Document ID: SEC-2020-0293-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2020-03-02T05:00Z

[Federal Register Volume 85, Number 41 (Monday, March 2, 2020)]
[Notices]
[Pages 12357-12360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04187]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88279; File No. SR-CboeBZX-2020-017]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Codify 
the Cancel Back Order Type and To Add That the Post Only Order 
Designated as Cancel Back May Remove Liquidity Pursuant to Exchange 
Rule 21.1

February 25, 2020.
    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 February 12, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to 
codify the Cancel Back order type and amend the Post Only order 
instructions that may remove liquidity pursuant to Rule 21.1. 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://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), 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

[[Page 12358]]

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 codify the Cancel Back order type, which 
is a System \5\ functionality already in place and currently available 
to Users today. In addition, the Exchange proposes to add that a Post 
Only order designated as Cancel Back may, in addition to Post Only 
orders designated as a display-price sliding order,\6\ remove 
liquidity.
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    \5\ The ``System'' is the automated trading system used by BZX 
Options for the trading of options contracts. See Rule 21.1(a).
    \6\ See Rule 21.1(h), which states that, unless a User enters 
instructions for an order (including a bulk message) to not be 
subject to the display-price sliding process in this paragraph (h), 
an order (including a bulk message) that, at the time of entry, 
would lock or cross a Protected Quotation of another options 
exchange will be ranked at the locking price in the BZX Options Book 
and displayed by the System at one minimum price variation below the 
current NBO (for bids) or to one minimum price variation above the 
current NBB (for offers) (``display-price sliding'').
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    First, the System currently offers ``Cancel Back'' functionality 
for Users' orders, which is not currently defined in the Rules. 
Specifically, the functionality operates so that when a User designates 
an order not to be subject to the display-price sliding process or 
Price Adjust process,\7\ then the order is subject to the Cancel Back 
instruction (note that an order will always include a Price Adjust, 
display-price sliding, or Cancel Back instruction). A Cancel Back order 
is immediately cancelled instead of re-priced when displaying the order 
at its limit price would create a violation of the linkage rules.\8\ 
The Exchange also notes that Rule 21.6(f) provides affirmative 
instruction consistent with Cancel Back functionality as it 
specifically provides that an order entered with a price that would 
lock or cross a Protected Quotation of another options exchange that is 
not eligible for either routing, the display-price sliding process, or 
the Price Adjust process will be cancelled. The Exchange now proposes 
to codify the existing Cancel Back instruction in proposed Rule 
21.1(m). The proposed definition is consistent (save for the provision 
in connection with Post Only--Cancel Back instructions, as described in 
greater detail below) with the corresponding definitions of a Cancel 
Back order under the rules of the Exchange's affiliated exchanges, Cboe 
EDGX Exchange, Inc. (``EDGX Options'') and Cboe C2 Exchange, Inc. 
(``C2'').\9\ As proposed, a Cancel Back order is an order (including 
bulk messages) \10\ a User designates to not be subject to the display-
price sliding process or the Price Adjust process that the System 
cancels or rejects (immediately at the time the System receives the 
order or upon return to the System after being routed away) if 
displaying the order on the Book would create a violation of Rule 27.3 
(Locked and Crossed Markets), or if the order cannot otherwise be 
executed or displayed in the BZX Options Book at its limit price. The 
System executes a Book Only--Cancel Back order against resting orders. 
The Exchange notes that pursuant to the Book Only instruction, an order 
or bulk message may not route away to another Exchange. Therefore, if 
an incoming Book Only order designated as Cancel Back locked or crossed 
an away market (i.e., the ABBO), the System would execute it to the 
extent it could against contra-side interest on the Exchange at prices 
the same as or better than the ABBO in accordance with the linkage 
rules. The System would then cancel it (or the remaining portion) to 
prevent a violation of Rule 27.3 of the intermarket linkage rules.
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    \7\ See Rule 21.1(i), which states that an order that, at the 
time of entry, would lock or cross a Protected Quotation of another 
options exchange or the Exchange will be ranked and displayed by the 
System at one minimum price variation below the current NBO (for 
bids) or to one minimum price variation above the current NBB (for 
offers) (``Price Adjust'').
    \8\ See Chapter XXVII of the Rules. See also Options Order 
Protection and Locked/Crossed Market Plan (the ``Linkage Plan'').
    \9\ See EDGX Options Rule 21.1(l) and C2 Rule 6.10(c).
    \10\ Bulk messages allow Users to enter, modify or cancel up to 
an Exchange-specified number of bids and offers in a single message. 
Therefore, a Cancel Back designation for a bulk message applies to 
all bulk message bids and offers within a single message. The System 
handles bulk message bids and offers in the same manner as it 
handles an order, or quote if submitted by a Market Maker, unless 
the Rules specify otherwise. See Rule 21.1(l)(3).
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    The proposed Cancel Back order definition also provides that the 
System executes a Post Only--Cancel Back order as set forth in Rule 
21.1(d)(8) (as proposed). In particular, Rule 21.1(d)(8) currently 
defines a Post Only order as an order to be ranked and executed on the 
Exchange or cancelled, as appropriate, without routing away to another 
options exchange and will not remove liquidity from the BZX Options 
Book unless it is subject to the display-price sliding process and 
executing against on order on the Book would be economically beneficial 
to the User entering the order (i.e., if the value of price improvement 
associated with such execution equals or exceeds the sum of fees 
charged for such execution and the value of any rebate that would be 
provided if the order posted to the BZX Options Book and subsequently 
provided liquidity).\11\ Thus, an executable order entered with a Post 
Only instruction is eligible to remove liquidity instead of having its 
display-price adjusted pursuant to those order handling instructions. 
The Exchange notes that the purpose of the display-price sliding 
instruction is to ensure compliance with the linkage rules like that of 
a Cancel Back instruction. The Exchange now proposes to amend Rule 
21.1(d)(8) to make it explicit that a Post Only order with a Cancel 
Back instruction may also be eligible to remove liquidity instead of 
being cancelled or rejected back to the User in certain circumstances. 
The Exchange believes that removal of liquidity in these circumstances 
would be economically beneficial to Users that submit Post Only--Cancel 
Back orders, in that, instead of being cancelled or rejected back to 
the User upon locking or crossing the market, a Post Only--Cancel Back 
order would have the opportunity to execute at an improved price while 
contributing to liquidity and the price discovery process on the 
Exchange. The Exchange notes that this is consistent with the price 
improvement opportunities currently provided for a locking or crossing 
Post Only order subject to the display-price sliding process, instead 
of having its display-price adjusted. Users who wish for their Post 
Only orders to post to the Book and forego the opportunity to remove 
liquidity upon entry under Rule 21.1(d)(8) may continue to do so by 
electing that the Post Only order be subject to the Price Adjust 
process. As indicated above, this proposed description of a Post Only--
Cancel Back order in proposed Rule 21.1(m) is unlike the description of 
a Post Only--Cancel Back order on the Exchange's affiliated options 
exchanges, C2 and EDGX Options, which cancel or reject a Post Only--
Cancel Back order that locks or crosses the respective exchange's best 
bid or offer, as their rules do not currently offer the same price 
improvement opportunity (opportunities, as proposed) for their Post 
Only orders.\12\
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    \11\ See Rule 21.1(h)(4). Any Post Only Order subject to the 
display-price sliding process that locks or crosses a Protected 
Quotation displayed by the Exchange upon entry will be executed as 
set forth in Rule 21.1(d)(8) or cancelled.
    \12\ See EDGX Options Rule 21.1(d)(8) and C2 Rule 6.10(c).

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[[Page 12359]]

    Additionally, the Exchange proposes to amend Rule 21.1(h)(4), which 
describes the display-price sliding process as it applies to Post Only 
orders, to provide additional clarity within the Rule. Currently, Rule 
21.1(h)(4) provides that any Post Only Order subject to the display-
price sliding process described in this paragraph (h) that locks or 
crosses a Protected Quotation displayed by the Exchange upon entry will 
be executed as set forth in Rule 21.1(d)(8) or cancelled. A Post Only 
bulk message that locks or crosses a Protected Quotation displayed by 
the Exchange upon entry will be cancelled. Any Post Only Order that 
locks or crosses a Protected Quotation displayed by an external market 
upon entry will be subject to the display-price sliding process 
described in this paragraph (h). The Exchange now proposes to 
restructure the paragraph language so that it reads in a more uniform 
and explanatory manner that is easier to follow. Specifically, the 
Exchange proposes to amend the rule to first provide for the manner in 
which a Post Only order that is subject to the display-price sliding 
process will be handled if it either locks or crosses a Protected 
Quotation displayed by the Exchange or by an away market. The 
description of how a Post Only order subject to the display price-
sliding message will be handled if it locks or crosses an away market 
is already in this provision, the Exchange is merely proposing to move 
this clause into the same sentence that describes how such an order is 
handled upon locking or crossing the Book. As indicated above, this 
provision then goes on to describe the manner in which a Post Only bulk 
message that is subject to the display-price sliding process will be 
handled if it locks or crosses a Protected Quotation displayed by the 
Exchange. The Exchange proposes to also add to this clause the 
description of how a Post Only bulk message subject to the display-
price sliding process will be handled if it locks or crosses a 
Protected Quotation displayed by an external market--to which, 
according to Rule 21.1(h)(1), the System would apply the display-price 
sliding process. The Exchange notes that it does not make any 
substantive changes to Rule 21.1(h)(4), but merely amends the rule to 
provide additional clarity and enhanced explanation within the Rule.
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.\13\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \14\ 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) \15\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    In particular, the Exchange believes the proposed definition of 
Cancel Back orders will provide additional transparency within the 
Rules and facilitate better understanding for market participants 
regarding their flexibility to designate orders as Cancel Back, as an 
alternative manner to comply with the linkage rules. The Exchange 
believes that the proposed rule change serves to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system because this change provides Users with Rules that 
clearly delineate an additional User flexibility regarding how they may 
instruct the System to handle their orders (i.e., designating their 
orders as Cancel Back by specifying that their orders are not subject 
to Price Adjust or display-price sliding). The Exchange also notes that 
permitting Users to elect that their orders to be treated as Cancel 
Back is an additional way to ensure compliance with the linkage rules, 
thereby protecting investors and the public interest. The Exchange also 
believes that this change is generally consistent with the Cancel Back 
definitions under the rules of the Exchange's affiliated exchanges, 
EDGX Options and C2.\16\ The Exchange believes that generally mirroring 
the corresponding rule language of its affiliates will provide better 
understanding for Users that participate across the affiliated 
exchanges.
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    \16\ See supra note 8.
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    Moreover, the Exchange believes that it is consistent with just and 
equitable principles of trade to permit an order entered with a Post 
Only--Cancel Back instruction to remove liquidity when executing as the 
taker of liquidity would be economically beneficial to a User. This 
handling is designed to ensure that orders entered with a Post Only 
instruction are eligible to trade in certain circumstances where the 
User may have an interest in securing an execution on entry (i.e., as 
the taker of liquidity) notwithstanding a Post Only instruction. The 
Exchange does not believe that the proposed change would raise any new 
or novel issues for market participants, as the System currently allows 
for Post Only orders subject to the display-price sliding process, an 
instruction similarly designed to ensure compliance with the linkage 
rules, to remove liquidity when economically beneficial to the User. 
The Exchange also believes that the proposed rule change will present 
Users with increased trading opportunities at multiple price points, 
which will potentially encourage the provision of more liquidity to the 
market to interact with such orders. As a result, the Exchange believes 
that the proposed rule change is reasonably designed to facilitate the 
mechanism of price discovery and enhance competition and overall market 
quality on the Exchange to the benefit of all investors.
    The Exchange also believes that the proposed change to the 
provision regarding Post Only orders subject to the display-price 
sliding process will provide market participants with additional 
clarity within the rules thereby facilitating increased understanding 
of the Exchange Rules. By making this provision easier to follow and 
understand the proposed rule change serves to remove impediments to and 
perfect the mechanism of a free and open market and national market 
system and benefit market participants. As noted, the proposed rule 
change is not of a substantive nature, as it merely reorganizes the 
provision and adds an order handling explanation that already applies 
and is provided within the general display-price sliding rule.

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 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 all Users would be able to designate their

[[Page 12360]]

orders as Cancel Back orders, including Post Only orders. Cancel Back 
orders of all Users will be handled in the same manner. Additionally, 
all Post Only--Cancel Back orders that would remove liquidity will be 
handled in the same manner pursuant to the proposed rule change. 
Further, the use of the Cancel Back instruction and/or the Post Only--
Cancel Back designation is voluntary and all Users may, instead, elect 
for their orders to be subject to the display-price sliding process or 
the Price Adjust process (specifically, if they wish for their Post 
Only orders not to remove liquidity).
    The Exchange does not believe 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. First, the 
Cancel Back instruction is functionality currently available and 
contemplated by the Rules. The instruction is intended as an additional 
order mechanism to ensure compliance with the linkage rules that 
provides Users with additional flexibility with respect to handling 
their orders. Second, the proposed rule change to allow Post Only--
Cancel Back orders to remove liquidity pursuant to Rule 21.1(d)(8) does 
not impact intermarket competition as Post Only orders (with any 
additional instruction), by definition, do not route away to other 
options exchanges. To the extent that the proposed changes make BZX 
Options a more attractive marketplace for market participants at other 
exchanges, such market participants are welcome to become BZX Options 
market participants. Additionally, the Exchange notes that the proposed 
rule change to the rule governing Post Only orders subject to the 
display-price sliding process would not impose any burden on 
competition as the proposed changes are nonsubstantive and serve only 
to add clarity to the rule and make it easier to follow and understand.

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:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. 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 \17\ and 
Rule 19b-4(f)(6) \18\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
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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-CboeBZX-2020-017 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-CboeBZX-2020-017. 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-CboeBZX-2020-017 and should be submitted 
on or before March 23, 2020.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04187 Filed 2-28-20; 8:45 am]
 BILLING CODE 8011-01-P