Document ID: SEC-2018-0438-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2018-03-16T04:00Z

[Federal Register Volume 83, Number 52 (Friday, March 16, 2018)]
[Notices]
[Pages 11794-11797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05330]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82855; File No. SR-CBOE-2018-019]

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

March 12, 2018.
    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 February 27, 2018, 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

    The Exchange proposes to amend its Fees Schedule to adopt the 
Select Customer Options Reduction (``SCORe'') program. 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.

[[Page 11795]]

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

1. Purpose
    The Exchange proposes to adopt the Select Customer Options 
Reduction program (``SCORe'').\3\ SCORe is a new discount program for 
Retail, Non-FLEX Customer (``C'' origin code) volume in the following 
options classes: SPX (including SPXW), VIX, RUT, MXEA, MXEF & XSP 
(``Qualifying Classes''). For purposes of this program ``Retail'' 
orders will be defined as Customer orders for which the original order 
size (in the case of a simple order) or largest leg size (in the case 
of a complex order) is 100 contracts or less. Volume executed during 
Extended Trading Hours (``ETH'') will be aggregated with volume 
executed during Regular Trading Hours (``RTH'').
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    \3\ The proposed SCORe program will be effective March 1, 2018 
(i.e., March discounts will be based on February 2018 volume for all 
participants that sign up prior to the second to last business day 
of February).
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    The SCORe program is available to any Trading Permit Holder 
(``TPH'') Originating Clearing Firm or non-TPH Originating Clearing 
Firm. For this program, an ``Originating Clearing Firm'' will be 
defined as either (a) the executing clearing Options Clearing 
Corporation (``OCC'') number on any transaction which does not also 
include a Clearing Member Trading Agreement (``CMTA'') OCC clearing 
number or (b) the CMTA in the case of any transaction which does 
include a CMTA OCC clearing number. In order to participate, an 
Originating Firm must complete the SCORe Registration Form by the 
second to last business day of the month preceding the month in which 
their participation in the SCORe program will commence. The Exchange 
will aggregate an Originating Firm's volume with volume of their OCC 
clearing affiliates if such affiliates are reported to the Exchange via 
the SCORe Registration Form and there is at least 75% common ownership 
between the firms as reflected on each firm's Form BD, Schedule A. 
``Originating Firm'' will refer to both an Originating Clearing Firm 
and any applicable affiliates.
    The SCORe program will utilize two measures for participation and 
discounts: (1) The Qualifying Tiers, which determine whether a firm 
qualifies for the discounts in either Tier A or Tier B and (2) the 
Discount Tiers, which determine the Originating Firm's applicable 
discount tiers and corresponding discounts, as further described below.

    Qualifying Tier B--Retail Volume Percentage in Qualifying Classes
                        Between 35.00% and 69.99%
------------------------------------------------------------------------
                                    Percentage of all      Discount per
         Discount tier            customer retail volume      retail
                                  in qualifying classes      contract
------------------------------------------------------------------------
B3.............................  0.00%-5.00%............            0.00
B2.............................  Above 5.00%-26.00%.....            0.04
B1.............................  Above 26.00%...........            0.08
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 Qualifying Tier A--Retail Volume Percentage in Qualifying Classes at or
                              Above 70.00%
------------------------------------------------------------------------
                                    Percentage of all      Discount per
         Discount tier            customer retail volume      retail
                                  in qualifying classes      contract
------------------------------------------------------------------------
A5.............................  0.00%-5.00%............           $0.00
A4.............................  Above 5.00%-37.00%.....            0.08
A3.............................  Above 37.00%-41.00%....            0.15
A2.............................  Above 41.00%-47.00%....            0.19
A1.............................  Above 47.00%...........            0.23
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                            Volume Multiplier
------------------------------------------------------------------------
                    MXEA/MXEF                         XSP         RUT
------------------------------------------------------------------------
99..............................................         99           2
------------------------------------------------------------------------

Qualifying Tiers
    To determine an Originating Firm's Qualifying Tier, the Originating 
Firm's total Retail volume in the Qualifying Classes will be divided by 
the Originating Firm's total Customer volume, Retail and non-Retail, in 
the Qualifying Classes. If an Originating Firm's Retail volume is 
between 35.00% and 69.99%, the Originating Firm will qualify for Tier B 
discounts. If an Originating Firm's Retail volume is at or above 
70.00%, the Originating Firm will qualify for Tier A discounts. The 
Qualifying Tier that is applied in a given month is based on an 
Originating Firm's Retail volume in the prior month (e.g., an 
Originating Firm's volume in January determines which Qualifying Tier 
applies in February).\4\
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    \4\ For example, in January, if an Originating Firm executes a 
total of 1,000,000 Customer (C) contracts in the Qualifying Classes, 
of which 600,000 contracts qualify as Retail volume, the Originating 
Firm would have a retail percentage of 60% and qualifies for the B 
Tier discounts to be applied to the Originating Firm's qualifying 
Retail Customer volume in February.
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Discount Tiers
    For the Discount Tier, an Originating Firm's Retail volume in the 
Qualifying Classes will be divided by total Retail volume in the 
Qualifying Classes executed on the Exchange. Additionally, SCORe will 
employ the use of ``product multipliers'' for the Discount Tier only. 
Multipliers will be applied to MXEF, MXEA, RUT and XSP volume only, as 
reflected below. Specifically, Retail volume in these products will be 
multiplied by the values indicated below so that any volume executed by 
an Originating Firm in these classes will be increased for purposes of 
the Discount Tier calculation, but not for purposes of calculating the 
Qualifying Tiers. Additionally, discounts will be applied to executed 
volume only, not on multiplied volume. If an Originating Firm's volume 
in a given month includes volume from MXEF, MXEA,

[[Page 11796]]

RUT or XSP, an average rate will be calculated using the Discount 
Tiers.\5\
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    \5\ For example, assume Originating Firms A and B both qualify 
for Tier A discounts in a given month and that the total qualifying 
contracts for that month is 1.4 million contracts.
    In that month, Originating Firm A executes 900,000 contracts 
from orders which qualify as Customer Retail volume, none of which 
were in product multiplier classes (i.e., MXEA, MXEF, XSP or RUT). 
Out of a total of 1.4 million total Retail volume executed on the 
Exchange in the Qualifying Classes, Originating Firm B [sic] has 
64.3% (900,000/1,400,000) of all qualifying contracts, and thus 
receives a discount of up to Tier A1. Originating Firm A therefore 
receives a discount using the following formula: receives $.00 on 
70,000 (5%) contracts, $.08/contract on 448,000 contracts equaling 
$35,840 (32%) (i.e. above 5% to 37%), $.15/contract on 56,000 
contracts equaling $8,400 (4%) (i.e. above 37.00% to 41%), $.19/
contract on 84,000 contracts equaling $15,960 (6%) (i.e., above 
41%--47%), and $.23/contract on the remaining 242,000 contracts 
equaling $55,660, resulting in a total discount of $115,860.
    In the same month, Originating Firm B executes 900,000 contracts 
from orders which qualify as Customer Retail volume, of which 10,000 
contracts were in XSP. The XSP volume of Originating Firm B is 
multiplied by 99 (i.e. adding an additional 980,000 [sic] contracts 
to the qualifying total). Originating Firm B's recalculated total of 
contracts is now ``1,880,000'' [sic] contracts (i.e., 134.3% of the 
total 1,400,000), and thus receives a discount up to Tier A1. 
Originating Firm B therefore receives an average rate using the 
following formula: the average of: $.00 on 70,000 (5%) contracts, 
$.08/contract on 448,000 contracts equaling $35,840 (32%) (i.e. 
above 5% to 37%), $.15/contract on 56,000 contracts equaling $8,400 
(4%) (i.e. above 37.00% to 41%), $.19/contract on 84,000 contracts 
equaling $15,960 (6%) (i.e., above 41%--47%), and $.23/contract on 
the remaining ``1,222,000'' contracts equaling $281,060, resulting 
in an average discount rate of $0.182 contract ($341,260/1,880,000) 
and a total discount of $163,800 ($0.182 x 900,000).
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    The Clearing TPH(s) that is billed for an Originating Firm's 
transactions will receive the applicable discounts. If more than one 
Clearing TPH was billed transaction fees for an Originating Firm's 
transactions subject to the SCORe program, the discounts will be 
applied pro-rata to the Clearing TPHs.
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.\6\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \7\ 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 
Section 6(b)(4) of the Act,\8\ 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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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78f(b)(4).
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    The adoption of SCORe is reasonable because it will allow Customers 
orders from Originating Firms that register for the program an 
opportunity to receive certain discounts for reaching certain trading 
volume thresholds. The Exchange notes that SCORe provides an 
incremental incentive for Originating Firms to strive for the highest 
tier level, which provides increasingly higher discounts. The Exchange 
notes that it is voluntary for Originating Firms to choose whether or 
not to register for the program.
    The Exchange believes it's equitable and not unfairly 
discriminatory to establish the program for Originating Firms only 
because this is designed to attract a greater number of customer orders 
in the Qualifying Classes. This increased volume creates greater 
trading opportunities that benefit all market participants by providing 
more trading opportunities and tighter spreads. Additionally, the 
Exchange notes that incentive programs based on Customer volume already 
exist elsewhere within the industry.\9\ In addition the Exchange 
believes the proposed program is equitable and not unfairly 
discriminatory because any Originating Firm may avail itself of this 
program provided it registers with the Exchange.
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    \9\ See e.g., Cboe Options Fees Schedule, the Volume Incentive 
Program and Frequent Trader; and Nasdaq PHLX LLC Pricing Schedule, 
Section B. Customer Rebate Program.
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    The Exchange believes limiting the SCORe program to the Qualifying 
Classes is equitable and not unfairly discriminatory because the 
Exchange has expended considerable time and resources in developing 
these products. The SCORe program is designed to encourage greater 
customer options trading in the Qualifying Classes, which, along with 
bringing greater options trading opportunities to all market 
participants, would bring in more fees to the Exchange, and such fees 
can be used to recoup the Exchange's costs and expenditures from 
developing and maintaining the Qualifying Classes.
    The Exchange believes limiting the SCORe program to Retail orders 
is equitable and not unfairly discriminatory because the Exchange wants 
to encourage more Retail Customer volume in the Qualifying classes, 
which as noted above will bring greater volume and liquidity, which 
benefit all market participants by providing more trading opportunities 
and tighter spreads. Additionally, the Exchange notes other incentive 
programs already exist for non-Retail Customer orders.\10\
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    \10\ See e.g., Cboe Options Fees Schedule, Customer Large Trade 
Discount.
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    The Exchange believes it's reasonable, equitable and not unfairly 
discriminatory to adopt a product multiplier because the Exchange 
wishes to support and encourage customers to provide greater order flow 
in these particular classes, which allows for price improvement in 
these products and has a number of positive impacts on the market 
system. The Exchange also believes however, that it's reasonable, 
equitable and not unfairly discriminatory to base the discount paid off 
the amount of transaction fees that would be assessed pursuant to the 
Fees Schedule (as opposed to being based off the ``theoretical'' number 
of contracts using the product multiplier) because the Exchange does 
not want to provide discount on contracts for which it is not also 
collecting transaction fees.
    The Exchange also believes it's reasonable, equitable and not 
unfairly discriminatory to provide that it will aggregate the volume of 
affiliated Originating Firms to determine whether and what volume 
thresholds are met as the entities being aggregated share more than 
majority ownership. Particularly, the Exchange notes multiple incentive 
programs allow for aggregation between affiliates provided there is at 
least 75% common ownership between the firms as reflected on each 
firm's Form BD, Schedule A.\11\
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    \11\ See e.g., Cboe Options Fees Schedule, Footnote 10, which 
provides the Exchange will aggregate the trading activity of 
separate Liquidity Provider firms for purposes of the Liquidity 
Provider Sliding Scale if there is at least 75% common ownership 
between the firms as reflected on each firm's Form BD, Schedule A.
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    Lastly, the Exchange believes it's reasonable, equitable and not 
unfairly discriminatory to provide the discount to the executing 
Clearing TPH (or if more than one Clearing TPH, than on a pro-rata 
basis to the Clearing TPHs) because the executing Clearing TPH is the 
entity that is assessed transactions fees on the SCORe eligible volume.

[[Page 11797]]

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 because, while the discounts 
apply only to Customer orders from Originating Firms, the Program is 
designed to encourage increased Customer options volume in the 
Qualifying Classes, which provides greater trading opportunities for 
all market participants. Additionally, there is a history in the 
options markets of providing preferential treatment to Customers 
orders. The Exchange believes that the proposed rule change will not 
cause an unnecessary burden on intermarket competition because the 
Qualifying Classes are products that only trade on Cboe Options. To the 
extent that the proposed changes make the Exchange a more attractive 
marketplace for market participants at other exchanges, such market 
participants are welcome to become Cboe Options market participants.

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 \12\ and paragraph (f) of Rule 19b-4 \13\ 
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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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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 [email protected]. Please include 
File Number SR-CBOE-2018-019 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-2018-019. 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-2018-019 and should be submitted on 
or before April 6, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05330 Filed 3-15-18; 8:45 am]
 BILLING CODE 8011-01-P