Document ID: SEC-2019-1927-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-12-20T05:00Z

[Federal Register Volume 84, Number 245 (Friday, December 20, 2019)]
[Notices]
[Pages 70235-70239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27460]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87765; File No. SR-CBOE-2019-117]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend Rule 5.72 To Eliminate the Requirement That Leg Prices Be 
Submitted Prior to the Time a Complex FLEX Order is Represented in an 
Open Outcry FLEX Auction

December 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 December 6, 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 
and II below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 5.72. The text of the proposed rule change is provided 
below.

(additions are italics; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *

Rule 5.72. FLEX Trading

    (a) No change.

[[Page 70236]]

    (b) FLEX Orders. A FLEX Option series is only eligible for trading 
if a FLEX Trader (the ``Submitting FLEX Trader'') (i) submits a FLEX 
Order for that series into an electronic FLEX Auction pursuant to 
paragraph (c) of this Rule, (ii) represents the FLEX Order in an open 
outcry FLEX Auction pursuant to paragraph (d) of this Rule, or (iii) 
submits the FLEX Order to a FLEX AIM or SAM Auction pursuant to Rule 
5.73 or 5.74, respectively.
    (1) No change.
    (2) Complex FLEX Order. A FLEX Order for a FLEX Option complex 
strategy submitted to the System must satisfy the criteria for a 
complex FLEX Order set forth in Rule 5.70(b) and include size, side of 
the market, and a net debit or credit price[, and a bid or offer price 
for each leg of the FLEX Order, which leg prices must add together to 
equal the net price]. Additionally, each leg of the FLEX Option complex 
strategy must include all terms for a FLEX Option series set forth in 
Rule 4.21 (including that a non-FLEX Option series with identical terms 
is not listed for trading), subject to the order entry requirements set 
forth in Rule 5.7.
    (A) A complex FLEX Order submitted into the System for an 
electronic FLEX Auction pursuant to paragraph (c) below must include a 
bid or offer price for each leg, which leg prices must add together to 
equal the net price.
    (B) A complex FLEX Order submitted into the System prior to 
representation in an open outcry FLEX Auction pursuant to paragraph (d) 
below may include a bid or offer price on one or more of the legs 
(subject to a FLEX Trader's responsibilities pursuant to Rule 5.91 and 
Chapter 9). The execution leg prices must be entered or modified, as 
necessary, via PAR following execution of the order, which prices must 
add together to equal the net execution price.
* * * * *
    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
    The Exchange proposes to amend Rule 5.72(b) regarding the 
information required in a FLEX Order \5\ for a FLEX Option complex 
strategy submitted to the System for execution in an open outcry FLEX 
Auction.\6\ A FLEX Option series is only eligible for trading if a FLEX 
Trader (the ``Submitting FLEX Trader'') submits a FLEX Order for that 
series into an electronic FLEX Auction pursuant to Rule 5.72(c) or 
represents the FLEX Order in an open outcry FLEX Auction pursuant to 
Rule 5.72(d).\7\ Currently, Rule 5.72(b) provides that a FLEX Order for 
a FLEX Option complex strategy submitted to the System must satisfy the 
criteria for a complex FLEX Order set forth in Rule 5.70(b) \8\ and 
include size, side of the market, a net debit or credit price, and a 
bid or offer price for each leg of the FLEX Order, which leg prices 
must add together to equal that net price. This applies to complex FLEX 
Orders submitted for both electronic and open outcry execution.
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    \5\ A ``FLEX Order'' is an order submitted in a FLEX Option. See 
Rule 5.70(a). A ``FLEX Option'' means a flexible exchange option. 
See Rule 1.1.
    \6\ See Rule 5.72(d) for a description of the open outcry FLEX 
Auction process.
    \7\ See Rule 5.72(b). A FLEX Option series may also be eligible 
for trading if the Submitting FLEX Trader submits the FLEX Order to 
a FLEX Automated Improvement Mechanism auction or FLEX Solicitation 
Auction Mechanism auction pursuant to Rule 5.73 or 5.74, 
respectively.
    \8\ Rule 5.70(b) requires each leg of a complex FLEX Order to: 
(1) be for a FLEX Option series authorized for FLEX trading with the 
same underlying equity security or index; (2) must have the same 
exercise style (American or European); and (3) for a FLEX Index 
Option, may have a different settlement type (a.m.-settled or p.m.-
settled), except each leg must have the same settlement type if 
designated as Asian-settled or Cliquet-settled.
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    The proposed rule change removes the requirement that a FLEX Order 
submitted into the System prior to representation in an open outcry 
FLEX Auction include leg prices at the time of order submission.\9\ 
Specifically, proposed Rule 5.72(b)(2)(B) states a complex FLEX Order 
submitted into the System prior to representation in an open outcry 
FLEX Auction pursuant to paragraph (d) of Rule 5.72 may include a bid 
or offer price on one or more of the legs (subject to a FLEX Trader's 
responsibilities pursuant to Rule 5.91 (which describes 
responsibilities of a floor broker) and Chapter 9 (which describes 
obligations on Trading Permit Holders that do business with the 
public)). The execution leg prices must be entered or modified, as 
necessary, via PAR following execution of the order, which prices must 
add together to equal the net execution price.
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    \9\ The proposed rule change has no impact on complex FLEX 
Orders submitted for electronic execution. The proposed rule change 
moves the requirement that a complex FLEX Order submitted into the 
System for an electronic FLEX Auction pursuant to Rule 5.72(c) 
include a bid or offer price for each leg, which leg prices must add 
together to equal the net price, to proposed Rule 5.72(b)(2)(A).
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    When a floor broker (which is the Submitting FLEX Trader with 
respect to open outcry FLEX trading) receives an order from a customer, 
the floor broker must systematize the terms of that order, including 
any limit price (which is the net price with respect to a complex 
order).\10\ As noted above, current Rule 5.72(b)(2) requires a 
Submitting FLEX Trader (i.e., a floor broker with respect to open 
outcry trading) to systematize prices of all legs of a complex order 
upon submission. The Exchange imposed this requirement for both 
electronic and open outcry FLEX orders for consistency within the 
Rules.
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    \10\ See Rule 5.7(f) (which requires systemization of the terms 
of an order, which would include the limit price if a limit order); 
see also Rule 5.6(b) (which defines a ``limit order'' as an order to 
buy or sell a stated number of option contracts at a specified price 
or better). Customers that trade complex limit orders generally only 
provide a limit price for the net price, as they are ultimately 
looking for execution of the entire package to occur at a certain 
price (or better). However, it is possible (although uncommon) that 
a customer may provide a limit price for one or more of the legs, 
which the floor broker would also be required to systematize upon 
entry as a term of the order. In addition to the definition of a 
limit order, which may not trade at a price worse than the limit 
price, floor brokers are required to use due diligence to execute an 
order at the best prices available, as well as in accordance with 
the rules (including the definition of a limit order) and general 
floor broker responsibilities. See Rule 5.91(a); see also Rule 
5.91(c) (which provides that an order entrusted to a floor broker is 
considered not held, which (as defined in Rule 5.6(c)) gives a floor 
broker discretion as to the price and time at which an order is to 
be executed, subject to a client's specified instruction).
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    Additionally, the Exchange believed this requirement to be 
appropriate due to the lack of electronic leg markets in FLEX options. 
In the non-FLEX market, there is no requirement to systematize leg 
prices upon submission of a complex order. In a non-FLEX market, there 
is a book and a national best bid or offer, and as a result, the System 
has a benchmark to use to determine execution leg prices based on the 
net

[[Page 70237]]

execution price of a complex order (which leg prices may not be outside 
of the best prices of orders and quotes in the book for those legs). 
This is not the case in the FLEX market, in which there is no market in 
the leg series of complex orders that the System can use to calculate 
appropriate execution prices of the legs of a complex strategy (for 
which there are countless combinations of prices). Therefore, the 
Exchange believed requiring the leg prices to be input upon submission 
of a complex FLEX order would provide the System with this benchmark 
information to use when determining leg execution prices based on the 
net execution price. Because of the automatic execution of an 
electronic FLEX order following the electronic FLEX auction, which 
auction is based on the net execution price, the Exchange continues to 
believe the requirement to input leg prices upon submission of an order 
to an electronic FLEX auction is appropriate. However, in open outcry 
FLEX trading (as well as open outcry non-FLEX trading), the FLEX 
auction process functions as a price negotiation through which the net 
execution price, as well as the leg execution prices (that add up to 
that net execution price) are determined. Since the open outcry FLEX 
Auction process can be used to determine leg prices for a complex FLEX 
order after the parties agree to a net execution price, the Exchange 
believes it is reasonable to permit a Submitting FLEX Trader to input 
leg prices into the System either upon submission of a complex FLEX 
Order (and adjusted as necessary following execution), or only 
following execution. If a Submitting FLEX Trader includes leg prices in 
a complex FLEX Order upon submission of the order, the execution prices 
of those legs may be modified following the auction (subject to any 
limit price for a leg as instructed by a customer), as long as they add 
up to the net execution price.
    The proposed rule change permits a Submitting FLEX Trader to 
continue to input those leg prices upon submission of the order and 
modify them as necessary following execution, or input them after 
execution. The proposed rule change is not modifying how complex FLEX 
Orders may be executed in open outcry, or the execution information 
that must be provided to the Exchange. Any leg prices input upon 
systematization of an order are visible only to the FLEX Trader on its 
PAR workstation. Prior to representing a complex order to the trading 
crowd, a FLEX Trader will generally request a market from the trading 
crowd. FLEX Traders (generally market-makers) in the trading crowd will 
respond with a market for the net price. Market-makers price the orders 
and the legs based on their own pricing models--they do not know the 
net limit price or the leg price of the systematized order, as a floor 
broker does not announce the leg prices when it represents the order on 
the trading floor. Once the crowd agrees on a net price, it then 
negotiates prices for the legs, which the Submitting FLEX Trader will 
input (or update, if applicable) into the order record on its PAR 
workstation. Therefore, whether a FLEX Trader inputs leg prices before 
an execution (and modifies them as necessary after execution to reflect 
floor negotiations during the open outcry auction (if necessary), or 
only inputs the execution leg prices after execution, has no impact on 
the open outcry FLEX auction or the prices at which FLEX complex orders 
(and the prices of the legs of those orders) trade. The proposed rule 
change is merely modifying the time at which FLEX Traders may provide 
the information to the Exchange.
    The Exchange will issue an Exchange Notice announcing the 
implementation date for the proposed rule change, which date the 
Exchange expects to be within the next two weeks. This will permit the 
Exchange to implement the proposed rule change within its system and 
provide sufficient notice of the change and its related requirements to 
Trading Permit Holders.
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.\11\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ 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) \13\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    In particular, the Exchange believes the proposed rule change will 
remove impediments to and perfect the mechanism of a free and open 
market by providing Submitting FLEX Traders with the flexibility to 
input leg prices of complex strategies either upon entry of a complex 
FLEX Order or following execution. The Exchange believes this may lead 
to more efficient open outcry executions on behalf of a floor broker's 
customer, as a Submitting FLEX Trader will not be required to take the 
time to input leg prices upon submission of the order and then modify 
them after execution to reflect these negotiations, which ultimately 
benefits investors (as further discussed below). As noted above, 
because any leg prices of a complex FLEX order input upon 
systematization are only known to the Submitting FLEX Trader and not 
known to any other person in the trading crowd, the Exchange believes 
the proposed rule change will have no impact on the manner in which 
complex FLEX Orders are negotiated and executed in open outcry. The 
proposed rule change is not modifying how complex FLEX Orders may be 
executed in open outcry, or the information that Submitting FLEX 
Traders must provide to the Exchange. The proposed rule change is 
merely modifying the time at which Submitting FLEX Traders may provide 
certain information to the Exchange.
    The Exchange believes the proposed rule change will protect 
investors, because it will permit a floor broker to request a market 
and execute a customer's order in open outcry in a more timely fashion. 
FLEX orders may include a substantial number of legs (they regularly 
include more than ten legs, but may include up to 100 legs). Inputting 
leg prices for a large number of legs may be a time-consuming exercise 
(and as noted above, it is ultimately unnecessary prior to an open 
outcry FLEX auction \14\ given the negotiations that occur during such 
an auction), which may delay execution of the customer's order and 
potentially miss an opportunity for execution at prices based on then-
current market conditions. While the proposed rule change has virtually 
no impact on other members of the trading crowd, the proposed rule 
change provides a floor

[[Page 70238]]

broker with flexibility that may result in a timelier execution of its 
customer's FLEX order.
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    \14\ This is subject to a floor broker's general obligation to 
adhere to its customers' instructions. See supra note 10.
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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 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 all 
Submitting FLEX Traders that represent complex FLEX Orders (i.e., floor 
brokers) in open outcry in the same manner. All Submitting FLEX Traders 
will have the option to input leg prices on a complex FLEX Order upon 
submission of the order to an open outcry FLEX Auction, or following 
execution of that FLEX Order. As noted above, because the remainder of 
the trading crowd does not currently know the leg prices systematized 
by the Submitting FLEX Trader, the proposed rule change will have 
virtually no impact on other market participants. The proposed rule 
change is not modifying the information that FLEX Traders must provide 
to the Exchange--it is merely modifying the time at which FLEX Traders 
may provide the information to the Exchange. The Exchange believes 
applying the proposed rule change to open outcry FLEX auctions but not 
electronic FLEX auctions is reasonable given the ability for the 
trading crowd to negotiate the leg prices in open outcry, while the 
System has no ability to price the legs based on the net execution 
price without an electronic leg market.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, because it 
relates solely to the timing of the input of leg prices of FLEX Orders 
that may be executed on the Exchange. The proposed rule change merely 
provides Submitting FLEX Traders with flexibility regarding when they 
may input leg prices for complex FLEX Orders submitted for open outcry 
execution--either upon submission of the order or following execution 
of the order. The proposed rule change will have no impact on how, or 
the prices at which, a complex FLEX Order may execute in an open outcry 
FLEX Auction.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \17\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \18\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the proposal may become operative upon filing. The Exchange stated 
that it believes, among other things, that waiver of the operative 
delay will permit FLEX Traders to take advantage of the proposed 
flexibility and the potential for more efficient open outcry FLEX 
executions as soon as possible, which it believes will ultimately 
benefit customers of floor brokers.
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    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiver of the operative delay is 
appropriate because, as the Exchange stated, the rule change is not 
modifying the information that a Submitting FLEX Trader must provide to 
Exchange, but only the time at which such information may be provided 
to the Exchange and is not changing the way a FLEX Order is executed in 
an open outcry FLEX auction. The rule proposal also makes clear that if 
one or more of the legs is submitted with a limit price the Submitting 
FLEX Trader must enter the leg prices upon entry of the terms of the 
order. For these reasons, the Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and 
the public interest. Accordingly, the Commission designates the 
proposed rule change to be operative upon filing.\19\
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    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

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-2019-117 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-2019-117. 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

[[Page 70239]]

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-2019-117 and should be 
submitted on or before January 10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27460 Filed 12-19-19; 8:45 am]
 BILLING CODE 8011-01-P