Document ID: SEC-2019-0229-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe EDGX Exchange, Inc.
Posted Date: 2019-03-01T05:00Z

[Federal Register Volume 84, Number 41 (Friday, March 1, 2019)]
[Notices]
[Pages 7140-7146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03705]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85200; File No. SR-CboeEDGX-2019-005]

Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Rule 20.6 To Apply the Obvious Error Rule to Stock-Option Orders, 
and To Amend Rules 21.1(d) and 21.20 To Add Qualified Contingent Cross 
With Stock Order Functionality

February 26, 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 February 12, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange'' 
or ``EDGX'') 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 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 EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') proposes to 
amend Rules [sic] 20.6 to apply the obvious error rule to stock-option 
orders, and to amend Rules 21.1(d) and 21.20 to add Qualified 
Contingent Cross with Stock Order (``QCC with Stock Order'') 
functionality. The text of the proposed rule change is provided below.

(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe EDGX Exchange, Inc.

* * * * *

Rule 20.6. Nullification and Adjustment of Options Transactions 
Including Obvious Errors

    The Exchange may nullify a transaction or adjust the execution 
price of a transaction in accordance with this Rule. However, the 
determination as to whether a trade was executed at an erroneous 
price may be made by mutual agreement of the affected parties to a 
particular transaction. A trade may be nullified or adjusted on the 
terms that all parties to a particular transaction agree, provided, 
however, that such agreement to nullify or adjust must be conveyed 
to the Exchange in a manner prescribed by the Exchange prior to 8:30 
a.m. Eastern Time on the first trading day following the execution. 
It is considered conduct inconsistent with just and equitable 
principles of trade for any Member to use the mutual adjustment 
process to circumvent any applicable Exchange rule, the Act or any 
of the rules and regulations thereunder.
    (a)-(l) No change.

Interpretations and Policies

    .01-.03 No change.
    .04 Complex Orders and Stock-Option Orders:
    (a)-(b) No change.
    (c) If the option leg of a stock-option order qualifies as an 
Obvious Error under paragraph (c)(1) or a Catastrophic Error under 
paragraph (d)(1), then the option leg that is an Obvious or 
Catastrophic Error will be adjusted in accordance with paragraph 
(c)(4)(A) or (d)(3), respectively, regardless of whether one of the 
parties is a Customer. However, the option leg of any Customer order 
subject to this paragraph (c) will be nullified if the adjustment 
would result in an execution price higher (for buy transactions) or 
lower (for sell transactions) than the Customer's limit price on the 
stock-option order, and the Exchange will attempt to nullify the 
stock leg. Whenever a stock trading venue nullifies the stock leg of 
a stock-option order or whenever the stock leg cannot be executed, 
the Exchange will nullify the option leg upon request of one of the 
parties to the transaction or in accordance with paragraph (c)(3).
* * * * *

Rule 21.1. Definitions

    The following definitions apply to Chapter XXI for the trading 
of options listed on EDGX Options.
    (a)-(c) No change.
    (d) The term ``Order Type'' shall mean the unique processing 
prescribed for designated orders, subject to the restrictions set 
forth in paragraph (j) below with respect to orders and bulk 
messages submitted through bulk ports, that are eligible for entry 
into the System, and shall include:
    (1)-(9) No change.
    (10) A ``Qualified Contingent Cross Order'' is comprised of an 
originating order to buy or sell at least 1,000 standard option 
contracts that is identified as being part of a qualified contingent 
trade, as that term is defined in paragraph (A) below, coupled with 
a contra-side order or orders totaling an equal number of contracts. 
See Rule 21.20 for a definition of a QCC with Stock Order. For 
purposes of this order type:
* * * * *

Rule 21.20. Complex Orders

    (a) No change.
    (b) Availability of Types of Complex Orders. The Exchange will 
determine and communicate to Members via specifications and/or a 
Regulatory Circular listing when the complex order types, among the 
complex order types set forth in this Rule, are available for use on 
the Exchange. The complex order types that may be submitted are 
limit orders and market orders, and orders with a Time in Force of 
GTD, IOC, DAY, GTC, or OPG as such terms are defined in Rule 
21.1(f). Users may not submit complex orders through bulk ports. The 
following complex orders will also be accepted by the Exchange:
    (1)-(5) No change.
    (6) QCC with Stock Orders. A ``QCC with Stock Order'' is a 
qualified contingent cross order, as defined in Rule 21.1(d)(10), 
entered with a stock component to be electronically communicated by 
the Exchange to a designated broker-dealer for execution on behalf 
of the submitting User pursuant to subparagraph (c)(7) below. QCC 
with Stock Orders are available to Users on a voluntary basis.
    (c) Trading of Complex Orders. The Exchange will determine and 
communicate to Members via specifications and/or Regulatory Circular 
which complex order origin codes (i.e., non-broker-dealer customers, 
broker-dealers that are not Market Makers on an options exchange, 
and/or Market Makers on an options exchange) are eligible for entry 
onto the COB. Complex orders will be subject to all other Exchange 
Rules that pertain to orders submitted to the Exchange generally, 
unless otherwise provided in this Rule.
    (1)-(6) No change.
    (7) QCC with Stock Orders. The System processes QCC with Stock 
Orders as follows:
    (A) Entry of QCC with Stock Order. When a User enters a QCC with 
Stock Order on the Exchange, it enters a QCC Order with a stock 
component (pursuant to Rule 21.10(d)(10)). When entering a QCC with 
Stock Order, the User must:
    (i) Include a net price for the stock and option components;
    (ii) give up a Clearing Member in accordance with Rule 21.12; 
and
    (iii) designate a specific broker-dealer to which the stock 
components will be communicated, which broker-dealer the Exchange 
must have identified as having connectivity to electronically 
communicate

[[Page 7141]]

the stock components of QCC with Stock Orders to stock trading 
venues and with which the User must have entered into a brokerage 
agreement (the ``designated broker-dealer''). The Exchange will have 
no financial arrangements with the broker-dealers it has identified 
with respect to communicating stock orders to them.
    (B) Option Component.
    (i) If the option component (i.e., the QCC Order) of a QCC with 
Stock Order can execute, the System executes it in accordance with 
Rule 21.8, but does not immediately send the User a trade execution 
report. The System then automatically communicates the stock 
component to the designated broker-dealer for execution at a stock 
trading venue.
    (ii) If the option component of a QCC with Stock Order cannot 
execute, the System cancels the QCC with Stock Order, including both 
the stock and option components.
    (C) Stock Component.
    (i) If the System receives an execution report for the stock 
component of a QCC with Stock Order from the designated broker-
dealer, the Exchange sends the User the trade execution report for 
the QCC with Stock Order, including execution information for both 
the stock and option components. The execution price of the buy 
(sell) stock leg of a QCC with Stock Order may be any price 
(including outside the NBBO for the stock leg), except the price 
must be permitted by Regulation SHO and the Limit Up-Limit Down 
Plan.
    (ii) If the System receives a report from the designated broker-
dealer that the stock component of a QCC with Stock Order cannot 
execute, the Exchange nullifies the option component trade and 
notifies the User of the reason for the nullification.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc. 
(``Cboe Global''), which is the parent company of Cboe Exchange, Inc. 
(``Cboe Options'') and Cboe C2 Exchange, Inc. (``C2''), acquired the 
Exchange, Cboe EDGA Exchange, Inc. (``EDGA''), Cboe BZX Exchange, Inc. 
(``BZX or BZX Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, 
together with C2, Cboe Options, the Exchange, EDGA, and BZX, the ``Cboe 
Affiliated Exchanges''). The Cboe Affiliated Exchanges are working to 
align certain system functionality, retaining only intended differences 
between the Cboe Affiliated Exchanges, in the context of a technology 
migration. Cboe Options intends to migrate its technology to the same 
trading platform used by the Exchange, C2, and BZX Options in the 
fourth quarter of 2019. The proposal set forth below is intended to add 
certain functionality to the Exchange's System that is available on 
Cboe Options in order to ultimately provide a consistent technology 
offering for market participants who interact with the Cboe Affiliated 
Exchanges. Although the Exchange intentionally offers certain features 
that differ from those offered by its affiliates and will continue to 
do so, the Exchange believes that offering similar functionality to the 
extent practicable will reduce potential confusion for Users.
QCC With Stock Order
    The Exchange proposes to offer QCC with Stock Order functionality 
to Users. QCC with Stock Order functionality facilitates the execution 
of the stock component of qualified contingent trades (``QCTs''). 
Specifically, a QCC with Stock Order is a QCC order entered with a 
stock component to be communicated to a designated broker-dealer for 
execution. QCC with Stock Orders will assist Users in maintaining 
compliance with rules regarding the execution of the stock components 
of QCTs, and help maintain an audit trail for surveillance of Users for 
compliance with such rules. Currently, although the Exchange offers 
qualified contingent cross (``QCC'') order functionality, it does not 
facilitate electronic communication of the stock component of QCC 
orders for execution. The proposed rule change provides Users with the 
option to electronically submit the stock component of QCC orders to 
the Exchange, and describes how the Exchange will electronically 
communicate the stock component to a designated broker-dealer for 
execution on behalf of Users.
    A QCC order is comprised of an originating order to buy or sell at 
least 1000 contracts that is identified as being part of a QCT,\5\ 
coupled with a contra-side order or orders totaling an equal number of 
contracts. QCC orders may execute without exposure provided the 
execution (1) is not at the same price as a public customer order 
resting in the electronic book and (2) is at or between the national 
best bid or offer (``NBBO'').\6\ QCC orders will be cancelled if they 
cannot be executed.\7\
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    \5\ See Rule 21.1(d)(10). A ``qualified contingent trade'' is a 
transaction consisting of two or more component orders, executed as 
agent or principal, where: (1) At least one component is an NMS 
stock, as defined in Rule 600 of Regulation NMS under the Exchange 
Act; (2) all components are effected with a product or price 
contingency that either has been agreed to by all the respective 
counterparties or arranged for by a broker-dealer as principal or 
agent; (3) the execution of one component is contingent upon the 
execution of all other components at or near the same time; (4) the 
specific relationship between the component orders (e.g., the spread 
between the prices of the component orders) is determined by the 
time the contingent order is placed; (5) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (6) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade. The proposed rule change amends 
Rule 21.1(d)(10) to add a cross-reference to the proposed definition 
of a QCC with Stock Order in Rule 21.20.
    \6\ See Rule 21.1(d)(10).
    \7\ Id.
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    Since QCC orders represent one component of a QCT, each QCC order 
must be paired with a stock order. When a User enters a QCC order, the 
User is responsible for executing the associated stock component of the 
QCT within a reasonable period of time after the QCC order is executed. 
The Exchange conducts surveillance of Users to ensure that Users 
execute the stock component of a QCT at or near the same time as the 
options component. While the Exchange does not specify how the User 
should go about executing the stock component of the trade, this 
process is often manual and is therefore a compliance risk for Users if 
they do not execute the stock component within a reasonable time period 
of execution of the options component. Thus, the Exchange is proposing 
to offer QCC with Stock Order functionality, pursuant to which the 
Exchange will automatically communicate the stock component of a QCT to 
a designated broker-dealer for execution in connection with the 
execution of a QCC order on the Exchange. This functionality will

[[Page 7142]]

reduce the compliance burden on Users by providing an automated means 
of executing the stock component of a QCT, and also will provide 
benefits for the Exchange's surveillance by providing an audit trail 
for the execution of the stock component. QCC with Stock Orders can be 
entered by Users through a front-end order and execution management 
system or through a User's own electronic connection to the Exchange.
    QCC with Stock Orders will be available to all Users on a voluntary 
basis.\8\ Under the proposed rule, when a User enters a QCC with Stock 
Order on the Exchange, it enters a QCC order with a stock component 
(pursuant to Rule 21.1(d)(10)). When entering a QCC with Stock Order, 
the User must:
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    \8\ See proposed Rule 21.20(b)(6).
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     Enter a net price for the stock and option components. 
Net-priced QCC with Stock Orders reduce the chance that Users will miss 
the market since the Exchange will calculate a price for the stock and 
options components that honors the net price of the package and current 
market prices, if possible. It is also consistent with the use of 
QCTs.\9\ The Exchange will not allow QCC with Stock Orders with a 
specified price for the stock component or the option component;
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    \9\ See Securities Exchange Act Release No. 54389 (August 31, 
2006), 71 FR 52829, 52831 (September 7, 2006) (Order Granting an 
Exemption for Qualified Contingent Trades from Rule 611(a) of 
Regulation NMS Under the Securities Exchange Act of 1934) (``QCT 
Exemption Order''). In its exemption request, the Securities 
Industry Association (``SIA'') indicated parties to a contingent 
transaction are focused on the spread or ratio between the 
transaction prices for each of the component instruments, rather 
than on the absolute price of any single component instrument. The 
SIA also noted the economics of a contingent trade are based on the 
relationship between the prices of the security and related 
derivative or security. See Letter to Nancy M. Morris, Secretary, 
Commission, from Andrew Madoff, SIA Trading Committee, SIA, dated 
June 21, 2006 (``SIA Exemption Request''), at 2.
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     give up a Clearing Member in accordance with Rule 21.12. 
Pursuant to Rule 21.12, a User must give up a Clearing Member it 
previously identified to the Exchange as a Designated Give Up for that 
User for all orders it submits to the Exchange; and
     designate a specific broker-dealer to which the stock 
components will be communicated, which broker-dealer the Exchange must 
have identified as having connectivity to electronically communicate 
the stock components of QCC with Stock Orders to stock trading venues 
and with which the User must have entered into a brokerage agreement 
(the ``designated broker-dealer''). The Exchange will have no financial 
arrangements with any broker-dealer it has identified with respect to 
communicating stock orders to them.\10\ The Exchange currently has one 
broker-dealer that has established connectivity for executing the stock 
component of QCC with Stock Orders. If the Exchange adds more in the 
future, and the User enters into brokerage agreements with multiple of 
the broker-dealers designated by the Exchange, the User must specify to 
which broker-dealer the Exchange should communicate the stock 
components of its QCC with Stock Orders when entering QCC with Stock 
Orders.
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    \10\ The Exchange also represents that broker dealers it 
identifies as having connectivity to electronically communicate the 
stock components of QCC with Stock Orders to stock trading venues do 
not receive other special benefits related to trading on the 
exchange.
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    Current Exchange fees applicable to QCC orders will apply to the 
options component of QCC with Stock Orders.\11\ To the extent the 
Exchange will apply a fee to the stock component of QCC with Stock 
Orders, the Exchange will submit a separate rule filing to adopt such a 
fee.
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    \11\ See Cboe EDGX Options Fee Schedule.
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    If the option component of a QCC with Stock Order satisfies the 
conditions of proposed Rule 21.20(b)(6) [sic] upon entry, the System 
executes the order in accordance with Rule 21.8 (which describes how 
simple option orders execute). However, the Exchange does not 
immediately send the User a trade execution report for this option 
execution.\12\ Because the User submitted a QCC with Stock Order to 
execute as a package, the Exchange waits to send a trade execution 
report to the User until after it has determined whether all components 
of the QCC with Stock Order have executed, as described below. After 
the QCC order is executed, the Exchange will then automatically 
communicate the stock component to the designated broker-dealer for 
execution.
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    \12\ Even though the Exchange does not send the User an 
execution report immediately following execution of the option 
component, the Exchange disseminates the trade at that time pursuant 
to the OPRA Plan and creates a record to be sent to the Clearing 
Corporation.
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    Although the option component (which is a QCC order) of a QCC with 
Stock Order is eligible for automatic execution, it is possible that 
the option component order may not be executable based on market prices 
at the time the order is entered (e.g. the order would execute at the 
same price as a customer). If the QCC order cannot execute after one 
attempt, the System cancels the QCC with Stock Order, including both 
the stock and options components. This prevents execution of the stock 
component of a QCT where the options component has not been 
successfully executed, consistent with the purpose of contingent trades 
and the QCT exemption.
    As noted above, if the option component executes, the System then 
automatically communicates the stock component to the designated 
broker-dealer for execution. If the System receives an execution report 
for the stock component of a QCC with Stock Order from the designated 
broker-dealer, the Exchange sends the User the trade execution report 
for the QCC with Stock Order, including execution information for both 
the stock and option components. However, if the System receives a 
report from the designated broker-dealer that the stock component of 
the QCC with Stock Order cannot execute,\13\ the Exchange nullifies the 
option component trade and notifies the User of the reason for the 
nullification.\14\ This proposed rule change prevents execution of the 
option component of a QCT where the stock component has not been 
successfully executed, just as the proposed rule change prevents 
execution of the stock component of a QCT where the option component 
has not been successfully executed by cancelling the stock component if 
the option component cannot execute.
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    \13\ For example, if the stock execution venue to which the 
designated broker-dealer routed the stock component is experiencing 
system issues, the stock component may not be able to execute. 
Additionally, the Exchange understands certain stock execution 
venues apply risk controls to the stock components of QCTs, which 
may prevent execution of the stock components at certain prices.
    \14\ The Exchange will nullify the option component trade in the 
same manner as it currently nullifies any other trades (when 
nullification is permitted under the Rules).
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    Currently, whenever a stock trading venue nullifies the stock leg 
of a stock-option order or whenever the stock leg cannot execute, the 
Exchange will nullify the option leg upon request of one of the parties 
to the transaction or on an Exchange Official's own motion in 
accordance with the Rules.\15\ As noted above, to qualify as a QCT, the 
execution of one component is contingent upon the execution of all 
other components at or near the same time.\16\ Given this requirement, 
if the

[[Page 7143]]

stock component does not execute at or near the same time as the option 
component, it is reasonable to expect a User that submitted a QCC with 
Stock Order to request such nullification.\17\ If the stock component 
does not execute, rather than require the User that submitted the QCC 
with Stock Order to contact the Exchange to request the nullification 
of the option component execution pursuant to proposed Rule 20.6, 
Interpretation and Policy .04 if the stock component cannot execute, 
the proposed rule change simply eliminates this requirement for the 
submitting User to make such a request. Instead, the proposed rule 
states the Exchange will automatically nullify the option transaction 
if the stock component does not execute. The Exchange believes such 
nullification without a request from the User is consistent with the 
definitions of QCC and QCT orders. The proposed rule change merely 
automates an otherwise manual process for Users.
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    \15\ See proposed Rule 20.6, Interpretation and Policy .04(c). 
As discussed below, proposed Rule 20.6, Interpretation and Policy 
.04(c) is virtually identical to rules of other options exchanges. 
Pursuant to Rule 20.6, other nullifications may generally occur only 
if both parties agree.
    \16\ See QCT Exemption Order, which requires the execution of 
one component of the QCT to be contingent upon the execution of all 
other components at or near the same time to qualify for the 
exemption. In the SIA Exemption Request, the SIA stated that for 
contingent trades, the execution of one order is contingent upon the 
execution of the other order. SIA further stated that, by breaking 
up one or more components of a contingent trade and requiring that 
such components be separately executed, one or more parties may 
trade ``out of hedge.'' See SIA Exemption Request at 3. In the words 
of Rob Base and DJ E-Z Rock, it takes two (executions) to make a 
thing (a QCT) go right.
    \17\ As set forth in Rule 21.1(d)(10), when submitting a QCC 
order, a User submits an order as well as a contra-side order or 
orders totaling an equal number of contracts, which execute against 
each other if they satisfy the conditions set forth in that Rule. As 
a result, if that User requests nullification of the QCC order 
execution (or as proposed, if the Exchange automatically nullifies 
the QCC order execution) if the stock component cannot execute, no 
other party is impacted by the nullification.
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    Additionally, the Exchange believes this automatic nullification 
will reduce any compliance risk for the User associated with execution 
of a QCC order and lack of execution of a stock order at or near the 
same time.\18\ The Exchange conducts surveillance to ensure a User 
executes the stock component of a QCT, which will also apply to QCC 
with Stock Orders, if the option component executed. As a result, if 
the stock component does not execute when initially submitted to a 
stock trading venue by the designated broker-dealer, a User may be 
subject to compliance risk if it does not execute the stock component 
within a reasonable time period of the execution of the option 
component. The proposed rule change reduces this compliance risk for 
Users.
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    \18\ In the SIA Exemption Request, the SIA stated that parties 
to a contingent trade will not execute one side of the trade without 
the other component or components being executed in full (or in 
ratio) and at the specified spread or ratio. See SIA Exemption 
Request at 2. While a broker-dealer could re-submit the stock 
component to a stock trading venue or execution after it initially 
fails to execute, there is a compliance risk that the time at which 
the stock component executes is not close enough to the time at 
which the option component executed.

    Example 1: 
    Stock NBBO: $100 x $101
    Option NBBO: $1 x $2

    A User submits a QCC with Stock Order buying 1,000 puts and 100,000 
shares of stock with a net price of $101.50. A QCC order is entered on 
the Exchange and executed at a price of $1.50. The Exchange reports 
this trade to OPRA. The Exchange routes the stock component to an 
Exchange-designed broker-dealer at a price of $100. The Exchange 
receives a trade execution report from the designated broker-dealer 
that the stock component executed at $100, and sends a trade execution 
report for both components of the QCC with Stock Order to the User.

    Example 2: 
    Stock NBBO: $100 x $101
    Option NBBO: $1 x $2

    A User submits a QCC with Stock Order buying 1,000 puts and 100,000 
shares of stock with a net price of $101.50. A QCC order is entered on 
the Exchange and executed at a price of $1.50. The Exchange reports 
this trade to OPRA. The Exchange routes the stock component to an 
Exchange-designed broker-dealer at a price of $100. The Exchange 
receives a report from the designated broker-dealer that the stock 
component did not execute. The Exchange nullifies the option component 
trade, and sends a report to the User of the reason for the 
nullification.

    Example 3: 
    Stock NBBO: $100 x $101
    ABBO: $1.00 x $1.05
    Exchange BBO: $1.00 (Priority Customer) x 1.01 (Priority 
Customer)

    A User submits a QCC with Stock Order buying 1,000 puts and 100,000 
shares of stock with a net price of 101.01. A QCC order is entered on 
the Exchange at a price of $1.01. Because the QCC order is at the same 
price as a priority customer order resting on the Exchange, the 
Exchange cancels the QCC with Stock Order.
Obvious Error
    The proposed rule change applies much of current Rule 20.6 to 
stock-option orders.\19\ The proposed rule change deviates from the 
current rule only to account for the unique qualities of stock-option 
orders. The proposed rule reflects the fact that stock-option orders 
contain a stock component that is executed on a stock trading venue, 
and the Exchange may not be able to ensure that the stock trading venue 
will adjust or nullify the stock execution in the event of an obvious 
or catastrophic error.
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    \19\ In order for a stock-option order to qualify as an obvious 
or catastrophic error, at least one of the legs must itself qualify 
as an obvious or catastrophic error under current Rule 21.20. See 
Rule 20.6, Interpretation and Policy .04. A QCC with Stock Order is 
a type of stock-option order.
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    Proposed Interpretation and Policy .04(c) governs stock-option 
orders. It provides that if the option leg of a stock-option order 
qualifies as an Obvious Error under subparagraph (c)(1) or a 
Catastrophic Error under subparagraph (d)(1), then the option leg that 
is an Obvious or Catastrophic Error will be adjusted in accordance with 
subparagraph (c)(4)(A) or (d)(3), respectively, regardless of whether 
one of the parties is a Customer. However, the option leg of any 
Customer order subject to proposed Interpretation and Policy .04(c) 
will be nullified if the adjustment would result in an execution price 
higher (for buy transactions) or lower (for sell transactions) than the 
Customer's limit price on the stock-option order, and the Exchange will 
attempt to nullify the stock leg. Whenever a stock trading venue 
nullifies the stock leg of a stock-option order or whenever the stock 
leg cannot be executed, the Exchange will nullify the option leg upon 
request of one of the parties to the transaction or in accordance with 
subparagraph (c)(3).
    Similar to Interpretation and Policy .04(a), an options leg (or 
legs) of a stock-option order must qualify as an obvious or 
catastrophic error under the Current Rule in order for the stock-option 
order to qualify as an obvious or catastrophic error. Also similar to 
Interpretation and Policy .04(a), if an options leg (or legs) does 
qualify as an obvious or catastrophic error, the option leg (or legs) 
will be adjusted in accordance with subparagraph (c)(4)(A) or (d)(3), 
respectively, regardless of whether one of the parties is a Customer. 
Again, as with Interpretation and Policy .04(a), where at least one 
party to a complex order transaction is a Customer, the Exchange will 
nullify the option leg and attempt to nullify the stock leg if 
adjustment would result in an execution price higher (for buy 
transactions) or lower (for sell transactions) than the Customer's 
limit price on the complex order or individual leg(s).
    The stock leg of a stock-option order is not executed on the 
Exchange; rather, the stock leg is sent to a stock trading venue for 
execution. The Exchange is unaware of a mechanism by which the Exchange 
can guarantee that the stock leg will be nullified by the stock trading 
venue in the event of an obvious or

[[Page 7144]]

catastrophic error on the Exchange. Thus, in the event of the 
nullification of the option leg pursuant to proposed Interpretation and 
Policy .04(c), the Exchange will attempt to have the stock leg 
nullified by the stock trading venue by either contacting the stock 
trading venue or notifying the parties to the transaction that the 
option leg is being nullified. The party or parties to the transaction 
may ultimately need to contact the stock trading venue to have the 
stock portion nullified.
    Finally, the Exchange proposes to provide guidance that whenever 
the stock trading venue nullifies the stock leg of a stock-option 
order, the option will be nullified upon request of one of the parties 
to the transaction or by an Official acting on their own motion in 
accordance with subparagraph (c)(3). There are situations in which 
buyer and seller agree to trade a stock-option order, but the stock leg 
cannot be executed. The Exchange proposes to provide guidance that 
whenever the stock portion of a stock-option order cannot be executed, 
the Exchange will nullify the option leg upon request of one of the 
parties to the transaction or on an Official's own motion.
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.\20\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \21\ 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) \22\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ Id.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change is designed to 
promote just and equitable principles of trade because it will provide 
Users with optional functionality to facilitate the stock component of 
a QCT. The QCC with Stock Order is an optional piece of functionality 
offered to Users to communicate the stock component of a QCT to a 
designated broker-dealer for execution. A User that does not wish to 
use QCC with Stock Order functionality can continue to execute a QCT by 
entering a QCC order on the Exchange and separately executing the stock 
component of the QCT [sic] another venue, as it may do today. A User 
can also build its own technology to electronically communicate the 
stock component of any QCT to a broker-dealer for execution.
    QCC with Stock Orders reduce Users' compliance burden because it 
allows for the automatic submission of the stock component of a QCT in 
connection with the execution of the options component(s) as a QCC 
order on the Exchange. QCC with Stock Order functionality also provides 
benefits to the Exchange by establishing an audit trail for the 
execution of the stock component of a QCT within a reasonable period of 
time after the execution of the QCC order. The proposed rule change 
further reduces Users' compliance risk by providing that the Exchange 
will, in addition to cancelling the stock component if the option 
component cannot execute, nullify any option component execution when 
the stock component does not execute without a request from the User. 
Nullification of the option trade is consistent with the requirement 
that a User must execute the stock component of a QCT within a 
reasonable period of time after executing the option component on the 
Exchange as a QCC order. The proposed rule change simply eliminates the 
requirement that one party to the transaction request nullification of 
the option component trade before the Exchange nullifies the option 
trade (as proposed), because such nullification is consistent with the 
definitions of QCC orders and QCT. The proposed rule change merely 
automates an otherwise manual process for Users. As noted above, to 
qualify as a QCT, the execution of one component is contingent upon the 
execution of all other components at or near the same time.\23\ Since 
the purpose of a QCC with Stock Order is for all components to trade at 
or near the same time, if the stock component does not execute at or 
near the same time as the option component, it is reasonable to expect 
a User that submitted a QCC with Stock Order to request such 
nullification to avoid any compliance risk associated with execution of 
a QCC order and lack of execution of a stock order at or near the same 
time.\24\
---------------------------------------------------------------------------

    \23\ See supra notes 5 and 16.
    \24\ See supra note 18.
---------------------------------------------------------------------------

    The Exchange conducts surveillance to ensure a User executes the 
stock component of a QCT, which will also apply to QCC with Stock 
Orders, if the option component executed. As a result, if the stock 
component does not execute when initially submitted to a stock trading 
venue by the designated broker-dealer, a User may be subject to 
compliance risk if it does not execute the stock component within a 
reasonable time period of the execution of the option component. The 
proposed rule change reduces this compliance risk for Users. The 
Exchange therefore believes the proposed rule change removes 
impediments to and perfects the mechanisms of a free and open market 
and a national market system, and in general, protects investors and 
the public interest.
    The Exchange believes the proposed rule change to require a User to 
submit a QCC with Stock Order with a net price will also perfect the 
mechanism of a free and open market and a national market system and 
protect investors, because a net price will reduce the chance that 
Users will miss the market since the Exchange will calculate a price 
for the stock and options components that honors the net price of the 
package and current market prices, if possible. As noted above, a User 
that wants to enter a net price for the stock and option components can 
execute a QCT by entering a QCC order on the Exchange and separately 
executing the stock component of the QCT [sic] another venue, as it may 
do today. As noted above, submission of a QCC with Stock Order is 
consistent with the use of QCTs.\25\
---------------------------------------------------------------------------

    \25\ See supra notes 5, 16, and 18.
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    Additionally, the proposed functionality is similar to 
functionality offered by another options exchange \26\ and consistent 
with the QCT exemption previously approved by the Commission.\27\
---------------------------------------------------------------------------

    \26\ See Cboe Options Rules 6.53(u) and 6.53C, Interpretation 
and Policy .06(g); see also Nasdaq ISE, LLC (``ISE'') Rules 715(t) 
and 721(c) and Supplementary Material.
    \27\ See QCT Exemption Order.
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    The proposed rule change to adopt obvious error provisions stock-
option orders is consistent with efforts among options exchanges to 
seek harmonized rules related to the adjustment and nullification of 
erroneous options transactions. The Exchange believes that the proposed 
rule change will provide greater transparency and clarity with

[[Page 7145]]

respect to the adjustment and nullification of erroneous options 
transactions. The proposed rule change is virtually identical to the 
rules of other options exchanges.\28\ Particularly, the proposed 
changes seek to achieve consistent results for participants across U.S. 
options exchanges while maintaining a fair and orderly market, 
protecting investors and protecting the public interest. Based on the 
foregoing, the Exchange believes that the proposal is consistent with 
Section 6(b)(5) of the Act \29\ in that the proposed rule change will 
foster cooperation and coordination with persons engaged in regulating 
and facilitating transactions [sic].
---------------------------------------------------------------------------

    \28\ See, e.g., Cboe Options Rule 6.25, Interpretation and 
Policy .07; ISE Rule 720, Supplementary Material .05; and MIAX Rule 
521, Interpretation and Policy .03.
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes the various provisions allowing or dictating 
adjustment rather than nullification of a trade are necessary given the 
benefits of adjusting a trade price rather than nullifying the trade 
completely. Because options trades are used to hedge, or are hedged by, 
transactions in other markets, including securities and futures, many 
Options Members, and their customers, would rather adjust prices of 
executions rather than nullify the transactions and, thus, lose a hedge 
altogether. As such, the Exchange believes it is in the best interest 
of investors to allow for price adjustments as well as nullifications.
    The Exchange does not believe that the proposal is unfairly 
discriminatory, even though it differentiates in certain places between 
Customers and non-Customers. As with the Current Rule, Customers are 
treated differently, often affording them preferential treatment. This 
treatment is appropriate in light of the fact that Customers are not 
necessarily immersed in the day-to-day trading of the markets, are less 
likely to be watching trading activity in a particular option 
throughout the day, and may have limited funds in their trading 
accounts. At the same time, the Exchange reiterates that in the U.S. 
options markets generally there is significant retail customer 
participation that occurs directly on (and only on) options exchanges 
such as the Exchange. Accordingly, differentiating among market 
participants with respect to the adjustment and nullification of 
erroneous options transactions is not unfairly discriminatory because 
it is reasonable and fair to provide Customers with additional 
protections as compared to non-Customers.
    The Exchange believes its proposal related to stock-option orders 
is consistent with the Act. Stock-option orders consist of an option 
component and a stock component. Due to the fact that the Exchange has 
no control over the venues on which the stock is executed the proposal 
focuses on the option component of the stock-option order by adjusting 
or nullifying the option in accordance with subparagraph (c)(4)(A) or 
(d)(3). Also, nullifying the option component if the stock component 
cannot be executed ensures that market participants receive the 
execution for which they bargained. Stock-option orders are negotiated 
and agreed to as a package; thus, if for any reason the stock portion 
of a stock-option order cannot ultimately be executed, the parties 
should not be saddled with an options position sans stock.
    The proposed rule change is generally intended to align system 
functionality currently offered by the Exchange with Cboe Options 
functionality in order to provide a consistent technology offering for 
the Cboe Affiliated Exchanges. A consistent technology offering, in 
turn, will simplify the technology implementation, changes, and 
maintenance by Users of the Exchange that are also participants on Cboe 
Affiliated Exchanges. The proposed rule change would also provide Users 
with access to functionality that is generally available on options 
exchanges other than the Cboe Affiliated Exchanges,\30\ which may 
result in the more efficient execution of QCTs and provide Users with 
additional flexibility and increased functionality on the Exchange's 
System. Additionally, the proposed functionality is consistent with the 
QCT exemption previously approved by the Commission.\31\ The Exchange 
believes this consistency will promote a fair and orderly national 
options market system.
---------------------------------------------------------------------------

    \30\ See Cboe Options Rules 6.53(u) and 6.53C, Interpretation 
and Policy .06 (which permits QCC orders with one or more option 
components and QCC with Stock Orders, and stock-option orders with 
one or more option legs, respectively); ISE Rules 715(t) and 721(c) 
and Supplementary Material .01 through .03 (which permits QCC orders 
and QCC with stock orders); and MIAX Rule 518 (which permits stock-
option orders with one or more option legs and QCC orders with one 
or more option components).
    \31\ See QCT Exemption Order.
---------------------------------------------------------------------------

    When Cboe Options migrates to the same technology as that of the 
Exchange and other Cboe Affiliated Exchanges, Users of the Exchange and 
other Cboe Affiliated Exchanges will have access to similar 
functionality on all Cboe Affiliated Exchanges. As such, the proposed 
rule change would foster cooperation and coordination with persons 
engaged in facilitating transactions in securities and would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system.

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. QCC with Stock Orders 
facilitate Users [sic] compliance with the requirements associated with 
executing QCC orders on the Exchange, and are not designed to impose 
any unnecessary burden on competition. QCC with Stock Order 
functionality is available to Users on a voluntary basis, and Users are 
not required to use QCC with Stock Orders when executing QCTs. The 
proposed rule change has no impact on Users that elect to execute QCTs 
without using QCC with Stock Order functionality. Those Users may 
continue to execute QCTS [sic] in the same manner as they do today by 
entering a QCC order on the Exchange and separately executing the stock 
component of the QCT another venue. A User can also build its own 
technology to electronically communicate the stock component of any QCT 
to a broker-dealer for execution. For Users that elect to use QCC with 
Stock Order functionality to execute QCTs, the proposed rule change 
reduces those Users' compliance burdens to satisfy their obligation to 
execute the related stock component of the QCT within a reasonable 
period of time after the QCC order is executed on the Exchange, as this 
functionality provides an automated means for satisfying this 
obligation.
    QCC with Stock Orders are available to all Users either through a 
front-end order and execution management system or through a User's own 
electronic connection to the Exchange. Additionally, the proposed 
functionality is similar to functionality offered by another options 
exchange \32\ and consistent with the QCT exemption previously approved 
by the Commission.\33\
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    \32\ See Cboe Options Rules 6.53(u) and 6.53C, Interpretation 
and Policy .06(g); see also ISE Rules 715(t) and 721(c) and 
Supplementary Material.
    \33\ See QCT Exemption Order.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change to adopt obvious 
error rules related to stock-option orders will not impose a burden on 
intermarket competition but will rather alleviate any burden on 
competition because it is the result of a collaborative effort by all

[[Page 7146]]

options exchanges to harmonize and improve the process related to the 
adjustment and nullification of erroneous options transactions. The 
Exchange does not believe that the rules applicable to such process is 
an area where options exchanges should compete, but rather, that all 
options exchanges should have consistent rules to the extent possible. 
Particularly where a market participant trades on several different 
exchanges and an erroneous trade may occur on multiple markets nearly 
simultaneously, the Exchange believes that a participant should have a 
consistent experience with respect to the nullification or adjustment 
of transactions. Several other options exchanges have virtually 
identical rules.\34\
---------------------------------------------------------------------------

    \34\ See Cboe Options Rule 6.25, Interpretation and Policy .07, 
ISE Rule 720, Supplementary Material .05, and MIAX Rule 521, 
Interpretation and Policy .03.
---------------------------------------------------------------------------

    The Exchange does not believe that the proposed rule change imposes 
a burden on intramarket competition because the obvious error 
provisions apply to all market participants equally within each 
participant category (i.e., Customers and non-Customers). With respect 
to competition between Customer and non-Customer market participants, 
the Exchange believes that the proposed rule change acknowledges 
competing concerns and tries to strike the appropriate balance between 
such concerns. For instance, the Exchange believes that protection of 
Customers is important due to their direct participation in the options 
markets as well as the fact that they are not, by definition, market 
professionals. At the same time, the Exchange believes due to the 
quote-driven nature of the options markets, the importance of liquidity 
provision in such markets and the risk that liquidity providers bear 
when quoting a large breadth of products that are derivative of 
underlying securities, that the protection of liquidity providers and 
the practice of adjusting transactions rather than nullifying them is 
of critical importance. As described above, the Exchange will apply 
specific and objective criteria to determine whether an erroneous 
transaction has occurred and, if so, how to adjust or nullify a 
transaction.

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 \35\ and 
Rule 19b-4(f)(6) \36\ 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.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78s(b)(3)(A).
    \36\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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-CboeEDGX-2019-005 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-CboeEDGX-2019-005. 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-CboeEDGX-2019-005 and should be 
submitted on or before March 22, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-03705 Filed 2-28-19; 8:45 am]
 BILLING CODE 8011-01-P