations to the Agency Order or Solicited Order.

[[Page 53527]]

     The proposed rule change moves the requirement that the 
price of the Agency Order and the Solicited Order must be in an 
increment the Exchange determines on a class basis, which may be no 
smaller than $0.01 from current Rule 6.74B(a)(3) to proposed Rule 
5.39(a)(4). The proposed rule change makes no changes to the 
permissible minimum increments in SAM Auctions.
     Proposed Rule 5.39(a)(5) states the Initiating TPH may not 
designate an Agency Order or Solicited Order as Post Only. A Post Only 
order is an order the System ranks and executes pursuant to proposed 
Rule 5.32, subjects to the Price Adjust process pursuant to Rule 5.32, 
or cancels or rejects (including if it is not subject to the Price 
Adjust process and locks or crosses a Protected Quotation of another 
exchange), as applicable (in accordance with User instructions), except 
the order or quote may not remove liquidity from the Book or route away 
to another Exchange. The Exchange does not currently offer Post Only 
order functionality, but will as of the technology migration.\11\ The 
Exchange believes it is appropriate to not permit the Agency or 
Solicited Order to be designated as Post Only, as the purpose of a Post 
Only order is to not execute upon entry and instead rest in the Book, 
while the purpose of a SAM Auction is to receive an execution following 
the Auction but prior to entering the Book.
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    \11\ See Cboe Options Rule 5.6(c) in the shell Rulebook.
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     Proposed Rule 5.39(a)(6) states an Initiating TPH may only 
submit an Agency Order to a SAM Auction after the market open. This is 
consistent with current functionality, as executions cannot occur prior 
to the opening of trading. The proposed rule change clarifies this in 
the Rule.
     Proposed Rule 5.39(a)(7) states an Initiating TPH may not 
submit an Agency Order if the NBBO is crossed (unless the Agency Order 
is a SAM Intermarket Sweep Order (``SAM ISO'') (see discussion below)). 
This is consistent with current functionality and ISO orders, as well 
as linkage rules, and the proposed rule change clarifies this in the 
Rule. The Exchange believes it is appropriate to not permit a SAM 
Auction to be initiated if the NBBO is crossed, as a crossed NBBO may 
indicate price uncertainty within the market. The Exchange believes 
this may prevent executions at potentially erroneous prices.
    The proposed rule change also explicitly states that all of the 
eligibility requirements in proposed paragraph (a) must be met for a 
SAM Auction to be initiated, and that the System rejects or cancels 
both an Agency Order and Solicited Order submitted to a SAM Auction 
that do not meet the conditions in proposed paragraph (a). This is 
consistent with current functionality and the concept of eligibility 
requirements, and merely adds this detail the Rules.
    Proposed Rule 5.39(b) lists the requirements related to the price 
at which the Solicited Order must stop the Agency Order: \12\
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    \12\ With respect to the existing SAM Auction eligibility 
requirements that the proposed rule change retains but moves from 
Rule 6.74B in the current Rulebook to Rule 5.39 in the shell 
Rulebook, the proposed rule change makes nonsubstantive changes, 
including to make the rule provision more plain English, to simplify 
the provisions, to delete any redundant language, and to conform 
language to corresponding rules of applicable Cboe Affiliated 
Exchanges. Unless otherwise specified in this rule filing, the 
proposed rule change makes no substantive changes to these 
provisions.
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     The proposed rule change moves the requirement that the 
stop price for a buy (sell) Agency Order must be at or better than the 
then-current national best offer (``NBO'') (national best bid 
(``NBB'')) from current Rule 6.74B(a)(2) and (b)(1)(A) to proposed Rule 
5.39(b)(1). The current rule also requires the stop price to be at or 
better than the same side NBBO. While the proposed rule change does not 
impose that restriction, it requires the execution price to be at or 
better than the Initial NBBO, and thus it has the same ultimate effect.
     Proposed rule 5.39(b)(2) states if the Agency Order is to 
buy (sell), the stop price must be at least one minimum increment 
better than the Exchange best bid (offer) (``BBO''), unless the Agency 
Order is a Priority Customer order and the resting order is a non-
Priority Customer order, in which case the stop price must be at or 
better than the Exchange best bid (offer). Current Rule 6.74B is silent 
regarding whether the stop price must be at or better than the same-
side Exchange best bid or offer; however, the execution price must be 
at or better than the Exchange best bid or offer, and the proposed stop 
price requirement is consistent with the provision, which merely 
applies this protection at the initiation of the SAM Auction. The 
Exchange believes this condition protects orders on the same side as 
the Agency Order resting on the Book, including Priority Customer 
orders. By permitting a Priority Customer Agency Order to be entered at 
the same price as a resting non-Priority Customer order, the proposed 
rule change also protects Priority Customer orders submitted into a SAM 
Auction. The proposed rule change is consistent with general customer 
priority principles.
     If the Agency Order is to buy (sell) and the Exchange best 
offer (bid) represents (a) a Priority Customer order on the Book, the 
stop price must be at least one minimum increment better than the 
Exchange best offer (bid); or (b) a quote or order that is not a 
Priority Customer order on the Book, the stop price must be at or 
better than the Exchange best offer (bid). Current Rule 6.74B is silent 
regarding whether the stop price must be at or better than the 
opposite-side Exchange best bid or offer; however, the execution price 
may not be at the same price as priority customer orders resting on the 
book on the opposite side of the Agency Order (unless the priority 
customer orders execute against the Agency Order), and the proposed 
stop price requirement is consistent with the provision, which merely 
applies this protection at the initiation of the SAM Auction. The 
Exchange believes this condition protects orders on the opposite side 
of the Agency Order resting on the Book, including Priority Customer 
orders.
     Proposed Rule 5.39(b)(4) states if the Initiating TPH 
submits a SAM sweep order to a SAM Auction, the stop price, SAM 
responses, and executions are permitted at a price inferior to the 
Initial NBBO. A ``SAM sweep order'' or ``SAM ISO'' is the submission of 
two orders for crossing in a SAM Auction without regard for better-
priced Protected Quotes (as defined in Rule 5.65) because the 
submitting TPH routed an intermarket sweep order (``ISO'') 
simultaneously with the routing of the SAM ISO to execute against the 
full displayed size of any Protected Quote that is better than the stop 
price and has swept all interest in the Book with a price better than 
the stop price. Any execution(s) resulting from these sweeps accrue to 
the SAM Agency Order. Current Rule 6.74B is silent on whether ISOs are 
permitted with respect to SAM Auctions. However, the proposed 
definition of a SAM ISO is consistent with linkage rules.
    The proposed rule change also explicitly states that the System 
rejects or cancels both an Agency Order and Solicited Order submitted 
to a SAM Auction that do not meet these conditions. This is consistent 
with current functionality and the concept of price conditions, and 
merely adds this detail the Rules.
    Proposed Rule 5.39(c) describes the SAM Auction process, which 
commences upon receipt of an Agency Order that meets the conditions in

[[Page 53528]]

proposed paragraphs (a) and (b), as described above: \13\
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    \13\ With respect to the provisions regarding the SAM Auction 
process that the proposed rule change retains but moves from Rule 
6.74B in the current Rulebook to Rule 5.39 in the shell Rulebook, 
the proposed rule change makes nonsubstantive changes, including to 
make the rule provision more plain English, to simplify the 
provisions, to delete any redundant language, and to conform 
language to corresponding rules of applicable Cboe Affiliated 
Exchanges. Unless otherwise specified in this rule filing, the 
proposed rule change makes no substantive changes to these 
provisions.
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     Proposed Rule 5.39(c)(1) states that one or more SAM 
Auctions in the same series may occur at the same time. To the extent 
there is more than one SAM Auction in a series underway at a time, the 
SAM Auctions conclude sequentially based on the exact time each SAM 
Auction commenced, unless terminated early pursuant to proposed 
paragraph (d). At the time each SAM Auction concludes, the System 
allocates the Agency Order pursuant to proposed paragraph (e) and takes 
into account all SAM Auction responses and unrelated orders in place at 
the exact time of conclusion. In the event there are multiple SAM 
Auctions underway that are each terminated early pursuant to proposed 
paragraph (d), the System processes the SAM Auctions sequentially based 
on the exact time each SAM Auction commenced.\14\ The Exchange believes 
the proposed new functionality may lead to an increase in SAM Auctions, 
which may provide additional opportunities for price improvement for 
Agency Orders.
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    \14\ See proposed Rule 5.39(c)(1). This provision regarding 
concurrent SAM Auctions is the same as the Automated Improvement 
Mechanism (``AIM'') provision that permits concurrent AIM Auctions 
for Agency Orders of 50 contracts or more. See Rule 5.37(c)(1) of 
the shell Rulebook.
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    The Exchange notes it is also possible for various types of 
auctions (such as an AIM Auction or a complex order auction (``COA'')) 
today to occur concurrently in the same series, and at the end of each 
auction, it is possible for interest resting in the Book to trade 
against any of the auctioned orders in the series. While these auctions 
may be occurring at the same time, they will be processed in the order 
in which they are terminated (similar to how the System processes SAM 
Auctions as discussed above). In other words, suppose there is an AIM 
Auction, a SAM Auction, and a COA all occurring in the same series, 
which began and will terminate in that order, and each of which last 
100 milliseconds. While it is possible for all three auctions to 
terminate nearly simultaneously, the System will still process them in 
the order in which they terminate. When the AIM Auction terminates, the 
System will process it in accordance with Rule 6.74A in the current 
Rulebook (Rule 5.37 in the shell Rulebook), and the auctioned order may 
trade against any resting interest (in addition to the contra-side 
order and responses submitted to that AIM Auction, which may only trade 
against the order auctioned in that AIM pursuant to Rule 6.74A (Rule 
5.37 in the shell Rulebook). The System will then process the SAM 
Auction when it terminates, and the auctioned order may trade against 
any resting interest that did not execute against the AIM order (in 
addition to the contra-side order and responses submitted to that SAM 
Auction, which may only trade against the order auctioned in that SAM 
pursuant to current Rule 6.74B (proposed Rule 5.39)). Finally, the 
System will then process the COA Auction when it terminates, and the 
COA order may leg into the Book and trade against any resting interest 
that did not execute against the AIM order or SAM order (in addition to 
any interest resting on the complex order book and COA responses 
pursuant to current Rule 6.53C in the current Rulebook (which the 
Exchange intends to move to Rule 5.33 in the shell Rulebook)).
     The proposed rule change moves the provision regarding the 
SAM Auction notification message (currently referred to as a request 
for responses message) from current Rule 6.74B(b)(1)(B) to proposed 
Rule 5.39(c)(2). The proposed provision specifies that the message will 
detail the Capacity of the Agency Order, an Auction ID, and the option 
series, in addition to the price, side, and size, of the Agency Order, 
which message is sent to all TPHs that elect to receive SAM Auction 
notification messages. This is consistent with the current auction 
message that is disseminated; the proposed rule change adds these 
details to the rule. The proposed rule change also adds that SAM 
Auction notification messages are not included in the disseminated BBO 
or OPRA, which is also consistent with current functionality.
     The proposed rule change moves the provision regarding the 
length of the SAM Auction period from current Rule 6.74B(b)(1)(C) to 
proposed Rule 5.39(c)(3). The proposed rule change makes no changes to 
the current range of permitted lengths of SAM Auction periods.
     The proposed rule change clarifies in proposed Rule 
5.39(c)(4) that the Initiating TPH may not modify or cancel an Agency 
Order or Solicited Order after submission to a SAM Auction. This is 
consistent with current functionality, and the proposed rule change 
merely adds this detail to the Rules.
    Proposed Rule 5.39(c)(5) describes the provisions related to SAM 
responses: \15\
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    \15\ With respect to the provisions regarding SAM responses that 
the proposed rule change retains but moves from Rule 6.74B in the 
current Rulebook to Rule 5.39 in the shell Rulebook, the proposed 
rule change makes nonsubstantive changes, including to make the rule 
provision more plain English, to simplify the provisions, to delete 
any redundant language, and to conform language to corresponding 
rules of applicable Cboe Affiliated Exchanges. Unless otherwise 
specified in this rule filing, the proposed rule change makes no 
substantive changes to these provisions.
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     The proposed rule change moves the provision that states a 
SAM response must specify size and side from current Rule 
6.74B(b)(1)(C) to proposed Rule 5.39(c)(5). The proposed rule change 
deletes the requirement that a SAM response include a price, and 
instead permits a SAM response to specify a limit price or be treated 
as market. This provides Users with more flexibility regarding the 
price at which it is willing to trade against an Agency Order. The 
proposed rule change adds that a SAM response must also specify an 
Auction ID, and that a SAM response may only participate in the AIM 
Auction with the Auction ID specified in the response. While not 
specified in current Rule 6.74B, this is consistent with current 
functionality, and the proposed rule change adds this detail to the 
Rules. The Exchange proposes to include this language given the above 
proposal that permits concurrent SAM Auctions in the same series.
    Current Rule 6.74B(b)(1)(C) permits all Trading Permit Holders may 
submit responses to a SAM request for responses (``RFR''), except that 
responses may not be entered for the account of an options market-maker 
from another options exchange. The proposed rule change permits all 
Users (including Market-Makers from another options exchange) \16\ to 
submit responses to a SAM Auction. By permitting additional 
participants to submit responses to SAM Auctions, the Exchange believes 
this may provide the opportunity for additional liquidity in these 
auctions, which could lead to additional price improvement 
opportunities. Rules of other exchanges do not contain restrictions on 
who may

[[Page 53529]]

respond to similar solicitation auction mechanisms.\17\
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    \16\ The proposed rule change also prohibits the Initiating TPH 
from submitting a response to a SAM Auction (and notes the system 
helps enforce this prohibition by not permitting a response to have 
the same EFID as the Agency Order). This will prevent the submitter 
of a Solicited Order from submitting a response to attempt to 
participate in the execution of an Agency Order in the event the 
Solicited Order does not execute against the Agency Order, which is 
consistent with the requirement that the Solicited Order cannot be a 
facilitation.
    \17\ See, e.g., Miami International Securities Exchange, LLC 
(``MIAX'') Rule 515A(b).
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     The proposed rule change moves the provision that states 
the minimum price increment for SAM response is the same as the one the 
Exchange determines for a class (pursuant to proposed Rule 5.39(a)(4)), 
and the System rejects a SAM response that is not in the applicable 
minimum increment from current Rule 6.74B(b)(1)(E) to proposed Rule 
5.39(c)(5)(A).
     Proposed Rule 5.39(c)(5)(B) states SAM buy (sell) 
responses are capped at the Exchange best offer (bid), or one minimum 
increment better than the Exchange best offer (bid) if it is 
represented by a Priority Customer on the Book (unless the Agency Order 
is a SAM ISO) that exists at the conclusion of the SAM Auction. The 
System will execute SAM responses, if possible, at the most aggressive 
permissible price not outside the BBO at the conclusion of the SAM 
Auction or the Initial NBBO. The proposed rule change ensures the 
execution price of a response will not cross the Initial NBBO in 
accordance with linkage rules.\18\ Additionally, proposed subparagraph 
(e) requires the execution price to be at or between the BBO at the 
conclusion of the SAM Auction. Therefore, as proposed, the price at 
which any response may be entered (and thus be executed) will 
ultimately not be through the Initial NBBO or the BBO at the conclusion 
of the SAM Auction.
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    \18\ See Rule 6.81(b)(8) in the current Rulebook (Rule 
5.66(b)(8) in the shell Rulebook) (requires an order to be stopped 
at a price no worse than the price at the time of receipt of the 
order).
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     Proposed Rule 5.39(c)(5)(C) states a User may submit 
multiple SAM responses at the same or multiple prices to a SAM Auction. 
This is consistent with current functionality. Current Rule 6.74B 
contains no restriction on how many responses a User may submit; the 
proposed rule change merely makes this explicit in the Rules. The 
proposed rule change also states for purposes of a SAM Auction, the 
System aggregates all of a User's orders and quotes on the Book and SAM 
responses for the same EFID at the same price. This (combined with the 
proposed size cap described below) will prevent a User from submitting 
multiple orders, quotes, or responses at the same price to obtain a 
larger pro-rata share of the Agency Order.
     Proposed Rule 5.39(c)(5)(D) states the System caps the 
size of a SAM response, or the aggregate size of a User's orders and 
quotes on the Book and SAM responses for the same EFID at the same 
price, at the size of the Agency Order (i.e., the System ignores size 
in excess of the size of the Agency Order when processing the AIM 
Auction). This is consistent with current subparagraph (b)(1)(F), 
except the proposed rule change caps the aggregate size of a User's 
interest at the same price, rather than the size of an individual 
response. The Exchange believes this is reasonable to prevent a User 
from submitting an order, quote, or response with an extremely large 
size in order to obtain a larger pro-rata share of the Agency Order.
     Proposed Rule 5.39(c)(5)(E) states SAM responses must be 
on the opposite side of the market as the Agency Order, and the System 
rejects a SAM response on the same side of the market as the Agency 
Order. This is consistent with current functionality, and the proposed 
rule change merely adds this detail to the rules. Additionally, the 
Exchange believes this is reasonable given that the purpose of a SAM 
response is to trade against the Agency Order in the SAM Auction into 
which the SAM response was submitted.
     The proposed rule change moves the provision that says SAM 
responses are not visible to SAM Auction participants or disseminated 
to OPRA from current Rule 6.74B(b)(1)(D) to proposed Rule 
5.39(c)(5)(F).
     The proposed rule change moves the provision that says a 
User may modify or cancel its SAM responses during a SAM Auction from 
current Rule 6.74B(b)(1)(G) to proposed Rule 5.39(c)(5)(G).
    Current Rule 6.74B(b)(2) states a SAM Auction at the sooner of Rule 
6.74A(b)(2)(A) through (F), which are the provisions that describe when 
an AIM Auction concludes. The Exchange recently amended the events that 
may cause an AIM Auction to conclude, so the proposed rule change 
similarly amends the events that may cause a SAM Auction to conclude to 
be the same as the events that may cause an AIM Auction to conclude 
(and adds them to proposed Rule 5.39). Therefore, proposed Rule 5.39(d) 
states a SAM Auction concludes at the earliest to occur of the 
following times:
     The end of the SAM Auction period;
     upon receipt by the System of a Priority Customer order on 
the same side of the market with a price the same as or better than the 
stop price that would post to the Book;
     upon receipt by the System of an unrelated order or quote 
that is not a Priority Customer order on the same side of the market as 
the Agency Order that would cause the stop price to be outside of the 
BBO;
     the market close (consistent with current functionality 
and merely added to the Rules); and
     any time the Exchange halts trading in the affected 
series, provided, however, that in such instance the SAM Auction 
concludes without execution (consistent with current Rule 
6.74A(b)(2)(F), and the proposed rule change adds detail that a SAM 
Auction in such a case will conclude without execution, which is 
consistent with current functionality, as no executions may occur while 
a series is halted for trading).
    The proposed rule change deletes the following events that 
currently cause a SAM Auction to conclude early:
     Upon receipt by the System of an unrelated order (in the 
same series as the Agency Order) that is marketable against either the 
BBO (when such quote is the NBBO) or the RFR responses;
     upon receipt by the System of an unrelated limit order (in 
the same series as the Agency Order and on the opposite side of the 
market as the Agency Order) that improves any RFR responses; and
     any time there is a quote lock on the Exchange pursuant to 
Rule 6.45(c) in the current Rulebook.
    As discussed below, unrelated orders on the opposite side of the 
Agency Order received during the SAM Auction may execute against 
interest outside of the SAM Auction, and therefore, the Exchange will 
no longer terminate a SAM Auction due to the receipt of an order on the 
opposite side of the Agency Order. The proposed rule change to conclude 
a SAM Auction early upon receipt of certain orders on the same side as 
the Agency Order ensure that the execution price does not occur at the 
same price as a Priority Customer order on the Book or at a price worse 
on than a non-Priority Customer order on the Book. This is consistent 
with the requirements for the stop price described above. Additionally, 
the Exchange will not have quote lock functionality following the 
technology migration, and therefore proposes to delete that as an event 
that may cause a SAM Auction to terminate early.\19\
---------------------------------------------------------------------------

    \19\ See Securities Exchange Act Release No. 86374 (July 15, 
2019), 84 FR 34963 (July 19, 2019) (SR-CBOE-2019-033) (proposed rule 
change in which the Exchange deletes quote lock functionality).
---------------------------------------------------------------------------

    An unrelated market or marketable limit order (against the BBO), 
including a Post Only Order, on the opposite side of the Agency Order 
received during the AIM Auction does not cause the SAM

[[Page 53530]]

Auction to end early and executes against interest outside of the SAM 
Auction. If contracts remain from such unrelated order at the time the 
SAM Auction ends, they may be allocated for execution against the 
Agency Order pursuant to proposed paragraph (e). Because these orders 
may have the opportunity to trade against the Agency Order following 
the conclusion of the SAM Auction, which execution must still be at or 
better than the Initial NBBO and BBO at the conclusion of the SAM 
Auction, the Exchange does not believe it is necessary to cause a SAM 
Auction to conclude early in the event the Exchange receives such 
orders. This will provide more time for potential price improvement, 
and the unrelated order will have the opportunity to trade against the 
Agency Order in the same manner as all other contra-side interest.
    The proposed rule change moves the provisions regarding the 
allocation of the Agency Order at the conclusion of the SAM Auction 
against the Solicited Order or contra-side interest (which includes 
orders and quotes resting in the Book and SAM responses) from current 
Rule 6.74B(b)(2) to proposed Rule 5.39(e). Executions at the conclusion 
of the SAM Auction will occur in the same manner as they do today, 
except the proposed rule change prioritizes Priority Customer AON 
orders over all non-Priority Customer contra-side interest (displayed 
Priority Customer orders will have priority over Priority Customer AON 
orders) in executions following SAM Auctions.\20\ The Exchange believes 
this encourages market participants, including Priority Customers, to 
display their best bids and offers, which may lead to enhanced 
liquidity and tighter markets.
---------------------------------------------------------------------------

    \20\ Providing displayed interest with priority over 
nondisplayed interest is consistent with the Exchange's general 
allocation rules. See Rule 5.32(a)(3)(A) in the shell Rulebook 
(which provides that displayed orders have priority over 
nondisplayed orders).
---------------------------------------------------------------------------

    The proposed rule change adds detail regarding the priority of 
contra-side interest that executes against the Agency Order, which is 
consistent with the general priority rules in current Rule 6.45 in the 
current Rulebook (Rule 5.32 in the shell Rulebook), except for the AON 
provision noted above. The proposed rule change also explicitly states 
that the System cancels or rejects any unexecuted SAM responses (or 
unexecuted portions) at the conclusion of a SAM Auction. While the 
current rule does not state this, it is consistent with current 
functionality. Additionally, it is consistent with the provision (as 
described above) that Users submit responses to a specific auction to 
potentially execute against the Agency Order and the proposed provision 
that responses may only execute in the SAM Auction into which they are 
submitted. The proposed rule change also makes nonsubstantive changes 
to the allocation provisions, including to make the rule provision more 
plain English, to simplify the provisions, to delete any redundant 
language, and to conform language to corresponding rules of applicable 
Cboe Affiliated Exchanges. Unless otherwise specified in this rule 
filing, the proposed rule change makes no substantive changes to these 
provisions.
    The proposed rule change moves current Rule 6.74B, Interpretations 
and Policies .02 and .03 to proposed Rule 5.39, Interpretations and 
Policies .01 and .02, respectively, making only nonsubstantive changes.
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.\21\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \22\ 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) \23\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ Id.
---------------------------------------------------------------------------

    The Exchange's SAM Auction as proposed will function in a 
substantially similar manner following the technology migration as it 
does today. The proposed rule change will benefit investors by 
providing continued consistency across the Exchange's (and the Cboe 
Affiliated Exchanges', as applicable) price improvement mechanisms. The 
general framework of the SAM Auction process as proposed to be amended 
(such as the eligibility requirements, the auction response period, the 
same-side stop price requirements, response requirements, and auction 
notification process) will continue to be substantively the same as the 
framework for the AIM price improvement auction the Exchange's current 
price improvement auction, as the Exchange recently amended.\24\ The 
Exchange continued similarity of its SAM Auction to its AIM Auction 
will allow the Exchange's proposed price improvement functionality to 
fit seamlessly into the options market and benefit market participants 
with consistency across similar functionality. The Exchange also 
believes this will encourage Users to compete vigorously to provide the 
opportunity for price improvement for customer orders in a competitive 
auction process.
---------------------------------------------------------------------------

    \24\ See SR-CBOE-2019-045 (filed August 28, 2019).
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change to permit the 
Solicited Order to be comprised of multiple orders that total the size 
of the Agency Order may increase liquidity and opportunity for Agency 
Orders to participate in SAM Auctions, and therefore provide Agency 
Orders with additional opportunities for price improvement, which is 
consistent with the principles behind the SAM Auction. The Exchange 
believes that this will be beneficial to participants because allowing 
multiple contra-parties should foster competition for filling the 
contra-side order and thereby result in potentially better prices, as 
opposed to only allowing one contra-party and, thereby requiring that 
contra-party to do a larger size order which could result in a worse 
price for the trade. Another exchange permits the contra-side in a 
solicited auction mechanism to be comprised of multiple contra-
parties.\25\ The Exchange notes the contra-side of a Qualified 
Contingent Cross order may be comprised of multiple orders.\26\
---------------------------------------------------------------------------

    \25\ See ISE Options 3, Section 11(d); and ISE Regulatory 
Information Circular 2014-013.
    \26\ Unlike orders submitted to a SAM Auction, Qualified 
Contingent Cross orders may immediately execute and are not exposed 
to the market for possible price improvement.
---------------------------------------------------------------------------

    The proposed rule that an Initiating TPH may not designate an 
Agency Order or Solicited Order as Post Only protects investors, 
because it provides transparency regarding functionality that will not 
be available for SAM. The Exchange believes this is appropriate, as the 
purpose of a Post Only order is to not execute upon entry and instead 
rest in the Book, while the purpose of submitting orders to a SAM 
Auction is to receive an execution following the

[[Page 53531]]

auction and not enter the Book. Pursuant to current Rule 6.74B and 
proposed Rule 5.39, an Agency Order will fully execute against contra-
side interest (possibly against the Solicited Order, which must be for 
the same size as the Agency Order), or will be cancelled in the event 
there is no execution following a SAM Auction, and thus there cannot be 
remaining contracts in an Agency Order or Solicited Order to enter the 
Book.
    The proposed stop price requirements will benefit investors, as 
they will protect Priority Customer orders in the Book (as well as 
Agency Orders for Priority Customers). The current rule essentially 
enforces these price requirements at the conclusion of a SAM Auction; 
the proposed rule change merely applies this check at the initiation of 
a SAM Auction. The Exchange believes application of this price check at 
the initiation of a SAM Auction may result in the Agency Order 
executing at a better price, since the stop price must improve any 
same-side orders (with the exception of a Priority Customer Agency 
Order and a resting non-priority customer order described above). The 
proposed rule change is consistent with general customer priority 
principles.
    As discussed above, the Exchange has proposed to allow SAM Auctions 
to occur concurrently with other SAM Auctions. Although SAM Auctions 
for Agency Orders will be allowed to overlap, the Exchange does not 
believe this raises any issues that are not addressed through the 
proposed rule change described above. For example, although 
overlapping, each SAM Auction will be started in a sequence and with a 
time that will determine its processing. Thus, even if there are two 
SAM Auctions that commence and conclude, at nearly the same time, each 
SAM Auction will have a distinct conclusion at which time the SAM 
Auction will be allocated. In turn, when the first Auction concludes, 
unrelated orders that then exist will be considered for participation 
in the SAM Auction. If unrelated orders are fully executed in such SAM 
Auction, then there will be no unrelated orders for consideration when 
the subsequent SAM Auction is processed (unless new unrelated order 
interest has arrived). If instead there is remaining unrelated order 
interest after the first SAM Auction has been allocated, then such 
unrelated order interest will be considered for allocation when the 
subsequent SAM Auction is processed. As another example, each SAM 
response is required to specifically identify the Auction for which it 
is targeted and if not fully executed will be cancelled back at the 
conclusion of the Auction. Thus, SAM responses will be specifically 
considered only in the specified SAM Auction. The Exchange does not 
believe that allowing multiple auctions to overlap for Agency Orders 
presents any unique issues that differ from functionality already in 
place on the Exchange or other exchanges. Pursuant to Rule 5.37(c)(1) 
in the shell Rulebook, multiple AIM Auctions for Agency Orders for 50 
or more contracts may overlap. Additionally, other options exchanges 
permit other auctions to overlap.\27\
---------------------------------------------------------------------------

    \27\ See, e.g., ISE Options 3, Section 11(d); and Boston Options 
Exchange (``BOX'') Rule 7270.
---------------------------------------------------------------------------

    The proposed rule change will also perfect the mechanism of a free 
and open market and a national market system, as it is consistent with 
linkage rules. Proposed Rule 5.39 does not permit Agency Orders to be 
submitted when the NBBO is crossed and requires Agency Order execution 
prices at the end of SAM Auctions to be at or between the Initial NBBO 
and the BBO at the conclusion of the SAM Auction. The proposed stop 
price requirements and the events to terminate a SAM Auction early 
further ensure execution prices at or better than the Initial NBBO and 
BBO. Additionally, the proposed SAM ISO order type (which is similar to 
current AIM ISO functionality) will provide TPHs with an efficient 
method to initiate a SAM Auction while preventing trade-throughs.
    The proposed rule change to permit all Users (other than the 
Initiating TPH) to respond to SAM Auctions will benefit investors. 
Permitting all Users to submit responses to SAM Auctions may result in 
more Users having the opportunity to participate in executions at the 
conclusion of SAM Auctions. Additionally, it may increase liquidity in 
SAM Auctions, which may lead to more opportunities to price 
improvement. The Exchange believes the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, because other exchanges permit all market 
participants to respond to similar price improvement auctions.\28\
---------------------------------------------------------------------------

    \28\ See, e.g., MIAX Rule 515A(b)(2)(i)(C).
---------------------------------------------------------------------------

    The proposed SAM Auction response requirements are reasonable and 
promote a fair and orderly market and national market system, as they 
provide clarity regarding how they may respond to a SAM Auction. The 
proposed provisions regarding the aggregation of responses with other 
contra-side interest of the same User, and capping the size and price 
of that interest at the price and size of the Agency Order, will 
protect investors by preventing a User from submitting multiple orders, 
quotes, or responses at the same price to obtain a larger pro-rata 
share of the Agency Order. The proposed response provisions also ensure 
responses will be available for execution at prices at or better than 
the BBO at the conclusion of the SAM Auction, and the Initial NBBO, in 
accordance with linkage rules, as discussed above.
    Unlike current Rule 6.74B, the Exchange will not conclude a SAM 
Auction early due to the receipt of an opposite side order. The 
Exchange believes this promotes just and equitable principles of trade, 
because these orders may have the opportunity to trade against the 
Agency Order following the conclusion of the SAM Auction, which 
execution must still be at or better than the Initial NBBO and BBO 
existing at the conclusion of the SAM Auction. The Exchange believes 
this will protect investors, because it will provide more time for 
price improvement, and the unrelated order will have the opportunity to 
trade against the Agency Order in the same manner as all other contra-
side interest.
    With respect to trading halts, as described herein, in the case of 
a trading halt on the Exchange in the affected series, the Auction will 
be cancelled without execution. Cancelling Auctions without execution 
in this circumstance is consistent with Exchange handling of trading 
halts in the context of continuous trading on the Exchange and promotes 
just and equitable principles of trade and, in general, protects 
investors and the public interest.\29\
---------------------------------------------------------------------------

    \29\ The Exchange notes that trading on the Exchange in any 
option contract will be halted whenever trading in the underlying 
security has been paused or halted by the primary listing market and 
other circumstances. See Rule 6.3 in the current Rulebook.
---------------------------------------------------------------------------

    Agency Orders will execute against contra-side interest at the 
conclusion of a SAM Auction in the same manner as it does today, except 
that the proposed rule change will also provide priority to Priority 
Customer AON orders over all non-Priority Customer contra-side 
interest. Displayed Priority Customer orders will have priority over 
Priority Customer AON orders, SAM Auctions, which the Exchange believes 
encourages market participants, including Priority Customers, to 
display their best bids and offers, which may lead to enhanced 
liquidity and tighter markets. Prioritizing displayed interest over 
nondisplayed interest is consistent with the Exchange's current 
allocation and priority rules, which have been

[[Page 53532]]

previously filed with the Commission.\30\ The Exchange believes this 
will ensure a fair and orderly market by maintaining priority of orders 
and quotes and protecting Priority Customer orders, while still 
affording the opportunity for price improvement during each SAM Auction 
commenced on the Exchange. The proposed allocation will continue to 
ensure that the Agency Order will be filled if there is a Priority 
Customer order on the Book at the stop price and sufficient other 
contra-side interest to satisfy the Agency Order.
---------------------------------------------------------------------------

    \30\ See Rule 5.32(a)(3)(A) in the shell Rulebook.
---------------------------------------------------------------------------

    While other exchange rules do not discuss how AON orders are 
prioritizes at the conclusion of similar solicitation auction 
mechanisms, the Commission has previously considered this issue. The 
Commission has stated that not protecting AON public customer order on 
the book while permitting the agency order and solicited order to 
execute would disadvantage the public customer order.\31\ The proposed 
rule change to prioritize Priority Customer AON orders over non-
Priority Customer contra-side interest ensures that the Agency order 
and Solicited Order will not cross when a Priority Customer AON order 
at the stop price is resting on the Exchange's Book, and thus is 
consistent with the Act, as it promotes just and equitable principles 
of trade, 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. As noted above, the Commission has 
also previously considered the issue of prioritizing displayed interest 
over nondisplayed interest, as that concept exists in the Exchange's 
Rules (and was therefore previously filed with the Commission). While 
Priority Customer AON orders generally execute after all other 
interest,\32\ the Exchange believes it is appropriate to provide this 
priority to Priority Customer AON orders in the context of a SAM 
Auction and give these orders an increased change to execute \33\ 
against the Agency Order (assuming there is sufficient size to satisfy 
the Agency Order and the AON contingency can be satisfied) given that 
such orders may prevent an Agency Order from executing against a 
Solicited Order. As a result, the proposed rule change ensures a 
Priority Customer AON resting on the Book at the stop price at the 
conclusion of a SAM Auction will not be disadvantaged.
---------------------------------------------------------------------------

    \31\ The Commission previously stated that permitting ``the 
Agency Order and Solicited Order to cross when an all-or-none 
customer order at the stop price exists on Phlx's order book would 
result in an outcome that is not consistent with the Act. 
Specifically, rather than protecting the all-or-none public customer 
order at the stop price, Phlx's proposal to allow the Solicited 
Order to execute against the Agency Order and leave the all-or-none 
public customer order on the order book would disadvantage the 
public customer order. While such a result may be expedient for the 
firm that entered the Agency Order and Solicited Order into the 
Solicitation Auction and for the solicited party, it would raise 
concerns under Section 6(b)(5) of the Act, which, among other 
things, requires that the rules of a national securities exchange be 
designed `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 . . .' '' See Securities Exchange 
Act Release No. 75300 (June 25, 2015), 80 FR 37672, 37683 (July 1, 
2015) (SR-Phlx-2014-66) (order disapproving a proposed rule change 
to adopt an electronic solicitation mechanism).
    \32\ See Rule 5.32(a)(3)(C) in the shell Rulebook.
    \33\ If the Priority Customer AON order received last priority 
(except for non-Priority Customer AON orders, as is normally the 
case (see Rule 5.32(a)(3)(C) in the shell Rulebook), the Priority 
Customer AON order would have a reduced change to execute against 
the Agency Order.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule changes that add detail to 
the Rules, which are consistent with current functionality, will remove 
impediments to and perfect the mechanism of a free and open market and 
protect investors, as these changes provide transparency in the Rules 
regarding SAM Auctions. Additionally, the proposed rule change is 
substantially the same as the rule of another exchange.\34\
---------------------------------------------------------------------------

    \34\ See EDGX Options Rule 21.21; see also Securities Exchange 
Act Release No. 87060 (September 23, 2019) (SR-CboeEDGX-2019-047).
---------------------------------------------------------------------------

    The proposed rule change is also consistent with Section 11(a)(1) 
of the Act \35\ and the rules promulgated thereunder. Generally, 
Section 11(a)(1) of the Act restricts any member of a national 
securities exchange from effecting any transaction on such exchange for 
(i) the member's own account, (ii) the account of a person associated 
with the member, or (iii) an account with respect to which the member 
or a person associated with the member exercises investment discretion 
(collectively referred to as ``covered accounts''), unless a specific 
exemption is available. Examples of common exemptions include the 
exemption for transactions by broker dealers acting in the capacity of 
a market maker under Section 11(a)(1)(A),\36\ the ``G'' exemption for 
yielding priority to non-members under Section 11(a)(1)(G) of the Act 
and Rule 11a1-1(T) thereunder,\37\ and ``Effect vs. Execute'' exemption 
under Rule 11a2-2(T) under the Act.\38\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a 
national securities exchange from effecting transactions on that 
exchange for its own account, the account of an associated person, 
or an account over which it or its associated person exercises 
discretion unless an exception applies.
    \36\ 15 U.S.C. 78k(a)(1)(A).
    \37\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
    \38\ 17 CFR 240.11a2-2(T).
---------------------------------------------------------------------------

    The ``Effect vs. Execute'' exemption permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\39\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member has investment 
discretion, neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule. For the reasons set forth below, the Exchange 
believes that TPHs entering orders into SAM would satisfy the 
requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \39\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    In the context of automated trading systems, the Commission has 
found that the off-floor transmission requirement is met if a covered 
account order is transmitted from off the floor directly to the 
Exchange by electronic means.\40\ Because the Exchange's SAM Auction 
receives, and will continue to receive, orders from TPHs electronically 
through remote terminals or computer-to-computer interfaces, the 
Exchange believes that orders submitted to a SAM Auction from off the 
Exchange's trading floor will satisfy the off-floor transmission 
requirement.\41\
---------------------------------------------------------------------------

    \40\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \41\ A TPH may not enter an order for a covered account from on 
the trading floor and rely on the Effect v. Execute, and therefore 
another exception must apply. A TPH may not send an order for a 
covered account for an affiliated TPH on the floor and rely on the 
Effect v. Execute, and therefore another exception must apply.

---------------------------------------------------------------------------

[[Page 53533]]

    The second condition of Rule 11a2-2(T) requires that neither a 
member nor an associated person of such member participate in the 
execution of its order. The Exchange represents that, upon submission 
to the SAM Auction, an order or SAM response will be executed 
automatically pursuant to the rules set forth for SAM Auctions. In 
particular, execution of an order (including the Agency and the 
Solicited Order) or a SAM response sent to the mechanism depends not on 
the TPH entering the order or response, but rather on what other orders 
and responses are present and the priority of those orders and 
responses. Thus, at no time following the submission of an order or 
response is a TPH or associated person of such TPH able to acquire 
control or influence over the result or timing of order or response 
execution.\42\ Once the Agency Order and Solicited Order, or the 
response, as applicable, have been transmitted, the Initiating TPH that 
transmitted the orders, or the User that submitted the response, 
respectively, will not participate in its execution of the Agency Order 
or Solicited Order, or the response, respectively. No TPH, including 
the Initiating TPH, will see a SAM response submitted into SAM, and 
therefore and will not be able to influence or guide the execution of 
their Agency Orders, Solicited Orders, or SAM responses, as applicable.
---------------------------------------------------------------------------

    \42\ n Initiating TPH may not cancel or modify an Agency Order 
or Solicited Order after it has been submitted into SAM, but Users 
may modify or cancel their responses after being submitted into a 
SAM. See proposed Rule 5.39(c)(4) and (c)(5)(G). The Exchange notes 
that the Commission has stated that the non-participation 
requirement does not preclude members from cancelling or modifying 
orders, or from modifying instructions for executing orders, after 
they have been transmitted so long as such modifications or 
cancellations are also transmitted from off the floor. See 
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 
11542, 11547 (the ``1978 Release'').
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s third condition requires that the order be 
executed by an exchange member who is unaffiliated with the member 
initiating the order. The Commission has stated that the requirement is 
satisfied when automated exchange facilities, such as the SAM Auction, 
are used, as long as the design of these systems ensures that members 
do not possess any special or unique trading advantages in handling 
their orders after transmitting them to the exchange.\43\ The Exchange 
represents that the SAM Auction is designed so that no TPH has any 
special or unique trading advantage in the handling of its orders or 
responses after transmitting them to the mechanism.
---------------------------------------------------------------------------

    \43\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release.
---------------------------------------------------------------------------

    A TPH (not acting in a market-maker capacity) could submit an order 
for a covered account from off of the Exchange's trading floor to an 
unaffiliated Floor Broker for submission for execution in the SAM 
Auction from the Exchange's trading floor and satisfy the effect-
versus-execute exemption (assuming the other conditions are 
satisfied).\44\ However, a TPH could not submit an order for a covered 
account to its ``house'' Floor Broker on the trading floor for 
execution and rely on this exemption. Because a TPH may not rely on the 
``G'' exemption when submitting an order to a SAM Auction,\45\ it would 
need to ensure another exception applies in this situation.
---------------------------------------------------------------------------

    \44\ Orders for covered accounts that rely on the ``effect 
versus execute'' exemption in this scenario must be transmitted from 
a remote location directly to the Floor Broker on the trading floor 
by electronic means.
    \45\ See proposed Rule 5.39(e) (which describes the allocation 
of the Agency Order at the conclusion of the SAM Auction, which does 
not prioritize non-TPH broker-dealers, as would be required by the 
``G'' exemption).
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s fourth condition requires that, in the case of a 
transaction effected for an account with respect to which the 
initiating member or an associated person thereof exercises investment 
discretion, neither the initiating member nor any associated person 
thereof may retain any compensation in connection with effecting the 
transaction, unless the person authorized to transact business for the 
account has expressly provided otherwise by written contract referring 
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\46\ The 
Exchange recognizes that TPHs relying on Rule 11a2-2(T) for 
transactions effected through the SAM Auction must comply with this 
condition of the Rule, and the Exchange will enforce this requirement 
pursuant to its obligations under Section 6(b)(1) of the Act to enforce 
compliance with federal securities laws.
---------------------------------------------------------------------------

    \46\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement which amount must be exclusive of all amounts paid to 
others during that period for services rendered to effect such 
transactions. See also 1978 Release, at 11548 (stating ``[t]he 
contractual and disclosure requirements are designed to assure that 
accounts electing to permit transaction-related compensation do so 
only after deciding that such arrangements are suitable to their 
interests'').
---------------------------------------------------------------------------

    Therefore, the Exchange believes that the instant proposal is 
consistent with Rule 11a2-2(T), and that therefore the exception should 
apply in this case. Therefore, the Exchange believes the proposed rule 
change is consistent with Section 11(a) of the Act and the Rules 
thereunder.
    The proposed rule change is generally intended to amend certain 
system functionality currently offered by Cboe Options in order to 
provide a consistent technology offering for the Cboe Affiliated 
Exchanges. A consistent technology offering, in turn, will simplify the 
technology implementation, changes and maintenance by Users of the 
Exchange that are also participants on Cboe Affiliated Exchanges. This 
will provide Users with greater harmonization of price improvement 
auction mechanisms available among the Cboe Affiliated Exchanges.

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 the proposed rule change will impose any burden on intramarket 
competition, as the proposed changes to the Exchange's SAM Auction will 
apply to all orders submitted to a SAM Auction in the same manner. SAM 
Auctions will continue to be voluntary for TPHs to use, and are 
available to all TPHs. Additionally, the ability to respond to SAM 
Auctions will not be available to all Users (except the Initiating TPH, 
which is consistent with the requirement that the contra-side order be 
a solicitation rather than a facilitation). The proposed rule change to 
provide Priority Customer AON orders with priority over all non-
Priority Customer contra-side interest protects additional Priority 
Customer orders and will ensure that a Priority Customer AON order 
resting on the Book at the stop price is not disadvantaged.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition, because the general framework 
and primary features of the Exchange's current SAM Auction are not 
changing, and will continue to protect orders,

[[Page 53534]]

including Priority Customer orders, resting in the Book, as applicable. 
The proposed rule change will provide continued consistency across the 
Exchange's (and the Cboe Affiliated Exchanges', as applicable) price 
improvement mechanisms. The general framework and primary features of 
the proposed SAM Auction process (such as the eligibility requirements, 
auction response period, same-side stop price requirements, response 
requirements, and auction notification process), are substantively the 
same as the framework for the AIM price improvement auction the 
Exchange's current price improvement auction, as recently proposed to 
be amended in connection with the Exchange's upcoming technology 
migration.\47\ Additionally, other options exchanges also offer similar 
auction mechanisms.\48\
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    \47\ See supra note 24.
    \48\ See, e.g., Nasdaq ISE, LLC (``ISE'') Options 3, Section 
11(d); and MIAX Rule 515A(b).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

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

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

    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) of the Act \49\ and Rule 19b-
4(f)(6) thereunder.\50\
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    \49\ 15 U.S.C. 78s(b)(3)(A).
    \50\ 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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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \51\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \52\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the Exchange may implement the proposed rule change at the time of its 
anticipated October 7, 2019 system migration. The Exchange notes that 
the proposed rule change is substantially identical to EDGX Options 
Rule 21.21 and similar to functionality on other options exchanges, and 
believes waiver of the operative delay would permit the Exchange to 
continue to provide the SAM functionality to market participants on a 
continuous, uninterrupted basis.\53\ For these reasons, the Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest. Therefore, the 
Commission hereby waives the operative delay and designates the 
proposal as operative upon filing.\54\
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    \51\ 17 CFR 240.19b-4(f)(6).
    \52\ 17 CFR 240.19b-4(f)(6)(iii).
    \53\ See supra notes 34 and 48.
    \54\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change 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 SR-CBOE-2019-063 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-2019-063. 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 such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2019-063, and should be submitted 
on or before October 28, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
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    \55\ 7 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21725 Filed 10-4-19; 8:45 am]
BILLING CODE 8011-01-P