Document ID: SEC-2019-1032-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-07-22T04:00Z

[Federal Register Volume 84, Number 140 (Monday, July 22, 2019)]
[Notices]
[Pages 35147-35165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15475]

[[Page 35147]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86387; File No. SR-CBOE-2019-034]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend the Exchange's Opening 
Process Including on VIX Settlement Days

July 16, 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 July 2, 2019, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend its opening process. 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. Cboe Options believes offering 
similar functionality to the extent practicable will reduce potential 
confusion for market participants.
    In connection with this technology migration, the Exchange has a 
shell structure for the Exchange's Rulebook that will become effective 
upon the migration of the Exchange's trading platform to the same 
system used by the Cboe Affiliated Exchanges (``shell Rulebook'') that 
resides alongside its currently effective Rulebook (``current 
Rulebook''), which shell Rulebook will contain the Rules that will be 
in place upon completion of the Cboe Options technology migration.
    The proposed rule change amends the Exchange's opening auction 
process.\3\ Pursuant to the proposed opening auction process, the 
Exchange will have a Queuing Period, during which the System will 
accept orders and quotes and disseminate expected opening information 
(similar to the pre-opening period described in current Rule 6.2(a)); 
will initiate an opening rotation upon the occurrence of certain 
triggers (similar to the current opening rotation triggers described in 
current Rule 6.2(b)); will conduct an opening rotation during which the 
System matches and executes orders and quotes against each other in 
order to establish an opening Exchange best bid and offer and trade 
price, if any, for each series, subject to certain price protections 
(similar to the opening rotation period described in current Rule 
6.2(c) and the opening conditions in Rule 6.2(d)); and will open series 
for trading. This order of events that comprise the proposed opening 
auction process corresponds to the Exchange's current opening auction 
process described in current Rule 6.2.
---------------------------------------------------------------------------

    \3\ The Exchange's opening auction process is set forth in Rule 
6.2 of the current Rulebook. The proposed rule change deletes Rule 
6.2 of the current Rulebook and adopts Rule 5.31 in the shell 
Rulebook, which changes are expected to become operative on October 
7, 2019.
---------------------------------------------------------------------------

    Proposed Rule 5.31(a) sets forth the definitions of the following 
terms for purposes of the opening auction process in proposed Rule 
5.31: \4\
---------------------------------------------------------------------------

    \4\ A term defined elsewhere in the Rules has the same meaning 
with respect to proposed Rule 5.31, unless otherwise defined in 
proposed Rule 5.31.
---------------------------------------------------------------------------

     Composite Market: The term ``Composite Market'' means the 
market for a series comprised of (1) the higher of the then-current 
best appointed Market-Maker bulk message bid on the Exchange and the 
away best bid (``ABB'') (if there is an ABB) and (2) the lower of the 
then-current best appointed Market-Maker bulk message offer on the 
Exchange and the away best offer (``ABO'') (if there is an ABO). The 
term ``Composite Bid (Offer)'' means the bid (offer) used to determine 
the Composite Market.
    The Exchange currently considers quotes of appointed Market-Makers 
on the Exchange \5\ and quotes from any away markets, if it has 
activated Hybrid Agency Liaison (``HAL'') at the open, as part of its 
current opening conditions.\6\ The Exchange does not intend to activate 
HAL at the open upon the technology migration and will thus apply the 
same opening conditions to all classes. The Exchange believes it is 
appropriate to consider any quotes from away markets in addition to 
quotes on its own market when determining whether to open a series in 
all classes, because consideration of all then-available pricing 
information may provide for more accurate opening prices.
---------------------------------------------------------------------------

    \5\ The term ``quote'' in the current Rulebook corresponds to 
the term ``bulk message'' in the shell Rulebook. Additionally, 
currently on Cboe Options, only Market-Makers may submit quotes in 
their appointed classes.
    \6\ See current Rule 6.2(d).
---------------------------------------------------------------------------

     Composite Width: The term ``Composite Width'' means the 
width of the Composite Market (i.e., the width between the Composite 
Bid and the Composite Offer) of a series.
     Maximum Composite Width: The term ``Maximum Composite 
Width'' means the amount that the Composite Width of a series may 
generally not be greater than for the series to open (subject to 
certain exceptions, as described below). The Market

[[Page 35148]]

Composite Widths for all classes are as follows (based on the Composite 
Bid for a series): \7\
---------------------------------------------------------------------------

    \7\ The Maximum Composite Widths are consistent with the 
Exchange's current authority to determine the OEPW (as defined 
below); the Exchange is adding this detail to the Rules. The 
proposed widths are similar, but narrower, than the Exchange's 
current width settings. See Cboe Options Regulatory Circular RG16-
080.

------------------------------------------------------------------------
                                                              Market
                      Composite bid                          composite
                                                               width
------------------------------------------------------------------------
0-1.99..................................................            0.50
2.00-5.00...............................................            0.80
5.01-10.00..............................................            1.00
10.01-20.00.............................................            2.00
20.01-50.00.............................................            3.00
50.01-100.00............................................            5.00
100.01-200.00...........................................            8.00
>=200.01................................................           12.00
------------------------------------------------------------------------

    The Exchange may modify these amounts during the opening auction 
process (which modifications the Exchange disseminates to all 
subscribers to the Exchange's data feeds that deliver opening auction 
updates).
    The Maximum Composite Width corresponds to the opening exchange 
prescribed width range (``OEPW'') currently used on Cboe Options.\8\ 
The Exchange will determine the Maximum Composite Width in a slightly 
different manner than it currently determines the OEPW; \9\ however, 
both are intended to create a reasonable quote width to protect against 
a market opening with an extreme width. Currently, if the opening quote 
width is wider than the OEPW, but other conditions exist, the Exchange 
will then consider a separate quote width setting used as a price 
protection measure after trading opens.\10\ The proposed protection 
measure is simplified to only be based on the Maximum Composite Width.
---------------------------------------------------------------------------

    \8\ See Cboe Options Rule 6.2(d)(i)(A).
    \9\ The Exchange will set the Maximum Composite Width on a 
Composite Bid basis rather than premium basis.
    \10\ See current Rule 6.2(d) (such intraday width is referred to 
as the IEPW).
---------------------------------------------------------------------------

     Opening Auction Updates: The term ``opening auction 
updates'' means Exchange-disseminated messages that contain information 
regarding the expected opening of a series based on orders and quotes 
in the Queuing Book for the applicable trading session and, if 
applicable, the Global Trading Hours (``GTH'') Book,\11\ including the 
expected opening price, the then-current cumulative size on each side 
at or more aggressive than the expected opening price, and whether the 
series would open (and any reason why a series would not open).
---------------------------------------------------------------------------

    \11\ In other words, for the Regular Trading Hours (``RTH'') 
opening auction in an All Sessions class, the expected opening 
information to be disseminated in opening auction updates prior to 
the conclusion of the GTH trading session will be based on orders 
and quotes in the RTH Queuing Book (i.e., RTH Only orders) and in 
the GTH Book (i.e., All Sessions orders).
---------------------------------------------------------------------------

    The proposed auction update messages correspond to the expected 
opening information messages (``EOIs'') the Exchange currently 
disseminates.\12\ The information to be included in auction update 
messages will differ slightly from the information the Exchange 
currently disseminates in EOIs. For example, the Exchange currently 
disseminates the expected size of an opening trade and the size and 
side of any imbalance. As proposed, the Exchange will disseminate the 
then-current cumulative size on each side at or more aggressive than 
the expected opening price, along with information regarding whether a 
series will or will not open, which ultimately provides market 
participants with equivalent information.
---------------------------------------------------------------------------

    \12\ See current Rule 6.2(a)(ii).
---------------------------------------------------------------------------

     Opening Collar: The term ``Opening Collar'' means the 
price range that establishes limits at or inside of which the System 
determines the Opening Trade Price for a series. The Opening Collar is 
determined by determining the midpoint of the Composite Market, and 
adding and subtracting half of the applicable width amount above and 
below, respectively, that midpoint. The Opening Collar widths for all 
classes are as follows (based on the Composite Bid for a series):

------------------------------------------------------------------------
                                                          Opening collar
                      Composite bid                            width
------------------------------------------------------------------------
0-1.99..................................................            0.50
2.00-5.00...............................................            0.80
5.01-10.00..............................................            1.00
10.01-20.00.............................................            2.00
20.01-50.00.............................................            3.00
50.01-100.00............................................            5.00
100.01-200.00...........................................            8.00
>=200.01................................................           12.00
------------------------------------------------------------------------

    The Exchange may modify these amounts during the opening auction 
process (which modifications the Exchange disseminates to all 
subscribers to the Exchange's data feeds that deliver opening auction 
updates).
    The Exchange currently uses the OEPW (or IEPW in certain 
circumstances) as the range within which the opening price must be.\13\ 
While the Exchange proposes to use a different measure to protect 
against a market opening at an extreme price than it uses to protect a 
market against opening too wide, the new Opening Collar will be based 
on appointed Market-Maker quotes and away market quotes, and will be 
used in a similar manner to protect against the market opening at an 
extreme price.
---------------------------------------------------------------------------

    \13\ See current Rule 6.2(d)(i)(C). The proposed Opening Collar 
widths are consistent with the Exchange's current authority to 
determine the OEPW; the Exchange is adding this detail to the Rules. 
The proposed widths are similar, but narrower, than the Exchange's 
current width settings. See Cboe Options Regulatory Circular RG16-
080.
---------------------------------------------------------------------------

     Opening Trade Price: The term ``Opening Trade Price'' 
means the price at which the System executes opening trades in a series 
during the opening rotation.\14\
---------------------------------------------------------------------------

    \14\ See current Rule 6.2(c)(i)(A).
---------------------------------------------------------------------------

     Queuing Book: The term ``Queuing Book'' means the book 
into which Users may submit orders and quotes (and onto which good-til-
cancelled (``GTC'') and good-til-day (``GTD'') orders \15\ remaining on 
the Book from the previous trading session or trading day, as 
applicable, are entered) during the Queuing Period for participation in 
the applicable opening rotation.\16\ Orders and quotes on the Queuing 
Book may not execute until the opening rotation. The Queuing Book for 
the GTH opening auction process may be referred to as the ``GTH Queuing 
Book,'' and the Queuing Book for the RTH opening auction process may be 
referred to as the ``RTH Queuing Book.'' There is no equivalent term to 
a Queuing Book in current Rule 6.2. However, the System currently 
accepts orders and quotes during the pre-opening period, which orders 
and quotes rest on the book and are eligible for execution during the 
opening rotation.
---------------------------------------------------------------------------

    \15\ See Rule 5.6(d) in the shell Rulebook.
    \16\ In other words, at 7:30 a.m., All Sessions orders will rest 
on the GTH Queuing Book and be eligible to participate in the GTH 
opening auction process, and RTH Only orders will rest on the RTH 
Queuing Book and be eligible to participate in the RTH opening 
auction process. Additionally, unexecuted All Sessions orders 
resting on the GTH Book at the end of the GTH trading session will 
enter the RTH Queuing Book and be eligible to participate in the RTH 
opening auction process. This does not currently occur, because the 
GTH and RTH trading sessions currently operate separately and do not 
interact. Following the technology migration, these trading sessions 
will be able to interact, as they will use the same book and 
connectivity. See Rules 1.1 (definition of Book) in the shell 
Rulebook.
---------------------------------------------------------------------------

     Queuing Period: The term ``Queueing Period'' means the 
time period prior to the initiation of an opening rotation during which 
the System accepts orders and quotes for participation in the opening 
rotation for the applicable trading session.\17\ The Queuing Period is 
equivalent to the pre-open period described in current Rule 6.2(a).
---------------------------------------------------------------------------

    \17\ See current Rule 6.2(a).
---------------------------------------------------------------------------

    Proposed Rule 5.31(b) describes the Queuing Period. The Queuing 
Period will begin at 2:00 a.m. Eastern Time for

[[Page 35149]]

All Sessions Classes and at 7:30 a.m. Eastern Time for RTH Only 
Classes.\18\ The System currently begins accepting orders in quotes at 
5:00 p.m. Eastern Time \19\ the previous trading day for the GTH 
trading session and at 7:30 a.m. Eastern Time for the RTH trading 
session.\20\ While Users will have less time to submit orders and 
quotes prior to the GTH opening, the Exchange believes having one hour 
to submit orders and quotes in All Sessions Classes prior to the GTH 
opening is sufficient given that the Exchange lists fewer classes for 
trading during GTH, and it is the same amount of time they have to 
submit orders and quotes in RTH Only classes prior to the RTH trading 
session.\21\
---------------------------------------------------------------------------

    \18\ See proposed Rule 5.31(b)(1).
    \19\ The Exchange notes the times in its current Rule are in 
Central Time rather than Eastern Time, as is the case in its 
proposed Rule.
    \20\ See current Rule 6.2(a); see also Cboe Options Regulatory 
Circular RG15-103 (July 13, 2015). The Exchange currently begins 
accepting orders and quotes at 7:30 a.m. Eastern Time for the RTH 
trading session, which time is not changing.
    \21\ Pursuant to C2 Options Rule 6.11(a) and EDGX Options Rule 
21.7(a), the Queuing Period for the GTH trading session will 
similarly begin one hour prior to the beginning of that trading 
session on those exchanges. Current Rule 6.2(a) provides the 
Exchange with flexibility regarding when to begin the pre-opening 
period. The Exchange proposes to eliminate this flexibility from the 
Rules, as it does not believe it is necessary any more. If the 
Exchange determines to change the time at which the Queuing Period 
will begin, it will submit a rule filing.
---------------------------------------------------------------------------

    Proposed Rule 5.31(b)(2) clarifies that orders and quotes on the 
Queuing Book are not eligible for execution until the opening rotation 
pursuant to proposed paragraph (e), as described below.\22\ This is 
consistent with the current order entry period, pursuant to which 
orders and quotes entered for inclusion in the opening process do not 
execute until the opening trade pursuant to current Rule 6.2(c). During 
the Queueing Period, the System accepts all orders and quotes that are 
available for a class and trading session pursuant to Rule 5.30,\23\ 
which are eligible for execution during the opening rotation, except as 
follows:
---------------------------------------------------------------------------

    \22\ The proposed rule change moves the provision that states 
that GTC and GTD orders remaining on the Book from the previous 
trading day may participate in the opening process from current Rule 
6.2(b) to the definition of Queuing Book in proposed Rule 5.31(a).
    \23\ The Exchange intends to add Rule 5.30 to the shell Rulebook 
in a separate rule filing, which will set forth the order types, 
instructions, and times-in-force the Exchange may make available for 
electronic trading.
---------------------------------------------------------------------------

     The System rejects immediate-or-cancel (``IOC'') and fill-
or-kill (``FOK'') orders during the Queuing Period; \24\
---------------------------------------------------------------------------

    \24\ See current Rule 6.2(a)(i) and proposed Rule 5.31(a)(2)(A).
---------------------------------------------------------------------------

     the System accepts orders and quotes with MTP Modifiers 
during the Queuing Period, but does not enforce them during the opening 
rotation; \25\
---------------------------------------------------------------------------

    \25\ See proposed Rule 5.31(a)(2)(B). The Exchange currently has 
Market-Maker trade prevention orders, which it does not accept prior 
to the opening. See Rule 6.2(a)(i).
---------------------------------------------------------------------------

     the System accepts stop and stop-limit orders\26\ during 
the Queuing Period, but they do not participate during the opening 
rotation. The System enters any of these orders it receives during the 
Queuing Period into the Book following completion of the opening 
rotation (in time priority); \27\
---------------------------------------------------------------------------

    \26\ See proposed Rule 5.31(a)(2)(C). Current Rule 6.2(c)(i)(A) 
provides that all-or-none orders and orders with a stop contingency 
will not participate in the opening rotation in classes in which the 
Exchange has not activated HAL at the open. As noted above, the 
Exchange intends to not activate HAL at the open for any classes 
following the technology migration, so proposed Rule 5.31(a)(2)(C) 
is consistent with that current Rule.
    \27\ This is consistent with current functionality, and the 
proposed rule change is adding this detail to the Rules. See also 
Cboe Options Rule 6.2(c)(i)(B) (which states that order with a stop 
contingency do not participate in the opening rotation).
---------------------------------------------------------------------------

     the System converts all intermarket sweep orders 
(``ISOs'') received prior to the completion of the opening rotation 
into non-ISOs; \28\ and
---------------------------------------------------------------------------

    \28\ See proposed Rule 5.31(a)(2)(D); see also current Rule 
6.2(a)(i) (which does not permit ISOs to be entered during the pre-
opening period).
---------------------------------------------------------------------------

     complex orders do not participate in the opening auction 
described in proposed Rule 5.31 and instead may participate in the 
complex order book (``COB'') opening process pursuant to proposed Rule 
5.33(c).\29\
---------------------------------------------------------------------------

    \29\ See current Rule 6.2(c)(i)(B) and proposed Rule 
5.31(a)(2)(E). The Exchange intends to add Rule 5.33 to the shell 
Rulebook (equivalent to current Rule 6.53C in the current Rulebook) 
in a separate rule filing, which will describe the COB opening 
process.
---------------------------------------------------------------------------

    Proposed Rule 5.31(c) describes the opening auction updates the 
Exchange will disseminate as part of the opening auction process. As 
noted above, opening auction updates contain information regarding the 
expected opening of a series and are similar to the EOIs the Exchange 
currently disseminates during the pre-opening period. These messages 
provide market participants with information that may contribute to 
enhanced liquidity and price discovery during the opening auction 
process. Beginning at 2:00 a.m. Eastern Time for the GTH trading 
session and at 8:30 a.m. Eastern Time for the RTH trading session, the 
Exchange disseminates opening auction updates for the series.\30\ The 
Exchange disseminates opening auction updates every five seconds, 
unless there are no updates to the opening information since the 
previously disseminated update, in which case the Exchange disseminates 
updates every minute, to all subscribers to the Exchange's data feeds 
that deliver these messages until a series opens.\31\ If there have 
been no changes since the previous update, the Exchange does not 
believe it is necessary to disseminate duplicate updates to market 
participants at the next interval of time.
---------------------------------------------------------------------------

    \30\ The Exchange only begins disseminating updates for series 
with locked or crossed interest or if the series needs Market-Maker 
bulk messages. There can only be an expected opening price to 
disseminate if these conditions have been met, and thus no updates 
will be disseminated if these conditions do not exist. See current 
Rule 6.2(a)(ii). Cboe Options currently begins disseminating EOIs at 
8:30 a.m. or 9:00 a.m. Eastern Time (depending on the class), which 
is consistent with the proposed rule change to begin dissemination 
of opening auction messages no earlier than one hour prior to the 
expected initiation of the opening rotation for a series. The 
Exchange believes market participants generally want to receive this 
information closer to the opening of trading.
    \31\ See current Rule 6.2(a)(ii) (the Exchange currently 
disseminates EOIs at regular intervals or less frequently if there 
are no updates, and will not disseminate EOIs in certain 
circumstances, including if there is no locked or crossed interest 
(because there would be no expected opening price or size)).
---------------------------------------------------------------------------

    Proposed Rule 5.31(d) describes the events that will trigger the 
opening rotation for a class. Pursuant to current Rule 6.2(b), unless 
unusual circumstances exist, the System initiates the opening rotation 
procedure on a class-by-class basis for Regular Trading Hours:
     With respect to equity and exchange-traded product 
options, after the opening trade or the opening quote is disseminated 
in the market for the underlying security,\32\ or at 9:30 a.m. Eastern 
Time for classes determined by the Exchange (including over-the-counter 
equity classes); or
---------------------------------------------------------------------------

    \32\ The ``market for the underlying security'' is either the 
primary listing exchange or the first exchange to open the 
underlying security, as determined by the Exchange on a class-by-
class basis.
---------------------------------------------------------------------------

     with respect to index options, at 9:30 a.m. Eastern Time, 
or at the later of 9:30 a.m. and the time the Exchange receives a 
disseminated index value for classes determined by the Exchange.
    The System currently initiates the opening rotation procedure for 
Global Trading Hours at 3:00 a.m. Eastern Time.
    The proposed opening rotation triggers are similar to the current 
opening rotation triggers, except the Exchange proposes to have the 
same trigger for all equity options and the same trigger for all index 
options. As proposed for Regular Trading Hours, after a time period 
(which the Exchange determines for all classes) following the System's 
observation after 9:30 a.m. Eastern Time of the first disseminated (1) 
transaction in the security

[[Page 35150]]

underlying an equity option on the primary market or (2) index value 
for the index underlying an index option, the System will initiate the 
opening rotation for the series in that class, and will disseminate a 
message to market participants indicating the initiation of the opening 
rotation. For Global Trading Hours, the System will initiate the 
opening rotation at 8:30 a.m. Eastern Time. For Regular Trading Hours, 
the opening rotation will be triggered in all equity classes by 
observation of the first transaction in the underlying security on the 
primary market (rather than some classes being triggered by a timer), 
and the opening rotation will be triggered in all index classes by 
observation of the first index value (rather than some classes being 
triggered by a timer), after 9:30 a.m. Eastern Time. The Exchange 
believes that it no longer needs the flexibility to open either equity 
option classes or index option classes based on a timer, and believes 
the proposed opening rotation triggers will simplify the process. Upon 
the occurrence of one of these proposed triggers for a class, the 
System will initiate the opening rotation for the series in that class, 
and will disseminate a message to market participants indicating the 
initiation of the opening rotation.\33\
---------------------------------------------------------------------------

    \33\ See current Rule 6.2(b)(ii) and proposed Rule 5.31(d).
---------------------------------------------------------------------------

    Proposed Rule 5.31(e) describes the opening rotation process, 
during which the System will determine whether the Composite Market for 
a series is not wider than a maximum width, will determine the opening 
price, and will open series for trading.\34\ The Maximum Composite 
Width Check and Opening Collar are intended to facilitate that series 
opening in a fair and orderly manner and at prices consistent with the 
current market conditions for the series and not at extreme prices, 
while taking into consideration prices disseminated from other options 
exchanges that may be better than the Exchange's at the open.
---------------------------------------------------------------------------

    \34\ See current Rule 6.2(d) (pursuant to which the Exchange 
will generally not open a series if the width is wider than an 
acceptable price range or if the opening trade price is outside of 
an acceptable price range). As noted above, the Exchange will 
similarly have a maximum quote width and acceptable opening price 
range, however, as noted above, the proposed ranges will be 
determined in a slightly different manner.
---------------------------------------------------------------------------

    Proposed Rule 5.31(e)(1) describes the Maximum Composite Width 
Check, and the two sets of conditions under which a series will be 
eligible to open.
     If the Composite Market of a series is not crossed, and 
the Composite Width of a series is less than or equal to the Maximum 
Composite Width, the series is eligible to open (and the System 
determines the Opening Price as described below).
     If the Composite Market of a series is not crossed, and 
the Composite Width of a series is greater than the Maximum Composite 
Width, but there are no non-M Capacity \35\ market orders or buy (sell) 
limit orders with prices higher (lower) than the Composite Bid (Offer) 
and there are no locked or crossed orders or quotes, the series is 
eligible to open (and the System determines the Opening Price as 
described below).\36\
---------------------------------------------------------------------------

    \35\ Capacity M is used for orders for the account of a Market-
Maker (with an appointment in the class). See Rule 1.1 (definition 
of Capacity).
    \36\ Similarly, pursuant to current Rule 6.2(d)(ii)(B), if the 
opening quote is wider than the OEPW range (but not outside another 
acceptable price range) and there are no orders or quotes marketable 
against each other or that lock or cross the OEPW range, Cboe 
Options will open the series.
---------------------------------------------------------------------------

     If neither of the conditions above are satisfied for a 
series, the series is ineligible to open. The Queuing Period for the 
series continues (including the dissemination of opening auction 
updates) until one of the above conditions for the series is 
satisfied.\37\
---------------------------------------------------------------------------

    \37\ Similarly, pursuant to current Rule 6.2(d)(ii)(B), if the 
opening quote is wider than the OEPW range and there are orders or 
quotes marketable against each other or that lock or cross the OEPW 
range, the System does not open a series. If the opening quote is no 
wider than the IEPW range and there are no orders or quotes 
marketable against each other or that lock or cross the OEPW range, 
the System opens the series. Pursuant to current Rule 6.2(d)(iii), 
if the opening conditions are not satisfied, the opening rotation 
period continues, including the dissemination of EOIs until the 
opening conditions are satisfied.
---------------------------------------------------------------------------

    The following examples show the application of the Maximum 
Composite Width Check:
Example #1
    The Maximum Composite Width for a class is 0.50, and the Composite 
Market is 2.00 x 1.00, comprised of an appointed Market-Maker bulk 
message bid of 2.00 and an appointed Market-Maker bulk message offer of 
1.00. There is no other interest in the Queuing Book. The series is not 
eligible to open, because the Composite Market is crossed. The Queuing 
Period for the series will continue until the series satisfies the 
Maximum Composite Width Check.
Example #2
    The Maximum Composite Width for a class is 0.50, and the Composite 
Market is 1.00 x 2.00, comprised of an appointed Market-Maker bulk 
message bid of 1.00 and an appointed Market-Maker bulk message offer of 
2.00. There is no other interest in the Queuing Book. The series is 
eligible to open, because the width of the Composite Market is greater 
than the Maximum Composite Width and there are no locked orders or 
quotes in the series or non-M Capacity orders. The System will then 
determine the Opening Trade Price.
Example #3
    The Maximum Composite Width for a class is 0.50, and the Composite 
Market is 1.00 x 2.00, comprised of an appointed Market-Maker bulk 
message bid of 1.00 and an appointed Market-Maker bulk message offer of 
2.00. There is a non-M Capacity limit order to buy for $1.99 in Queuing 
Book. The series is not eligible to open, because the width of the 
Composite Market is greater than the Maximum Composite Width, and there 
is a non-M Capacity order at a price inside of the Composite Market. 
The Queuing Period for the series will continue until the series 
satisfies the Maximum Composite Width Check.
Example #4
    The Maximum Composite Width for a class is 0.50, and the Composite 
Market is 1.00 x 2.00, comprised of an appointed Market-Maker bulk 
message bid of 1.00 and an appointed Market-Maker bulk message offer of 
2.00. There is a market order to buy in the Queuing Book. The series is 
not eligible to open, because the width of the Composite Market is 
greater than the Maximum Composite Width and there is a marketable 
order. The Queuing Period for the series will continue until the series 
satisfies the Maximum Composite Width Check.
    Proposed subparagraph (e)(2) describes how the System determines 
the Opening Trade Price. After a series satisfies the Maximum Composite 
Width Check described above, if there are orders and quotes marketable 
against each other at a price not outside the Opening Collar, the 
System determines the Opening Trade Price for the series.\38\ The 
Opening Trade Price is the volume-maximizing, imbalance-minimizing 
price (``VMIM price'') that is not outside the Opening Collar. The VMIM 
price is:
---------------------------------------------------------------------------

    \38\ If there are no such orders, there is no Opening Trade 
Price. See current Rule 6.2(c)(i) (pursuant to which there may or 
may not currently be an opening trade price).
---------------------------------------------------------------------------

     The price at which the largest number of contracts can 
execute (i.e., the volume-maximizing price);
     if there are multiple volume-maximizing prices, the price 
at which the fewest number of contracts remain unexecuted (i.e., the 
imbalance-minimizing price); or
     if there are multiple volume-maximizing, imbalance-
minimizing prices, (1) the highest (lowest) price, if there is a buy 
(sell) imbalance, or (2) the

[[Page 35151]]

price at or nearest to the midpoint of the Opening Collar, if there is 
no imbalance.
    The proposed process to determine an opening trade price is 
substantially similar to the process the Exchange currently uses. 
Pursuant to current Rule 6.2(c)(i)(A), the opening trade price of a 
series is the ``market-clearing'' price, which is the single price at 
which the largest number of contracts in the Book can execute (i.e., 
the volume-maximizing price), leaving bids and offers that cannot trade 
with each other. If there are multiple prices at which the same number 
of contracts would clear, the System currently uses (1) the price at or 
nearest to the midpoint of the opening best bid or offer, or the widest 
offer (bid) point of the OEPW range if the midpoint is higher (lower) 
than that price point, in classes in which the Exchange has not 
activated HAL at the open, or (2) the price at or nearest to the 
midpoint of the range consisting of the higher of the opening national 
best bid and widest bid point of the OEPW range, and the lower of the 
opening national best offer and widest offer point of the OEPW range, 
in classes in which the Exchange has activated HAL at the open. The 
proposed ``tiebreakers'' described above will apply to all classes. 
While the proposed tiebreakers are different than the current 
tiebreakers, the Exchange believes the proposed volume-maximizing, 
imbalance-minimizing procedure is reasonable, as it will provide for 
the largest number of contracts in the Queuing Book that can execute at 
a price not outside the Opening Collar range, leaving as few as 
possible bids and offers in the Book that cannot execute, and will 
consider all pricing information available on the Exchange and from 
away markets.
    The Exchange currently applies different opening conditions to 
classes in which the Exchange has activated HAL at the open and to 
classes in which the Exchange has not activated HAL at the open.\39\ 
The proposed opening conditions are similar to the opening conditions 
the Exchange currently applies pursuant to current Rule 6.2(d)(ii), 
which are the opening conditions that apply to classes in which HAL is 
activated at the open. As noted above, the Exchange does not intend to 
activate HAL at the open in any classes following the technology 
migration, and will apply the same opening conditions to all classes. 
The Exchange has currently activated HAL at the open in the majority of 
classes that trade on the Exchange, and therefore the Exchange believes 
it is appropriate that the proposed opening conditions correspond to 
the opening conditions in Rule 6.2(d)(ii). Additionally, those opening 
conditions consider price information from away markets, as the 
proposed opening conditions do. The Exchange believes considering all 
available information will provide for more accurate pricing at the 
open.
---------------------------------------------------------------------------

    \39\ The proposed rule change deletes all the references in 
current Rule 6.2(d) to the exposure of orders via HAL, and excludes 
those references in the description of the current opening 
conditions below.
---------------------------------------------------------------------------

    Pursuant to current Rule 6.2(d)(ii):
     If there are no quotes on the Exchange or disseminated 
from at least one away exchange present in the series, the System does 
not open the series.\40\
---------------------------------------------------------------------------

    \40\ Pursuant to the proposed rule change, a series will 
similarly not open in this case. The proposed opening conditions 
require a Composite Market. Therefore, the System will not open a 
series (as it will not today) without bulk message bids and offers 
from appointed Market-Makers or bids and offers from at least one 
away exchange.
---------------------------------------------------------------------------

     If the width between the best quote bid and best quote 
offer, which quotes may consist of Market-Maker quotes or bids and 
offers disseminated from an away exchange(s) (for purposes of this 
subparagraph (d)(ii), the ``opening quote'') is wider than the OEPW 
range and there are orders or quotes marketable against each other or 
that lock or cross the OEPW range, the System does not open the series. 
However, if the opening quote width is no wider than the IEPW range and 
there are no orders or quotes marketable against each other or that 
lock or cross the OEPW range, the System opens the series. If the 
opening quote width is wider than the IEPW range, the System does not 
open the series.
     If the opening trade price would be outside of the OEPW 
range or NBBO, the System opens the series by matching orders and 
quotes to the extent they can trade and reports the opening trade, if 
any, at an opening trade price not outside either the OEPW range or 
NBBO.
     If the opening trade would leave a market order imbalance 
(i.e., there are more market orders to buy or to sell for the 
particular series than can be satisfied by the orders and quotes on the 
opposite side), the System opens the series by matching orders and 
quotes to the extent they can trade and reports the opening trade, if 
any, at the opening trade price.
     If the opening quote bid (offer) or NBB (NBO) crosses the 
opening quote offer (bid) or NBO (NBB) by more than a specified amount 
determined by the Exchange on a class- by-class and premium basis, the 
System does not open the series. If the opening quote bid (offer) or 
NBB (NBO) crosses the opening quote offer (bid) or NBO (NBB) by no more 
than the specified amount, the System opens the series by matching 
orders and quotes to the extent they can trade and reports the opening 
trade, if any, at the opening trade price.
    The Exchange will use the Maximum Composite Width Check as a price 
protection measure to prevent orders from executing at extreme prices 
at the open, as it currently uses the OEPW range pursuant to the second 
bullet above.\41\ If the width of the Composite Market (which 
represents the best market, as it is comprised of the better of Market-
Maker bulk messages on the Exchange or any away market quotes) is no 
greater than the Maximum Composite Width, the Exchange believes it is 
appropriate to open a series under these circumstances and provide 
marketable orders with an opportunity to execute at a reasonable 
opening price (as discussed below), because there is minimal risk of 
execution at an extreme price.\42\ However, if the Composite Width is 
greater than the Maximum Composite Width but there are no non-M 
Capacity orders \43\ that lock or cross the opposite-side widest point 
of the Composite Market (and thus not marketable at a price at which 
the Exchange would open, as described below), there is similarly no 
risk of an order executing at an extreme price on the open. Because the 
risk that the Maximum Composite Width Check is intended to address is 
not present in this situation, the Exchange believes it is appropriate 
to open a series in either of these conditions. However, if neither of 
these conditions is satisfied, the Exchange believes there may be risk 
that orders would execute at an extreme price if the series open, and 
therefore the Exchange will not open a series.\44\
---------------------------------------------------------------------------

    \41\ See current Rule 6.2(d)(ii)(B), pursuant to which the 
Exchange will open a series if the opening quote is not outside the 
OEPW.
    \42\ This corresponds to current Rule 6.2(d)(ii)(B), pursuant to 
which the Exchange will open even if the opening quote is too wide 
but there are no marketable orders or quotes.
    \43\ Market-Maker bulk messages are considered when determining 
the Composite Market. The Exchange believes it is appropriate to 
consider Market-Maker bulk messages when determining an opening 
quote to ensure there will be liquidity in a series when it opens. 
Additionally, while it is possible for Market-Makers to submit M 
orders, the Exchange believes there is less risk of a Market-Maker 
inputting an order at an extreme price given that Market-Makers are 
the primary liquidity providers in the options market, and thus 
generally responsible for pricing the market.
    \44\ Pursuant to current Rule 6.2(d)(ii), the Exchange will not 
open a series if similar conditions exist that could create risk 
that orders would execute at an extreme price if the series open.

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

[[Page 35152]]

    The Exchange will use the Opening Collar as a further price 
protection measure to prevent orders from executing at extreme prices 
at the open, as it currently uses the OEPW range pursuant to the third 
bullet above. If the Opening Trade Price is not outside the Opening 
Collar (which will be based on the best then-current market), the 
Exchange believes it is appropriate to open a series at that price, 
because there is minimal risk of execution at an extreme price. The 
Exchange believes there may be risk that orders would execute at an 
extreme price if the Opening Trade Price were outside of the Opening 
Collar.
    As set forth above in the fifth bullet, the Exchange will similarly 
not open a series today if the opening quote is crossed by more than a 
specified amount. However, as proposed, a series will not be eligible 
to open if the Composite Market is crossed. The Exchange believes this 
slight change is appropriate given that the existence of a crossed 
market may indicate pricing uncertainty within the market. The Exchange 
believes this proposed rule change will reduce price risk for any 
executions that may occur during the opening rotation due to the 
existence of a crossed market.
    The Exchange may also open a series pursuant to current Rule 6.2(e) 
(proposed Rule 5.31(h)), which permits the Exchange to deviate from the 
standard manner of the opening auction process, including by adjusting 
the timing of the opening rotation in any class, modifying any time 
periods described in proposed Rule 5.31, and delaying or compelling the 
opening of a series if the opening width is wider than Maximum 
Composite Width, when it believes it is necessary in the interests of a 
fair and orderly market. The Exchange will continue to make and 
maintain records to document all determinations to deviate from the 
standard manner of the opening auction process, and will periodically 
review these determinations for consistency with the interests of a 
fair and orderly market.\45\
---------------------------------------------------------------------------

    \45\ See proposed Rule 5.31(h).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 5.31(e)(3), if the System establishes an 
Opening Trade Price, the System will execute orders and quotes in the 
Queuing Book at the Opening Trade Price. The System will prioritize 
orders and quotes in the following order: market orders, limit orders 
and quotes with prices better than the Opening Trade Price, and orders 
and quotes at the Opening Trade Price.\46\ The System allocates orders 
and quotes on a pro-rata basis pursuant to Rule 5.32). The System 
applies a Priority Customer overlay to all classes, except for SPX 
(including SPXW) and VIX (excluding VIXW).\47\ If there is no Opening 
Trade Price, the System opens a series without a trade.
---------------------------------------------------------------------------

    \46\ See current Rule 6.2(c)(i)(C). The Exchange believes it is 
appropriate to prioritize orders with the most aggressive prices, as 
it provides market participants with incentive to submit their best-
priced orders.
    \47\ See current Rule 6.2, Interpretation and Policy .04. The 
proposed allocation during the opening rotation is consistent with 
the Exchange's current authority to determine the allocation 
algorithm used at the open, and is the same one applied to classes 
(and groups) today. The Exchange applies different algorithm to 
different classes (and groups) based on the market model and 
characteristics of different products. The proposed rule change 
merely codifies this in the Rules.
---------------------------------------------------------------------------

    The Exchange proposes to delete current Rule 6.2(c)(iii) regarding 
the order in which the System will open series. The order in which the 
System opens series for trading is generally immaterial. The Exchange 
currently opens series in the order set forth in Rule 6.2(c)(iii), 
because it believes opening series in this order on exercise settlement 
value determination days enhances liquidity during the modified opening 
auction process set forth in current Rule 6.2, Interpretation and 
Policy .01. As discussed below, the Exchange proposes other 
enhancements to the modified opening auction process, and thus no 
longer believes it will be necessary to open series in this specific 
order. Therefore, the System will open series as the opening conditions 
in those series are satisfied, in no particular order.
    Pursuant to proposed subparagraph (f), as is the case today, 
following the conclusion of the opening rotation, the System enters any 
unexecuted orders and quotes (or remaining portions) from the Queuing 
Book into the Book in time sequence (subject to a User's instructions--
for example, a User may cancel an order), where they may be processed 
in accordance with Rule 5.32. Consistent with the OPG contingency (and 
current functionality), the System cancels any unexecuted OPG orders 
(or remaining portions) following the conclusion of the opening 
rotation.
    Proposed Rule 5.31(g) \48\ states the Exchange will open series 
using the same opening auction process described above following a 
trading halt in the class declared by the Exchange pursuant to Rule 
5.20,\49\ except:
---------------------------------------------------------------------------

    \48\ See current Rule 6.2(f). The proposed rule regarding the 
opening auction process to be used following a trading halt 
eliminates the flexibility regarding whether there may or may not be 
a Queuing Period during a trading halt. The proposed rule change 
also provides Users with the ability to decide how their resting 
orders and quotes should be handled in the event of a trading halt.
    \49\ The Exchange intends to adopt Rule 5.20 in the shell 
Rulebook in a separate rule filing, which rule will correspond to 
Rules 6.3 and 24.7 in the current Rulebook.
---------------------------------------------------------------------------

     The Queuing Period will begin immediately when the 
Exchange halts trading in the class.
     If a User has orders or quotes resting on the Book at the 
time of a trading halt, the System queues those orders and quotes in 
the Queueing Book for participation in the opening rotation following 
the trading halt, unless the User entered instructions to cancel its 
resting orders and quotes.
     The System initiates the opening rotation for a class upon 
the Exchange's determination to resume trading pursuant to Rule 5.20.
    The proposed rule change deletes current Rule 6.2(g) regarding the 
use of the opening auction process to conduct a closing rotation upon 
determination by the Exchange. The Exchange does not currently use the 
opening auction process to conduct a closing rotation, and does not 
intend to use the proposed opening auction process to conduct a closing 
rotation following the technology migration.
    Proposed Rule 5.31(j) describes the modified opening auction 
process \50\ the Exchange will use to calculate the exercise or final 
settlement value of expiring volatility index derivatives. As described 
below, the Exchange proposes to make certain enhancements to the 
current process, which is described in current Rule 6.2, Interpretation 
and Policy .01. Cboe Options and Cboe Futures Exchange, LLC (``CFE'') 
list options and futures, respectively, on the Cboe Volatility Index 
(``VIX'').\51\ The exercise settlement value for VIX derivatives is 
determined on the morning of their expiration date through a special 
opening quotation (``SOQ'') of the VIX using the opening prices of a 
portfolio of SPX options that expire approximately 30 days later, which 
opening prices are determined through a modified version of the 
Exchange's standard opening auction process.
---------------------------------------------------------------------------

    \50\ Current Rule 6.2, Interpretation and Policy .01 currently 
refers to this process as the Modified HOSS (Hybrid Opening System) 
Procedure.
    \51\ Cboe Options and CFE previously listed options and futures 
on other volatility indexes; however, currently, they only list VIX 
options and VIX futures, respectively. Options expire on an 
expiration date and settle to an exercise settlement value, and 
futures settle on a final settlement date to a final settlement 
value. For ease of reference, the Exchange will use the options 
terminology throughout the filing when referring to the final 
settlement date and final settlement value for VIX derivatives.
---------------------------------------------------------------------------

    By providing market participants with a mechanism to buy and sell 
options

[[Page 35153]]

that will be used to calculate the exercise settlement value at the 
prices that will be used to calculate the exercise settlement value of 
VIX derivatives, the VIX settlement process is ``tradable.'' A tradable 
settlement creates the opportunity to convert the exposure of an 
expiring VIX derivative into a portfolio of SPX options that will be 
used to calculate the exercise settlement value of the expiring 
contract. Specifically, some market participants may desire to maintain 
the vega, or volatility, risk exposure of expiring VIX derivatives. 
Since VIX derivatives expire 30 days prior to the SPX options used to 
calculate their settlement value, a market participant may have a vega 
risk from its portfolio of index positions that the participant wants 
to continue to hedge after the participant's VIX derivatives 
expire.\52\ To continue that vega coverage following expiration of a 
VIX derivative, a market participant may determine to trade the 
portfolio of SPX options used to calculate the exercise settlement 
value of an expiring VIX derivative, since those SPX options still have 
30 more days to expiration. This trade essentially replaces the 
uncovered vega exposure ``hole'' created by an expiring VIX derivative.
---------------------------------------------------------------------------

    \52\ The orders for an SPX option portfolio a market participant 
submits to the modified opening auction process to replicate the 
vega risk exposure of its expiring VIX derivatives may be referred 
to as a ``vega replicating order'' in this rule filing.
---------------------------------------------------------------------------

    Since the VIX settlement value converges with the value of the 
portfolio of SPX options used to calculate the VIX settlement value, 
trading this SPX option portfolio mitigates settlement risk.\53\ This 
is because, if the SPX options that will be used to calculate the VIX 
settlement value execute at the open in the proportions that those 
options will be used in that calculation, the vega exposure obtained in 
the SPX option portfolio will replicate the vega exposure of the 
expiring VIX derivative. Because a market participant is converting 
vega exposure from one instrument (an expiring VIX derivative) to 
another (a portfolio of SPX options expiring in 30 days), the market 
participant is likely to be indifferent to the settlement price 
received for the expiring VIX derivative. Importantly, trading the next 
VIX derivative expiration (i.e., rolling) will not accomplish the 
conversion of vega exposure since that VIX derivative contract would 
necessarily cover a different period of expected volatility and would 
be based on an entirely different portfolio of SPX options.
---------------------------------------------------------------------------

    \53\ In the absence of a tradable settlement, settlement risk 
refers to the difference between the exercise settlement value of 
the expiring VIX derivatives and the value of the portfolio of the 
option series used to calculate the exercise settlement value. The 
potential disparity between the exercise settlement value for 
expiring VIX derivatives and the value of the replicating portfolio 
of option series that will be used to calculate the exercise 
settlement value is referred to as ``slippage.'' A tradable 
settlement provides convergence between the exercise settlement 
value and the value of the portfolio of option series used to 
calculate the exercise settlement value (i.e., eliminates slippage). 
While it is possible to construct a replicating portfolio of SPX 
options, it is highly unlikely that, absent a tradable settlement, 
traders would be able to trade SPX options that will be used to 
calculate the exercise settlement value at prices that would match 
the final settlement price.
---------------------------------------------------------------------------

    The VIX settlement process is patterned after the process used to 
calculate the exercise settlement value of SPX options. On the days SPX 
options expire, S&P calculates an SOQ of the S&P 500 Index using the 
opening prices of the component stocks in their primary markets. Market 
participants can seek to replicate the exposure of their expiring SPX 
options by entering orders to buy and sell the component stocks of the 
S&P 500 Index at their opening prices. If they are successful, market 
participants can effectively construct a portfolio that matches the 
value of the SOQ of the S&P 500 Index. At this point, the values of the 
derivatives and cash markets converge. In a similar way, the VIX 
exercise settlement value is calculated using the opening prices of SPX 
options that expire approximately 30 days later. Analogous to the 
settlement process for SPX options, market participants can replicate 
the exposure of their expiring VIX derivatives by entering buy and sell 
orders in SPX options that will be used to calculate the VIX settlement 
value in the proportions the Exchange will use when calculating the VIX 
settlement value. If they are successful, market participants can 
effectively construct a portfolio of SPX option positions whose value 
matches the exercise settlement value of the participants' VIX 
derivatives.
    The primary feature of the modified opening auction process that 
currently distinguishes it from the standard opening auction process is 
a cut-off time for the entry of strategy orders,\54\ which market 
participants currently submit for participation in the modified opening 
auction process to replicate the vega exposure of their expiring VIX 
derivatives. The Exchange understands that the entry of strategy orders 
may lead to order imbalances in the series in the settlement strip. To 
the extent (1) market participants seeking to replicate the vega 
exposure of an expiring VIX derivative position are on one side of the 
market (e.g., strategy orders to buy SPX options) and (2) those market 
participants' orders predominate over other orders during the modified 
opening auction process, those trades may contribute to an order 
imbalance prior to the open. The Exchange established the strategy 
order cut-off time to provide market participants with time to enter 
additional orders and quotes to offset any such imbalances prior to the 
opening of these series.\55\ Market participants may also, among other 
things, submit competitively priced non-strategy orders and quotes in 
response to changing market conditions following the strategy order 
cut-off time until the open of trading to contribute to a fair and 
orderly opening process.\56\
---------------------------------------------------------------------------

    \54\ The Exchange deems individual orders (considered 
collectively) that a market participant submits for participation in 
the modified opening auction process to be a ``strategy'' order, 
based on related facts and circumstances considered by the Exchange, 
only if the orders: (1) Relate to the market participant's positions 
in expiring VIX derivatives; (2) are for option series with the 
expiration that the Exchange will use to calculate the exercise or 
final settlement value, as applicable, of the applicable VIX 
derivative; (3) are for option series with strike prices 
approximating the range of series that are later determined to 
constitute the constituent option series for the applicable 
expiration; (4) are for put (call) options with strike prices equal 
to or less (greater) than the ``at-the-money'' strike price; and (5) 
have quantities approximating the weighting formula used to 
determine the exercise or final settlement value, as applicable, in 
accordance with the VIX methodology. See current Rule 6.2, 
Interpretation and Policy .01(a) (definition of ``strategy order''). 
As proposed, there will continue to be a cut-off time during the 
modified opening auction process; however, the Exchange is 
eliminating the concept of a strategy order.
    \55\ See Securities Exchange Act Release Nos. 52367 (August 31, 
2005), 70 FR 53401 (September 8, 2005) (SR-CBOE-2004-86) 
(established for the rapid opening system procedure, which his no 
longer used). The Commission stated it believed that the proposed 
rule change may serve the intended benefits of the strategy order 
cut-off time without imposing an undue burden on market 
participants. Id. at 53402. Pursuant to current Rule 6.2, 
Interpretation and Policy .01(b), the Exchange may determine a 
strategy order cut-off time, which may be no earlier than 9:00 a.m. 
Eastern Time and no later than the opening of trading. The current 
strategy order cut-off time is 9:20 a.m. Eastern Time.
    \56\ Pursuant to current Rule 6.2, Interpretation and Policy 
.01(b), the Exchange may determine a non-strategy order cut-off 
time, which may be no earlier than 9:25 a.m. Eastern Time and no 
later than the opening of trading. The current non-strategy order 
cut-off time is the opening of trading.
---------------------------------------------------------------------------

    When the Exchange initially adopted the concept of a strategy order 
and strategy order cut-off time, VIX derivatives had only just begun 
trading. The Exchange believed some flexibility within the rules 
regarding what constituted a strategy order was appropriate in applying 
the strategy order cut-off time. Additionally, the flexibility 
permitted market participants to submit strategy orders in a manner 
consistent with their businesses. The

[[Page 35154]]

flexibility within the rule provided the Exchange with the ability to 
gain experience in monitoring trading in these products and evaluating 
the use of strategy orders.\57\ The Exchange understands this 
flexibility has created some uncertainty among market participants 
regarding what constitutes a strategy order. As a result of this 
uncertainty, the Exchange understands certain market participants have 
hesitated to submit orders in the modified opening auction process out 
of concern that such orders could be deemed either a new strategy order 
or a modification to or cancellation of an existing strategy order.
---------------------------------------------------------------------------

    \57\ See supra note 55.
---------------------------------------------------------------------------

    The Exchange recently amended the rule that sets forth the 
characteristics of a strategy order to attempt to reduce some of this 
uncertainty by eliminating some of the flexibility within the rule 
regarding the characteristics of a strategy order, and to provide 
additional clarity to market participants regarding what orders they 
may submit following the strategy order cut-off time. The Exchange 
believed this clarity would reduce uncertainty among market 
participants and promote increased liquidity in series in the 
settlement strip on exercise settlement value determination days.\58\
---------------------------------------------------------------------------

    \58\ See Securities Exchange Act Release No. 84436 (October 16, 
2018), 83 FR 53337 (October 22, 2018) (SR-CBOE-2018-062).
---------------------------------------------------------------------------

    The Exchange believes recent enhancements have eliminated some 
uncertainty and alleviated certain perceived risk; however, the current 
characteristics of a strategy order retain some level of flexibility. 
The Exchange understands that, due to this retained flexibility, some 
market participants continue to believe there is risk regarding what 
orders submitted after the strategy order cut-off time will be deemed 
either a new strategy order or a modification to or cancellation of an 
existing strategy order. This perceived risk may lead to reduced 
liquidity and may increase the time it takes to open a series at a 
competitive price. Therefore, the Exchange proposes to eliminate the 
concept of a strategy order from the modified opening auction process. 
There will continue to be a cut-off time (the time of which will be the 
same time as the current strategy order cut-off time) to provide the 
market with time to resolve any imbalances created by the submission of 
vega replicating orders. However, to further reduce any perceived risk 
described above, the Exchange proposes a more define [sic] approach 
regarding the types of orders market participants may submit following 
the cut-off time. The Exchange believes providing market participants 
with a definitive order type they may submit following the cut-off time 
that cannot be deemed an improper modification of an earlier submitted 
order will promote additional liquidity in the modified opening auction 
process.
    All provisions of proposed Rule 5.31 will apply to the opening of 
constituent option series for Regular Trading Hours on exercise 
settlement value determination days, except as provided in proposed 
Rule 5.31(j).\59\ The opening auction process used on those days as 
modified by proposed paragraph (j) is referred to as the ``modified 
opening auction process.'' \60\
---------------------------------------------------------------------------

    \59\ See current Rule 6.2, Interpretation and Policy .01(b).
    \60\ The Exchange uses the opening trade prices of series in the 
settlement strip (or the average of the opening bid and offer prices 
of a series in the settlement strip if there is no opening trade in 
that series) established by the modified opening auction process to 
calculate the exercise or final settlement value, as applicable, of 
expiring volatility index derivatives. See current Rule 
24.9(a)(5)(B) (the proposed rule change moves this language to 
proposed Rule 5.31(j), so that all provisions in the Rules regarding 
the modified opening auction process are included in a single 
place).
---------------------------------------------------------------------------

    Proposed Rule 5.31(j)(1) defines the following terms for purposes 
of the modified opening auction process: \61\
---------------------------------------------------------------------------

    \61\ See current Rule 6.2, Interpretation and Policy .01(a). 
Except for the definition of settlement strip (which corresponds to 
the definition of constituent option series in current Rule 6.2, 
Interpretation and Policy .01), as discussed below, the proposed 
rule change makes no changes to the definitions that are in current 
Rule 6.2, Interpretation and Policy .01(a) and proposed to be moved 
to Rule 5.31(j)(1), except: (a) The proposed rule refers to 
volatility index derivatives as VIX derivatives, because, as noted 
above, those are currently the only volatility index derivatives for 
which the Exchange uses the modified opening auction process to 
determine the exercise settlement value, and to update cross-
references as necessary; (b) the Exchange proposes to use the term 
``constituent option series'' to refer to all SPX series with the 
expiration the Exchange uses to calculate the exercise or final 
settlement value, as that corresponds to the terminology used in the 
Exchange's technical specifications and documentation to which Users 
often refer; and (c) the Exchange proposes to use the term 
``settlement strip'' instead of ``constituent option series'' to 
refer to the series that the Exchange will use to determine the 
exercise settlement value, as that corresponds to terminology 
regularly used by market participants.
---------------------------------------------------------------------------

     VIX Derivatives: The term ``VIX derivatives'' means VIX 
options listed for trading on the Exchange (as determined under Rule 
4.11), VIX futures listed for trading on an affiliated designated 
contract market, or over-the-counter derivatives overlying VIX whose 
exercise or final settlement values, as applicable, are calculated 
pursuant to, or by reference to, as applicable, the modified opening 
auction process.
     Exercise Settlement Value Determination Day: The term 
``exercise settlement value determination day'' means a day on which 
the Exchange determines the exercise or final settlement value, as 
applicable, of expiring VIX derivatives.
     Constituent Option Series: The term ``constituent option 
series'' means all SPX (including SPXW) option series listed on the 
Exchange with the expirations the Exchange uses to calculate the 
exercise or final settlement value of the expiring VIX derivative on 
exercise settlement value determination days.
     Maximum Composite Width: The term ``Maximum Composite 
Width'' has the meaning set forth in proposed Rule 5.31(a) (as 
described above), except the following Maximum Composite Widths apply 
to constituent option series on exercise settlement value determination 
days: \62\
---------------------------------------------------------------------------

    \62\ The proposed Maximum Composite Widths on exercise 
settlement value determination days are consistent with the 
Exchange's current authority to determine the OEPW; the Exchange is 
adding this detail to the Rules. The proposed widths on these are 
the same as the Exchange's current width settings. See Cboe Options 
Notice, Operational Setting Changes for Cboe Options Acceptable 
Price Range (APR) and Opening Exchange Prescribed Width (OEPW) (May 
4, 2018).

------------------------------------------------------------------------
                                                              Market
                      Composite bid                          composite
                                                               width
------------------------------------------------------------------------
0-0.25..................................................            0.25
0.25-0.50...............................................            0.30
0.51-1.00...............................................            0.35
1.01-2.00...............................................            0.40
2.01-5.00...............................................            0.60
5.01-10.00..............................................            0.70
10.01-20.00.............................................            1.00
20.01-30.00.............................................            1.80
30.01-40.00.............................................            2.40
40.01-50.00.............................................            3.00
50.01-100.00............................................            6.00
100.01-200.00...........................................            9.00
>=200.01................................................           14.00
------------------------------------------------------------------------

     Opening Collar: The term ``Opening Collar'' has the 
meaning set forth in proposed Rule 5.31(a) (as described above), except 
the following Opening Collar widths apply to constituent option series 
on exercise settlement value determination days: \63\
---------------------------------------------------------------------------

    \63\ The proposed Opening Collar widths on exercise settlement 
value determination days are consistent with the Exchange's current 
authority to determine the OEPW; the Exchange is adding this detail 
to the Rules. The proposed widths on these days are the same as the 
Exchange's current width settings. See Cboe Options Notice, 
Operational Setting Changes for Cboe Options Acceptable Price Range 
(APR) and Opening Exchange Prescribed Width (OEPW) (May 4, 2018).

[[Page 35155]]

------------------------------------------------------------------------
                                                          Opening collar
                      Composite bid                            width
------------------------------------------------------------------------
0-0.25..................................................            0.25
0.25-0.50...............................................            0.30
0.51-1.00...............................................            0.35
1.01-2.00...............................................            0.40
2.01-5.00...............................................            0.60
5.01-10.00..............................................            0.70
10.01-20.00.............................................            1.00
20.01-30.00.............................................            1.80
30.01-40.00.............................................            2.40
40.01-50.00.............................................            3.00
50.01-100.00............................................            6.00
100.01-200.00...........................................            9.00
>=200.01................................................           14.00
------------------------------------------------------------------------

     Settlement Strip: The term ``settlement strip'' means the 
constituent option series with strike prices within a specified strike 
range used to calculate the exercise or final settlement value, as 
applicable, of expiring VIX derivatives. As further discussed below, 
the proposed rule change provides that the Exchange will determine this 
strike range pursuant to an algorithm. The Exchange will disseminate 
the highest call strike and the lowest put strike that establish the 
strike range to all subscribers to the Exchange's data feeds that 
deliver opening auction update messages, no later than 8:45 a.m. 
Eastern Time on exercise settlement value determination days. The 
Exchange may update the strike range until 9:15 a.m. Eastern Time 
pursuant to an algorithm due to changes to the value of the VIX Index, 
prices of related futures, or other algorithmic inputs. The Exchange 
disseminates any such updates as soon as reasonably possible.
     Settlement Liquidity Opening Order and SLOO: The terms 
``settlement liquidity opening order'' and ``SLOO'' mean a limit order 
in a constituent option series designated with an OPG Time-in-Force 
that Users may submit to the Exchange only on exercise settlement value 
determination days following the cut-off time described below. The 
System cancels a SLOO (or remaining portion) that does not execute 
during the modified opening auction process.\64\
---------------------------------------------------------------------------

    \64\ Users may not designate bulk messages as SLOOs.
---------------------------------------------------------------------------

    [cir] If the limit price of a buy (sell) SLOO crosses the midpoint 
of the then-current Opening Collar upon entry, the System adjusts the 
SLOO's price to equal the midpoint of the Opening Collar (rounded up 
(down) to the nearest minimum increment), except for a sell SLOO when 
the midpoint is less than or equal to 0.175. If the midpoint of the 
Opening Collar changes during the Queuing Period, the System re-adjusts 
the SLOO's price to equal the new Opening Collar midpoint (rounded as 
provided above), up to its limit price.
    [cir] The prices of SLOOs in the Queuing Book are not disseminated 
in the Exchange's Multicast PITCH and Multicast TOP data feeds.
    As discussed above, the Exchange proposes to eliminate the concept 
of a strategy order, and thus the proposed rule change deletes the 
portions of the current rule describing the characteristics of strategy 
orders and non-strategy orders.
    Proposed Rule 5.31(j)(3) states that during the Queuing Period, the 
System accepts orders and quotes in constituent option series as 
follows, subject to proposed Rule 5.31(b)(2): \65\
---------------------------------------------------------------------------

    \65\ In other words, the conditions regarding order and quote 
entry set forth in proposed Rule 5.31(b)(2) apply to the submission 
of orders and quotes to the modified opening auction process.
---------------------------------------------------------------------------

     The System accepts all orders and quotes (except SLOOs, 
which the System rejects), and any changes to or cancellations of those 
orders and quotes, prior to 9:20 a.m. (Eastern Time).\66\
---------------------------------------------------------------------------

    \66\ As noted above, this is the same time as the current 
strategy order cut-off time. The proposed rule change eliminates the 
Exchange's current flexibility regarding the cut-off time. There is 
currently only one class to which the modified opening auction 
process applies, so there is no need for class-by-class flexibility. 
The Exchange will submit a rule filing if it determines to change 
the cut-off time.
---------------------------------------------------------------------------

     After 9:20 a.m. (Eastern Time) (until the opening of 
trading in a series), the System only accepts (1) SLOOs (including 
changes to and cancellations of SLOOs); and (2) bulk message bids and 
offers (including changes to and cancellations of bulk message bids and 
offers submitted before and after the cut-off time) from Market-Makers 
with an SPX appointment. The System rejects all other orders and quotes 
(and changes to and cancellations of orders and quotes submitted prior 
to the cut-off time).
    While the proposed rule change eliminates the concept of strategy 
orders, the proposed modified opening auction process is similar to the 
current process. The proposed rule change will have no impact on orders 
that may be submitted prior to the cut-off time. All market 
participants may currently submit all orders and quotes, including vega 
replicating orders (i.e., strategy orders), in constituent option 
series (subject to restrictions set forth in current Rule 6.2, which 
are similar to the restrictions in proposed Rule 5.31(b) and, as noted 
above, will apply to the modified opening auction process). The 
proposed rule change will permit this same order and quote entry 
activity prior to the cut-off time, including the submission of orders 
to replicate the vega exposure of expiring VIX derivatives (i.e., the 
equivalent of current strategy orders).
    The Exchange expects market participants to continue to use the 
modified opening auction process to replicate the vega exposure of 
their expiring VIX derivatives. To continue to provide market 
participants with sufficient time to submit additional interest to 
offset any imbalances that may be created by the submission of these 
orders, the Exchange will retain an order entry cut-off time. 
Currently, only non-strategy orders may be submitted following the 
strategy order cut-off time. While a non-strategy order is defined as 
any order that is not, or that does not modify or cancel, a strategy 
order, the current rule identifies two specific types of interest that 
are not strategy orders, and they are therefore permissible following 
the cut-off time:
     A buy (sell) order in a settlement strip series if an EOI 
disseminated no more than two minutes prior to the time a market 
participant submitted the order included a sell (buy) imbalance and the 
size of the order is not larger than the size of the imbalance in the 
EOI, regardless of whether the market participant previously submitted 
a strategy order or has positions in expiring volatility index 
derivatives; or
     a bid or offer in a settlement strip series submitted by a 
Market-Maker with an appointment in a class with settlement strip 
series, for bona fide market-making purposes in accordance with current 
Rule 8.7 and the Exchange Act for its market-maker account prior to the 
open of trading for participation in the modified opening auction 
process.
    The explicit permission to submit these orders and quotes following 
the strategy order cut-off time is consistent with the operational 
purpose of establishing a strategy order cut-off time, which was to 
provide sufficient time for market participants to submit liquidity to 
offset the size of any imbalances created by the submission of 
volatility replicating orders and to contribute to a competitively 
priced opening process. The orders and quotes that may be submitted 
after the cut-off time will continue to be limited in a manner 
consistent with this purpose. The System, however, will automatically 
enforce these order entry limitations, which will eliminate any 
responsibility currently placed on market participants to determine 
whether the orders and quotes they submit following the strategy order 
cut-off time would be permissible under current Rules.

[[Page 35156]]

    By eliminating the concept of a strategy order and only permitting 
two specific types of market activity following the cut-off time, the 
Exchange believes the proposed rule change will eliminate any existing 
uncertainty among market participants with respect to what orders they 
may submit following the cut-off time. All market participants may 
submit SLOOs following the cut-off time, which will serve a similar 
purpose as the non-strategy orders that market participants may 
currently submit. The proposed SLOO repricing functionality will 
prevent the entry of a SLOO from creating or adding to an imbalance 
that would prevent a constituent option series from opening.
    The Exchange believes permitting sell SLOOs to cross the midpoint 
of the Opening Collar in any series with a midpoint of 0.175 or less 
will provide market participants with opportunities to execute against 
bids in lower-valued series. If there is a low bid in a series, a 
market participant may be willing to sell at that price, and the 
Exchange believes that not adjusting the price of a sell SLOO in that 
situation will encourage liquidity and price improvement over Market-
Maker quotes in these lower-valued series.\67\ For example, assume the 
Composite Market (and the Opening Collar) for a series is 0 to 0.30, 
and thus the midpoint of the Opening Collar is $0.15. An order to buy 
at $0.05 rests in the Queuing Book. If a market participant submits a 
SLOO to sell at $0.05, it would be able to execute against the resting 
order during the opening rotation, rather than be slid to a price of 
$0.15. The Exchange believes this is reasonable, because it would allow 
for the potential execution of sell orders in series with no Market-
Maker bid and Market-Maker offers less than or equal to $0.35 (which is 
the maximum possible Opening Collar offer for the midpoint to be 
$0.175). The maximum midpoint of $0.175 is reasonable because, with a 
higher maximum midpoint, there may be an increased risk of having a 
sell order execute at a potentially erroneous low price in a series 
that is not truly no-bid.
---------------------------------------------------------------------------

    \67\ For similar reasons, the Exchange will convert a market 
order to sell in a no-bid series into a limit order to sell at the 
minimum increment of the series. See Rule 6.13(b)(vi).
---------------------------------------------------------------------------

    Additionally, permitting SLOOs to cross the midpoint of the Opening 
Collar in these series will also not create or increase an imbalance 
that would prevent a series from opening. For example, assume the 
Composite Market is 0-0.25, as is the Opening Collar. The midpoint of 
the Opening Collar is 0.125. If there is a buy order for one contract 
at $0.05, and a market participant enters a SLOO to sell 10,000 
contracts at $0.05, the VMIM price ($0.05) is within the Opening 
Collar, and therefore series would be eligible to open. Instead, assume 
the Composite Market is 0.25-0.50, as is the Opening Collar. The 
midpoint of the Composite Market is 0.375. If there is a buy order for 
one contract at $0.05, and a market participant enters a SLOO to sell 
10,000 contracts at $0.05, the VMIM price is $0.05, which is outside of 
the Opening Collar, and thus the series would not open.
    Pursuant to the proposed rule change, market participants will no 
longer need to manually review opening auction updates to determine if 
it is permissible to submit orders to offset any imbalances. The 
proposed rule change reduces the types of orders market participants 
may submit following the cut-off time; however, the Exchange believes 
it may attract greater liquidity than the current system, because it 
will reduce uncertainty for market participants regarding the 
submission of orders following the cut-off time, which may encourage 
them to submit SLOOs to offset order imbalances. SLOOs will also 
provide market participants with a definitive order type they may use 
to contribute to the competitive pricing within constituent option 
series following the cut-off time, without creating an imbalance 
condition that would prevent a series from opening. The Exchange 
believes elimination of the perceived risk described above will enhance 
liquidity in the modified opening auction process, which would 
contribute to a fair and orderly opening in constituent option series.
    Market-Makers with an SPX appointment will continue to be able to 
submit bulk message bids and offers (including changes to and 
cancellations of bulk message bids and offers submitted before and 
after the cut-off time) following the cut-off time, as they may 
currently do today.\68\ In the options market, it is important for 
Market-Makers to be able to provide liquidity to execute against 
interest submitted by other market participants. Pursuant to current 
Rule 8.7 (which the Exchange expects to move to Rule 5.51 in the shell 
Rulebook), a Market-Maker has general obligations to, among other 
things, engage (to a reasonable degree under existing circumstances) in 
dealings for the Market-Maker's own account when there exists a lack of 
price continuity, a temporary disparity between the supply of and 
demand for an option (i.e., an imbalance), to compete with other 
Market-Makers to improve markets in its appointed classes, and to 
update market quotations in response to changed market conditions in 
its appointed classes. As described above, the submission of strategy 
orders (or any orders, including orders intended to replicate vega 
exposure of expiring VIX derivatives) may lead to order imbalances in 
constituent option series. As noted above, Market-Maker quotes also 
play a significant role in the price protection measures the Exchange 
uses to protect against opening executions occurring at extreme prices. 
In order for the System to open settlement strip series for trading and 
to achieve the most competitive prices, the Exchange believes Market-
Market participation throughout the entire modified opening auction 
process may add liquidity to the process and promote a fair and orderly 
opening and settlement process. Therefore, the Exchange believes it is 
important to continue to permit Market-Makers to submit quotes (and 
updates to their quotes) following the cut-off time.
---------------------------------------------------------------------------

    \68\ The term ``bulk message'' in the proposed rule is 
equivalent to the term ``quote'' in the current rule. The current 
rule requires a Trading Permit Holder with which the Market-Maker is 
affiliated to establish, maintain, and enforce reasonably designed 
written policies and procedure (including information barriers, as 
applicable), taking into consideration the nature of the Trading 
Permit Holder's business and other facts and circumstances, to 
prevent the misuse of material nonpublic information (including the 
submission of strategy orders); and that a Market-Maker have no 
actual knowledge of any previously submitted strategy orders. 
Because the proposed rule change eliminates the concept of a 
strategy order and the ability for any orders submitted prior to the 
cut-off time to be modified after the cut-off time, the proposed 
rule change eliminates these requirements.
---------------------------------------------------------------------------

    Market-Maker quoting activity on exercise settlement value 
determination days will continue to be subject to all applicable Rules, 
including:
     Current Rule 4.1 (which the Exchange intends to move to 
Rule 8.1 in the shell Rulebook), which prohibits a Trading Permit 
Holder from engaging in acts or practices inconsistent with just and 
equitable principles of trade.
     Current Rule 4.6 (which the Exchange intends to move to 
Rule 8.6 in the shell Rulebook), which prohibits (among other things) a 
Trading Permit Holder from effecting or inducing the purchase, sale, or 
exercise of any security for the purpose of creating or inducing a 
false, misleading, or artificial appearance of activity in such 
security or in the underlying security, or for the purpose of unduly or 
improperly influencing the market price of such security or of the 
underlying security or for the purpose of making a price that

[[Page 35157]]

does not reflect the true state of the market in such security or in 
the underlying security.
     Current Rule 4.17 (which the Exchange intends to move to 
Rule 8.17 in the shell Rulebook), which requires a Trading Permit 
Holder to establish, maintain, and enforce written policies and 
procedures reasonably designed, taking into consideration the nature of 
such Trading Permit Holder's business, to prevent the misuse, in 
violation of the Exchange Act and the Rules, of material, nonpublic 
information by the Trading Permit Holder or persons associated with the 
Trading Permit Holder.
     Current Rule 8.7 (which the Exchange intends to move to 
Rule 5.51 in the shell Rulebook), which requires Market-Makers to, 
among other things, enter into transactions in their market-making 
capacity that constitute a course of dealings reasonably calculated to 
contribute to the maintenance of a fair and orderly market, and not to 
make bids or offers or enter into transactions that are inconsistent 
with such course of dealings.
    The Exchange believes the proposed rule changes regarding 
permissible market activity following the cut-off time will encourage 
all market participants to participate and quote competitively in the 
modified opening auction process, including to offset imbalances and 
contribute to price transparency and liquidity in constituent option 
series at the open, which will promote a fair and orderly opening on 
exercise settlement value determination days. All Trading Permit Holder 
activity following the cut-off time will continue to be subject to all 
applicable Rules, including 8.1, 8.6, and 8.17 (each as described 
above). The Exchange will continue to review all Trading Permit Holder 
activity in constituent series on exercise settlement value 
determination days for compliance with these and all other applicable 
Rules.
    As noted above, the proposed rule change adds to the definition of 
settlement strip (currently referred to as ``constituent option 
series'' in the current rules) that the Exchange will determine the 
strike range of the settlement strip and will disseminate it to all 
subscribers to the Exchange's data feeds that deliver opening auction 
update messages, no later than 8:45 a.m. Eastern Time on exercise 
settlement value determination days. The Exchange may update this 
strike range until 9:15 a.m. Eastern Time, and will disseminate any 
updates during that time period as soon as reasonably possible. 
Therefore, the final strike range of the settlement strip that the 
Exchange disseminates at 9:15 a.m. Eastern Time to market participants 
will be identical to that which the Exchange will use to calculate the 
VIX settlement value itself.
    Currently, to select the settlement strip, the VIX methodology 
excludes from the universe of out-of-the-money SPX put and call options 
in any SPX series that have a zero bid price. The methodology then 
truncates the SPX series used to calculate the VIX settlement value 
after encountering two consecutive series having ``zero-bid'' prices, 
even if further out-of-the-money series have an opening trade price and 
are ``non-zero'' bid. The current VIX settlement methodology selects 
these series based on the opening trade prices, and then posts the 
actual series used to calculate the SOQ after the settlement. In other 
words, the settlement strip is set after the opening rotation in those 
series is complete, because only those series that have a bid remaining 
immediately after the open are eligible for inclusion in the settlement 
calculation.
    As proposed, the Exchange will determine the strike range of the 
settlement strip prior to the settlement pursuant to an algorithm 
designed to approximate the same settlement strip as would be used 
pursuant to the current methodology based on various market inputs 
available on expiration settlement value determination days. As 
discussed above, one of the reasons the Exchange uses a tradable 
settlement is to provide market participants with the opportunity to 
convert the exposure of an expiring VIX derivative into a portfolio of 
series that comprise the settlement strip to maintain their vega risk 
exposure of expiring VIX derivatives. Market participants currently 
submit these vega replicating orders in the series they believe (but do 
not know when submitting them) will ultimately comprise the settlement 
strip. However, if their estimation is incorrect, their resulting vega 
risk exposure may not be perfectly replicated (i.e., is subject to 
slippage). By setting the strike range of the final settlement strip no 
later than 9:15 a.m. Eastern Time, market participants will have 
sufficient time prior to the cut-off time to enter or modify their vega 
replicating orders to match the actual settlement strip. The Exchange 
believes determination of the strike range of the settlement strip 
prior to the cut-off time, and disseminating to market participants the 
high call strike and low call put of this strike range, is consistent 
with the purpose of the tradable settlement, as it will provide market 
participants with an opportunity to achieve accurate replication of the 
vega risk exposure of their expiring VIX derivatives.
    The following charts contrast the strikes ranges actually employed 
in previous exercise settlement value determination days versus the 
strike ranges the proposed approach would have employed. The vertical 
lines identify the actual strikes used in the settlement strips on the 
exercise settlement value determination days during the timeframes in 
the charts, and the horizontal lines identify the highest call strike 
and lowest put strike that Exchange's algorithm would have used on 
those exercise settlement value determination days.\69\
---------------------------------------------------------------------------

    \69\ Note the Exchange did not apply the algorithm it intends to 
use to make any updates to the strike range after 8:45 a.m. Eastern 
Time.
---------------------------------------------------------------------------

    The Exchange applied the approach it intends to use to determine 
the strike range of the settlement strip to 32 previous exercise 
settlement value determination days for VIX derivatives with standard 
expirations between September 21, 2016 and April 19, 2019 to compare 
which settlement strip the formula would have selected to the actual 
settlement strip on those days. The Exchange also determined how use of 
the settlement strip determined by the formula as proposed would have 
changed the actual VIX settlement value on those days. There was no 
directional bias in the differences observed and the average absolute 
difference was 0.09 in those cases.

[[Page 35158]]

[GRAPHIC] [TIFF OMITTED] TN22JY19.000

    Similarly, the Exchange applied the approach it intends to use to 
determine the strike range of the settlement strip to 107 previous 
exercise settlement value determination days for VIX derivatives with 
weekly expirations between August 24, 2016 and April 10, 2019 to 
compare which settlement strip the formula would have selected to the 
actual settlement strip on those days. The Exchange also determined how 
use of the settlement strip determined by the formula as proposed would 
have changed the actual VIX settlement value on those days. There was 
no directional bias in the differences observed and the average 
absolute difference was 0.07 in those cases.

[[Page 35159]]

[GRAPHIC] [TIFF OMITTED] TN22JY19.001

    The Exchange intends to begin determining the strike range for the 
settlement strip prior to the opening rotation on the first exercise 
settlement value determination date following the technology migration 
(which would be October 9, 2019), and thus, this selection process 
would apply to the settlement of VIX derivative positions that were 
created prior to this change. The Exchange believes the Exchange is 
providing the marketplace and investors with sufficient notice that the 
Exchange will determine the strike range for the settlement strip used 
to determine the exercise settlement value for all VIX derivative 
contracts listed for trading prior to and after the System migration. 
Additionally, because the approach the Exchange intends to use is 
designed to approximate the same settlement strip as would be used 
pursuant to the current methodology, and in light of the Exchange's 
analysis described above, the Exchange believes the proposed rule 
change will have a de minimis impact, if any, on the settlement strip 
(and thus the VIX settlement value) that would have been selected (and 
thus the VIX settlement value) if the current procedure had been 
applied to existing VIX derivatives.
    Additionally, while the Exchange believes the current settlement 
process is not readily susceptible to manipulation, the proposed rule 
change may provide additional protection against manipulation since the 
Exchange will be solely responsible for determining the strike range 
used of the settlement strip. This is because the non-zero bid 
provision and two consecutive zero-bid provisions in the current VIX 
settlement methodology will no longer be used for determining the 
settlement strip used to calculate the exercise settlement value for 
VIX derivatives. The Exchange's algorithm that will determine the 
strike range of the settlement strip will employ numerous market 
inputs, including prices (both on the exercise settlement value 
determination day (including during the GTH trading day) and the 
previous trading day) of SPX options, SPY options, e-mini S&P 500 
options. Therefore it is unlikely for one of these inputs of the 
Exchange's algorithm to have a material impact on the determination of 
the strike range. The Exchange believes this feature will therefore 
will further enhance the modified opening auction process in a manner 
that contributes to a fair and orderly opening and settlement process 
and that protects investors.
    Proposed Rule 5.31(j)(4) states the opening rotation on exercise 
settlement value determination days will be the same as the opening 
rotation that occurs on all other days, with one exception. 
Specifically, the opening rotation on exercise settlement value 
determination days will occur as follows:
     First, the System will conduct the Maximum Composite Width 
check, as set forth in proposed Rule 5.31(e)(1). As noted above, the 
Exchange will have different Maximum Composite Widths applicable to 
constituent series on exercise settlement value determination days.
     Second, after a series satisfies the Maximum Composite 
Width Check described in proposed subparagraph (e)(1), if there are 
orders and quotes marketable against each other at a price not outside 
the Opening Collar, the System determines the Opening Trade Price for 
the series. As noted above, the Exchange will have different Opening 
Collar widths applicable to constituent series on exercise settlement 
value determination days. If there are no such orders or quotes, there 
is no Opening Trade Price. The System will determine

[[Page 35160]]

the VMIM price pursuant to proposed subparagraphs (e)(2)(A) through 
(C), as described above (in the same manner as it determines the VMIM 
price on all other days). During the opening rotation on non-exercise 
settlement value determination days, the Opening Trade Price is the 
VMIM price that is not outside the Opening Collar. In other words, if 
the System determines that the VMIM price is outside of the Opening 
Collar, rather than not open, the System will use the collar limit as 
the opening price. For example, assume the Composite Market is 1.00--
1.20, with size 100 x 100, and the Opening Collar range is 1.00--1.20. 
There is also an order to sell 100 at 1.25 and an order to buy 101 for 
1.25 in the Queuing Book. The VMIM is 1.25, which is outside the 
Opening Collar. The System instead will use 1.20 as the Opening Trade 
Price, and trade 100 contracts of the buy order with 100 contracts of 
the Market-Maker offer at 1.20, which is the VMIM price not outside the 
Opening Collar.
    On exercise settlement value determination days for constituent 
series, this part of the opening rotation process will be different 
than on other days. Pursuant to proposed Rule 5.31(j)(4)(C), if (1) the 
VMIM price is outside the Opening Collar or (2) there would be 
unexecuted market orders (or remaining portions), the series would not 
open.\70\ In either case, the Queuing Period for the series continues 
(including the dissemination of opening auction updates) until the VMIM 
price is not outside the Opening Collar, or the Exchange opens the 
series pursuant to proposed paragraph (h). Using the same example as 
above, assume the Composite Market is 1.00--1.20, with size 100 x 100, 
and the Opening Collar is 1.00--1.20. There is also an order to sell 
100 at 1.25 and an order to buy 101 for 1.25 in the Queuing Book. The 
VMIM is 1.25, which is outside the Opening Collar range, so the series 
is not eligible to open. As another example, using the same Composite 
Market and Opening Collar, but the only liquidity in the Queuing Book 
is a market order to buy 101. The VMIM is 1.20, but the series is not 
eligible to open because there would be an unexecuted portion of a 
market order remaining.
---------------------------------------------------------------------------

    \70\ As is the case on all other days, on an exercise settlement 
value determination day, if the VMIM price is not outside the 
Opening Collar, it is the Opening Trade Price, and the System opens 
the series pursuant to proposed subparagraph (e)(3). See proposed 
subparagraph (j)(4)(B).
---------------------------------------------------------------------------

    While this approach is different than the proposed opening auction 
process on other days, it is consistent with the current opening 
auction process in classes in which HAL is not activated at the 
open.\71\ The Exchange does not activate HAL at the open for SPX, and 
therefore the proposed approach is consistent with an opening condition 
that applies to the current modified opening auction process. The 
Exchange proposes to keep this same opening requirement in place for 
the modified opening auction process, because the opening trading 
prices that will be used to determine the settlement values of expiring 
VIX derivatives will be determined by prices of interest in the market 
(subject to, but not capped by, an Exchange-determined price range to 
protect against potentially erroneous executions). The Exchange 
believes maintaining this same opening condition for the modified 
opening auction process will contribute (as it does today) to a fair 
and orderly auction and settlement process.
---------------------------------------------------------------------------

    \71\ See current Rule 6.2(d)(i)(C) and (D).
---------------------------------------------------------------------------

     Third, if the System establishes an Opening Trade Price, 
the System executes orders and quotes in the Queuing Book at the 
Opening Trade Price, and if there is no Opening Trade Price, the System 
opens a series without a trade, as set forth in proposed Rule 
5.31(e)(3).
    Proposed Rule 5.31(j)(2)(A) states that, to the extent the Exchange 
makes a determination for the opening auction process pursuant to 
proposed Rule 5.31, it may make a separate determination for the 
modified opening auction process pursuant to proposed paragraph (j), 
including but not limited to (1) the Opening Collar width, (2) the 
Maximum Composite Width, and (3) the time intervals at which the 
Exchange disseminates opening auction updates. This is consistent with 
current Exchange authority pursuant to current Rule 6.2, Interpretation 
and Policy .05; the proposed rule change merely states this explicitly 
in the Rules. Given the unique purpose of the modified opening auction 
process, the Exchange believes this flexibility is appropriate to 
permit the Exchange to facilitate a fair and orderly opening and 
settlement process.
    Proposed Rule 5.31(j)(2)(B) states the Exchange may determine it is 
necessary in the interests of a fair and orderly market (for example, 
due to the existence of unusual market conditions or circumstances) to 
delay the time at which the System begins attempting to observe an 
opening rotation trigger pursuant to proposed subparagraph (d)(1) above 
for the modified opening auction process. If that delay occurs, the 
Exchange will determine a revised time and announce it to market 
participants as soon as reasonably possible. Additionally, to 
correspond to that revised time, the Exchange will adjust (1) the times 
at which it determines the strike range of the settlement strip, and 
(2) the order entry cut-off time.\72\ Proposed Rule 5.31(j)(2)(C) 
states the Exchange may determine it is necessary in the interests of a 
fair and orderly market (for example, due to the existence of unusual 
market conditions or circumstances) to not use the modified opening 
auction process described in proposed paragraph (j). If that occurs, 
the Exchange will announce that to market participants as soon as 
reasonably possible. These proposed provisions are consistent with 
current Exchange authority pursuant to current Rule 6.2(e) and proposed 
Rule 5.31(h); the proposed rule change merely states this explicitly in 
the Rules, and references the specific times in the proposed modified 
opening auction process that may be adjusted given such unusual 
conditions or circumstances.
---------------------------------------------------------------------------

    \72\ For example, if the Exchange determine to delay the time at 
which the System begins attempting to observe an opening rotation 
trigger from 9:30 a.m. to 12:00 p.m., the times between which the 
Exchange would determine the strike range of the settlement strip 
would move from 8:45 a.m. through 9:15 a.m. to 11:15 a.m. through 
11:45 a.m.; and the cut-off time would move from 9:20 a.m. to 11:50 
a.m.
---------------------------------------------------------------------------

    Proposed Rule 5.31(j)(5) states a User may submit multiple orders 
and quotes in accordance with proposed subparagraph (j)(3). If, during 
the opening rotation, the System executes an order or quote of that 
User against another order or quote of that User, the Exchange does not 
deem that fact alone to cause these executions to be considered 
violations of Section 9(a)(1) of the Exchange Act, and instead will 
evaluate other facts and circumstances.\73\ The Exchange reviews all 
activity, including these executions, during the modified opening 
auction

[[Page 35161]]

process for compliance with the Rules and the Exchange Act, including 
current Rule 4.7 (which the Exchange intends to propose to move to Rule 
10.6 in the shell Rulebook).\74\
---------------------------------------------------------------------------

    \73\ Section 9(a)(1) of the Exchange Act states it is unlawful 
for any person, directly or indirectly, by the use of the mails or 
any means or instrumentality of interstate commerce, or of any 
facility of any national securities exchange, or for any member of a 
national securities exchange, for the purpose of creating a false or 
misleading appearance of active trading in any security other than a 
government security, or a false or misleading appearance with 
respect to the market for any such security, (a) to effect any 
transaction in such security which involves no change in the 
beneficial ownership thereof, (b) to enter an order or orders for 
the purpose of such security with the knowledge that an order or 
orders of substantially the same size, at substantially the same 
time, and at substantially the same price, for the sale of any such 
security, has been or will be entered by or for the same or 
different parties, or (c) to enter any order or orders for the sale 
of any such security with the knowledge that an order or orders of 
substantially the same size, at substantially the same time, and at 
substantially the same price, for the purchase of such security, has 
been or will be entered by or for the same or different parties.
    \74\ Current Rule 4.17 (which the Exchange intends to move to 
Rule 8.17 in the shell Rulebook) states no TPH may effect or induce 
the purchase, sale, or exercise of any security for the purpose of 
creating or inducing a false, misleading, or artificial appearance 
of activity in such security or in the underlying security, or for 
the purpose of unduly or improperly influencing the market price of 
such security or of the underlying security or for the purpose of 
making a price that does not reflect the true state of the market in 
such security or in the underlying security. No TPH or any other 
person or organization subject to the jurisdiction of the Exchange 
may directly or indirectly participate in or have any interest in 
the profit of a manipulative operation or knowingly manage or 
finance a manipulative operation.
---------------------------------------------------------------------------

    Market participants may currently submit multiple orders and quotes 
to the modified opening auction process.\75\ It is possible that a 
User's order or quote may execute against another order or quote of 
that User. For example, if a User today submits a strategy order prior 
to the cut-off time, and then submits a non-strategy order in response 
to an imbalance EOI following the cut-off time, it is possible for 
those orders to execute against each other during the opening rotation. 
Similarly, as proposed, a market participant may submit orders that 
replicate the vega exposure of its expiring VIX derivatives prior to 
the cut-off time, and then submit a SLOO after the cut-off time to 
contribute liquidity to the opening process (including to offset any 
imbalances). In both cases, the purpose of submitting the second order 
(assuming there were no other factors demonstrating a different 
purpose) was not to execute against the strategy order (and thus effect 
a transaction that involves no change in beneficial ownership to create 
a false or misleading appearance of active trading in SPX options), but 
rather to contribute liquidity to the modified opening auction process 
to offset an existing imbalance and to contribute to a fair and orderly 
opening process for that series.
---------------------------------------------------------------------------

    \75\ While current Rule 6.2, Interpretation and Policy .01 does 
not explicitly state this principle, there is no restriction on 
market participants submitting multiple orders and quotes to the 
modified opening auction process.
---------------------------------------------------------------------------

    The Exchange proposes to expressly state in the Rules that, subject 
to other facts and circumstances (such as that may demonstrate a 
different purpose for the submission of the orders), the Exchange will 
not consider self-trades resulting from the execution of a User's 
orders against each other during the opening rotation of the modified 
opening auction process to be violations of Section 9(a)(1) of the 
Exchange Act. If the Exchange observes other facts and circumstances 
surrounding these executions that demonstrate these orders may have 
been submitted for improper purposes (i.e., not for bona fide reasons 
to submit orders to the modified opening auction process), the Exchange 
may review that activity for compliance with Section 9(a)(1) of the 
Exchange Act, and all other sections of the Securities Exchange Act of 
1934 (the ``Act'') and the Rules. The following are examples of 
occurrences of self-trades that, based on the facts and circumstances 
(assuming there were no other circumstances that may indicate 
manipulative intent), appear not to have been conducted for an improper 
purpose, and thus to be self-trades the Exchange would not deem to be 
violations of Section 9(a)(1) of the Exchange Act:
Example #1
Strike range of settlement strip determined at 9:15 a.m. Eastern Time: 
2800 through 3200 calls, and 2800 through 1500 puts
Best SPX Market-Maker Quote Range in the 2000 put series at 9:20 a.m. 
Eastern Time: 0-0.20 (0 x 500 contracts)
Firm A submits vega replicating market order to buy 1,000,000 vega at 
9:17 a.m. Eastern Time
Firm B submits vega replicating market order to buy 500,000 vega at 
9:18 a.m. Eastern Time

    This example focuses on the 2000 put series, in which Firm A has a 
market order to buy 1,000 contracts of the 2000 put and Firm B has a 
market order to buy 500 contracts of the 2000 put. At the 9:20 cut-off 
time, the book depth shows a GTC order to sell 10,000 of the 2000 put 
for 0.50 was previously submitted. The Opening Collar range is 0 to 
0.25.\76\ At 9:20 a.m., the then-current expected opening price based 
on orders and quotes in the Queuing Book is 0.50, at which price there 
are 1,500 contracts to buy (from the vega replicating orders of Firms A 
and B) and 1,500 contracts to sell (from the resting GTC order), which 
price is outside of the Opening Collar. As a result, the opening 
auction updates indicate more sellers are needed at a price of no more 
than 0.25 in order for the series to open. At 9:22 a.m., Firm A sees 
one of those messages and submits a SLOO to sell 500 of the 2000 put at 
0.20. The same imbalance continues to exist (because more contracts 
will execute at a price of 0.50 than 0.20), so the opening auction 
updates continue, except the amount of the imbalance has been reduced 
(there are now 1,500 contracts to buy and 1,000 contracts to sell at 
that price). At 9:28 a.m., Firm C sees one of those messages and 
submits a SLOO to sell 500 at 0.15. As a result, there are 1500 
contracts on each side of the market to open with an Opening Trade 
Price of 0.20. Assuming no other sellers enter the market prior to the 
opening of trading, during the opening rotation:
---------------------------------------------------------------------------

    \76\ Assume for a Composite Bid of 0, the Exchange has 
determined the width of the Opening Collar is 0.30, and the range is 
determined by adding and subtracting half of that width to the 
Market-Maker quote midpoint of 0.10.

 Firm A buys 1,000 contracts of the 2000 put at 0.20
 Firm B buys 500 contracts of the 2000 put at 0.20
 Firm A sells 500 contracts of the 2000 put at 0.20
 Firm C sells 500 contracts of the 2000 put at 0.20
 Market-Makers sell 500 contracts of the 2000 put at 0.20

    If the System executed some or all of the contracts comprising Firm 
A's SLOO against 500 contracts comprising part of Firm A's vega 
replicating market order to buy, based on this information (and in the 
absence of other facts and circumstances demonstrating a different 
intent), it appears Firm A submitted the SLOO because it deemed that 
submission to be in Firm A's interest to try to execute against contra-
side interest causing the imbalance and ensure the series opens at a 
reasonable price, rather than to influence the settlement price. 
Therefore, the Exchange would not view execution of Firm A's SLOO 
against its vega replicating order would not be deemed a violation of 
Section 9(a)(1) of the Exchange Act.
Example #2
Strike range of settlement strip determined at 9:15 a.m. Eastern Time: 
2800 through 3200 calls, and 2800 through 1500 puts
Best SPX Market-Maker Quote Range in the 2800 call series at 9:20 a.m. 
Eastern Time: 10.00-11.00 (500 x 500 contracts)
Firm A submits vega replicating market order to buy 1,000,000 vega at 
9:17 a.m. Eastern Time
Firm B submits vega replicating market order to sell 500,000 vega at 
9:18 a.m. Eastern Time

    This example focuses on the 2800 call series, in which Firm A has a 
market order to buy 200 contracts of the 2800 call and Firm B has a 
market order to sell 100 contracts of the 2800 call. The

[[Page 35162]]

Opening Collar range is 10.10-10.90.\77\ At 9:20 a.m., the then-current 
expected opening price based on orders and quotes in the Queuing Book 
is 11.00, at which price there are 200 contracts to buy (from the vega 
replicating order of Firm A) and 200 contracts to sell (from Market-
Makers), which price is outside of the Opening Collar. As a result, the 
opening auction updates indicate more sellers are needed at a price of 
no more than 10.90 in order for the series to open. At 9:22 a.m., Firm 
A sees one of those messages and submits a SLOO to sell 100 of the 2800 
call at 10.80. As a result, there are 200 contracts on each side of the 
market to open with an Opening Trade Price of 10.90. Assuming no other 
sellers enter the market prior to the opening of trading, during the 
opening rotation:
---------------------------------------------------------------------------

    \77\ Assume for a Composite Bid of 10.00, the Exchange has 
determined the width of the Opening Collar is 0.80, and the range is 
determined by adding and subtracting half of that width to the 
Market-Maker quote midpoint of 10.50.

 Firm A buys 200 contracts of the 2800 call at 10.90
 Firm A sells 100 contracts of the 2800 call at 10.90
 Firm B sells 100 contracts of the 2800 call at 10.90

    In this case, the 100 contracts from Firm A's SLOO executed against 
100 contracts of Firm A's vega replicating market order to buy. Based 
on this information (and in the absence of other facts and 
circumstances demonstrating a different intent), it appears Firm A 
submitted the SLOO because it deemed that submission to be in Firm A's 
interest to try to execute against contra-side interest causing the 
imbalance and ensure the series opens at a reasonable price, rather 
than to influence the settlement price. Therefore, the Exchange would 
not view execution of Firm A's SLOO against its vega replicating order 
would not be deemed a violation of Section 9(a)(1) of the Exchange Act.
Example #3
Strike range of settlement strip determined at 9:15 a.m.: 2800 through 
3200 calls, and 2800 through 1500 puts
Firm A submits vega replicating market order to buy 3,000,000 vega at 
9:17 a.m. Eastern Time Eastern Time Firm B submits vega replicating 
market order to buy 1,500,000 vega at 9:18 a.m. Eastern Time

    As a result, the opening auction updates indicate more sellers are 
needed in most of the strikes in the settlement strip series. At 9:25 
a.m., Firm A determines from the auction update messages that the 
indicative VIX value may be above 17.5 with a total amount of 4,500,000 
vega. Separately, the auction update messages indicate at least 
1,000,000 vega to sell is necessary to open. Firm A responds to these 
auction update messages by submitting a SLOO in each series in the 
settlement strip that need sellers based on 1,000,000 vega with an 
indicative VIX value of 16.5. Other market participants also submit 
SLOOs to offset the imbalances. The indicative VIX settlement value is 
16.75. Assuming no other sellers enter the market prior to the opening 
of trading, during the opening rotation:

 Firm A buys 3,000,000 vega at 16.75
 Firm B buys 1,500,000 vega at 16.75
 Firm A sells 1,000,000 vega at 16.75
 MMs sell 3,500,000 vega at 16.75

    If the System executed some or all of the contracts comprising Firm 
A's SLOO to sell against contracts comprising part of Firm A's vega 
replicating market order to buy, based on this information (and in the 
absence of other facts and circumstances demonstrating a different 
intent), it appears Firm A submitted the SLOO because it deemed that 
submission to be in Firm A's interest to try to execute against contra-
side interest causing the imbalance and ensure the series opens at a 
reasonable price, rather than to influence the settlement price. 
Therefore, the Exchange would not view execution of Firm A's SLOO 
against its vega replicating order would not be deemed a violation of 
Section 9(a)(1) of the Exchange Act.
    The Exchange has an adequate surveillance program in place to 
review options activity during the modified opening auction process 
that occurs on each exercise settlement value determination day. The 
Exchange is updating its surveillance program to reflect the proposed 
amendments to the process, and will continue to review its surveillance 
program to determine whether additional enhancements are necessary or 
appropriate.
    The Exchange will continue to evaluate the modified opening auction 
process to identify potential enhancements, and intends to modify the 
procedure as it deems appropriate to contribute to a fair and orderly 
opening process. A fair and orderly opening in these series benefits 
all market participants who trade in the volatility index derivatives 
and series that comprise the settlement strip.
    The proposed rule change deletes current Rule 6.2, Interpretation 
and Policy .02(a) regarding the Exchange's ability to determine minimum 
size requirements for Market-Maker opening quotes. The Exchange 
currently does not impose a minimum size requirement for opening 
quotes, and does not intend to. The proposed rule change also deletes 
current Rule 6.2, Interpretation and Policy .02(b) regarding the 
Exchange's ability to set bid/ask differential requirements for Market-
Makers' opening quotes, as the Exchange no longer intends to impose 
these requirements on Market-Maker opening quotes.\78\ As noted above, 
pursuant to current Rule 8.7 (which the Exchange expects to move to 
Rule 5.51 in the shell Rulebook), a Market-Maker has general 
obligations to, among other things, engage (to a reasonable degree 
under existing circumstances) in dealings for the Market-Maker's own 
account when there exists a lack of price continuity, a temporary 
disparity between the supply of and demand for an option (i.e., an 
imbalance), to compete with other Market-Makers to improve markets in 
its appointed classes, and to update market quotations in response to 
changed market conditions in its appointed classes. Therefore, the 
Exchange believes at this time it is unnecessary to impose other 
obligations on Market-Makers. Additionally, the Exchange believes the 
proposed Maximum Composite Width and Opening Collars that generally 
must be satisfied for a series to open will further incentive [sic] 
Market-Makers to submit competitive quotes.
---------------------------------------------------------------------------

    \78\ The Exchange notes other options exchanges do not impose 
these requirements on Market-Makers at the opening of trading. See, 
e.g., C2 Rule 6.11.
---------------------------------------------------------------------------

    The proposed rule change deletes current Rule 6.2, Interpretation 
and Policy .05 regarding Exchange determinations, as it is duplicative 
of Rule 1.5 in the shell Rulebook.
    The Exchange intends to add a rule regarding the use of aftermarket 
valuation processes for SPX options, as currently described in Rule 
6.2, Interpretation and Policy .06, to the shell Rulebook in a separate 
rule filing. Because proposed Rule 5.31 relates solely to the opening 
of option series, the Exchange believes it is appropriate to move the 
provision regarding non-trading closing rotations to a different rule.
    The proposed rule change moves the provision regarding how the 
existence of a limit up-limit down state in a class will impact the 
opening auction process from current Rule 6.2, Interpretation and 
Policy .07 to proposed Rule 5.31(i). The proposed rule change makes no 
substantive changes to that provision.

[[Page 35163]]

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\79\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \80\ 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) \81\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 78f(b).
    \80\ 15 U.S.C. 78f(b)(5).
    \81\ Id.
---------------------------------------------------------------------------

    In particular, the proposed opening auction process is 
substantially similar to the Exchange's current opening auction 
process. The Exchange believes the proposed opening auction process 
will continue to create opportunities for price discovery based on 
then-current market conditions when the Exchange opens series for 
trading. The Exchange believes the proposed opening auction process 
will promote competitive liquidity and open series at prices consistent 
with then-current market conditions, and thus will promote a fair and 
orderly opening process.
    While the proposed Queuing Period for the GTH trading session 
begins later than the current order entry period, the Exchange believes 
market participants will continue to have sufficient time prior to the 
GTH trading session to submit orders and quotes for participation in 
the opening auction process for that trading session. This proposed 
rule change promotes just and equitable principles of trade, as it 
provides market participants with the same amount of time to submit 
orders and quotes for participation in the opening auction process for 
the RTH trading session (approximately one hour).
    The proposed rule change will remove impediments to and perfect the 
mechanism of a free and open market, and protect investors by ensuring 
market participants will continue to have access to robust information 
regarding the opening of a series. While the information the Exchange 
will disseminate in opening auction updates will differ slightly from 
the information the Exchange currently disseminates in EOIs, the 
information to be disseminated is equivalent to the currently 
disseminated information, and will continue to provide market 
participants with transparency that will permit them to participate in 
the opening auction process and contribute to, and benefit from, the 
price discovery the auction may provide. The Exchange believes the 
proposed opening auction updates are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers, because 
all market participants may subscribe to the Exchange's data feeds that 
deliver these messages, and thus all market participants will have 
access to this information.
    The proposed opening rotation triggers are substantially similar to 
the current events that will trigger series openings on the Exchange. 
The proposed trigger events will remove impediments to and perfect the 
mechanism of a free and open market and a national market system, as 
they ensure that during Regular Trading Hours, the underlying 
securities will have begun trading, or the underlying index values will 
have begun being disseminated, before the System opens a series for 
trading. As this information will not be available during Global 
Trading Hours, the Exchange believes it is appropriate to continue to 
begin the opening rotation for Global Trading Hours at a specified 
time. Additionally, the Exchange believes its current flexibility to 
open certain equity option classes and certain index option classes 
based on different triggers is no longer necessary. The Exchange 
believes opening all equity option classes based on the same trigger 
will protect investors by simplifying the process.
    The proposed Maximum Composite Width Check and Opening Collar will 
protect investors by providing price protection measures to prevent 
orders from executing at extreme prices at the open. The Exchange 
believes it is appropriate to open a series under the proposed 
circumstances and provide marketable orders with an opportunity to 
execute at a reasonable opening price (as discussed below), because 
there is minimal risk of execution at an extreme price. These proposed 
price protection mechanisms are substantially similar to the current 
price protection mechanisms the Exchange applies during the opening 
auction process, as they are based on all available pricing 
information, including Market-Maker bulk messages (which are generally 
used to price markets for series) and any quotes disseminated from away 
markets. The proposed price protection mechanisms, like the current 
price protection mechanisms, will also consider whether there are 
crossing orders or quotes when determining whether the opening width 
and trade price are reasonable. As a result, the Exchange believes the 
proposed process to determine an Opening Trade Price will incorporate 
then-current market conditions. While the Exchange proposes to 
calculate the maximum width and opening price range in a slightly 
different manner, the Exchange believes this proposed manner is 
reasonable and will promote a fair and orderly opening.
    The Exchange believes the proposed modified opening auction process 
will protect investors, as it will continue to provide investors with 
the opportunity to submit vega replicating orders and other liquidity 
into the auction. The proposed modified opening auction process will 
function in a substantially similar manner as the current modified 
opening auction process. The proposed elimination of the concept of 
strategy orders and the adoption of a systematically enforced (and thus 
definitive) approach regarding the types of orders market participants 
may submit following the cut-off time is the primary difference between 
the current and proposed auction process. The Exchange believes this 
change will provide clarity and certainty to market participants 
regarding the orders and quotes they may submit following the cut-off 
time, which may encourage them to provide additional liquidity to the 
modified opening auction process. All market participants will have the 
opportunity following the cut-off time to address order imbalances and 
provide price transparency to the auction process without the perceived 
risk of potentially modifying a previously submitted strategy order.
    The Exchange believes the proposed rule change removes an 
impediment that may have discouraged market participants from 
submitting orders to offset imbalances and from providing price 
discovery in response to changing market conditions prior to the open. 
As a result, the Exchange believes the proposed rule change to permit 
all Users to submit SLOOs, which functionally cannot create or increase 
an imbalance, and to continue to let appointed SPX Market-Makers update 
quotes following the cut-off time, should result in

[[Page 35164]]

increased liquidity in the modified opening auction process. This 
increased liquidity may increase execution opportunities, reduce 
imbalances in series in the settlement strip, promote price 
transparency, and increase the presence of quotes within the Opening 
Collar range. This will ultimately benefit all market participants who 
trade VIX derivatives and the SPX option series that comprise the 
settlement strip.
    The proposed rule change that the Exchange will determine the 
strike range of the settlement strip prior to the opening of trading is 
consistent with one of the primary purposes of the modified opening 
auction process, which is to provide investors with an opportunity to 
replicate the vega risk exposure of their expiring VIX derivatives. The 
proposed rule change will benefit investors, as it will provide market 
participants with the opportunity to perfectly replicate this exposure, 
as they will have a minimum of five minutes to enter or modify their 
vega replicating orders prior to the cut-off time to conform them to 
the actual settlement strip.
    The Exchange also believes the modified opening auction process, 
including the change pursuant to which the Exchange will determine the 
strike range of the settlement strip prior to the cut-off time, will 
continue to be designed to prevent fraudulent and manipulative acts and 
practices. The proposed rule change may provide additional protection 
against manipulation since the Exchange will be solely responsible for 
determining the strike range of the settlement strip, meaning it would 
become impossible for anyone to attempt to manipulate the VIX 
settlement process by attempting to artificially affect which SPX 
series will have zero bids at the opening. The Exchange believes this 
will therefore will [sic] further enhance the modified opening auction 
process in a manner that contributes to a fair and orderly opening and 
settlement process and that protects investors.
    All market participants (include those that may submit orders and 
quotes following the cut-off time) will continue to be required to 
abide by current Rules 4.1 (Just and Equitable Principles of Trade), 
4.7 (Manipulation), and 4.18 (Prevention of the Misuse of Material, 
Nonpublic Information). The Exchange will continue to conduct 
surveillance to monitor all trading activity in constituent option 
series on exercise settlement value determination days, including but 
not limited to monitoring the entry of orders and quotes following the 
cut-off time, as well as compliance with other Rules.
    The proposed rule change is generally intended to align system 
functionality currently offered by the Exchange with other Cboe 
Affiliated Exchange functionality in order to provide a consistent 
technology offering for the Cboe Affiliated Exchanges. The proposed 
opening auction process (other than the modified opening auction 
process, which only occurs on the Exchange) is virtually identical to 
the opening auction process on two other Cboe Affiliated Exchanges.\82\ 
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 Exchange 
believes this consistency will promote a fair and orderly national 
options market system. When Cboe Options migrates to the same 
technology as that of the Cboe Affiliated Exchanges, Users of the 
Exchange and other Cboe Affiliated Exchanges will have access to 
similar functionality on all Cboe Affiliated Exchanges. 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.
---------------------------------------------------------------------------

    \82\ See C2 Rule 6.11 and EDGX Options Rule 21.7.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change to amend the standard opening 
auction process will impose any burden on intramarket competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Act, because it will apply to orders and quotes of all market 
participants in the same manner. The order types that may not be 
accepted prior to the opening of trading, or that may not participate 
in the opening of trading, are substantially similar to the 
restrictions currently in place. The Exchange does not believe that the 
proposed rule change to amend the standard opening auction process will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, because it is 
designed to open series on the Exchange in a fair and orderly manner. 
The Exchange believes the proposed opening auction process will 
continue to provide market participants with an opportunity for price 
discovery based on then-current market conditions when the Exchange 
opens series for trading. This will facilitate the presence of 
sufficient liquidity in a series when it opens, and increase the 
ability of series to open at prices consistent with then-current market 
conditions (at the Exchange and other exchanges) rather than at extreme 
prices that could result in unfavorable executions to market 
participants. Additionally, as discussed above, the proposed opening 
auction process is substantially similar to the opening auction process 
in the rules of certain Cboe Affiliated Exchanges.\83\
---------------------------------------------------------------------------

    \83\ See C2 Rule 6.11 and EDGX Options Rule 21.7.
---------------------------------------------------------------------------

    The Exchange does not believe that the proposed rule change to 
amend the modified opening auction process will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, because it will apply to orders 
and quotes of all market participants in the same manner. The proposed 
rule change will continue to permit all market participants to submit 
orders and quotes, including vega replicating orders, prior to a cut-
off time that will provide market participants with sufficient time to 
respond to imbalances (which is consistent with the initial purpose of 
the cut-off time). All market participants may submit SLOOs following 
the cut-off time, which will be handled by the System in the same 
manner. Market-Makers will continue to have the ability to submit 
quotes following the cut-off time to offset imbalances and update the 
prices of their quotes in response to changing market conditions prior 
to the open.
    The Exchange does not believe the proposed rule change to amend the 
modified opening auction process will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act, because it is designed to promote a fair and 
orderly opening and settlement process for series that trade on the 
Exchange and are used to determine the exercise settlement value for 
VIX derivatives. The Exchange believes the proposed rule change will 
contribute to price transparency and liquidity in the series that 
comprise the settlement strip, and thus to a fair, competitive, and 
orderly opening and settlement process on exercise settlement value 
determination days.

[[Page 35165]]

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2019-034 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-2019-034. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2019-034 and should be submitted on 
or before August 12, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
---------------------------------------------------------------------------

    \84\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15475 Filed 7-19-19; 8:45 am]
 BILLING CODE 8011-01-P