Document ID: SEC-2018-0790-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe Exchange, Inc.
Posted Date: 2018-05-21T04:00Z

[Federal Register Volume 83, Number 98 (Monday, May 21, 2018)]
[Notices]
[Pages 23503-23506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10708]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83241; File No. SR-CBOE-2018-039]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
to Its Fees Schedule in Connection With the Exchange's Planned 
Migration of Standard Third-Friday Options on the S&P 500 Index to the 
Hybrid Trading System From the Hybrid 3.0 System

May 15, 2018.
    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 May 3, 2018, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe 
Options'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Fees Schedule in connection with 
the Exchange's planned migration of standard third-Friday options on 
the S&P 500 Index (``SPX options'') to the Hybrid Trading System from 
the Hybrid 3.0 System.
    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

[[Page 23504]]

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
    By way of background, a.m.-settled standard third-Friday options on 
the S&P 500 Index (``SPX options'') were previously traded on the 
Hybrid 3.0 trading platform. On April 30, 2018, the Exchange retired 
the Hybrid 3.0 platform and transitioned SPX options series then traded 
on the Hybrid 3.0 trading platform during Regular Trading Hours 
(``RTH'') onto the standard Hybrid trading platform. The Exchange notes 
that SPX options were the only product traded on the Hybrid 3.0 
platform and consequently, the symbol for these series remains SPX. In 
light of SPX's transition to Hybrid, the Exchange proposes to amend its 
Fees Schedule with respect to references to Hybrid 3.0 and also adopt 
an SPX Select Market-Makers (``SPX SMMs'') financial incentive 
program.\5\
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    \5\ The Exchange initially filed the proposed fee changes on 
April 20, 2018 (SR-CBOE-2018-032). On May 3, 2018, the Exchange 
withdrew that filing and submitted this filing.
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    First, the Exchange proposes to eliminate references to Hybrid 3.0 
in the Fees Schedule. Particularly, the Exchange proposes to rename the 
``Hybrid 3.0 Execution Surcharge (SPX only)'' to the ``SPX Hybrid 
Execution Surcharge (SPX only)''. As noted above, SPX options were the 
only product available to trade on Hybrid 3.0 and as such, the term 
Hybrid 3.0 as used for the Hybrid 3.0 Execution Surcharge was 
synonymous with SPX options. The Exchange similarly proposes to delete 
and update references to Hybrid 3.0 in corresponding Footnote 21. The 
Exchange next proposes to eliminate the reference to Hybrid 3.0 in the 
``Quoting Bandwidth'' section under ``Trading Permit Descriptions'' in 
the Trading Permit and Tier Appointment Fees table. Specifically, the 
Fees Schedule currently provides: ``To the extent a Market-Maker is 
able to submit electronic quotes in a Hybrid 3.0 class (such as an LMM 
that streams quotes in the class or a Market-Maker or LMM that streams 
quotes in a series of a Hybrid 3.0 class that trades on the Hybrid 
Trading System), the Market-Maker shall receive the quoting bandwidth 
allowance to quote in, and only in, that class.'' The Exchange proposes 
to eliminate the reference to Hybrid 3.0 class (which includes both SPX 
and SPXW) and replace it with ``SPX and/or SPXW''. The Exchange also 
proposes to eliminate the parenthetical that follows the new reference, 
as it does not believe it's necessary given that the proposed reference 
specifies the exact products affected (i.e., SPX and SPXW). The 
Exchange notes that no substantive changes are being made by the 
proposed ``Hybrid 3.0'' deletions and corresponding reference updates.
    The Exchange lastly proposes to adopt a financial incentive program 
for SPX Select Market-Makers (``SPX SMMs''), effective May 1, 2018. 
More specifically, the Exchange proposes to provide incentives to 
Market-Makers that are appointed as SPX SMMs and meet heightened 
quoting obligations.\6\ SPX SMMs that meet the heightened quoting 
standard (which shall be explained herein), will receive one Market-
Maker Permit and one SPX Tier Appointment free of charge.
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    \6\ SPX SMMs would serve as SPX SMMs during the RTH session only 
for a.m.-settled standard third-Friday options on the S&P 500 Index 
only (i.e., does not apply to SPXW).
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    By way of background, the Exchange previously appointed Lead 
Market-Makers (``LMMs'') in SPX. The Exchange does not intend to 
appoint LMMs in SPX following its transition to the Hybrid trading 
platform. Rather, the Exchange proposes to provide a financial 
incentive to Market-Makers that satisfy heightened quoting standards 
and are appointed by the Exchange to serve as SPX SMMs.\7\ Similar to 
LMMs, the Exchange proposes to provide that it may approve one or more 
Market-Makers to act as an SMM in SPX for terms of at least one 
year.\8\ Various factors will be considered by the Exchange in 
selecting SPX SMMs, which include: Adequacy of capital, experience in 
trading options, presence in the trading crowd, adherence to Exchange 
rules and ability to meet the heightened quoting standard, described 
further below. The Exchange notes that the factors it considers in 
appointing SPX SMMs are the same as the factors it currently uses to 
appoint LMMs.\9\ The Exchange also proposes to provide that removal of 
an SPX SMM may be effected by the Exchange on the basis of the failure 
of the SPX SMM to meet the heightened quoting standards or any other 
applicable Exchange Rule, which standard is the same as used for the 
removal of LMMs.\10\ If an SPX SMM is removed or if for any reason an 
SPX SMM is no longer eligible for, or resigns, its appointment, the 
Exchange may appoint one or more interim SPX SMMs for the remainder of 
the term or shorter time period designated by the Exchange.
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    \7\ This is similar to Market-Makers that serve as LMMs during 
the Exchange's Extended Trading Hours Session (``ETH'') (including 
SPX LMMs during ETH).
    \8\ On March 23, 2018, the Exchange issued an Exchange Notice 
which announced that the Exchange had appointed 4 LMMs (now proposed 
to be known as ``SPX SMMs'') in SPX for A.M.-settled SPX options 
(P.M.-settled options, which already trade on Hybrid, will continue 
to utilize a competing Market-Maker structure without any LMMs). The 
SPX SMM appointments will be effective for a one-year period, 
beginning on the launch date for SPX trading on Hybrid. The 
financial incentive will not apply for the month of April 2018.
    \9\ See Cboe Options Rule 8.15(a)(i).
    \10\ See Cboe Options Rule 8.15(a)(ii).
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    With respect to quoting obligations, the Exchange first notes that 
to the extent the Exchange approves a Market-Maker to act as an SPX 
SMM, the SMM must comply with the continuous quoting obligation \11\ 
and other obligations of Market-Makers described in Cboe Options Rules. 
The Exchange proposes that an SPX SMM will receive one Market-Maker 
Trading Permit and one SPX Tier Appointment free of charge if it (1) 
provides continuous electronic quotes in 95% of all SPX series 90% of 
the time in a given month, (2) submits opening quotes that are no wider 
than the Opening Exchange Prescribed Width (``OEPW'') within one minute 
of the initiation of an opening rotation in any series that is not open 
due to the lack of a qualifying quote, on all trading days, to ensure 
electronic quotes on the open that allow the series to open, (3) submit 
opening quotes that are no wider than the OEPW quote by 8:00 a.m. (CT) 
on volatility settlement days and (4) provide quotes for the end-of-
month fair value closing rotation on a rotating basis. The Exchange may 
consider other exceptions to this quoting standard based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances. SPX SMMs will not be obligated to satisfy the 
aforementioned heightened quoting standard. Rather, SPX SMMs will only 
receive a waiver of fees otherwise assessed for one Market-Maker 
Trading Permit and one SPX Tier Appointment if they satisfy the 
abovementioned heightened quoting standard. If an SPX SMM does not meet 
the heightened quoting standard, then they simply will not receive one 
free Trading Permit and Tier Appointment for that month. The Exchange 
believes the proposed incentive however, will encourage SPX SMMs to 
provide significant liquidity in

[[Page 23505]]

SPX. Additionally, the Exchange notes that it expects that TPHs may 
need to undertake expenses to be able to quote at a significantly 
heightened standard in these classes, such as purchase additional 
bandwidth. The Exchange notes that the proposed financial incentive 
program for SPX SMMs is similar to the rebate program adopted for ETH 
LMMs, as both programs offer financial benefits for meeting increased 
quoting standards as opposed to providing benefits for those that are 
required to meet heightened quoting obligations.\12\
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    \11\ See e.g., Cboe Options Rule 8.7.
    \12\ See Cboe Options Fees Schedule, Footnote 38.
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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.\13\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5)\14\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with 
Section 6(b)(4) of the Act,\15\ which requires that Exchange rules 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its Trading Permit Holders and other persons using 
its facilities.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes eliminating references to ``Hybrid 3.0'' in 
the Fees Schedule helps avoid confusion by eliminating language that 
will be rendered obsolete following the transition of moving the only 
product trading on the Hybrid 3.0 platform (i.e., SPX options series) 
to the Hybrid trading platform, thereby removing impediments to and 
perfecting the mechanism of a free and open market and a national 
market system. The Exchange notes that no substantive changes are being 
made by eliminating references to Hybrid 3.0.
    The Exchange believes it is reasonable to offer SPX SMMs that meet 
a certain heightened quoting standard (described above) one free 
Market-Maker Trading Permit and one SPX Tier Appointment given the 
potential added costs that an SPX SMM may undertake in order to satisfy 
that heightened quoting standard (e.g., having to purchase additional 
bandwidth). Additionally, if an SPX SMM does not satisfy the heightened 
quoting standard, then it will not receive the proposed free Trading 
Permit and Tier Appointment.
    The Exchange believes it is equitable and not unfairly 
discriminatory to only offer the financial incentive to SPX SMMs 
because it benefits all market participants trading in the SPX to 
encourage SPX SMMs to satisfy the heightened quoting standards, which 
may increase liquidity and provide more trading opportunities and 
tighter spreads. Because there are no additional required obligations 
imposed on SPX SMMs, they receive no additional benefits (e.g., no 
participation entitlement). The Exchange notes that creating an 
incentive in which SPX SMMs must satisfy a heightened standard 
encourages Market-Makers that are appointed as SPX SMMs to provide 
significant liquidity in SPX. The Exchange notes that without the 
proposed financial incentive, there would not be sufficient incentive 
for Trading Permit Holders to undertake an obligation to quote at 
heightened levels, which could result in lower levels of liquidity. The 
SPX SMM incentive program is also reasonable, as it is designed to 
encourage increased quoting to add liquidity in SPX, thereby protecting 
investors and the public interest.
    The Exchange also believes the incentive program is not unfairly 
discriminatory, as all Trading Permit Holders have the opportunity to 
apply to act as SPX SMMs and participate in the incentive program, and 
the Exchange will appoint SPX SMMs based on the factors described 
above, which are proposed to be set forth in the Fees Schedule and 
otherwise disclosed to Trading Permit Holders.\16\ The Exchange notes 
that the factors used by the Exchange in appointing SPX SMMs are the 
same currently used to appoint LMMs.\17\ The Exchange lastly notes that 
a similar financial incentive program was adopted for appointed LMMs in 
ETH.\18\
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    \16\ See Exchange Notice ``Solicitation for SPX Lead Market-
Makers (``LMMs'') During Regular Trading Hours (``RTH'')'' (dated 
February 27, 2018).
    \17\ See Cboe Options Rule 8.15(i).
    \18\ See Cboe Options Fees Schedule, Footnote 38 and Cboe 
Options Rule 6.1A.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition that are not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because, while the financial 
incentive is offered only to certain market participants (i.e., 
appointed SPX SMMs that meet a heightened quoting standard), those 
market participants must meet heightened quoting standards to receive 
the financial incentive. Additionally, SPX SMMs may incur additional 
costs to meet the heightened quoting standard. The Exchange believes 
the financial incentive of one free Trading Permit and Tier Appointment 
encourages those market participants to bring liquidity to the Exchange 
in SPX options (which benefits all market participants).
    The Exchange does not believe that the proposed rule changes will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because SPX 
options are proprietary products that will only be traded on Cboe 
Options. To the extent that the proposed changes make Cboe Options a 
more attractive marketplace for market participants at other exchanges, 
such market participants are welcome to become Cboe Options market 
participants.

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 proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section

[[Page 23506]]

19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6) thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \21\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \22\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. According to 
the Exchange, waiver of the operative delay will allow the immediate 
implementation of the SPX SMM program and updated references relating 
to ``Hybrid 3.0''. The Exchange also states that delaying the 
implementation of the SPX SMM program could result in lower levels of 
liquidity, as without the program there may not be sufficient incentive 
for Trading Permit Holders to undertake an obligation to quote at 
heightened levels. In addition, the Exchange states that the SPX SMM 
program does not present any new or novel issues. The Commission 
believes the waiver of the operative delay is consistent with the 
protection of investors and the public interest. As discussed above by 
the Exchange, there are no new or novel issues raised by the proposed 
rule change. Therefore, the Commission hereby waives the operative 
delay and designates the proposal operative upon filing.\23\
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    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2018-039 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-2018-039. 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-2018-039 and should be submitted on 
or before June 11, 2018.
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    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10708 Filed 5-18-18; 8:45 am]
 BILLING CODE 8011-01-P