Document ID: SEC-2019-1305-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2019-09-11T04:00Z

[Federal Register Volume 84, Number 176 (Wednesday, September 11, 2019)]
[Notices]
[Pages 47977-47984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19610]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86878; File No. SR-CBOE-2019-050]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Exchange Rules Regarding Routing Services, Including the Hybrid Agency 
Liaison System, and Move Those Rules From the Currently Effective 
Rulebook to the Shell Rulebook To Be Effective Upon Migration

September 5, 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 August 23, 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, 
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

    The Exchange proposes to amend the Exchange's Rules regarding 
routing services, including the Hybrid Agency Liaison (``HAL'') system, 
and move those Rules from the currently effective Rulebook (``current 
Rulebook'') to the

[[Page 47978]]

shell structure for the Exchange's Rulebook that will become effective 
upon the migration of the Exchange's trading platform to the same 
system used by the Cboe Affiliated Exchanges (as defined below) 
(``shell Rulebook''). The text of the proposed rule change is provided 
in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc. 
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also 
the parent company of Cboe C2 Exchange, Inc. (``C2''), acquired Cboe 
EDGA Exchange, Inc. (``EDGA''), Cboe EDGX Exchange, Inc. (``EDGX'' or 
``EDGX Options''), Cboe BZX Exchange, Inc. (``BZX'' or ``BZX 
Options''), and Cboe BYX Exchange, Inc. (``BYX'' and, together with 
Cboe Options, C2, EDGX, 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 trading platform to the 
same system used by the Cboe Affiliated Exchanges, which the Exchange 
expects to complete on October 7, 2019. In connection with this 
technology migration, the Exchange has a shell Rulebook that resides 
alongside its current Rulebook, which shell Rulebook will contain the 
Rules that will be in place upon completion of the Cboe Options 
technology migration.
    The Exchange proposes to harmonize its rules in connection with 
routing functions on the Exchange to that of the Cboe Affiliated 
Exchanges. Specifically, the Exchange proposes to update and amend 
current Rule 6.14A, which governs the operation of the HAL system to be 
consistent with of the corresponding rule of EDGX Options, Rule 21.18, 
which governs the operation of the Step Up Mechanism (``SUM''). The 
Exchange also proposes to harmonize Rule 6.6A, Rule 6.14B, and Rule 
6.14C with that of its affiliate option exchange, C2, Rule 6.15, as 
well as EDGX and BZX Rule(s) 21.9, which provide for order routing 
rules of the exchange. The Exchange proposes these amendments to 
reflect the routing functions rule language of the Cboe Affiliated 
Exchange rules, retaining only slight differences regarding Exchange-
specific language/definitions. In conforming its routing rules to that 
of the Cboe Affiliated Exchanges' rules, the Exchange proposes few 
substantive changes, namely amending the rules to allow for all Users 
\5\ to respond to a SUM (the Exchange proposes to rename HAL as SUM, 
and refers to SUM herein) exposure message, to allow a User to opt out 
of having its exposed order routed to other exchanges at the conclusion 
of a SUM exposure period, to update the scenarios in which a SUM 
auction will terminate early (which includes incorporating provisions 
that account for All-or-None orders), and, finally, to adopt the order 
routing functionality currently in place on the Cboe Affiliated 
Exchanges.
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    \5\ The term ``User'' means any TPH or Sponsored User who is 
authorized to obtain access to the System. See Rule 1.1 in the shell 
Rulebook.
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    The Exchange also proposes to make non-substantive changes to 
simplify, clarify, and generally update its routing rules by 
consolidating its routing provisions into a single rule, simplify rule 
language, update the rule text to read in plain English, reformat the 
paragraph lettering and/or numbering, and update cross-references to 
rules not yet in the shell Rulebook but that will be in the shell 
Rulebook and implemented upon migration.
Proposed Rule 5.35
    Current Rule 6.14A governs the operation of HAL. SUM is the EDGX 
Options equivalent of the Exchange's HAL. Both systems allow for orders 
not automatically executed by the respective exchange to ``step up'' to 
meet the NBBO in order to interact with orders sent to the Exchange. 
Both rules govern the current handling of orders eligible for such 
automatic handling, which include (i) an order that is marketable 
against the Exchange's disseminated quotation (the ``BBO'', as 
specifically defined in the Exchange's Rules) while not the NBBO and 
(ii) an order that would improve the BBO and that is marketable against 
quotations disseminated by other exchanges (the ``ABBO'') that are 
participants in the Options Order Protection and Locked/Crossed Plan 
(the ``Linkage Plan'').\6\ In anticipation of migration, the Exchange 
proposes to move Rule 6.14A to proposed Rule 5.35 (and subsequently 
delete Rule 6.14A upon migration) and amend the current provisions 
under Rule 6.14A to be consistent with EDGX Option's corresponding Rule 
21.18. This includes renaming ``HAL'' to be called ``SUM'', which, as 
stated, is a substantially similar system for processing orders not 
automatically executed by the respective exchanges. The automatic 
handling systems across the affiliated exchanges will function in a 
substantively identical manner upon migration, therefore updating HAL 
to be called SUM will mitigate any potential investor confusion and 
provide for uniform rules regarding the same functionality.
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    \6\ The proposed rule deletes an additional eligible order 
provision that will no longer apply the rules and functionality on 
Cboe Options upon migration because the drill through provision 
referenced will mirror that of EDGX Options, which is not SUM 
specific.
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    Currently on HAL, pursuant to Rule 6.14A(b), only Market-Makers 
with an appointment in the relevant option class and Trading Permit 
Holders (``TPHs'') acting as agent for orders resting at the top of the 
Book in the relevant option series opposite the order submitted to HAL 
may submit responses to the exposure message during the exposure period 
(unless the Exchange determines, on a class-by-class basis, to allow 
all TPHs to submit responses to the exposure message). The proposed 
rule change updates this provision to align with the manner in which 
SUM responses function on EDGX Options; all Users may submit responses 
to the exposure message during the exposure period.\7\ The Exchange 
currently allows all TPHs to respond to all classes during the exposure 
period, therefore this change does not change or impact the manner in 
which the SUM process currently functions, but instead merely removes 
the flexibility for the Exchange to allow all TPHs to respond on a 
class-by-class basis, as this is the manner in which the Exchange 
intends for the

[[Page 47979]]

SUM process to continue to function upon migration.
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    \7\ See proposed 5.35(b)(2).
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    The Exchange notes that as a result of this proposed change, the 
proposed rule also removes: (i) The current rule text which provides 
that an order will not be exposed if the Exchange quotation contains 
resting orders and does not contain sufficient Market Maker quotation 
interest to satisfy the entire order; (ii) the early termination 
provision that terminate an exposure period if Market Maker interest 
decrements to an amount equal to the size of the exposed order; and 
(iii) the current Interpretation and Policy .01 which prohibits the 
redistribution of exposure messages to market participants not eligible 
to respond to such messages. The proposed rule change removes these 
provisions because the Exchange proposes for SUM to not be dependent 
only on Market-Maker interest in any way and all Users will be 
permitted to respond to all exposure messages.
    The proposed rule change also amends the current provision 
regarding allocation of exposed orders to allow for a User to opt out 
of having the remaining portion of its exposed order routed to other 
exchanges following the exposure period.\8\ This is consistent with the 
EDGX Options SUM rule and the manner in which Users on EDGX Options may 
currently opt out of having their remaining portion of SUM exposed 
orders routed away.
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    \8\ See proposed Rule 5.35(c)(4).
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    The proposed rule change also updates the rule to be consistent 
with how EDGX Options SUM process handles an All or None (``AON'') 
order,\9\ which is currently an order type available on the Exchange. 
Currently (and as proposed), any responses priced at the prevailing 
NBBO or better, and any unrelated order or quote on the opposite side 
of the market from the exposed order that could trade against the 
exposed order at the prevailing NBBO or better, will immediately trade 
against the exposed order, and the exposure period will continue. A SUM 
(current HAL) exposure period will currently terminate upon the receipt 
of a response (or unrelated order or quote) to trade the entire exposed 
order at the NBBO or better. Because an AON order cannot partially 
execute pursuant to its terms, the proposed rule change makes it 
explicit that during the exposure of an AON order, the System will hold 
responses priced at or better than the prevailing NBBO (rather than 
trade against the exposed AON immediately) until there is sufficient 
aggregate size to satisfy the AON order,\10\ and that a SUM exposure 
period will terminate upon the receipt of multiple responses with 
sufficient aggregate size to satisfy the AON order.\11\ This is the 
manner in which the HAL system currently functions, and the proposed 
change merely codifies this in the proposed rule. In addition to this, 
the proposed rule change provides that if an AON order is exposed and 
the Exchange receives an unrelated order or quote that would be 
displayed at a price at or better than the NBBO with insufficient size 
to satisfy the exposed order, the SUM exposure period terminates and 
the exposed order is processed pursuant to the allocation of exposed 
orders provision \12\ under the SUM process.\13\ This is consistent 
with current HAL functionality, to which an order is eligible for the 
process if its price is marketable against the Exchange's disseminated 
quotation that is not at the NBBO. Because a SUM auction would not have 
begun if the Exchange displayed a contra-side order at the NBBO, the 
Exchange believes it is appropriate to terminate the exposure period if 
that situation arises in connection with exposed AON orders during the 
exposure period.\14\ As stated, this is consistent with the way in 
which the current HAL system and SUM on EDGX Options function.
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    \9\ Pursuant to Rule 1.1 in shell Rulebook an ``All-or-None'' or 
``AON'' order is an order to be executed in its entirety or not at 
all. An AON order may be a market or limit order.
    \10\ See proposed Rule 5.35(c)(1).
    \11\ See proposed Rule 5.35(d).
    \12\ See proposed Rule 5.35(c).
    \13\ If an AON order is exposed and the Exchange receives an 
unrelated AON order with a price at or better than the NBBO with 
insufficient size to satisfy the exposed order the exposure period 
will continue because the incoming AON order would not be displayed 
at a price at or better than the NBBO.
    \14\ For example, suppose the NBBO is 1.00 x 1.20 and the Cboe 
Options BBO is 1.00 x 1.25, and an AON order to buy 10 at 1.20 is 
exposed at 1.20 pursuant to SUM. During the exposure period, the 
Exchange receives an order to sell 5 at 1.20. The incoming order 
cannot satisfy the size of the exposed AON order, so it would enter 
the Cboe Options Book and would cause the Cboe Options BBO to become 
1.00 x 1.20. Therefore, upon receipt of that order, the exposure 
period terminates and the exposed AON order will be process pursuant 
to proposed Rule 5.35(c).
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    The Exchange amends the other provisions in connection with early 
termination of exposure period to be consistent with the EDGX Option's 
SUM rule. The proposed rule change amends these provisions to include 
early termination when the exposed order is no longer marketable 
against the NBBO or if a resting order on the Exchange is locked or 
crossed by another options exchange.\15\ In addition to aligning with 
the reasons a SUM auction may currently terminate on EDGX Options, the 
Exchange believes that these scenarios are reasonable to terminate the 
SUM process because if an order is no longer marketable, then it cannot 
be executed through the SUM process and no longer benefit from 
exposure, and continuing to expose a resting order resting in a locked 
or crossed market may likely presents difficulties with respect to the 
handling of the resting order, particularly if an exposed, routable 
order should be routed for potential price improvement to another 
options exchange that has published a crossing quotation. The proposed 
rule change also removes current early termination provisions which 
would terminate an exposure period when a same-side order is received 
by the Exchange and if the underlying security enters a limit up limit 
down state. The Exchange believes because a User will have the ability 
to cancel its order after the SUM process is initiated coupled with the 
fact that the Exchange will only execute an order that has been exposed 
via the SUM process to the extent the order is marketable against the 
NBBO (as proposed below) will mitigate any potential concern in 
removing these early termination provisions. As stated, this is 
consistent with the scenarios for early termination currently on EDGX 
Options and the Exchange does not believe that the proposed updates 
present any new or novel changes or significantly impact functionality 
of the step up process as it will operate in substantially the same 
manner as it currently does.
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    \15\ See proposed Rule 5.35(d)(1)-(2).
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    The Exchange notes other proposed changes such as making explicit 
that bulk messages will not be eligible for SUM. Cboe Options intends 
to implement bulk message functionality upon migration, therefore now 
proposes to reflect this functionality in its proposed SUM rule (as 
well as in proposed Rule 5.36 for order routing, described in detail 
below).\16\ Bulk messages are the equivalent of the Exchange's current 
quoting functionality. Currently, quotes do not route to other 
exchanges, and thus are not eligible for HAL. Therefore, the proposed 
rule change is consistent with current functionality. EDGX Options Rule 
21.18 also states that bulk messages are not eligible for SUM. The 
proposed change also includes a few additional details that are 
consistent with EDGX Options SUM rule and the manner in which the HAL 
process currently functions but are not made explicit in the current 
HAL rule. This

[[Page 47980]]

includes making clear that responses are ``cancelled back'' at the end 
of the exposure period if unexecuted,\17\ that responses may become 
executable based on changes to the prevailing NBBO,\18\ and that the 
Exchange will not initiate the SUM process if the NBBO is crossed.\19\ 
These updates do not alter the manner in which HAL currently functions 
but merely make explicit in the rules the operation of the proposed SUM 
process.\20\
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    \16\ See Rule 5.5(c).
    \17\ See proposed Rule 5.35(b)(3).
    \18\ See proposed Rule 5.35(c)(3).
    \19\ See proposed Rule 5.35(a). The Exchange notes that this is 
current EDGX Rule 21.18.02.
    \20\ The Exchange also removes Interpretation and Policy .01 
which provides that all pronouncements regarding determinations by 
the Exchange pursuant to Rule 6.14A and the Interpretations and 
Policies thereunder will be announced to Trading Permit Holders via 
Regulatory Circular as upon migration all Exchange determinations 
under the Rules will automatically be made pursuant to 
specifications, Notices, or Regulatory Circulars with appropriate 
advanced notice, which are posted on the Exchange's website, or 
electronic message. See Rule 1.5 in the shell Rulebook.
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Proposed Rule 5.36
    The Exchange proposes to adopt the order routing rule of its 
affiliated options exchange, C2 Rule 6.15, under proposed Rule 5.36 in 
the shell Rulebook. The Exchange will continue to support orders that 
are designated to be routed to the NBBO as well as orders that will 
execute only within Cboe Options.
    Proposed Rule 5.36(a) states for System securities, the order 
routing process is available to Users from 9:30 a.m. until market 
close. Users can designate an order as either available or not 
available for routing. Orders designated as not available for routing 
and bulk messages, which will not be for routing, are processed 
pursuant to Rule 5.32 \21\ (which will be the rule governing order and 
quote Book processing, display, priority, and execution upon 
migration). For an order designated as available for routing, the 
System first checks for the Book for available contracts for execution 
against the order pursuant to Rule 5.32. Unless otherwise instructed by 
the User, the System then designates the order (or unexecuted portion) 
as Immediate-or-Cancel (``IOC'') \22\ and routes it to one or more 
options exchanges for potential execution, per the User's instructions. 
After the System receives responses to the order, to the extent it was 
not executed in full through the routing process, the System processes 
the order (or unexecuted portion) as follows, depending on parameters 
set by the User when the incoming order was originally entered:
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    \21\ See Rule 5.32 in the shell Rulebook.
    \22\ Pursuant to Rule 1.1 in the shell Rulebook, the terms 
``Immediate-or-Cancel'' and ``IOC'' mean, for an order so 
designated, a limit order that must execute in whole or in part as 
soon as the System receives it; the System cancels and does not post 
to the Book an IOC order (or unexecuted portion) not executed 
immediately on the Exchange or another options exchange.
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    (i) Cancels the order (or unexecuted portion) back to the User; 
posts the unfilled balance of the order to the Book, subject to the 
Price Adjust process described in proposed Rule 5.32(b), if applicable;
    (ii) repeats the process described above by executing against the 
Book and/or routing to the other options exchanges until the original, 
incoming order is executed in its entirety;
    (iii) repeats the process described above by executing against the 
Book and/or routing to the other options exchanges until the original, 
incoming order is executed in its entirety, or, if not executed in its 
entirety and a limit order, posts the unfilled balance of the order on 
the Book if the order's limit price is reached; or
    (iv) to the extent the System is unable to access a Protected 
Quotation and there are no other accessible Protected Quotations at the 
NBBO, cancels or rejects the order back to the User, provided, however, 
that this provision does not apply to Protected Quotations published by 
an options exchange against which the Exchange has declared self-help.
    Currently, the Exchange automatically routes intermarket sweep 
orders, consistent with the definition in current Rule 6.80(8).\23\ 
This routing process is functionally equivalent to the current Exchange 
routing process, and, as proposed, referred to as SWPA and is 
specifically described in proposed Rule 5.36(a)(2)(B), which is a 
routing option (and will be the default routing option following 
migration, and thus, if no other routing option is specified by a User, 
a User's order subject to routing will be handled in the same way it is 
today). Following the migration, the Exchange will offer additional 
routing options identical to the routing options offered by C2 Rule 
6.15, as well as by EDGX Options and BZX Options Rule(s) 21.9. Under 
proposed Rule 5.36(a)(2), routing options may be combined with all 
available Order Instructions \24\ and Times-in-Force, with the 
exception of those whose terms are inconsistent with the terms of a 
particular routing option. The System considers the quotations only of 
accessible markets. The term ``System routing table'' refers to the 
proprietary process for determining the specific options exchanges to 
which the System routes orders and the order in which it routes them. 
The Exchanges reserves the right to maintain a different System routing 
table for different routing options and to modify the System routing 
table at any time without notice. These additional routing options are 
ROUT, destination specific, and directed ISO:
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    \23\ Pursuant to Rule 6.80(8), an ``Intermarket Sweep Order 
(``ISO'')'' means a Limit Order for an options series that, 
simultaneously with the routing of the ISO, one or more additional 
ISOs, as necessary, are routed to execute against the full displayed 
size of any Protected Bid, in the case of a limit order to sell, or 
any Protected Offer, in the case of a limit order to buy, for the 
options series with a price that is 290 superior to the limit price 
of the ISO. See also Rule 1.1 in the shell Rulebook. The Exchange 
relies on the marking of an order by a User as an ISO order when 
handling such order, and thus, it is the entering User's 
responsibility, not the Exchange's responsibility, to comply with 
the requirements relating to ISOs.
    \24\ See Rule 5.6 in shell Rulebook.
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    (i) ROUT is a routing option under which the System checks the Book 
for available contracts to execute against an order and then sends it 
to destinations on the System routing table. A User may select either 
Route To Improve (``RTI'') or Route To Fill (``RTF'') for the ROUT 
routing option. RTI may route to multiple destinations at a single 
price level simultaneously while RTF may route to multiple destinations 
and at multiple price levels simultaneously.
    (ii) Destination specific is a routing option under which the 
System checks the Book for available contracts to execute against an 
order and then sends it to a specific away options exchange.
    (iii) Directed ISO is a routing option under which the System does 
not check the Book for available contracts and sends the order to 
another options exchange specified by the User. It is the entering 
User's responsibility, not the Exchanges responsibility, to comply with 
the requirements relating to Intermarket Sweep Orders.
    Proposed Rule 5.36(a)(3) offers two options for Re-Route 
instructions, Aggressive Re-Route and Super Aggressive Re-Route, either 
of which can be assigned to routable orders:
    (i) Pursuant to the Aggressive Re-Route instruction, if the 
remaining portion of a routable order has been posted to the Book 
pursuant proposed subparagraph (a)(1) (i.e., routing away to options 
exchanges), if the order's price is subsequently crossed by the quote 
of another accessible options exchange, the System routes the order to 
the crossing options exchange if the User has selected the Aggressive 
Re-Route instruction.
    (ii) Pursuant to the Super Aggressive Re-Route instruction, to the 
extent the unfilled balance of a routable order has been posted to the 
Book pursuant to

[[Page 47981]]

subparagraph (a)(1), if the order's price is subsequently locked or 
crossed by the quote of another accessible options exchange, the System 
routes the order to the locking or crossing options exchange if the 
User has selected the Super Aggressive Re-Route instruction.
    Proposed Rule 5.36(b) states the System does not rank or maintain 
in the Book pursuant to Rule 5.32 orders it has routed to other options 
exchanges, and therefore those orders are not available to execute 
against incoming orders. Once routed by the System, an order becomes 
subject to the rules and procedures of the destination options exchange 
including, but not limited to, order cancellation. If a routed order 
(or unexecuted portion) is subsequently returned to the Exchange, the 
order (or unexecuted portion), the order receives a new time stamp 
reflected the time the System receives the returned order. Proposed 
Rule 5.36(c) states Users whose orders are routed to other options 
exchanges must honor trades of those orders executed on other options 
exchanges to the same extent they would be required to honor trades of 
those orders if they had executed on the Exchange. These provisions are 
consistent with the corresponding rules of its affiliated options 
exchanges, they are substantively identical to the current rule text 
and functionality of C2 Rule 6.15 and also substantively the same as 
EDGX Options and BZX Options Rule(s) 21.9.
    Proposed Rule 5.36(d) and (f) make explicit certain requirements in 
connection with Cboe Trading, which, pursuant to current Exchange 
rules,\25\ is an affiliate of the Exchange that provides inbound and 
outbound routing services, which currently apply to Cboe Trading today. 
Proposed Rule 5.36(d) states that the Exchange will route orders in 
options via Cboe Trading, which currently serves as the Outbound Router 
of the Exchange. The Outbound Router will route orders in options 
listed and open for trading on the Exchange to other options exchanges 
pursuant to Exchange Rules solely on behalf of the Exchange. The 
Outbound Router is subject to regulation as a facility of the Exchange, 
including the requirement to file proposed rule changes under Section 
19 of the Exchange Act. Use of Cboe Trading or Routing Services (under 
current Rule 6.14B and proposed Rule 5.36(e)) to route orders to other 
market centers is optional. Parties that do not desire to use Cboe 
Trading or other Routing Services provided by the Exchange must 
designate orders as not available for routing. Proposed Rule 5.35(f) 
states that in addition to the Rules regarding routing to away options 
exchanges, Cboe Trading has, pursuant to Rule 15c3-5 under the Exchange 
Act, implemented certain tests designed to mitigate the financial and 
regulatory risks associated with providing Trading Permit Holders with 
access to away options exchanges. Pursuant to the policies and 
procedures developed by Cboe Trading to comply with Rule 15c3-5, if an 
order or series of orders are deemed to be erroneous or duplicative, 
would cause the entering Trading Permit Holder's credit exposure to 
exceed a preset credit threshold, or are noncompliant with applicable 
pre-trade regulatory requirements, Cboe Trading will reject the orders 
prior to routing and/or seek to cancel any orders that have been 
routed. As stated, these provisions are the same as C2 Rule 6.15(d) and 
(f) and EDGX Options and BZX Options Rule(s) 21.9(f), and currently 
apply to Cboe Trading, therefore the proposed change just makes these 
provisions in connection with Cboe Trading explicit as well as 
harmonizes its order routing rules with that of its affiliated options 
exchanges' routing rules.
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    \25\ See Rule 3.11(c), Rule 3.12; and Rule 3.13.
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    The proposed rule change moves current Rule 6.14B which governs the 
routing services provided by non-affiliated routing brokers, to 
proposed Rule 5.36(e) which is consistent with the corresponding rules 
of the Exchanges' affiliated options exchanges, C2, EDGX Options, and 
BZX Options. The Exchange does not proposed any substantive changes to 
the rule. The Exchange deletes current Interpretation and Policy .01 
which states that a routing broker is not prohibited from designating a 
preferred market-maker at the other exchange to which the order is 
being routed, which is consistent with the agreements currently in 
place between the Exchange and its routing brokers, which do not allow 
for routing broker discretion in connection with order flow. The 
Exchange also notes that this proposed change is consistent with the 
corresponding order routing rules of the Exchange's affiliated options 
exchanges, C2, EDGX Options, and BZX Options.
    Finally, the Exchange deletes current Rule 6.6A and current Rule 
6.14C because they are duplicative of Exchange Rules and/or routing 
broker agreements already in place. Current Rule 6.6A provides for the 
Exchange to cancel or release orders as it deems necessary to maintain 
fair and orderly markets if a technical or systems issue occurs. These 
provisions are already covered under other Exchange Rules: Rule 6.6A(a) 
and (b) are already provided for under current Rule 3.12(a)(6) \26\ and 
current Rule 6.14B(f) (proposed Rule 5.36(e)(6)); and Rule 6.6A(c) is 
already provided for under current Rule 3.12(a)(7)(C). Current Rule 
6.14C provides for rules in connection with Routing Service Error 
Accounts. The provisions in connection with the Exchange's Error 
Account are currently provided for under Rule 3.12(7), which already 
requires Cboe Trading, as the Exchange's affiliated outbound router, to 
maintain an Error Account, provides the Exchange with the authority to 
assign resulting Error Positions to TPHs or have resulting Error 
Positions liquidated, and prohibits Cboe Trading from accepting any 
positions in its error account from an account of a TPH, or permitting 
any TPH to transfer any positions from the TPH's account to Cboe 
Trading's error account. The provisions regarding a routing broker's 
Error Account are already in place in all contracts between the 
Exchange and its routing brokers pursuant to current Rule 6.14B(a) and 
(h) (proposed Rule 5.36(e)(1) and (8)). As a result, the proposed rule 
change deletes current Rules 6.6A and 6.14C as they are duplicative of 
the current Exchange Rules. The Exchange also notes that this proposed 
change aligns the Exchange's Rules with that of its affiliated options 
exchanges, C2, EDGX Options, and BZX Options.
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    \26\ The Exchange notes that the Exchange's discretion to cancel 
orders as either it deems necessary to maintain fair and orderly 
markets if a technical or systems issue occurs pursuant to Rule 
3.12(a)(6) entails its discretion to ``release'' orders being held 
awaiting an away exchange execution, that is such orders are 
cancelled back to Users if a technical or systems issue occurs at 
the Exchange, a routing broker, or another exchange to which an 
Exchange order has been routed.
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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.\27\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \28\ 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

[[Page 47982]]

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) \29\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
    \29\ Id.
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    The proposed rule changes are generally intended to add or align 
certain system functionality currently offered by the Exchange and the 
Cboe Affiliated Exchanges 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 does not propose to 
implement new or unique functionality that has not been previously 
filed with the Commission, found to be consistent with the Act, or is 
not available on Cboe Affiliated Exchanges. The Exchange notes that the 
proposed rule text is primarily based on EDGX Options Rules, as well as 
substantially the same as BZX and C2 Options rules, and is different 
only to the extent that it makes non-substantive changes to retain some 
Exchange-specific language/definitions, simplify language and make the 
rule provisions plain English. The Exchange believes that consistent 
rules will simplify the regulatory requirements and increase the 
understanding of the Exchange's operations for Trading Permit Holders 
that are also participants on the Cboe Affiliated Exchanges. The 
proposed rule change seeks to provide greater harmonization between the 
rules of the Cboe Affiliated Exchanges, which would result in greater 
uniformity and less burdensome and more efficient regulatory 
compliance. 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. The Exchange also 
believes that the proposed amendments will contribute to the protection 
of investors and the public interest by making the Exchange's rules 
easier to understand.
    The Exchange believes that the proposed rule change to make the 
current HAL process consistent with the EDGX Options SUM process will 
serve to remove impediments to and perfect the mechanism of a free and 
open market and national market system and facilitate transactions in 
securities because the current HAL process is already equivalent to the 
EDGX Options SUM process and the proposed rule changes do not raise any 
new or significant policy concerns, but instead serve to harmonize 
functionality and the rules across the affiliate exchanges so as to 
provide market participants with the same product offerings and bolster 
collective understanding of the rules upon migration.
    In addition to protecting and benefitting market participants by 
providing consistent functionality and rules, the proposed change will 
continue to allow all Users to submit responses to the exposure message 
during the exposure period, which the Exchange already does, which will 
remove impediments to and perfect the mechanism of a free and open 
national market system in that it will continue to provide all Users 
with the opportunity to improve their prices and ``step up'' to meet 
the NBBO and interact with exposure messages and allow the market 
participant sending an order to the Exchange to increase its chances of 
receiving an execution on the preferred venue in which it has chosen to 
participate (i.e., Cboe Options), thereby benefitting all market 
participants. In addition to this, the proposed rule change that allows 
for a User to opt out of having the remaining portion of their exposed 
order routed to other exchanges following the exposure period will 
remove impediments to and perfect the mechanism of a free and open 
national market system by providing Users with additional control 
regarding the execution of their orders and by providing them with 
consistent opportunities and functionality across the affiliated 
exchanges upon migration.
    The Exchange also believes the proposed rule change regarding the 
handling of AON orders exposed in a SUM auction will protect investors 
because it is identical to the handling of AON orders exposed in the 
EDGX Options SUM process. Additionally, the proposed rule change will 
provide AON orders with execution opportunities when the Exchange is 
not at the NBBO in a manner consistent with the current SUM process and 
makes it explicit that the exposure period for an AON order will 
terminate when there is sufficient aggregate contra-side interest to 
satisfy the exposed AON order (except it will not execute any incoming 
contra-side interest immediately against the exposed AON order, unless 
it has sufficient size which will prevent a partial execution in 
conflict with the AON size contingency), which is the manner in which 
the current HAL process already functions. This benefits market 
participants by providing them with rules that accurately reflect 
current functionality (as well as functionality that will be provided 
on the Exchange upon migration). The proposed rule change regarding an 
early termination of the exposure period of an AON order is consistent 
with current reasons that will cause an exposure period to terminate; 
it will prevent an exposure period from continuing when new conditions 
arise that would have prevented an exposure period from initiating in 
the first place. The proposed rule change will remove impediments to 
and perfect the mechanism of free and open market and a national market 
system, because it ensures an AON order will be handled in a manner 
consistent with the current SUM process.
    The proposed rule changes to the other provisions in connection 
with early termination of exposure period align with the reasons a SUM 
auction may currently terminate on EDGX Options and will remove 
impediments to and perfect the mechanism of a free and open market and 
national market system by terminating an orders that would no longer 
benefit from exposure or would likely present order handling 
difficulties, which could impact market participants. In addition to 
this, because a User will have the ability to cancel its order after 
the SUM process is initiated coupled with the fact that the Exchange 
will only execute an order that has been exposed via the SUM process to 
the extent the order is marketable against the NBBO will mitigate any 
potential concern in removing other early termination provisions. The 
Exchange believes that the other updates proposed to align the 
Exchange's proposed rule with that of the EDGX Options SUM process do 
not alter the manner in which HAL currently functions but merely make 
explicit in the rules the operation of the proposed SUM process.
    The proposed change to adopt C2's order routing rules (which are 
also substantially the same as the routing rules on EDGX Options and 
BZX Options) will likewise serve to protect and benefit market 
participants by providing consistent functionality and rules in 
connection with order routing. As stated, the order routing rule of the 
Exchange's affiliated options exchanges have previously been filed with 
the Commission. Proposed Rule 5.36 will serve to remove impediments to 
and perfect the mechanism of a free and open market and national market 
system because it will allow Users to route orders in much the same way 
in which

[[Page 47983]]

they may already route ISO orders on the Exchange today, and in the 
same manner as Users may already route orders on the Exchange's 
affiliated options exchanges, C2, EDGX Options, and BZX Options. Under 
the proposed rules the System will still process, display and 
prioritize orders as it currently does as well as ensure the same price 
protections currently in place, thereby protecting investors. The 
additional routing options that the proposed rule change offers are the 
same routing options already available to Users on the Exchange's 
affiliated options exchange, therefore these options do not raise any 
new or novel functionality for market participants but ensure that upon 
migration market participants across the Cboe Affiliated Exchanges will 
have access to the same functionality and product offerings.
    The proposed provisions regarding Cboe Trading will benefit market 
participants by making explicit certain rules that already apply to 
Cboe Trading on the Exchange, as well as serve to harmonize the 
Exchange's routing rules with the corresponding rules of C2 and EDGX 
Options, as well as BZX Options. The other proposed changes will also 
remove impediments to and perfect the mechanism of a free and open 
national market system by removing rules that are duplicative of other 
Exchange rules that currently provide for the same and are already 
effectively provided for in the contracts between the Exchange and its 
non-affiliated routing brokers. This, in turn, provides market 
participants with up-to-date, streamlined rules with are easy to 
understand, and mirror the corresponding rules of C2 and EDGX Options, 
as well as BZX Options.
    The proposed rule change makes other various non-substantive 
changes throughout the rules that will protect investors and benefit 
market participants as these changes simplify the rules and use plain 
English throughout the rules.

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 reiterates that 
the proposed rule change is being proposed in the context of a 
technology migration of the Cboe Affiliated Exchanges. As stated, the 
proposed changes to the rules that reflect functionality that will be 
in place come October 7, 2019 provide clear, consistent rules for 
market participants upon the completion of migration. The Exchange 
believes the proposed rule change will benefit Exchange participants in 
that it will provide a consistent technology offering for Users by the 
Cboe Affiliated Exchanges.
    The Exchange does not believe the proposed rule change will impose 
any burden on intramarket competition. The proposed SUM process and 
order routing functionality will apply to all Users and order and 
quotes submitted by Users in the same manner. Like HAL currently, the 
Exchange's proposed SUM is open to all Users. Additionally, all Users 
will have the option to route orders to away exchanges, and apply the 
different proposed routing instructions, under the proposed order 
routing provisions.
    The Exchange does not believe that the proposed rules change will 
impose any burden on intermarket competitions. As discussed above, the 
basis for the proposed rule changes in this filing are the rules of C2 
and EDGX Options, as well as substantial similarities to the approved 
rules of BZX Options, which have already been filed with the 
Commission. The Exchange also notes that market participants on other 
exchanges are welcome to become participants on the Exchange if they 
determine that this proposed rule change has made Cboe Options a more 
attractive or favorable venue.

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 \30\ and 
Rule 19b-4(f)(6) \31\ 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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    \30\ 15 U.S.C. 78s(b)(3)(A).
    \31\ 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-CBOE-2019-050 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-2019-050. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2019-050 and

[[Page 47984]]

should be submitted on or before October 2, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19610 Filed 9-10-19; 8:45 am]
 BILLING CODE 8011-01-P