Document ID: SEC-2020-1370-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2020-08-27T04:00Z

[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Notices]
[Pages 53029-53034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18828]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89636; File No. SR-CBOE-2020-051]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment No. 1, To Amend Its Automated Price Improvement 
Auction Rules in Connection With Agency Order Size Requirements

August 21, 2020.

I. Introduction

[[Page 53030]]

    On June 11, 2020, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
permitting the Exchange to impose a maximum size requirement for an 
agency order submitted into the Automated Price Improvement Mechanism 
(``AIM'' or ``AIM Auction'') and the Complex Automated Price 
Improvement Mechanism (``C-AIM'' or ``C-AIM Auction'') in S&P 
500[supreg] Index Options (``SPX''). The proposed rule change was 
published for comment in the Federal Register on June 18, 2020.\3\ On 
July 23, 2020, the Exchange submitted Amendment No. 1 to the proposed 
rule change, which replaced and superseded the proposed rule change in 
its entirety.\4\ On July 27, 2020, pursuant to Section 19(b)(2) of the 
Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\ The Commission is publishing this notice and 
order to solicit comment on the proposed rule change, as modified by 
Amendment No. 1, from interested persons and to institute proceedings 
pursuant to Section 19(b)(2)(B) of the Act \7\ to determine whether to 
approve or disapprove the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89058 (June 12, 
2020), 85 FR 36918. Comments received on the proposed rule change 
are available on the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-051/srcboe2020051.htm.
    \4\ In Amendment No. 1, the Exchange: (1) Amended its proposal 
to modify the proposed maximum size requirement for AIM and C-AIM 
agency orders in SPX to ten contracts rather than a size determined 
by the Exchange of up to 100 contracts, specify that this size 
requirement would apply to all agency orders in SPX, and make 
related conforming changes to its proposed rule text; and (2) 
provided additional data, justification, and support for its 
modified proposal. The full text of Amendment No. 1 is available on 
the Commission's website at: https://www.sec.gov/comments/sr-cboe-2020-051/srcboe2020051-7470738-221292.pdf.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 89399, 85 FR 46202 
(July 31, 2020). The Commission designated September 16, 2020 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Exchange proposes to amend Rule 5.37(a)(3) and Rule 5.38(a)(8) 
to adopt a maximum size of 10 contracts for Agency Orders in SPX 
submitted through the Automated Price Improvement Mechanism (``AIM'' or 
``AIM Auction'') and the Complex Automated Price Improvement Mechanism 
(``C-AIM'' or ``C-AIM Auction'').\8\
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    \8\ Amendment No. 1 adopts a fixed maximum size requirement of 
10 contracts for SPX Agency Orders submitted to AIM and C-AIM and 
amends the Initial Rule Filing to reflect this fixed maximum.
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    Currently, Rules 5.37(a)(3) and 5.38(a)(3), which govern the size 
requirements for AIM and C-AIM Agency and Initiating Orders, provide 
that there is no minimum size for orders submitted into AIM and C-AIM 
Auctions, respectively, and that the Initiating Order must be for the 
same size as the Agency Order. As such, an Agency Order of any size may 
currently be submitted in an AIM or C-AIM Auction.
    The Exchange now proposes to amend Rule 5.37(a)(3) to provide the 
maximum size for all Agency Orders in SPX is 10 contracts, and by 
amending Rule 5.38(a)(3) to provide that the maximum size for the 
smallest leg of all Agency Orders in SPX is 10 contracts.\9\ The 
proposed maximum size limit for SPX Agency Orders submitted in an AIM 
or C-AIM Auction is designed to address the specific trading 
characteristics, market model, and investor basis of SPX. The Exchange 
notes that the maximum size requirement for Agency Orders in SPX would 
apply to all Agency Orders in the entire SPX class (including SPX 
Weeklys (``SPXW'')).
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    \9\ Application of the maximum size to the smallest leg of 
complex orders is consistent with the application of a size 
requirement for the Exchange's Complex Solicitation Auction 
Mechanism, which is a similar price improvement auction mechanism on 
the Exchange. See Rule 5.40(a)(3).
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    In particular, SPX has a different and more complicated market 
model, involves taking on greater risk, has a significantly higher 
notional value (e.g., they are ten times the notional size of SPY 
options), tends to trade in much larger size, tends to have a larger 
percentage of volume executed in open outcry than other classes, and 
tends to execute increasingly more complex strategies (e.g., SPX Combo 
orders) than in other options classes. The Exchange understands these 
factors may limit retail customer participation in SPX to simpler 
strategies and smaller-sized orders. While AIM and C-AIM have 
historically been activated for all other options classes, the unique 
and more complex characteristics of SPX have contributed to the 
Exchange's historical determination to not activate AIM and C-AIM in 
SPX when the floor is open so to encourage liquidity on the trading 
floor as well as in the electronic book to accommodate these large and 
complex trades.\10\ Therefore, the Exchange believes the application of 
an Agency Order size ceiling may provide more price improvement 
opportunities in SPX geared towards retail customers when AIM and C-AIM 
are activated in SPX.\11\ The Exchange believes this may incentivize 
increased retail customer auction participation in SPX and provide 
retail customers with execution and price improvement opportunities in 
SPX while incentivizing continued liquidity in the electronic book and 
on the trading floor for larger and more complex orders.
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    \10\ The Exchange notes that, due to the Covid-19 pandemic, the 
trading floor was inoperable from March 16, 2020 through June 12, 
2020 and, as a result, AIM and C-AIM were activated for SPX for the 
duration of the floor closure.
    \11\ Amendment No. 1 adds additional clarification regarding the 
differences between SPX and other classes and the role of such 
differences in the Exchange's historical determination not to 
activate AIM and C-AIM for SPX.
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    The Exchange has observed that smaller size order flow tends to 
attract liquidity provider responses, as such orders are generally 
easier to hedge than larger orders, which may encourage market 
participants to compete to provide price improvement in an electronic 
competitive auction process. This, in turn, may contribute to a deeper, 
more liquid auction process with additional price improvement 
opportunities for market participants that submit smaller size orders, 
particularly retail customers.
    The Exchange notes that smaller orders in SPX are not commonly 
executed on the floor, and, without an opportunity to execute in AIM 
and C-AIM, smaller orders are primarily submitted into to the Book and 
trade at the market, whereas, with AIM and C-AIM, smaller orders may 
receive price improvement.\12\ For example, the Exchange observed that 
during April and May 2020, while the trading floor was inoperable and 
AIM and C-AIM were activated for SPX, the average daily statistics for 
Agency Orders

[[Page 53031]]

containing various quantities was as follows:
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    \12\ Amendment No. 1 provides additional detail regarding the 
typical order flow of smaller, retail-sized orders when the Exchange 
is operating in its historically normal environment (i.e., when the 
trading floor is operable and AIM/C-AIM is not activated in SPX). 
The Exchange notes, too, that Rule 5.37(b)(1)(A) guarantees price 
improvement for smaller order submitted to AIM. It provides that if 
a buy (sell) Agency Order is for less than 50 standard option 
contracts (or 500 mini-option contracts), the stop price of the 
Initiating Order must be at least one minimum increment better than 
the then-current NBO (NBB) or the Agency Order's limit price (if the 
order is a limit order), whichever is better.

----------------------------------------------------------------------------------------------------------------
                                                                AIM                            C-AIM
                                                 ---------------------------------------------------------------
               Order size category                   Number of       Number of       Number of       Number of
                                                   Agency orders     contracts     Agency orders     contracts
----------------------------------------------------------------------------------------------------------------
1 to 10.........................................           1,668           4,229           2,123          17,231
11 to 50........................................             103           2,759             189          17,226
51 to 100.......................................              19           1,654              30          12,696
101 to 250......................................               5             977              21          16,373
251 to 500 \13\.................................               3           1,335              12          19,144
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    The Exchange then observed that since the re-opening of the trading 
floor on June 15, 2020,\14\ the average daily statistics for customer 
orders for various quantities has been as follows:
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    \13\ The Exchange also notes that orders for over 500 contracts 
did not exceed a daily average of 2 orders (for up to an average 
daily total of 3,425 contracts) in AIM nor over a daily average of 4 
orders (for up to an average daily total of 50,971 contracts) in C-
AIM.
    \14\ Through July 16, 2020, when this data was compiled.

----------------------------------------------------------------------------------------------------------------
                                                      Simple orders on floor          Complex orders on floor
                                                 ---------------------------------------------------------------
               Order size category                   Number of                       Number of
                                                     customer        Number of       customer        Number of
                                                      orders         contracts        orders         contracts
----------------------------------------------------------------------------------------------------------------
1 to 10.........................................              11              50              12           1,481
11 to 50........................................              11             376              41          11,894
51 to 100.......................................               8             688              44          16,305
101 to 250......................................               9           1,487              30          20,635
251 to 500 \15\.................................               6           2,240              19          22,489
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    The Exchange has observed that brokers generally cross customer 
orders on the trading floor, which is currently the only way to cross 
orders on the Exchange. Overall, as demonstrated in the tables above, 
the Exchange has observed that, when AIM and C-AIM were activated for 
SPX, there was a significant number of SPX orders (and resulting number 
of contracts) containing quantities of one to ten contracts submitted 
through the electronic auctions over any other order size category. 
However, once the trading floor was again operable in June 2020, and 
AIM and C-AIM consequently switched off for SPX, the volume of customer 
orders in SPX for one to ten contracts submitted to the trading floor 
decreased significantly (approximately a 99% decrease in number of 
simple orders, total number of simple order contracts and number of 
complex orders, and approximately a 91% decrease in total number of 
complex order contracts) from the volume that had previously been 
submitted to the electronic auctions, whereas, larger order sizes 
experienced a notable increase in volume once the trading floor was 
again operable. Thus, the data demonstrates that when AIM is not 
available, brokers do not take advantage of the ability to cross 
smaller-sized orders on the trading floor, but when AIM is available, 
brokers use the electronic auction to cross these smaller-sized orders.
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    \15\ The Exchange also notes that orders for over 500 contracts 
have had up to a daily average of 4 orders (for up to an average 
daily total of 9,120 contracts) in AIM and up to 10 orders (for up 
to an average daily total of 60,091 contracts) in C-AIM.
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    In addition to this, the Exchange observed that, in a sample of SPX 
orders submitted into simple AIM during a week of trading in April 
2020,\16\ orders containing quantities from one to ten contracts 
submitted through AIM received an average price improvement of 
approximately $0.34 over their limit prices, whereas orders containing 
quantities from 11 to 50 contracts received an average price 
improvement of approximately $0.22, and orders for 51 to 250 contracts 
received an average price improvement of $0.08 and orders containing 
quantities of between 251 and 500 received an average of $0.15. That is 
approximately a 55% larger average price improvement that orders for 
one to ten contracts received than orders for 11 to 50 contracts, a 
325% larger average price improvement than orders for 51 to 250 
contracts and approximately 127% larger average price improvement than 
orders for 251 to 500 contracts. While the Exchange did not observe 
such a significant increase in price improvement for complex orders 
from one to ten contracts in the sample of SPX orders submitted to C-
AIM, it notes that greater price improvement generally did occur for 
smaller sized complex orders as compared to larger sized orders. The 
Exchange notes, however, that it is simultaneously submitting a rule 
filing to amend the manner in which price improvement occurs for 
certain complex SPX orders submitted to C-AIM so that price improvement 
received through the C-AIM Auction is better aligned with pricing that 
typically occurs on the trading floor. The Exchange believes that this, 
paired with the proposed maximum quantity, will greatly incentivize 
more retail-sized order flow through C-AIM. Overall, as this data 
demonstrates, price improvement on smaller orders (particularly for one 
to ten contracts) in SPX, a class which generally exhibits more 
complicated trading characteristics and complex market factors, is 
generally more beneficial than price improvement on larger orders 
submitted through AIM and C-AIM, and customers are more inclined to 
submit smaller orders (1-10 contracts) in SPX into the electronic 
auctions when activated for SPX, rather

[[Page 53032]]

than to the trading floor, when operable. As a result, if the Exchange 
is able to implement a maximum size requirement of up to 10 contracts 
for SPX as proposed,\17\ it may determine to activate AIM and C-AIM 
when the trading floor is open. The Exchange believes this could 
provide incentive for the submission of smaller size SPX orders to the 
Exchange and into the electronic auction. As a result, the Exchange 
believes the proposed rule change will provide retail customers with 
additional price improvement opportunities overall when the trading 
floor is open while preserving liquidity available in the market, 
particularly on the trading floor, for larger and more complicated 
orders.
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    \16\ Amendment No. 1 amends the data sample presented by 
expanding the time frame in which the sample was taken for average 
price improvement over the limit price of Agency Orders submitted 
into AIM and C-AIM from through.
    \17\ The proposed rule change to designate a maximum size of 10 
contracts is based on this data, which demonstrates that orders with 
size up to 10 contracts generally experience the most volume when 
AIM and C-AIM are activated for SPX and generally receive the most 
beneficial price improvement (and are considered to be ``retail'' 
sized orders).
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    The Exchange notes that the trading floor is generally better 
suited for the larger complex orders typical in SPX. Therefore, while 
permitting retail-sized orders in SPX to execute in AIM and C-AIM will 
provide additional price improvement opportunities for smaller orders, 
it is also designed to maintain SPX liquidity, and incentive Market-
Maker activity in SPX, on the trading floor and in the electronic book 
when AIM and C-AIM is activated for SPX, creating a liquid hybrid 
environment for orders in this class. Indeed, the Exchange has observed 
that open outcry trading is the generally preferred execution mechanism 
for orders in such a complex and nuanced class as SPX, which has been 
indicated, among other observations, by a significant decrease in SPX 
executions while the Exchange operated in an all-electronic 
environment. Data from February 3, 2020 through March 13, 2020 (the 
last trading day prior to the temporary close of the trading floor) 
shows that a total of 2,717,383 contracts for simple orders in SPX and 
27,242,625 contracts for complex orders in SPX were executed in open 
outcry auctions, whereas data for approximately the same timeframe, 
from March 16, 2020 through April 21, 2020, shows that 534,790 
contracts were executed in AIM in SPX and 13,059,041 contracts were 
executed in C-AIM in SPX. The Exchange notes, too, that the Exchange's 
trading floor may be better suited for crosses in SPX with more complex 
orders, complicated strategies and larger size. Such orders are more 
commonly executed on the trading floor as Trading Permit Holders 
(``TPHs'') are able to negotiate and fine-tune the terms of a trade on 
the trading floor and are permitted to submit complex orders with a 
ratio less than one-to-three (.333) or greater than three-to-one (3.00) 
for execution on the trading floor.\18\ TPHs are not currently 
permitted to submit complex orders with such ratios for electronic 
processing. In addition to this, the trading crowd in open outcry is 
able to provide markets that are more tailored to the complexity and 
size of orders typically submitted in SPX. Greater execution and price 
improvement opportunities for SPX orders may result from the markets 
given by the trading crowd that better define the nuanced complexity 
and size of such orders than if the same orders were submitted via AIM 
or C-AIM -which, instead, may provide greater price improvement 
opportunities for simpler and smaller orders (as demonstrated in the 
data sample explained above).\19\
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    \18\ See Rule 5.83(b).
    \19\ Amendment No. 1 adds additional detail and bolsters the 
explanation regarding the reasons why the trading floor is better 
suited for the execution of the generally larger, more complicated 
orders in SPX, including providing additional data regarding SPX 
order flow to the floor when operable and to AIM/C-AIM when the 
floor was not operable.
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    Finally, pursuant to current Rule 5.37.02 and Rule 5.38.02, it is 
deemed conduct inconsistent with just and equitable principles of trade 
and a violation of Exchange Rule 8.1 to engage in a pattern of conduct 
where the Initiating Member breaks up an Agency Order into separate 
orders for the purpose of gaining a higher allocation percentage than 
the Initiating TPH would have otherwise received in accordance with the 
allocation procedures contained in the AIM and C-AIM Rules, 
respectively. In light of the proposed rule change, the Exchange also 
proposes to amend Rules 5.37.02 and 5.38.02 to make it clear that 
Initiating TPHs also may not break up an Agency Order into separate 
orders for the purpose of circumventing the maximum quantity 
requirement pursuant to subparagraph(s) (a)(3). The Exchange notes that 
its surveillance program will monitor for such violations in the same 
manner in which it currently monitors for allocation-related break up 
violations.

III. Summary of Comment Letters Received

    To date the Commission has received six comment letters on the 
proposal.\20\ The Exchange also submitted a letter responding to the 
comments.\21\ Two commenters supported imposing a maximum size 
limitation on SPX agency orders in AIM and C-AIM auctions, agreeing 
with Cboe's assertions that it would incentivize increased retail 
customer participation in SPX auctions and provide increased execution 
and price improvement opportunities for retail customers in SPX.\22\ 
One of these commenters further agreed with Cboe's assertions that 
allowing Cboe to determine a maximum size for SPX orders in AIM and C-
AIM auctions would enhance execution quality for smaller orders while 
maintaining liquidity on the trading floor for larger complex 
orders.\23\ The other commenter claimed its clients recognized 
significant price improvement opportunities in AIM auctions of SPX 
orders from 1-100 contracts, but saw mixed results on orders greater 
than 100 contracts.\24\
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    \20\ See letters to Vanessa Countryman, Secretary, Commission, 
from Michael Golding, Head of Trading, Optiver US LLC, and Rutger 
Brinkhuis, Head of Trading, AMS Derivatives B.V., dated July 8, 2020 
(``Optiver Letter''); Richard J. McDonald, Susquehanna International 
Group, LLP, dated July 8, 2020 (``SIG Letter''); Ellen Greene, 
Managing Director, Equities & Options Market Structure, The 
Securities Industry and Financial Markets Association, dated July 9, 
2020 (``SIFMA Letter''); John S. Markle, Interim General Counsel, TD 
Ameritrade, Inc., dated July 9, 2020 (``TD Ameritrade Letter''); 
Stephen John Berger, Managing Director and Global Head of Government 
& Regulatory Policy, Citadel Securities, dated July 9, 2020 
(``Citadel Letter I''); and Stephen John Berger, Managing Director 
and Global Head of Government & Regulatory Policy, Citadel 
Securities, dated August 12, 2020 (``Citadel Letter II'').
    \21\ See letter to Vanessa Countryman, Secretary, Commission, 
from Rebecca Tenuta, Counsel, Cboe Global Markets, dated July 31, 
2020 (``Cboe Response Letter'').
    \22\ See SIFMA Letter, supra note 20, at 2; TD Ameritrade 
Letter, supra note 20, at 1. The SIFMA Letter and TD Ameritrade 
Letter commented on Cboe's original proposal, which would have given 
Cboe the ability to determine a maximum size of up to 100 contracts, 
prior to Amendment No. 1, which proposed a set maximum size of ten 
contracts.
    \23\ See SIFMA Letter, supra note 20, at 2.
    \24\ See TD Ameritrade Letter, supra note 20, at 1.
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    Three commenters opposed Cboe's proposal.\25\ One of these 
commenters opposed activating AIM and C-AIM auctions for orders in SPX 
generally, regardless of size,\26\ while the other two commenters 
opposed Cboe's proposal to impose any degree of maximum size limitation 
on these orders, arguing instead that the auctions should be made 
available in SPX for agency orders of all sizes.\27\ One of these 
commenters argued that if retail order flow in SPX is in fact limited 
to smaller-sized orders, there is no need to impose a size

[[Page 53033]]

limitation in order to provide increased price improvement 
opportunities in the AIM and C-AIM mechanisms for these orders.\28\ 
This commenter further argued that, if larger-sized orders are better 
suited for the trading floor, as Cboe suggests, such orders would 
naturally gravitate towards the floor and obviate the need for any size 
limitations in the electronic mechanisms.\29\ Two commenters argued 
that market participants should have the choice of whether to direct 
their orders to the trading floor or an electronic auction, with one 
suggesting that brokers would have best execution obligations to 
monitor price improvement and route their orders in the most favorable 
manner.\30\ Three commenters suggested that Cboe's data analysis may be 
insufficient to support its proposal.\31\ Two of these commenters noted 
that the data does not measure a time period during which both 
electronic auctions and floor-based liquidity are available.\32\ One of 
these commenters and a separate commenter noted that Cboe's own data 
demonstrated that price improvement opportunities were observed for 
orders of all sizes in the electronic auction mechanisms during the 
trading floor closure.\33\ One commenter argued that allowing SPX 
market makers to provide electronic price improvement for SPX orders of 
all sizes would not discourage market makers from also providing price 
improvement for open outcry orders in SPX.\34\
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    \25\ See Optiver Letter, supra note 20, at 1-2; SIG Letter, 
supra note 20, at 3-4; Citadel Letter I, supra note 20, at 1; 
Citadel Letter II, supra note 20, at 1.
    \26\ See Optiver Letter, supra note 20, at 1-2.
    \27\ See SIG Letter, supra note 20, at 3-4; Citadel Letter I, 
supra note 20, at 1; Citadel Letter II, supra note 20, at 1.
    \28\ See SIG Letter, supra note 20, at 3.
    \29\ See id.
    \30\ See id. at 3; Citadel Letter I, supra note 20, at 1.
    \31\ See SIG Letter, supra note 20, at 3; Optiver Letter, supra 
note 20, at 2; Citadel Letter I, supra note 20, at 1.
    \32\ See SIG Letter, supra note 20, at 3; Optiver Letter, supra 
note 20, at 2. One of these commenters further questioned the 
validity of the data given the extreme volatility observed during 
the time period of the data. See Optiver Letter, supra note 20, at 
2.
    \33\ See SIG Letter, supra note 20, at 3 & n.9; Citadel Letter 
I, supra note 20, at 1. As noted above, however, a separate 
commenter suggested price improvement opportunities were mixed for 
SPX orders greater than 100 contracts. See TD Ameritrade Letter, 
supra note 20, at 1.
    \34\ See SIG Letter, supra note 20, at 4.
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    In its response to comments, Cboe noted that its current rules 
already allow it to use AIM and C-AIM for all options classes, and 
therefore it may activate AIM and C-AIM in SPX without a proposed rule 
change.\35\ Cboe further stated that the proposed maximum size for SPX 
orders in AIM and C-AIM is necessary in order to provide limited 
electronic auction functionality that some customers found beneficial 
when available, while mitigating any negative impact on the larger SPX 
market that Cboe claimed may result from the auctions, including 
decreased quoting liquidity on the book, wider quotes, and reduced 
participation by options market makers.\36\ In addition, Cboe 
reiterated its argument that the unique characteristics of SPX options 
warrant imposing a maximum size to SPX orders submitted through the AIM 
and C-AIM auctions.\37\ Cboe also argued that the proposal would not 
unfairly discriminate against any market participants, as it imposes no 
restrictions on any market participant's ability to utilize the AIM and 
C-AIM auctions for SPX options (i.e., any market participant would 
retain the ability to submit an SPX agency order of ten contracts or 
fewer in an AIM or C-AIM auction, respond to an AIM or C-AIM auction, 
and, to the extent permitted by Exchange Rules, be solicited for the 
initiating order).\38\ Finally, Cboe stated that it has provided 
sufficient additional data in the amended proposal to support the 
proposed maximum size of ten contracts, and argued that its data 
measuring price improvement for AIM and C-AIM SPX orders of various 
sizes is sufficiently representative because all order sizes reflected 
in the data sample were subject to the same market conditions.\39\ Cboe 
also stated that it is unable to provide comparable price improvement 
statistics for orders executed on the trading floor due to the nature 
of their execution as compared to electronically executed orders.\40\
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    \35\ See Cboe Response Letter, supra note 21, at 2 n.9.
    \36\ See id. at 2-3. Cboe also argued in its response to 
comments that the trading floor may be better for crosses in SPX, 
based on Cboe's observation that the number of larger and more 
complicated orders that are crossed on the Exchange was 
significantly lower when the trading floor was closed than when it 
was open. See id. at 3 & n.13 (finding that, from January 2, 2020 
through March 13, 2020, complex orders for SPX options with more 
than six legs represented approximately 5.3% of the total SPX 
complex order average daily volume, whereas from March 16, 2020 
through April 30, 2020 while the floor was closed and C-AIM was 
activated in SPX, complex orders for SPX options with more than six 
legs represented only approximately 2.2% of the total SPX complex 
order average daily volume).
    \37\ See id. at 3-4.
    \38\ See id. at 5.
    \39\ See id. at 6.
    \40\ See id.
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    Three commenters recommended that, to the extent any maximum size 
is established for SPX orders in AIM and C-AIM auctions, the level of 
the maximum size should be clearly stated in the proposed rule, with 
any future modifications subject to a separate proposed rule 
change.\41\ Two of these commenters suggested that, when proposing any 
modification to the maximum size threshold, Cboe should provide 
sufficient supporting information, including, for example, data showing 
price improvement and internalization statistics, and any information 
necessary to clearly demonstrate how the threshold amount accurately 
captures retail investor activity in SPX and does not exclude a 
significant amount of retail activity.\42\ In response to these 
comments, as described above, Cboe amended its initial proposal to 
establish a set maximum size of ten contracts for AIM and C-AIM agency 
orders in SPX and provided additional data and analysis to support this 
proposed threshold.\43\ In response to the amended proposal, one 
commenter argued that the proposed ten contract maximum size is without 
a rational basis and will result in unfair discrimination that would 
deny significant price improvement to many retail investors.\44\ This 
commenter claimed that retail investors commonly submit orders of more 
than ten contracts and provided data showing that more than fifty 
percent of the AIM-eligible retail simple marketable SPX orders that it 
routed to Cboe from mid-March 2020 to mid-May 2020 were larger than ten 
contracts.\45\ This commenter also argues that its data demonstrates 
that retail orders of up to 100 contracts received significant price 
improvement in the AIM auction and requests that Cboe either eliminate 
the proposed maximum size threshold or, at a minimum, set the threshold 
at 100 contracts.\46\
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    \41\ See TD Ameritrade Letter, supra note 20, at 2; Citadel 
Letter I, supra note 20, at 2; Optiver Letter, supra note 20, at 2. 
The TD Ameritrade Letter and Citadel Letter I, commenting on Cboe's 
initial proposal, both suggested that Cboe commit to allowing orders 
of up to 100 contracts to participate in the electronic auctions. 
See TD Ameritrade Letter, supra note 20, at 2; Citadel Letter I, 
supra note 20, at 2.
    \42\ See Citadel Letter I, supra note 20, at 2; Optiver Letter, 
supra note 20, at 2.
    \43\ See Cboe Response Letter, supra note 21, at 2.
    \44\ See Citadel Letter II, supra note 20, at 1.
    \45\ See id. at 1-2.
    \46\ See id. at 2.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2020-051, as Modified by Amendment No. 1, and Grounds for Disapproval 
Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \47\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the

[[Page 53034]]

Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as stated below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change, as modified by Amendment No. 1, to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change.
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    \47\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\48\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulate 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 to protect investors and the public interest, and 
not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers; \49\ and Section 6(b)(8) of the Act, 
which requires that the rules of the Exchange do not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act.\50\
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    \48\ 15 U.S.C. 78s(b)(2)(B).
    \49\ 15 U.S.C. 78f(b)(5).
    \50\ 15 U.S.C. 89f(b)(8).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \51\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding,\52\ and any failure of a self-
regulatory organization to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Act and the 
applicable rules and regulations.\53\
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    \51\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \52\ See id.
    \53\ See id.
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    The Commission is instituting proceedings to allow for additional 
consideration and comment on the issues raised herein, including as to 
whether the proposal is consistent with the Act.

V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8), or any other provision of 
the Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4 under the Act,\54\ 
any request for an opportunity to make an oral presentation.\55\
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    \54\ 17 CFR 240.19b-4.
    \55\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by September 17, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 1, 2020. Commission 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-2020-051 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-2020-051. 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-2020-051, and should be submitted 
on or before September 17, 2020. Rebuttal comments should be submitted 
by October 1, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\
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    \56\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18828 Filed 8-26-20; 8:45 am]
BILLING CODE 8011-01-P