Document ID: SEC-2022-1377-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2022-10-20T04:00Z

[Federal Register Volume 87, Number 202 (Thursday, October 20, 2022)]
[Notices]
[Pages 63830-63834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22738]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96081; File No. SR-CBOE-2022-051]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Its Rules Relating to the 
Processing of Auction Responses

October 14, 2022.
    Pursuant to FR 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 October 3, 2022, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend its rules relating to the processing of auction responses. 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

[[Page 63831]]

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
    The Exchange seeks to amend its rules related to its auction 
responses.
Background
    The Exchange currently offers a variety of auction mechanisms which 
provide price improvement opportunities for eligible orders. 
Particularly, the Exchange offers the following auction mechanisms: 
Complex Order Auction (``COA''),\3\ Step Up Mechanism (``SUM''),\4\ 
Automated Improvement Mechanism (``AIM''),\5\ Complex AIM (``C-
AIM''),\6\ Solicitation Auction Mechanism (``SAM''),\7\ Complex SAM 
(``C-SAM''),\8\ FLEX Auction Process,\9\ FLEX AIM \10\ and FLEX 
SAM.\11\ The Exchange notes that eligible orders are electronically 
exposed for an Exchange-determined period (collectively referred to 
herein as ``auction response period'') in accordance with the 
applicable Exchange Rule, during which time Users may submit responses 
(collectively referred to herein as ``auction responses'' or ``auction 
response messages'') to an auction message. Trading Permit Holders 
(``TPHs'') may submit auction responses via logical port 
connectivity.\12\ An auction response may only execute in the 
applicable auction and is cancelled if it does not execute during an 
auction. If an auction response is unable to be processed by the System 
during the auction response period, that auction response is unable to 
receive any execution opportunity or provide liquidity (and possible 
price improvement) on the Exchange.
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    \3\ See Rule 5.33(d).
    \4\ See Rule 5.35.
    \5\ See Rule 5.37.
    \6\ See Rule 5.38.
    \7\ See Rule 5.39.
    \8\ See Rule 5.40.
    \9\ See Rule 5.72(c).
    \10\ See Rule 5.73.
    \11\ See Rule 5.74.
    \12\ A User connects to the Exchange using a logical port 
available through an API, such as the industry-standard FIX or BOE 
protocol. Logical ports represent a technical port established by 
the Exchange within the Exchange's trading system for the delivery 
and/or receipt of trading messages, including orders, cancels, and 
auction responses.
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    By way of further background, auction response messages 
historically have waited in the same System queue as all other order 
and quote message traffic. If an auction response is submitted at a 
time where there is a deep queue of other message traffic such as mass 
cancellation messages or other orders and quotes, it is possible that 
the auction response may not be ``processed'' by the System in 
sufficient time (i.e., prior to the end of the auction response 
period).\13\ Particularly, the queued auction response may not be able 
to participate in the applicable auction mechanism because the System 
had unprocessed (queued) messages at the time of the auction execution 
despite the fact that the User submitted the auction response prior to 
the end of the auction response period. Auctioned orders may therefore 
be missing out on potential price improvement that may have otherwise 
resulted if queued timely auction response(s) were able to participate 
in the auction. Indeed, the Exchange notes that its review of auction 
responses during July 2022 indicated that approximately 55% of auction 
responses had no opportunity to execute in their respective auctions, 
notwithstanding being submitted within the auction response period.
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    \13\ For example, it takes the Exchange's system approximately 
10 microseconds to process a single order/quote or auction response 
message and, on average, approximately 190 microseconds to process a 
mass cancel message. As such, under the current system, an auction 
response that is entered after a mass cancel message is more likely 
to be detrimentally delayed as compared to a mass cancel message 
that is entered after an auction response (i.e., a 190 microsecond 
``wait time'' versus a 10 microsecond ``wait time'').
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    The Exchange proposes to adopt new functionality under proposed 
Rule 5.25(e) which would apply across all of its auction mechanisms to 
increase the likelihood that timely submitted auction responses may 
participate in the applicable auction, even during periods of high 
message traffic. Under the proposed functionality, at the time an 
auction response period ends, the System will continue to process its 
inbound queue for any messages that were received before the end of the 
auction period (including auction messages) for up to an Exchange-
determined period of time, not to exceed 100 milliseconds (which the 
Exchange may determine on a class-by-class basis). That is, any auction 
responses that were in the queue before the conclusion of the auction 
(as identified by the Network Interface Card (``NIC'') timestamp on the 
message) \14\ would be processed as long as the Exchange-determined 
time on a class-by-class basis (not to exceed 100 milliseconds) is not 
exceeded. Only auction messages received prior to the execution of the 
applicable auction are eligible to be processed for that auction. The 
applicable auction will execute once all messages, including auction 
responses, received before the end time of the auction response period 
have been processed or the Exchange-determined maximum time limit of up 
to 100 milliseconds has elapsed, whichever occurs first. This 
continuation of processing the queue for an additional amount of time 
for messages that were received before the end of the auction allows 
for auction responses that would otherwise have been canceled due to 
the conclusion of the auction response period to still have an 
opportunity to participate in the auction. This provides such responses 
with increased opportunities to participate in the auction, even during 
periods of high message traffic, while still providing a processing cut 
off time to ensure auction executions aren't unduly delayed.
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    \14\ All incoming messages are ``timestamped'' by the Exchange's 
System.
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    By way of an example, if an auction with an auction response period 
set to 100 milliseconds were to start at 9:00:00 a.m., only auction 
responses that were able to be processed by the System by the 
conclusion of the auction at 9:00:100 would participate in the auction. 
Accordingly, if, for example, an auction response that was submitted at 
9:00:090 (within the auction time response period), is still in the 
message queue at 9:00:100, that response under the current System 
functionality would be canceled and not eligible to participate in the 
auction. Under the proposal, at 9:00:100, because the System continues 
to process all messages timestamped before 9:00:100, that same auction 
response submitted at 9:00:090 would not automatically be canceled but 
rather included in the auction as long as it was able to be processed 
within an additional 50 milliseconds, which is the additional 
processing time set by the Exchange for that class in this example. 
Once that auction response is up for

[[Page 63832]]

processing (because the System processes messages sequentially in time 
order sequence), the response will be able to participate in the 
auction so long as it's processed by 9:00:150, notwithstanding such 
processing would occur after the 100-millisecond auction response 
period has concluded. Any auction responses for the pending auction 
that are still pending after the execution of the auction would be 
canceled.\15\ The Exchange notes that using the same example, if an 
auction response was submitted at 9:00:120, it would not be eligible 
for processing because the timestamp would identify it as being 
submitted outside the auction response period which was otherwise set 
to conclude at 9:00:100.
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    \15\ If, for example, the System processed all messages received 
before 9:00:100 by 9:00:110, then the auction would execute at 
9:00:110 (i.e., the System does not need to wait until 9:00:150 to 
execute an auction if all messages submitted prior to the end time 
of the auction have been processed).
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    The Exchange believes the proposed rule change will result in 
increased execution opportunities for liquidity providers that submit 
auction responses and enhance the potential for price improvement for 
orders submitted to each mechanism to the benefit of investors and 
public interest. Indeed, the Exchange believes the proposed 
functionality will increase the possibility that timely submitted 
auction responses are processed by the Exchange and have an opportunity 
for execution in the applicable auction mechanism, even if there is a 
deep pending message queue. The Exchange believes the proposed maximum 
amount of additional time for processing is both an adequate amount of 
time to provide pending auction responses with such execution 
opportunity, but also an amount minimal enough that impact to other 
message traffic, if any, would be de minimis. Indeed, the Exchange 
anticipates that in the vast majority of cases, the additional time 
needed after the conclusion of auction response period, if any, to 
process all pending auction responses will be shorter than the maximum 
100 milliseconds. All message traffic (including auction responses) 
will continue to be processed in time-priority.
    The Exchange also believes the proposal will continue to allow the 
Exchange to set each auction response period to an amount of time that 
provides TPHs with sufficient time to respond to, compete for, and 
provide price improvement for orders while continuing to provide 
auctioned orders with timely executions that may reduce market and 
execution risk. It also provides timely submitted auction responses 
with more execution opportunities in the applicable, even during 
periods of high message traffic, thereby potentially providing 
customers with additional opportunities for price improvement.
    Finally, in light of the proposed change, the Exchange proposes to 
modify Rule 5.25 to make clear that the Exchange may determine whether 
or not to establish a Priority Queue for Auction response messages 
(indeed, the Exchange anticipates implementing the proposed 
functionality at this time in lieu of a Priority Queue). The Exchange 
previously adopted Priority Queue functionality under Rule 5.25, which 
provides that auction response messages may be processed through a 
Priority Queue, and all remaining messages would be processed through a 
General Queue. If the Exchange utilizes a Priority Queue, the System 
would process a certain number of messages, as determined by the 
Exchange, from each queue on an alternating basis and prioritize 
processing messages in each respective queue in the order in which the 
System receives them (i.e., in time priority). The Exchange adopted 
Rule 5.25 for similar purposes as this proposal, which is to increase 
the likelihood that submitted auction responses would have the 
opportunity to participate in auctions notwithstanding any potential 
deep queue of pending message traffic. The Exchange believes however, 
that the proposed new functionality is a more streamlined approach and 
would further increase the likelihood that timely submitted auction 
responses are able to participate in an applicable auction. 
Particularly, under the priority queue functionality, auction responses 
not processed by the conclusion of the auction response period would 
still be canceled, whereas, under the proposal, timely submitted 
auction responses would have the opportunity to be processed for up to 
an additional 100 milliseconds following the conclusion of the auction 
response period. Should the Exchange determine its necessary to utilize 
a priority queue for auction responses in the future, it would provide 
notice to all TPHs pursuant to Rule 1.5.
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 FR 6(b) of the Act.\16\ Specifically, the Exchange 
believes the proposed rule change is consistent with the FR 6(b)(5) 
\17\ 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 FR 6(b)(5) 
\18\ requirement that the rules of an exchange not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
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    In particular, the Exchange believes modifying its System to allow 
it to potentially process more, if not all, timely submitted auction 
responses may provide further opportunities for auctioned orders to 
receive price improvement, which removes impediments to a free and open 
market and ultimately protects and benefits investors. In particular, 
the proposed rule change will continue to provide investors with timely 
processing of their options quote and order messages, while providing 
investors who submit auction eligible orders with additional auction 
liquidity. Indeed, the proposed rule change may allow more investors 
additional opportunities to receive price improvement through an 
auction mechanism. While the Exchange may increase the length of 
auction response periods to accommodate more auction responses, the 
Exchange believes the proposed rule change will accommodate more 
auction responses and allow the Exchange to continue to mitigate the 
market risk that may accompany a longer auction period for auctioned 
orders by setting the length of an auction response period to a 
timeframe that allows an adequate amount of time for TPHs to respond to 
an auction message and providers orders with fast executions. 
Additionally, the Exchange believes the proposed functionality may 
provide liquidity providers that submit auction responses with 
additional execution opportunities in auctions, which may encourage the 
submission of more auction responses, which may contribute to a deeper, 
more liquid auction process that provides investors

[[Page 63833]]

with additional price improvement opportunities.
    The Exchange believes adopting the proposed functionality for 
auction responses would better provide customers with additional 
opportunities for price improvements with little to no impact to non-
auction response message traffic. Currently, auction responses account 
for an incredibly small fraction of message traffic submitted to the 
Exchange. Indeed, based on the Exchange's analysis in July 2022, 
auction response messages accounted for a mere 0.04% of all message 
traffic submitted to the Exchange. The Exchange believe the processing 
of such a small amount of message traffic, even after the conclusion of 
an auction response period, would therefore have de minimis, if any, 
impact on the processing of non-auction response messages waiting in 
the queue. The Exchange also notes that all messages are currently 
processed one at a time by the System. Therefore, the System still 
needs to ``process'' all pending auction responses, regardless of 
whether that processing involves canceling the pending auction response 
because it wasn't processed in time to participate in the auction or 
actually processing the response to participate in the auction. Either 
way, the non-auction response messages will still have to wait for 
processing of any pending responses ahead of it. Conversely, the 
current system may cause investors to miss out on opportunities to 
receive price improvement through the Exchange's auction mechanisms as 
the System is configured to cancel pending auction responses that 
``miss'' the auction execution, even if such responses were timely 
submitted but not processed due to the System being otherwise occupied 
processing messages in queue ahead of it. The Exchange therefore 
believes its proposal will make it more likely that the System 
processes timely submitted auction responses and includes them in 
applicable auctions, thus providing them with more opportunities to 
execute against auctioned orders, even during periods of high message 
traffic. The Exchange further believes the proposal will continue to 
allow the Exchange to set an auction response period to an amount of 
time that provides TPHs with sufficient time to respond to, compete 
for, and provide price improvement for orders while also continuing to 
provide auctioned orders with quick executions that may reduce market 
and execution risk. Accordingly, the Exchange believes the proposal 
would provide customers with additional opportunities for price 
improvement and enhance the quality of the auctions, thereby removing 
impediments to and perfecting the mechanism of a free and open market 
and a national market system, and, in general protecting investors and 
the public interest.
    The Exchange also believes the proposed rule change is not designed 
to permit unfair discrimination between market participants as all 
market participants are allowed to submit auction responses. 
Additionally, the Exchange believes it's reasonable to adopt the 
proposed functionality for auction responses as compared to other 
messages because auction responses are submitted only for the purpose 
of executing (and possibly providing price improvement) in auctions 
with short durations, whereas other messages are generally submitted to 
rest in or execute against the book (and generally not used to submit 
liquidity into auctions). As discussed above, the Exchange also 
believes the benefits that result from the adoption of the proposed 
functionality for auction responses would outweigh any potential 
negative impact to other message traffic, including customer orders, 
which have an incredibly low chance of being affected by the proposed 
change as discussed above and which continue to receive priority 
allocation in any event.
    The Exchange lastly believes clarifying in Rule 5.25 that the 
Exchange may utilize priority queue functionality for auction responses 
provides further transparency in the rules. The Exchange believes the 
proposed functionality is currently a better alternative to provide 
timely submitted auction responses with opportunities to participate in 
an applicable auction as compared to the priority queue functionality. 
Particularly, under the priority queue functionality, the System may 
still be unable to process all submitted auction responses, since the 
System will not include any auction responses that are still in queue 
at the conclusion of the auction response period in the auction, even 
if they were submitted in a timely manner. Under the proposed 
functionality, as discussed, the System identifies and looks to process 
all auction responses timely submitted and will process such messages 
even after the conclusion of the auction response period, up to 100 
milliseconds, thereby providing a better chance that more auction 
responses are in fact able to participate in the auction. As noted 
above, should the Exchange determine its necessary or appropriate to 
utilize a priority queue for auction responses in the future, it would 
provide notice to all TPHs pursuant to Rule 1.5.

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 changes will impose any burden on intra-
market competition that is not necessary or appropriate in furtherance 
of the purposes of the Act, as the proposed rule change would apply 
equally to all TPHs that submit auction responses. As noted above, all 
market participants are able to submit auction responses. Additionally, 
the Exchange believes the adoption of the proposed functionality for 
auction responses would have little to no impact on non-auction 
response message traffic. As discussed, auction response messages 
account for an incredibly small fraction of message traffic submitted 
to the Exchange. The Exchange therefore believes the processing of such 
a small amount of message traffic by using the functionality would have 
a de minimis, if any, impact on the processing of non-auction response 
messages. Moreover, the Exchange believes it's reasonable to adopt the 
proposed functionality for auction responses as compared to other 
messages because auction responses are submitted only for the purpose 
of executing (and possibly providing price improvement) in auctions 
with short durations, whereas other messages are generally submitted to 
rest in or execute against the book (and generally not used to submit 
liquidity into auctions). Lastly, the Exchange does not believe the 
proposed rule change will impose any burden on inter-market competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act, as the proposed change affects how the System processes 
auction responses that may only participate in auctions that occur on 
the Exchange.

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

[[Page 63834]]

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 [email protected]. Please include 
File Number SR-CBOE-2022-051 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-2022-051. 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-2022-051, and should be submitted 
on or before November 10, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-22738 Filed 10-19-22; 8:45 am]
BILLING CODE 8011-01-P