Document ID: SEC-2019-1321-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-09-16T04:00Z

[Federal Register Volume 84, Number 179 (Monday, September 16, 2019)]
[Notices]
[Pages 48664-48671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19902]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86923; File No. SR-CBOE-2019-057]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Regarding 
Price Protections and Risk Controls

September 10, 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 5, 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 
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 Exchange's Rules regarding price protections and risk 
controls, and moves those Rules from the currently effective Rulebook 
(``current Rulebook'') to the shell structure for the Exchange's 
Rulebook that will become effective upon the migration of the 
Exchange's trading platform to the same system

[[Page 48665]]

used by the Cboe Affiliated Exchanges (as defined below) (``shell 
Rulebook''). 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 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. 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 harmonize its rules in connection with the 
risk control and price protection functions on the Exchange to that of 
its affiliated Exchanges. Specifically, the Exchange proposes to 
consolidate all order and quote price protection mechanisms and risk 
controls into a single rule, proposed Rule 5.34 (and subsequently 
delete the relevant price protection mechanism and risk control 
provisions in current Rules 6.12, 6.13, 6.14, 6.23C, and 6.53C.08 upon 
migration). Proposed Rule 5.34 is substantively identical to C2 Rule 
6.14, as well as substantially the same as corresponding EDGX Options 
Rules 21.16, 21.17 and 22.11. In line with C2 Rule 6.14, proposed Rule 
5.34 categorizes these mechanisms and controls as ones applicable to 
simple orders (proposed paragraph (a)), complex orders (proposed 
paragraph (b)), and all (i.e. simple and complex) orders (proposed 
paragraph (c)). The following table identifies the Exchange's current 
price protection mechanisms and risk controls, the current Exchange 
Rule, the proposed Exchange Rule, the corresponding C2 Rule and EDGX 
rule, where applicable, and any proposed changes, if any. The Exchange 
notes that much of the proposed functionality is substantially similar 
to the current price protections and risk controls functionality. The 
Exchange also proposes to make non-substantive changes by updating 
cross-references to rules in the shell Rulebook and rules not yet in 
the shell Rulebook but that in the Exchange intends to move to the 
shell Rulebook, updating Exchange-specific references for consistency 
throughout the rules, and, as a result of consolidating and conforming 
the proposed rule to the rules of affiliated options exchanges, 
simplifies, clarifies, and updates the rule text to read in plain 
English, and reformats the paragraph lettering and/or numbering.

----------------------------------------------------------------------------------------------------------------
                                    Current Cboe                          Affiliated
 Price protection/ risk control     options rule      Proposed rule      exchange rule       Proposed changes
----------------------------------------------------------------------------------------------------------------
Handling of market orders        6.13(b)(vi).......  5.34(a)(1).....  C2 Rule             Pursuant to the
 received in no-bid series.                                            6.14(a)(1); EDGX    proposed rule change,
                                                                       Rule 21.17(a)(5).   the System cancels or
                                                                                           rejects a market
                                                                                           order if there is no-
                                                                                           bid and the best
                                                                                           offer is less than or
                                                                                           equal to $0.50. Under
                                                                                           current
                                                                                           functionality, the
                                                                                           System would treat
                                                                                           the sell order as a
                                                                                           limit order with a
                                                                                           price equal to the
                                                                                           minimum increment in
                                                                                           this situation. The
                                                                                           proposed rule change
                                                                                           also expands the same
                                                                                           protection to market
                                                                                           orders in no-offer
                                                                                           series. The Exchange
                                                                                           believes the proposed
                                                                                           rule change will
                                                                                           provide protection
                                                                                           for these orders to
                                                                                           prevent execution at
                                                                                           potentially erroneous
                                                                                           prices when a market
                                                                                           order is entered in a
                                                                                           series with no bid or
                                                                                           offer.
Market order NBBO width          6.13(b)(v)(A).....  5.34(a)(2).....  C2 Rule             The proposed
 protection.                                                           6.14(a)(2); EDGX    functionality is
                                                                       21.17(a)(1).        generally the same as
                                                                                           current
                                                                                           functionality, except
                                                                                           the acceptable amount
                                                                                           away from NBBO that a
                                                                                           market order may
                                                                                           execute will be
                                                                                           determined by a
                                                                                           percentage away from
                                                                                           the NBBO midpoint
                                                                                           (subject to a minimum
                                                                                           and maximum dollar
                                                                                           amount) rather than
                                                                                           specified dollar
                                                                                           ranges based on
                                                                                           premium, providing
                                                                                           the Exchange with
                                                                                           flexibility it
                                                                                           believes is
                                                                                           appropriate given
                                                                                           previous experience
                                                                                           with risk controls.
Buy order put check............  6.14(a)...........  5.34(a)(3).....  C2 6.14(a)(3);      The proposed rule
                                                                       EDGX 21.17(a)(3).   change will apply to
                                                                                           market order
                                                                                           executions during the
                                                                                           Opening Process, and
                                                                                           deletes the call
                                                                                           underlying value
                                                                                           check in current Rule
                                                                                           6.17(a)(i)(B), as
                                                                                           this functionality
                                                                                           will not be available
                                                                                           on the Exchange's new
                                                                                           system following the
                                                                                           technology migration.
Drill-through protection         6.13(b)(v)(B).....  5.34(a)(4).....  C2 6.14(a)(4);      The proposed
 (simple).                                                             EDGX 21.17(a)(4).   functionality is
                                                                                           generally the same as
                                                                                           current
                                                                                           functionality, except
                                                                                           the drill-through
                                                                                           amount is a buffer
                                                                                           amount determined by
                                                                                           class and premium
                                                                                           rather than a number
                                                                                           ticks. The proposed
                                                                                           rule change deletes
                                                                                           the distinction
                                                                                           between orders
                                                                                           exposed via HAL,
                                                                                           which is in line with
                                                                                           current functionality
                                                                                           on EDGX, which
                                                                                           provides for the HAL
                                                                                           equivalent, SUM. The
                                                                                           proposed
                                                                                           functionality applies
                                                                                           to Day orders, as
                                                                                           well as Good-til-Date
                                                                                           (``GTD'') and Good-
                                                                                           til-Cancel (``GTC'')
                                                                                           \5\ orders that
                                                                                           reenter the Book from
                                                                                           the prior trading
                                                                                           day, but not an
                                                                                           Immediate-or-Cancel
                                                                                           (``IOC'') or Fill-or-
                                                                                           Kill (``FOK'') order,
                                                                                           as resting in the
                                                                                           Book for a period of
                                                                                           time is inconsistent
                                                                                           with their purpose
                                                                                           (which is to cancel
                                                                                           if not executed
                                                                                           immediately).

[[Page 48666]]

 
Bulk message fat finger check..  N/A...............  5.34(a)(5).....  C2 6.14(a)(5);      The proposed
                                                                       EDGX 21.17(a)(6).   functionality adds a
                                                                                           price protection
                                                                                           mechanism for bulk
                                                                                           messages similar to
                                                                                           the fat finger check
                                                                                           the Exchange
                                                                                           currently provides
                                                                                           for orders. The
                                                                                           proposed rule states
                                                                                           the System cancels or
                                                                                           rejects any bulk
                                                                                           message bid (offer)
                                                                                           above (below) the NBO
                                                                                           (NBB) by more than a
                                                                                           specified amount
                                                                                           determined by the
                                                                                           Exchange. The
                                                                                           proposed check also
                                                                                           will not apply to
                                                                                           bulk messages
                                                                                           submitted prior to
                                                                                           the conclusion of the
                                                                                           Opening Process or
                                                                                           when no NBBO is
                                                                                           available, which is
                                                                                           appropriate during
                                                                                           the pre-open or
                                                                                           opening rotation so
                                                                                           that the check does
                                                                                           not impact the
                                                                                           determination of the
                                                                                           opening price, and
                                                                                           also when there is no
                                                                                           NBBO, as the Exchange
                                                                                           believes that it is
                                                                                           the most reliable
                                                                                           measure against which
                                                                                           to compare the price
                                                                                           of the bulk message
                                                                                           to determine its
                                                                                           reasonability.
Definitions of vertical spread,  6.53C.08..........  5.34(b)(1).....  C2 6.14(b)(1);      No substantive
 butterfly spread, and box                                             EDGX 21.17(b)(1).   changes.
 spread.
Credit-to-debit parameters.....  6.53C.08(b).......  5.34(b)(2).....  C2 6.14(b)(2);      No substantive
                                                                       EDGX 21.17(b)(2).   changes.
Debit/credit price               6.53C.08(c).......  5.34(b)(3).....  C2 6.14(b)(3);      The proposed
 reasonability checks.                                                 EDGX 21.17(b)(3).   functionality is
                                                                                           generally the same as
                                                                                           current
                                                                                           functionality, except
                                                                                           the acceptable price
                                                                                           is subject to a pre-
                                                                                           set buffer amount,
                                                                                           which flexibility is
                                                                                           consistent with C2
                                                                                           and EDGX
                                                                                           functionality. The
                                                                                           proposed rule also
                                                                                           adopts language that
                                                                                           accounts for the
                                                                                           stock component of a
                                                                                           stock-option order,
                                                                                           which is consistent
                                                                                           with EDGX Rule 21.17
                                                                                           (and not found within
                                                                                           C2 Rule 6.14 because
                                                                                           C2 does not currently
                                                                                           provide for this
                                                                                           functionality). The
                                                                                           check will apply to
                                                                                           multi-class spreads
                                                                                           because, upon
                                                                                           migration, such
                                                                                           orders will be routed
                                                                                           to PAR to which the
                                                                                           price protections and
                                                                                           risk controls under
                                                                                           the proposed rule
                                                                                           will apply.
Buy strategy parameters........  6.53C.08(d).......  5.34(b)(4).....  C2 6.14(b)(4);      The proposed
                                                                       EDGX 21.17(b)(4).   functionality is
                                                                                           generally the same as
                                                                                           current
                                                                                           functionality, except
                                                                                           the net credit price
                                                                                           is subject to a
                                                                                           buffer amount
                                                                                           (consistent with C2
                                                                                           and EDGX
                                                                                           functionality). The
                                                                                           proposed rule change
                                                                                           deletes the
                                                                                           mechanism's
                                                                                           applicability to sell
                                                                                           strategies, as that
                                                                                           functionality will
                                                                                           not be available on
                                                                                           the Exchange
                                                                                           following the
                                                                                           technology migration.
                                                                                           The Exchange also
                                                                                           uses proposed term
                                                                                           ``minimum increment''
                                                                                           as opposed to
                                                                                           ``$0.01'' as some
                                                                                           classes move in
                                                                                           increments that
                                                                                           differ from a penny.
Maximum value acceptable price   6.53C.08(g).......  5.34(b)(5).....  C2 6.14(b)(5);      The proposed
 range.                                                                EDGX 21.17(b)(5).   functionality is
                                                                                           generally the same as
                                                                                           current
                                                                                           functionality, except
                                                                                           the price range is
                                                                                           calculated using a
                                                                                           buffer amount
                                                                                           (consistent with C2
                                                                                           and EDGX
                                                                                           functionality) rather
                                                                                           than a percentage
                                                                                           amount.
Drill-through protection         N/A...............  5.34(b)(6).....  C2 6.14(b)(6);      The proposed
 (complex).                                                            EDGX 21.17(b)(6).   functionality is
                                                                                           generally the same as
                                                                                           current functionality
                                                                                           that applies to
                                                                                           simple orders, and
                                                                                           expands it to complex
                                                                                           orders. The proposed
                                                                                           rule change replaces
                                                                                           market width
                                                                                           parameter protection
                                                                                           and acceptable
                                                                                           percentage range
                                                                                           parameter in current
                                                                                           Rule 6.53C.08(a) and
                                                                                           (e), respectively,
                                                                                           which currently
                                                                                           protect Cboe Options
                                                                                           complex orders from
                                                                                           executing at
                                                                                           potentially erroneous
                                                                                           prices too far away
                                                                                           from the order's
                                                                                           price or the market's
                                                                                           best price. The
                                                                                           proposed rule is
                                                                                           identical to the
                                                                                           corresponding C2 and
                                                                                           EDGX rules, which
                                                                                           adds the concept that
                                                                                           an order eligible for
                                                                                           complex order request
                                                                                           for responses auction
                                                                                           process (``COA'')
                                                                                           would initiate a COA
                                                                                           at the drill-through
                                                                                           price as the prices
                                                                                           for complex strategy
                                                                                           executions may be
                                                                                           subject to the drill-
                                                                                           through protection,
                                                                                           and the price of a
                                                                                           COA may be impacted
                                                                                           by the drill-through
                                                                                           protection; and (2)
                                                                                           describes how a
                                                                                           change in the SBBO
                                                                                           prior to the end of
                                                                                           the time period but
                                                                                           the complex order
                                                                                           cannot Leg, and the
                                                                                           new SBO (SBB) crosses
                                                                                           the drill-through
                                                                                           price, the System
                                                                                           changes the displayed
                                                                                           price of the complex
                                                                                           order to the new SBO
                                                                                           (SBB) minus (plus)
                                                                                           $0.01, and the order
                                                                                           will not be cancelled
                                                                                           at the end of the
                                                                                           time period. The
                                                                                           proposed rule change
                                                                                           merely permits an
                                                                                           order to remain on
                                                                                           the complex order
                                                                                           book (``COB'') since
                                                                                           the market reflects
                                                                                           interest to trade
                                                                                           (but not currently
                                                                                           executable due to
                                                                                           Legging Restrictions)
                                                                                           that was not there at
                                                                                           the beginning of the
                                                                                           time period,
                                                                                           providing additional
                                                                                           execution
                                                                                           opportunities prior
                                                                                           to cancellation.
Limit Order Fat Finger Check...  6.12(a)(3) and      5.34(c)(1).....  C2 6.14(c)(1);      The proposed
                                  6.12(b).                             EDGX 21.17(a)(2)    functionality is
                                                                       & (b)(7).           generally the same as
                                                                                           current
                                                                                           functionality, except
                                                                                           the amount away from
                                                                                           the NBBO a limit
                                                                                           order price may be is
                                                                                           a buffer amount
                                                                                           rather than a number
                                                                                           of ticks with no
                                                                                           minimum, and Exchange
                                                                                           may determine whether
                                                                                           the check applies to
                                                                                           simple orders prior
                                                                                           to the conclusion of
                                                                                           the RTH opening
                                                                                           auction process
                                                                                           (current rules codify
                                                                                           pre-open
                                                                                           application),
                                                                                           providing the
                                                                                           Exchange with
                                                                                           flexibility it
                                                                                           believes appropriate
                                                                                           given previous
                                                                                           experience with risk
                                                                                           controls. The
                                                                                           proposed rule change
                                                                                           does not apply to GTC
                                                                                           or GTD orders that
                                                                                           reenter the Book from
                                                                                           the prior trading
                                                                                           day, as this check
                                                                                           only applies to
                                                                                           orders when the
                                                                                           System receives them.
                                                                                           The proposed rule
                                                                                           change provides Users
                                                                                           with the ability to
                                                                                           set a different
                                                                                           buffer amount to
                                                                                           accommodate its own
                                                                                           risk modeling; does
                                                                                           not apply to adjusted
                                                                                           series prior to the
                                                                                           RTH opening auction
                                                                                           process, as prices
                                                                                           may reflect the
                                                                                           corporate action for
                                                                                           the underlying but
                                                                                           the previous day's
                                                                                           NBBO would not
                                                                                           reflect that action.
                                                                                           If the check applies
                                                                                           prior to the RTH
                                                                                           opening auction
                                                                                           process, the System
                                                                                           compares the last
                                                                                           disseminated NBBO on
                                                                                           that trading day, or
                                                                                           the midpoint of the
                                                                                           prior trading day's
                                                                                           closing NBBO, if no
                                                                                           NBBO has been
                                                                                           disseminated on that
                                                                                           trading day, which
                                                                                           the Exchange believes
                                                                                           is another reasonable
                                                                                           price comparison.
Maximum contract size..........  6.14(e)...........  5.34(c)(2).....  C2 6.14(c)(2);      The proposed
                                                                       EDGX 21.17(b)(8).   functionality is
                                                                                           generally the same as
                                                                                           current
                                                                                           functionality, except
                                                                                           the Exchange will set
                                                                                           a default amount
                                                                                           rather than permit
                                                                                           User to set amount.
                                                                                           The proposed rule
                                                                                           change applies per
                                                                                           port rather than
                                                                                           acronym or login. The
                                                                                           functionality to
                                                                                           cancel a resting
                                                                                           order or quote if
                                                                                           replacement order or
                                                                                           quote is entered will
                                                                                           not be available on
                                                                                           the Exchange
                                                                                           following the
                                                                                           technology migration
                                                                                           (however, a User can
                                                                                           enable cancel on
                                                                                           reject functionality
                                                                                           described below to
                                                                                           receive same result).
Maximum notional value.........  N/A...............  5.34(c)(3).....  C2 6.14(c)(3);      Voluntary
                                                                       EDGX Technical      functionality similar
                                                                       specifications.     to maximum contract
                                                                                           size, except the
                                                                                           System cancels or
                                                                                           rejects an incoming
                                                                                           order or quote with a
                                                                                           notional value that
                                                                                           exceeds the maximum
                                                                                           notional value a User
                                                                                           establishes for each
                                                                                           of its ports. The
                                                                                           proposed rule change
                                                                                           provides an
                                                                                           additional, voluntary
                                                                                           control for Users to
                                                                                           manage their order
                                                                                           and execution risk on
                                                                                           the Exchange.

[[Page 48667]]

 
Daily risk limits..............  N/A...............  5.34(c)(4).....  C2 6.14(c)(4);      Voluntary
                                                                       EDGX Technical      functionality
                                                                       specifications.     pursuant to which a
                                                                                           User may establish
                                                                                           limits for cumulative
                                                                                           notional booked bid
                                                                                           (``CBB'') or offer
                                                                                           (``CBO'') value, and
                                                                                           cumulative notional
                                                                                           executed bid
                                                                                           (``CEB'') or offer
                                                                                           (``CEO'') value for
                                                                                           each of its ports on
                                                                                           a net or gross basis,
                                                                                           or both, and may
                                                                                           establish limits for
                                                                                           market or limit
                                                                                           orders (counting both
                                                                                           simple and complex),
                                                                                           or both. If a User
                                                                                           exceeds a cutoff
                                                                                           value (by aggregating
                                                                                           amounts across the
                                                                                           User's ports), the
                                                                                           System cancels or
                                                                                           rejects incoming
                                                                                           limit or market
                                                                                           orders, or both, as
                                                                                           applicable.\6\
Risk monitor mechanism.........  6.14(d) and 8.18..  5.34(c)(5).....  C2 6.14(c)(5);      Similar functionality
                                                                       EDGX 21.16.         to current quote risk
                                                                                           monitor and order
                                                                                           entry, execution, and
                                                                                           price parameter rate
                                                                                           checks on the
                                                                                           Exchange, which will
                                                                                           not be available on
                                                                                           the Exchange
                                                                                           following migration
                                                                                           (discussed below).
Cancel on reject...............  N/A...............  5.34(c)(6).....  C2 6.14(c)(6);      Additional, voluntary
                                                                       EDGX 6.14(a)(7).    control for Users to
                                                                                           manage their order
                                                                                           and execution risk on
                                                                                           the Exchange,
                                                                                           pursuant to which the
                                                                                           System cancels a
                                                                                           resting order or
                                                                                           quote if the System
                                                                                           rejects a cancel or
                                                                                           modification
                                                                                           instruction (because,
                                                                                           for example, it had
                                                                                           an invalid
                                                                                           instruction) for that
                                                                                           resting order or
                                                                                           quote. The proposed
                                                                                           rule change is
                                                                                           consistent with the
                                                                                           purpose of a cancel
                                                                                           or modification,
                                                                                           which is to cancel
                                                                                           the resting order or
                                                                                           quote, and carries
                                                                                           out this purpose
                                                                                           despite an erroneous
                                                                                           instruction on the
                                                                                           cancel/modification
                                                                                           message.
Kill switch....................  6.14(f)...........  5.34(c)(7).....  C2 6.14(c)(7);      The proposed
                                                                       EDGX 22.11.         functionality is
                                                                                           generally the same as
                                                                                           current
                                                                                           functionality, except
                                                                                           Users may apply it to
                                                                                           different categories
                                                                                           of orders by EFID
                                                                                           rather than acronym
                                                                                           or login (consistent
                                                                                           with new System
                                                                                           functionality for
                                                                                           migration), and block
                                                                                           of incoming orders or
                                                                                           quotes is a separate
                                                                                           request by Users.
Cancel on disconnect...........  6.23C.............  5.34(c)(8).....  C2 6.14(c)(8);      The proposed
                                                                       EDGX Technical      functionality is
                                                                       Specifications.     generally the same as
                                                                                           current technical
                                                                                           disconnect
                                                                                           functionality, except
                                                                                           it is the same for
                                                                                           both APIs on the new
                                                                                           System. The proposed
                                                                                           rule change will
                                                                                           continue to protect
                                                                                           Users against
                                                                                           erroneous executions
                                                                                           if it appears they
                                                                                           are experiencing a
                                                                                           system disruption.
                                                                                           The proposed
                                                                                           functionality will no
                                                                                           longer provide TPHs
                                                                                           with the ability to
                                                                                           determine length of
                                                                                           interval, but does
                                                                                           provide additional
                                                                                           flexibility with
                                                                                           respect to which
                                                                                           order types may be
                                                                                           cancelled--current
                                                                                           functionality permits
                                                                                           a choice of market-
                                                                                           maker quotes and day
                                                                                           orders, while the
                                                                                           proposed
                                                                                           functionality permits
                                                                                           a choice of day and
                                                                                           GTC/GTD orders, or
                                                                                           just day orders.
Block new orders...............  N/A...............  5.34(c)(9).....  C2 6.14(c)(9);      Similar to automatic
                                                                       EDGX 22.11.         functionality that
                                                                                           occurs on the
                                                                                           Exchange currently
                                                                                           when a Trading Permit
                                                                                           Holder uses kill
                                                                                           switch functionality.
                                                                                           The proposed rule
                                                                                           change merely
                                                                                           provides a separate
                                                                                           way to achieve this
                                                                                           result on the new
                                                                                           System, providing
                                                                                           Users with
                                                                                           flexibility regarding
                                                                                           how to manage their
                                                                                           resting orders and
                                                                                           quotes.
Duplicate order protection.....  N/A...............  5.34(c)(10)....  C2 6.14(c)(10);     Additional, voluntary
                                                                       EDGX Technical      control for Users to
                                                                       specifications.     manage their order
                                                                                           and execution risk on
                                                                                           the Exchange. The
                                                                                           proposed rule change
                                                                                           protects Users
                                                                                           against execution of
                                                                                           multiple orders that
                                                                                           may have been
                                                                                           erroneously entered.
Buy-Write/Married Put Check....  6.53C.08(a)(5)....  5.34(c)(11)....  EGDX 21.17(b)(9)..  The proposed
                                                                                           functionality is
                                                                                           generally the same as
                                                                                           current
                                                                                           functionality, the
                                                                                           acceptable price
                                                                                           range is based on the
                                                                                           price of the call
                                                                                           (put) plus (minus) an
                                                                                           Exchange-determined
                                                                                           buffer amount.
----------------------------------------------------------------------------------------------------------------

    The price  protection mechanisms and risk controls under proposed 
Rule 5.34 are applicable to the System's acceptance and execution of 
orders and quotes pursuant to the Rules, including Rules 5.31 through 
5.33,\7\ and to and orders routed to the Exchange's Public Automated 
Routing System (``PAR'') pursuant to Rule 5.82.\8\ The Exchange notes 
that the proposed rule's inclusion of PAR orders is an intended 
difference made between its proposed rule and C2's rule, as PAR is 
unique to the Exchange. Upon migration, all orders routed to PAR will 
also be subject to price protection mechanisms and risk controls. This 
will provide the same protections for User's PAR routed order as for 
User's order and quotes sent through and executed by the System. 
Currently, PAR functions outside of the System, therefore not all risk 
controls are currently applicable to PAR orders. Upon migration, PAR 
orders will be entered into the System in the same manner as all other 
orders, and will route to PAR per User instruction, after going through 
the System, therefore, the same price protection mechanisms and risk 
controls will apply.
---------------------------------------------------------------------------

    \5\ See Rule 5.6 in the shell Rulebook. For an order designated 
as a GTD order, if after entry into the System, the order is not 
fully executed, the order (or unexecuted portion) remains available 
for potential display or execution (with the same timestamp) until a 
date and time specified by the entering User unless cancelled by the 
entering User. For an order designated as a GTC order, if after 
entry into the System, the order is not fully executed, the order 
(or unexecuted portion) remains available for potential display or 
execution (with the same timestamp) unless cancelled by the entering 
User, or until the option expires, whichever comes first.
    \6\ The System calculates a notional cutoff on a gross basis by 
summing CBB, CBO, CEB, and CEO. The System calculates a notional 
cutoff on a net basis by summing CEO and CBO, then subtracting the 
sum of CEB and CBB, and then taking the absolute value of the 
resulting amount.
    \7\ Rules to be effective on October 7, 2019 and cover the 
opening auction process, order and quote book processing, display, 
priority, and execution, as well as complex orders.
    \8\ Rule to be effective on October 7, 2019 and governs the 
operation of the Exchange's Public Automated Routing System 
(``PAR'').
---------------------------------------------------------------------------

    The proposed rule change also deletes the mechanisms related to 
execution of quotes that lock or cross the NBBO and quotes inverting 
the NBBO (current Rule 6.14(b) and (c)). The Exchange's current quote 
functionality will be replaced with bulk message functionality \9\ upon 
migration; however, orders and bulk messages (the equivalent of current 
quotes) submitted by Market-Makers will be subject to the same 
protections, except for those that do not apply to bulk messages (e.g., 
for market orders in no-bid (offer) series, market order NBBO width and 
drill-through protections, limit order fat finger checks, and daily 
risk limits) as described above.
---------------------------------------------------------------------------

    \9\ See Rule 1.1 in shell Rulebook, which states that ``bulk 
message'' means a single electronic message a User submits to the 
Exchange in which the User may enter, modify, or cancel up to an 
Exchange-specified number of bids and offers. Upon migration the 
System will handle a bulk message bid or offer in the same manner as 
it handles an order or quote, unless the Rules specify otherwise. 
The proposed rule change accounts for bulk message functionality and 
makes explicit the price protections that will not apply to such 
messages. This is consistent with C2 Rule 6.14.
---------------------------------------------------------------------------

    Under the current C2 and EDGX debit/credit price reasonability 
check (see C2 Rule 6.14(b)(3) and EDGX Rule 21.17(b)(3)), the System 
only pairs calls (puts) if they have the same expiration date but 
different exercise prices or the same exercise price but different 
expiration dates. Under the Exchange's

[[Page 48668]]

current debit/credit reasonability check, with respect to pairs with 
different expiration the System pairs of calls (puts) with different 
expiration dates if the exercise price for the call (put) with the 
farther expiration date is lower (higher) than the exercise price for 
the nearer expiration date in addition to those with different 
expiration dates and the same exercise price. The proposed rule change 
amends this check to pair orders in the same manner as C2 and EDGX, 
which is to pair calls (puts) if they have the same expiration date but 
different exercise prices or the same exercise price but different 
expiration dates. Additionally, the proposed rule change deletes the 
exception for complex orders with European-style exercise. This aligns 
with the corresponding rules of C2 and EDGX and the Exchange no longer 
believes this exception is necessary and will expand this check to 
index options with all exercise styles.
    The proposed Risk Monitor Mechanism is identical to the current 
functionality on C2 and substantively the same as the functionality 
currently available on EDGX. Because there will no longer be separate 
order and quote functionality on the Exchange following the technology 
migration, there will no longer be separate mechanisms to monitor entry 
and execution rates, as there are on the Exchange today. Each User may 
establish limits for the following parameters in the Exchange's 
counting program. The System counts each of the following within a 
class (``class limit'') \10\ and across all classes for an EFID \11\ 
(``firm limit'') and/or across all classes for a group of EFIDs (``EFID 
Group'') (``EFID Group limit'') over a User-established time period 
(``interval'') on an absolute basis for a trading day (``absolute 
limits''):
---------------------------------------------------------------------------

    \10\ The Exchange also changes the term ``underlying'' and 
``underlying limit'' currently in the C2 rule to ``class'' and 
``class limit'' which more accurately reflect this Risk Monitor 
Mechanism limit and the language in the current Exchange rule.
    \11\ The Exchange will use EFIDs (i.e., Executing Firm IDs) upon 
migration. See Rule 1.1 in the shell Rulebook.
---------------------------------------------------------------------------

    (i) Number of contracts executed (``volume'');
    (ii) notional value of executions (``notional'');
    (iii) number of executions (``count'');
    (iv) number of contracts executed as a percentage of number of 
contracts outstanding within an Exchange-designated time period or 
during the trading day, as applicable (``percentage''), which the 
System determines by calculating the percentage of a User's outstanding 
contracts that executed on each side of the market during the time 
period or trading day, as applicable, and then summing the series 
percentages on each side in the class; and
    (v) number of times the limits established by the parameters under 
the above-listed are reached (``risk trips'').
    Also, when the System determines the volume, notional, count, 
percentage, or risk trips limits have been reached:
    (i) a User's class limit within the interval or the absolute limit 
for the class, the Risk Monitor Mechanism cancels or rejects such 
User's orders or quotes in all series of the class and cancels or 
rejects any additional orders or quotes from the User in the class 
until the counting program resets (as described below).
    (ii) a User's firm limit within the interval or the absolute limit 
for the firm, the Risk Monitor Mechanism cancels or rejects such User's 
orders or quotes in all classes and cancels or rejects any additional 
orders or quotes from the User in all classes until the counting 
program resets (as described below).
    (iii) a User's EFID Group limit within the interval or the absolute 
limit for the EFID Group, the Risk Monitor Mechanism cancels or rejects 
such User's orders or quotes in all classes and cancels or rejects any 
additional orders or quotes from any EFID within the EFID Group in all 
classes until the counting program resets (as described below).
    The Risk Monitor Mechanism will also attempt to cancel or reject 
any orders routed away to other exchanges. The System processes 
messages in the order in which they are received. Therefore, it will 
execute any marketable orders or quotes that are executable against a 
User's order or quote and received by the System prior to the time the 
Risk Monitor Mechanism is triggered at the price up to the size of the 
User's order or quote, even if such execution results in executions in 
excess of the User's parameters. The System will not accept new orders 
or quotes from a User after a class limit is reached until the User 
submits an electronic instruction to the System to reset the counting 
program for the class. The System will not accept new orders or quotes 
from a User after an EFID limit or EFID Group limit is reached until 
the User manually notifies the Trade Desk to reset the counting program 
for the firm, unless the User instructs the Exchange to permit it to 
reset the counting program by submitting an electronic message to the 
System. The Exchange may restrict the number of User class and firm 
resets per second. The System counts executed COA responses as part of 
the Risk Monitor Mechanism. The System counts individual trades 
executed as part of a complex order when determining whether the 
volume, notional, count, or risk trips limit has been reached. The 
System counts the percentage executed of a complex order when 
determining whether the percentage limit has been reached. In addition, 
a User may also engage the Risk Monitor Mechanism to cancel resting 
bids and offers, as well as order set forth in the kill switch 
protection provision. The Risk Monitor Mechanism providers Users with 
similar ability to manage their order and execution risk to the quote 
risk monitor and rate checks currently available on the Exchange, and 
merely uses different parameters and modifies the functionality to 
conform the new System to that of C2 and EDGX upon migration.
    With respect to various price protections and risk controls in 
current Rules 6.12.01, 6.13, and 6.53C.08, the Exchange has the 
authority to provide intraday relief by widening or inactivating one or 
more of the parameter settings for the mechanisms in those rules. This 
authority is included in proposed Interpretation and Policy .01, to 
provide this flexibility for all price protections and risk controls 
for which the Exchange sets parameters, providing the Exchange with 
flexibility it believes appropriate given previous experience with risk 
controls. This is consistent with corresponding C2 Rule 6.14.01. The 
Exchange will continue to make and keep records to document all 
determinations to grant intraday relief, and periodically review these 
determinations for consistency with the interest of a fair and orderly 
market.
    The proposed rule change makes a non-substantive change in moving 
the provision regarding the Exchange's ability to share User-designated 
risk settings in the System with a Clearing Trading Permit Holder that 
clears Exchange transactions on behalf of the User from the 
introduction of current Rule 6.14 to proposed Rule 5.34.02. Also, the 
proposed change makes non-substantive changes in that it updates all 
provisions to account for ``User'' as opposed to Trading Permit Holder 
(``TPH''), which is consistent with the definition under Rule 1.1 the 
shell Rulebook, and the use of the term throughout the Exchange Rules 
upon migration.
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

[[Page 48669]]

thereunder applicable to the Exchange and, in particular, the 
requirements of Section 6(b) of the Act.\12\ Specifically, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
---------------------------------------------------------------------------

    The proposed rule change is generally intended to add or align 
certain System functionality in connection with price protection 
mechanisms and risk controls with functionality currently offered by C2 
and EDGX 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. The proposed rule changes would also provide Users with 
access to functionality that is generally available on markets other 
than the Cboe Affiliated Exchanges and may result in the efficient 
execution of such orders and will provide additional flexibility as 
well as increased functionality to the Exchange's System and its Users. 
The proposed rule change seeks to provide greater harmonization between 
the rules of the Cboe Affiliated Exchanges, which would result in 
greater uniformity and less burdensome and more efficient regulatory 
compliance. As such, the proposed rule change would foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities and would remove impediments to and perfect the mechanism of 
a free and open market and a national market system. The Exchange also 
believes that consistent rules will increase the understanding of the 
Exchange's operations for Trading Permit Holders that are also 
participants on the Cboe Affiliated Exchanges, thereby contributing to 
the protection of investors and the public interest. The proposed rule 
change does not propose to implement new or unique functionality that 
has not been previously filed with the Commission or is not available 
on Cboe Affiliated Exchanges. The Exchange notes that the proposed rule 
text mirrors C2 Rules, save for intended differences that account for 
PAR (unique to the Exchange), Exchange-specific cross-references and 
references to certain terms (i.e. User throughout the proposed rule).
    Overall, the Exchange believes the additional and enhanced price 
protection mechanisms and risk controls will protect investors and the 
public interest and maintain fair and orderly markets by mitigating 
potential risks associated with market participants entering orders and 
quotes at unintended prices, and risks associated with orders and 
quotes trading at prices that are extreme and potentially erroneous, 
which may likely have resulted from human or operational error. The 
Exchange notes that the proposed rule change is substantially similar 
to the current Cboe Options Rules, and, while the Exchange currently 
offers many similar protections and controls, as described above, the 
Exchange believes Users will benefit from the additional functionality 
that will be available following the technology migration.
    As indicated in the table above, the proposed price protection and 
risk control mechanisms no longer establish outer boundaries or limits 
to the levels at which mechanisms are set (save for the proposed no-bid 
provision, noted below), but instead, the proposed rule change amends 
the price protection mechanisms and risk controls to account for 
Exchange-determined and/or User-determined buffer or default amounts. 
The Exchange believes this removes impediments to and perfects the 
mechanism of a free and open market and national market system because 
it affords the Exchange and Users reasonable and necessary flexibility 
to establish and modify the default parameters, which, in turn, 
protects investors and the public interest, and maintains a fair and 
orderly market. The Exchange notes any Exchange-determined parameters 
will always be available on the Exchange's website via specification or 
Notice.\15\ The Exchange also believes the proposed rule change to the 
no-bid provisions, that the System cancels or rejects a market order if 
there is no-bid and the best offer is less than or equal to $0.50, as 
well as a market order where there is no-offer, is designed to protect 
User's as it will provide protection for market orders to prevent 
execution at potentially erroneous prices when a market order is 
entered in a series with no bid or offer.
---------------------------------------------------------------------------

    \15\ See Rule 1.5 in the shell Rulebook.
---------------------------------------------------------------------------

    The proposed drill-through protections for complex orders removes 
impediments to and perfect the mechanism of a free and open market and 
national market system and facilitates transactions in securities by 
adding detail to the rules regarding complex order price protections. 
Particularly, by adding that a COA-eligible order would initiate a COA 
at the drill-through price because the prices for complex strategy 
executions may be subject to the drill-through protection and 
permitting an order that is not currently executable due to Legging 
restrictions to remain on the COB if the SBBO changes during the set 
time-period will provide additional execution opportunities, for Users' 
orders participating in the COA and/or prior to cancellation.
    The proposed provision in connection with the Risk Monitor 
Mechanism will not alter the function of this mechanism for market 
participants as it provides Users with the ability to manage their 
order and execution risk to the quote risk monitor and rate checks 
similar to that which is currently available on the Exchange, and 
merely uses different parameters and modifies the functionality to 
conform the new System to that of C2 and EDGX upon migration. The 
Exchange also notes that this functionality is optional; it is User-
enabled and the parameters are User-established.
    The proposed rule change also removes functionality, and reference 
to such functionality, that will not exist upon migration in order to 
align the Exchange's System with that of its affiliated options 
exchanges, which will serve to remove impediments to and perfect the 
mechanism of a free and open market and national market system by 
providing market participants with rules that accurately reflect 
functionality post-migration and effectively harmonize Exchange 
functionality with that of C2 and EDGX. Moreover, the Exchange does not 
believe that the proposed change that removes functionality that will 
no longer be available upon migration will impact investors because the 
proposed change provides substantially similar alternative mechanisms 
and controls that result in the same protections as current Exchange 
functionality. The

[[Page 48670]]

Exchange believes that the proposed rule provides a full suite of price 
protection mechanisms and risk controls, the same as those currently in 
effect on its affiliated options exchanges, which will sufficiently 
mitigate risks associated with market participants entering orders and 
quotes at unintended prices, and risks associated with orders and 
quotes trading at prices that are extreme and potentially erroneous, as 
a likely result of human or operational error. The Exchange also notes 
that a majority of the proposed price protection mechanisms and risks 
controls are voluntary and/or User-determined, which benefits market 
participants by providing Users with additional control and flexibility 
in connection with their orders.
    As stated, the Exchange notes the proposed price protection 
mechanisms and risk controls provisions do not present any new or 
unique rules or functionality for market participants as the proposed 
rule is substantially similar to the Exchange's current rules, 
identical to C2 Rule 6.14, as well as substantively the same as 
corresponding EDGX rules and technical specifications, as discussed 
above. The proposed rule change makes various non-substantive changes 
throughout the rules by updating cross-references and Exchange-specific 
terms, and by means of conforming language to C2 Rule 6.14, as well as 
corresponding EDGX rules, that will protect investors and benefit 
market participants as these changes simplify or clarify rules, delete 
duplicative rule provisions, conform paragraph numbering and lettering 
throughout the rules, and use plain English.

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 reiterates that 
the proposed rule change is being proposed in the context of the 
technology integration of the Cboe Affiliated Exchanges. Thus, the 
Exchange believes this proposed rule change is necessary to permit fair 
competition among national securities exchanges.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. Rather, the 
proposed rule change is designed to benefit Exchange participants in 
that it will provide a consistent technology offering for Users by the 
Cboe Affiliated Exchanges. Following the technology migration, the 
Exchange's System, as described in this proposed rule change, will 
apply to all Users and order and quotes submitted by Users in the same 
manner. The Exchange also notes that many of the proposed price 
protections and risk controls are either User-determined or altogether 
voluntary.
    In addition to this, the Exchange does not believe that the 
proposed rule change will impose any burden on intermarket competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act because the basis for the majority of the proposed rule changes 
in this filing are the rules of C2 and EDGX, which have previously been 
filed with the Commission. The Exchange also notes that market 
participants on other exchanges are welcome to become participants on 
the Exchange if they determine that this proposed rule change has made 
Cboe Options a more attractive or favorable venue. As stated, the 
proposed changes to the rules that accurately reflect functionality 
that will be in place come October 7, 2019, will not impose any burden 
on intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act but rather provide clear, 
consistent rules for market participants surrounding the completion of 
migration.

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.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

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-2019-057 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-2019-057. 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-2019-057, and should be submitted 
on or before October 7, 2019.

[[Page 48671]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19902 Filed 9-13-19; 8:45 am]
 BILLING CODE 8011-01-P