Document ID: SEC-2019-1951-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-12-26T05:00Z

[Federal Register Volume 84, Number 247 (Thursday, December 26, 2019)]
[Notices]
[Pages 71021-71024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27733]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87799; File No. SR-CBOE-2019-124]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Its Fees Schedule

December 18, 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 December 18, 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, 
II, and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend its Fees Schedule. The text of the proposed rule change is 
provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://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

[[Page 71022]]

Exchange has prepared summaries, set forth in sections A, B, and C 
below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes various amendments to its Fees Schedule.\3\
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    \3\ The Exchange originally filed the proposed fee changes on 
December 2, 2019 (SR-CBOE-2019-114). On December 12, 2019, the 
Exchange withdrew that filing and submitted SR-CBOE-2019-120. On 
December 18, 2019, the Exchange withdrew that filing and submitted 
this filing.
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SPX Select Market-Makers
    Footnote 49 of the Fees Schedule currently provides that any 
appointed SPX Select Market-Maker (``SMM'') will receive a monthly 
rebate of $8,000 if the SMM provides continuous electronic quotes in at 
least 99% of the SPX series 90% of the time in a given month. SMMs are 
not obligated to satisfy the heightened quoting standards described in 
the Fees Schedule. Rather, SMMs are eligible to receive a rebate if 
they satisfy the heightened standards. SMMs must still comply with the 
continuous quoting obligation and other obligations of Market-Makers 
described in Cboe Options Rules.\4\ The Exchange adopted the monthly 
rebate program to encourage SMMs to provide liquidity in SPX. The 
Exchange now proposes to eliminate the SMM rebate program. The Exchange 
no longer believes additional liquidity by an SMM is necessary and 
notes the Exchange is not required to maintain such an incentive 
program. The Exchange also notes that Market-Makers that were 
previously appointed as SMMs will still be required to comply with the 
continuous quoting obligation and other obligations of Market-Makers 
described in Cboe Options Rules.
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    \4\ See e.g., Cboe Options Rule 5.51.
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Linkage
    The Exchange currently assesses certain fees in connection with 
orders routed to other exchanges. The Exchange proposes to not pass 
through or otherwise charge customer (capacity code ``C'') orders (of 
any size) routed to other exchanges that were originally transmitted to 
the Exchange from the trading floor through an Exchange-sponsored 
terminal (e.g., PULSe Workstation). The primary objective of linkage 
fees are to recoup some of the costs associated with large electronic 
orders that are initially transmitted to the Exchange by parties who, 
in many instances, could be seeking to avoid being assessed another 
market's transaction fees. Orders that are initially transmitted from 
the trading floor are not attempting to avoid fees since they incur 
brokerage commission charges in connection with manual handling. 
Rather, orders that are generally transmitted from the floor are large, 
complex orders that are primarily executed on the Exchange, which only 
are transmitted to away markets if, during their execution on the 
Exchange, it is necessary to sweep some away markets. As such, the 
Exchange believes it's appropriate to waive linkage fees for these 
orders. The Exchange lastly notes that the proposed waiver is not 
novel. Indeed, the Exchange maintained the proposed waiver prior to the 
migration to a new billing system on October 7, 2019, but had 
eliminated the waiver upon migration.\5\ After further evaluation, the 
Exchange now wishes to re-adopt the proposed waiver. The Exchange notes 
the proposed waiver is identical to the waiver in place pre-migration.
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    \5\ See Securities and Exchange Act Release No. 87495 (November 
8, 2019), 84 FR 63701 (November 18, 2019) (SR-CBOE-2019-106).
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Tier Appointment Fees
    The Exchange currently assesses a SPX Tier Appointment Fee of 
$3,000 per month to any Market-Maker holding a Market-Maker Electronic 
Access Permit (``EAP'') (``MM EAP'') that trades any SPX (including 
SPXW) contracts at any time during the month. The Exchange proposes to 
amend the Fees Schedule to adopt a contract threshold. Particularly, 
the Exchange proposes to provide that the SPX Tier Appointment Fee will 
be assessed to any MM EAP that executes at least 1,000 contracts in SPX 
(including SPXW) excluding contracts executed during the opening 
rotation on the final settlement date of VIX options and futures with 
the expiration used in the VIX settlement calculation. The Exchange 
proposes to exclude SPX and SPXW volume executed during opening 
rotation on the final settlement date of VIX options and futures which 
have the expiration that contribute to the VIX settlement, as such 
orders help to facilitate the calculation of a settlement price for VIX 
options and futures and the Exchange does not wish to discourage the 
sending of such orders.\6\ The Exchange notes that the SPX Tier 
Appointment fee is intended to be assessed to Market-Maker TPHs who 
actually act as Market-Makers in SPX and engage in trading in SPX (as 
opposed to those who primarily execute volume during the opening 
rotation on VIX settlement days and subsequently execute volume to 
close out of such positions). The electronic Tier Appointment 
Surcharges for VIX and RUT similarly have a 1,000 contract 
threshold.\7\
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    \6\ The Exchange notes that only electronic SPX and SPXW orders 
participate in the opening rotation on the final settlement date of 
VIX options and futures. As open-outcry volume does not facilitate 
the calculation of the settlement price for VIX options and futures, 
the Exchange does not believe it's necessary to adopt a 
corresponding exception to the SPX Tier Appointment for Floor 
Market-Makers.
    \7\ See Cboe Options Fees Schedule, Market-Maker Tier 
Appointment Fees.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\8\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \9\ 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, and does not 
unfairly discriminate between customers, issuers, brokers or dealers. 
Additionally, the Exchange believes the proposed rule change is 
consistent with Section 6(b)(4) of the Act,\10\ which requires that 
Exchange rules provide for the equitable allocation of reasonable dues, 
fees, and other charges among its Trading Permit Holders and other 
persons using its facilities.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes eliminating the SPX SMM Program is 
reasonable, equitable and not unfairly discriminatory because the 
Exchange is not required to maintain such a rebate program and no 
longer desires to do so. The Exchange believes that there is sufficient 
liquidity in SPX and does not believe a rebate program is necessary to 
further incentivize liquidity. The Exchange believes the proposed 
change is not unfairly discriminatory because it will apply equally to 
all SMMs.
    The Exchange believes it's reasonable to waive linkage fees for 
customer

[[Page 71023]]

orders that were transmitted from the trading floor through an Exchange 
sponsored terminal (currently only PULSe workstation) as customers 
would not be subject to linkage fees. The proposed waiver would apply 
to all similarly situated market participants. The Exchange believes 
limiting the exception to customer orders that were originally 
transmitted from the trading floor through an exchange-sponsored 
terminal is equitable, reasonable and not unfairly discriminatory as 
the primary objective of linkage fees are to recoup some of the costs 
associated with large electronic orders that are initially transmitted 
to the Exchange by parties who, in many instances, could be seeking to 
avoid being assessed another market's transaction fees. As discussed 
above, orders that are generally transmitted from the floor are large, 
complex orders that are primarily executed on the Exchange and 
transmitted to away markets if, during their execution on the Exchange, 
it is necessary to sweep some away markets. The Exchange also believes 
limiting the exception from Linkage Fees to customer orders is 
equitable, reasonable and not unfairly discriminatory because non-
customer (e.g., broker-dealer proprietary) orders originate from 
broker-dealers who are by and large more sophisticated than public 
customers (i.e., orders yielding capacity code ``C'') and can readily 
control the exchange to which their orders are routed. While there may 
be some customers who direct the exchange to which their orders are 
routed, generally, customers submit orders to their brokerages but do 
not or cannot specify the exchange to which its order is sent. 
Therefore, non-customer order flow can, in most cases, more easily 
route directly to other markets if desired and thus avoid Linkage Fees. 
This includes the ability of broker-dealers to sweep better-priced away 
markets in connection with routing large orders to the Exchange's floor 
for handling by floor brokers. Moreover, the Commission has a long 
history of permitting differential treatment of customers and non-
customer investors.
    Finally, as noted above, the proposed waiver is not novel. Indeed, 
the Exchange maintained the proposed waiver prior to the migration to a 
new billing system on October 7, 2019, but had eliminated the waiver 
upon migration.\11\ After further evaluation, the Exchange has 
determined to re-adopt the proposed waiver, which waiver is identical 
to the waiver in place pre-migration.
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    \11\ See Securities and Exchange Act Release No. 87495 (November 
8, 2019), 84 FR 63701 (November 18, 2019) (SR-CBOE-2019-106).
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    The Exchange believes the proposed change to adopt a contract 
threshold to trigger the electronic SPX Tier Appointment Surcharge is 
reasonable as MM EAPs that trade below such threshold will not be 
subject to the MM EAP SPX Tier Appointment Fee. The Exchange believes 
the proposed change is reasonable as the SPX Tier Appointment surcharge 
was intended to apply to TPHs who act as Market-Makers in SPX, not 
those that do not regularly trade SPX electronically. Additionally, 
while liquidity is important to open all series on the Exchange, given 
the potential impact on the exercise settlement value determined for 
expiring volatility index derivatives, it is very important to 
encourage a fair and orderly opening of the series that are used to 
calculate the final settlement value of expiring VIX derivatives. 
Accordingly, the Exchange does not wish to assess the SPX Tier 
Appointment fee to MM EAPs who do not conduct significant electronic 
volume in SPX (or SPXW) other than volume executed during opening 
rotation on the final settlement date of VIX options and futures which 
have the expiration that are used in the VIX settlement calculation and 
subsequent volume executed to close out of such positions. The Exchange 
believes it's equitable and not unfairly discriminatory to adopt a 
threshold for off-floor Markets-Markets and not on-floor Market-Makers 
as only electronic SPX and SPXW orders participate in the opening 
rotation on the final settlement date of VIX options and futures. As 
open-outcry volume does not facilitate the calculation of the 
settlement price for VIX options and futures, the Exchange does not 
believe it's necessary to adopt a corresponding exception to the SPX 
Tier Appointment for on-floor Market-Makers. The Exchange notes that 
any TPH that electronically executes more than 1 contract but less than 
1,000 contracts in SPX (including SPXW), excluding volume executed 
during opening rotation on the final settlement date of VIX options and 
futures which have the expiration that are used in the VIX settlement 
calculation will no longer have to pay the Tier Appointment Fee. As 
noted above, the Exchange is not proposing to change the amount 
assessed for the electronic SPX Tier Appointment Fee. The proposed 
change is equitable and not unfairly discriminatory because it will 
apply uniformly to all TPHs. The Exchange lastly notes that a similar 
1,000 contract threshold also applies to MM EAP Tier Appointment Fees 
in RUT and VIX.\12\
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    \12\ See Cboe Options Fees Schedule, Market-Maker Tier 
Appointment Fees.
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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. Specifically, the Exchange 
does not believe that the proposed change will impose any burden on 
intramarket competitions that is not necessary or appropriate in 
furtherance of the purposes of the Act because the proposed changes 
will be applied equally to all similarly situated market participants. 
For example, although the proposed routing exception only applies to 
Customers, as discussed, above, the Exchange believes limiting the 
exception to customer orders is not unfairly discriminatory because 
non-customer (e.g., broker-dealer proprietary) orders originate from 
broker-dealers who are by and large more sophisticated than public 
customers and can readily control the exchange to which their orders 
are routed. Moreover, as discussed, the Commission has a long history 
of permitting differential treatment of customers and non-customer 
investors.
    The Exchange does not believe that the proposed rule change 
regarding the SMM Program or the SPX Tier Appointment Fee will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because the 
proposed waiver applies to a product traded exclusively on the 
Exchange. Additionally, the Exchange believes the proposed rule change 
relating to linkage does not impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Particularly, the Exchange operates in a highly 
competitive market. Members have numerous alternative venues that they 
may participate on and director their order flow, including 15 other 
options exchanges and off-exchange venues. The Exchange represents a 
small percentage of the overall market. Based on publicly available 
information, no single options exchange has more than 24% of the market 
share.\13\ Therefore, no exchange possesses significant pricing power 
in the execution of option order flow. Indeed, participants can choose 
to send their

[[Page 71024]]

orders to other exchanges and off-exchange venues if they deem fee 
levels at those other venues to be more favorable. Moreover, the 
Commission has repeatedly expressed its preference for competition over 
regulatory intervention in determining prices, products, and services 
in the securities markets. Specifically, in Regulation NMS, the 
Commission highlighted the importance of market forces in determining 
prices and SRO revenues and, also, recognized that current regulation 
of the market system ``has been remarkably successful in promoting 
market competition in its broader forms that are most important to 
investors and listed companies.'' \14\ The fact that this market is 
competitive has also long been recognized by the courts. In 
NetCoalition v. Securities and Exchange Commission, the D.C. Circuit 
stated as follows: ``[n]o one disputes that competition for order flow 
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .''.\15\ Accordingly, the Exchange 
does not believe its proposed fee changes imposes any burden on 
competition that are not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \13\ See Cboe Global Markets U.S. Options Market Volume Summary 
(December 2, 2019), available at https://markets.cboe.com/us/options/market_statistics/.
    \14\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005).
    \15\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \16\ and paragraph (f) of Rule 19b-4 \17\ 
thereunder. 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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f).
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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-2019-124 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-2019-124. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2019-124 and should be submitted on 
or before January 16, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27733 Filed 12-23-19; 8:45 am]
 BILLING CODE 8011-01-P