[Federal Register Volume 84, Number 186 (Wednesday, September 25, 2019)]
[Notices]
[Pages 50504-50521]
[FR Doc No: 2019-20711]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87015; File No. SR-CBOE-2019-060]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule To Amend Its
Rules Related to the Electronic Processing of Complex Orders and To
Move Them to the Shell Rulebook That Will Become Effective Upon the
Migration of the Exchange's Trading Platform to the Same System Used by
the Cboe Affiliated Exchanges

September 19, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 6, 2019, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend its Rule related to the electronic processing of complex
orders and move it from the currently effective Rulebook (``current
Rulebook'') to the 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
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. Cboe Options believes offering
similar functionality to the extent practicable will reduce potential
confusion for market participants.
    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 proposed rule change
first moves and amends it rules regarding the electronic processing of
complex orders from the current Rulebook to the shell Rulebook.
Specifically, proposed Rule 5.33 modifies the Exchange's current
complex order functionality (as set forth in current Rule 6.53C) to
substantially conform to the complex order functionality that is used
by C2 and EDGX Options. Electronic trading of complex orders will be
subject to all other Rules applicable to trading of orders, unless
otherwise provided in proposed Rule 5.33. This is true today, and the
proposed rule change merely states this in the Rules.
    The proposed rule change amends and moves the following definitions
related to the electronic processing of complex orders from the current
Rulebook to proposed Rule 5.33(a) in the shell Rulebook. The proposed
rule change also adds certain definitions.\3\ In addition to the
substantive changes described below, the proposed rule change makes
additional nonsubstantive changes to these Rules, including to make the
rule text plain English, simplify the rule provisions, update cross-
references and paragraph numbering and lettering, reorganize certain
provisions, and eliminate redundant provisions.
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    \3\ The proposed rule change adds a definition of ``Legging'' to
proposed Rule 5.33(a), which is just a cross-reference to proposed
paragraph (g), which is described further below.

----------------------------------------------------------------------------------------------------------------
                                      Current rule (current   Proposed rule (shell       Proposed substantive
           Rule provision                   rulebook)               rulebook)                  changes
----------------------------------------------------------------------------------------------------------------
Definition of complex order........  Rule 6.53C(a)(1)......  Rule 5.33(a) (which     The proposed rule change
                                                              refers to Rule 1.1,     moves the provision that
                                                              which has already       for purposes of applying
                                                              been moved to the       ratios to complex orders
                                                              shell Rulebook).        comprised of legs for both
                                                                                mini-options and standard
                                                                                options, ten mini-option
                                                                                contracts represent one
                                                                                standard option contract
                                                                                from the definition of
                                                                                complex order for
                                                                                electronic purposes to the
                                                                                general definition of
                                                                                complex order, as the same
                                                                                application applies to all
                                                                                complex orders, whether
                                                                                traded electronically or
                                                                                in open outcry.
Definition of stock-option order...  Rule 6.53C(a)(2)......  Rule 5.33(b)(5).......  The proposed rule change
                                                                                states that stock-option
                                                                                orders trade in the same
                                                                                manner as all other
                                                                                complex orders, except as
                                                                                specified in Rule 5.33.
                                                                                This is true today, and
                                                                                the proposed rule change
                                                                                merely makes this explicit
                                                                                in the Rules.
Definition of Complex Order Auction  Rule 6.53C(d)(i)(1)...  Rule 5.33(a)..........  Proposed Rule 5.33 no
 (``COA'').                                                                           longer refers to a COA as
                                                                                a request for responses
                                                                                (``RFR''). This is merely
                                                                                a change in terminology.
Definition of Complex Order Book     N/A...................  Rule 5.33(a)..........  The current Rulebook does
 (``COB'') (the Exchange's                                                            not contain a definition
 electronic book of complex orders                                                    of COB. However, the
 maintained by the System, which                                                      proposed definition is
 single book is used during both                                                      consistent with current
 the Regular Trading Hours                                                            COB functionality, except
 (``RTH'') and global trading hours                                                   that currently there is a
 (``GTH'') trading sessions).                                                         separate COB for each
                                                                                trading session. Following
                                                                                the migration, there will
                                                                                no longer be a need for a
                                                                                separate COB.\4\
Definition of complex strategy: The  N/A...................  Rule 5.33(a)..........  The Exchange is thus
 term ``complex strategy'' means a                                                    proposing two methods to
 particular combination of                                                            create a new complex
 components and their ratios to one                                                   strategy, one of which is
 another. New complex strategies                                                      a message that a Trading
 can be created as a result of the                                                    Permit Holder can send to
 receipt of a complex instrument                                                      create the strategy and
 creation request or complex order                                                    the other is a message a
 for a complex strategy that is not                                                   Trading Permit Holder can
 currently in the System. The                                                         send that will generate
 Exchange may limit the number of                                                     the strategy and that is
 new complex strategies that may be                                                   also an order in that same
 in the System at a particular time.                                                  strategy. These methods
                                                                                will be equally available
                                                                                to all Trading Permit
                                                                                Holders, but the Exchange
                                                                                anticipates that Trading
                                                                                Permit Holders and other
                                                                                liquidity providers who
                                                                                anticipate providing
                                                                                larger amounts of trading
                                                                                activity in complex
                                                                                strategies are the most
                                                                                likely to send in a
                                                                                complex instrument
                                                                                creation request (i.e., to
                                                                                prepare for their trading
                                                                                in the complex strategy
                                                                                throughout the day),
                                                                                whereas other participants
                                                                                are more likely to simply
                                                                                send a complex order that
                                                                                simultaneously creates a
                                                                                new strategy.\5\
Definition of Regular trading: The   N/A...................  Rule 5.33(a)..........  This is an additional term
 term ``regular trading'' means                                                       used in other portions of
 trading of complex orders that                                                       proposed Rule 5.33.\6\
 occurs during a trading session
 other than (a) at the opening of
 the COB or re-opening of the COB
 for trading following a halt
 (described in proposed paragraph
 or (b) during the COA process
 (described in proposed paragraph
 (d)).
Definition of Synthetic Best Bid or  Rule 1.1..............  Rule 5.33(a)..........  SBBO is currently referred
 Offer (``SBBO'').                                                                    to in the current Rulebook
                                                                                as ``Exchange Spread
                                                                                Market.''
Definition of Synthetic National     Rule 1.1..............  Rule 5.33(a)..........  SNBBO is currently referred
 Best Bid or Offer (``SNBBO'').                                                       to in the current Rulebook
                                                                                as ``National Spread
                                                                                Market.''
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    The definitions in the table above are substantively the same as
the corresponding definitions in C2 Rule 6.13(a) and EDGX Options Rule
21.20(a), and merely add terminology to the Rule rather than impact the
trading of complex orders on the Exchange.\7\
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    \4\ See definition of Book and Simple Book in Rule 1.1 of the
shell Rulebook (which has a similar definition).
    \5\ This proposed definition is the same as the corresponding
definition in C2 Rule 6.13(a) and EDGX Options Rule 21.20(a).
    \6\ Id.
    \7\ The Exchange notes C2 Rule 6.13(a) and EDGX Options Rule
21.20(a) include additional defined terms that are not in proposed
Rule 5.33(a), because the Exchange defines those terms in other
Rules (e.g., the Exchange defines BBO (the best bid or offer
disseminated by the Exchange) in Rule 1.1 in the shell Rulebook,
while EDGX Options defines that term in Rule 21.20(a)).
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    Proposed Rule 5.33(b) states that complex orders are available in
all classes listed for trading on the Exchange. Current Rule
6.53C(c)(i) provides the Exchange with flexibility to determine which
classes are eligible for complex orders. The Exchange currently makes
complex order functionality available in all classes, and no longer
needs this flexibility, so is eliminating it from the Rules. Complex
orders may be market or limit orders (this is consistent with current
functionality, and current Rule 6.53C in various places references
handling of both complex orders with prices (i.e., limit orders) and
complex market orders).\8\
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    \8\ See also C2 Rule 6.13(b) (which does not restrict the
classes in which complex orders are available) and EDGX Options Rule
21.20(b).
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    Proposed Rule 5.33(b)(1) states the Exchange determines which
Times-in-Force of Day, good-til-cancelled (``GTC''), good-til-date
(``GTD''), immediate-or-cancel (``IOC''), or at the open (``OPG'') \9\
are available for complex orders (including for eligibility to enter
the COB and initiate a COA). Current Rule 6.53C(b) permits complex
orders to be entered as FOK,\10\ IOC, and GTC, and current Rule
6.53C(c)(iii) permits complex orders to be designated

as day (the Exchange does not currently offer a GTD Time-in-Force, but
will following the technology migration). The Exchange proposes to
retain this flexibility to modify Times-in-Force (and Capacities, as
noted below) available on the Exchange in order to address any changes
in market conditions and remain competitive.\11\
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    \9\ See Rule 5.6(d) of the shell Rulebook for definitions of
these Times-in-Force; see also C2 Rule 6.13(b) and EDGX Options Rule
21.20(b).
    \10\ An order designated as FOK must execute in its entirety as
soon as the System receives it and, if not so executed, is cancelled
(and thus not rest in the Book for potential execution). See Rule
5.6(d) in the shell Rulebook. As discussed below, the Exchange will
permit complex orders to be designated as AON, but they may only
execute following a COA (if not executed, they will route to PAR for
manual handling or be cancelled, subject to the User's
instructions). Because AON complex orders will not be permitted to
rest in the Book, the Exchange believes offering a FOK designation
for complex orders is unnecessary. Additionally, a User could
designate an AON complex order as IOC, which would have the same
effect as an FOK (and it would be handled like all AONs, as further
described below).
    \11\ See also C2 Rule 6.13(b)(1) and EDGX Options Rule
21.20(b)(1).
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    Proposed Rule 5.33(b)(2) states the Exchange will determine which
Capacities (i.e., non-broker-dealer customers, broker-dealers that are
not market-makers on an options exchange, or market-makers on an
options exchange) are eligible for COA or for entry into the COB. This
is consistent with the Exchange's current authority under Rule
6.53C(c)(i) (with respect to eligibility for COB entry) and (d)(i)(2)
(with respect to eligibility for COA). Complex orders with Capacities
not eligible for COA or entry into to the COB will route to PAR for
manual handling or are cancelled, subject to a User's instructions.\12\
The proposed rule change moves the provision that permits the Exchange
to determine that a complex order with Capacity M or N to enter the COB
in certain circumstances in a class in which the Exchange determined
complex orders with those Capacities are not eligible for entry into
the COB from current Rule 6.53C(c)(i) to proposed Rule 5.33(b)(2)(A).
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    \12\ See current Rule 6.53C(c)(i) and (d)(vi). Proposed Rule
5.33 identifies the various circumstances in which a PAR-eligible
complex order may route to PAR. See also C2 Rule 6.13(b) and EDGX
Options Rule 21.20(b).
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    Proposed Rule 5.33(b)(3) states that Users may designate complex
orders as Attributable or Non-Attributable. This relates only to
information that User wants, or does not want, included when a complex
order is displayed, and has no impact on how complex orders are
processed or execute. As they do for simple orders, certain Users want
the ability to track their orders, such as which of the resting orders
in the COB or which COA'd order is theirs. The Attributable designation
means this information will appear in market data feeds and auction
messages, permitting these Users to track their own orders. This is
consistent with current Rule 6.53 and current functionality. Current
Rule 6.53 permits the Exchange to determine which order types
(including Attributable and Non-Attributable) in that rule are
available on a system-by-system basis (which includes COB and COA).
Pursuant to that rule, the Exchange current permits complex orders to
be designated as Attributable or Non-Attributable.\13\
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    \13\ See also C2 Rule 6.13(b) and EDGX Options Rule 21.20(b).
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    Proposed Rule 5.33(b)(4) states that Users may not submit complex
orders through bulk ports.\14\ In connection with the technology
migration, the Exchange is replacing its current quoting functionality
with bulk message \15\ functionality, which bulk messages may be
submitted through bulk ports. The Exchange does not currently offer
complex quoting functionality (and Market-Makers are not required to
quote on the COB), so this proposed rule change is consistent with
current functionality.\16\
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    \14\ See Rule 5.5(c)(3) in the shell Rulebook for a definition
of bulk ports.
    \15\ See Rule 1.1 in the shell Rulebook for a definition of bulk
messages.
    \16\ See also C2 Rule 6.13(b) and EDGX Options Rule 21.20(b).
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    Proposed Rule 5.33(b)(5) lists additional order instructions that
will be available for complex orders:
     All Sessions: The proposed definition of an ``All
Sessions'' complex order corresponds to the definition of an ``All
Sessions'' simple order in Rule 5.6(c) in the shell Rulebook. The
Exchange makes complex orders available for trading during GTH, and a
User may apply this instruction to an order in an All Sessions class if
the User wants the complex order to be available for execution during
the GTH trading session.\17\ A User may not designate an All Sessions
order as Direct to PAR, because PAR is not available during the Global
Trading Hours trading session (which is an electronic-only trading
session).\18\
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    \17\ Id.
    \18\ Id.
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     AON: An AON (all-or-none) complex order is a complex order
that is to be executed in its entirety or not at all. The Exchange
currently makes AON complex orders available.\19\ An AON complex order
may only execute following a COA, and is not eligible to rest in the
COB. The Exchange currently does not permit AON complex order to rest
in the COB, so the proposed rule change is consistent with current
functionality.\20\
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    \19\ See current Rule 6.53C(b).
    \20\ See Cboe Options Regulatory Circular RG17-042 (March 24,
2017), available at https://www.cboe.com/publish/RegCir/RG17-042.pdf. See also EDGX Options Rule 21.20(b). Other options
exchanges require AON complex orders to be IOC, and thus similarly
do not permit AON complex orders to rest in a complex order book. It
is not clear from their rules whether such orders may enter a
complex order auction on those exchanges. See, e.g., Nasdaq ISE, LLC
(``ISE'') Options 3, Section 14(b)(2).
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     Book Only: The proposed definition of a ``Book Only''
complex order corresponds to the definition of a ``Book Only'' simple
order in Rule 5.6(c) in the shell Rulebook. Because complex orders are
not routable, all complex orders submitted to the Exchange today for
electronic processing are the equivalent of Book Only.\21\ A User may
not designate a Book Only complex order as Direct to PAR, as the
purpose of a Book Only complex order is to rest in the COB if it does
not execute upon entry.
---------------------------------------------------------------------------

    \21\ See also C2 Rule 6.13(b) and EDGX Options Rule 21.20(b).
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     COA-Eligible and Do-Not-COA Orders: The Exchange proposes
to allow all types of orders to initiate a COA but proposes to have
certain types of orders default to initiating a COA upon arrival with
the ability to opt-out of initiating a COA and other types of orders
default to not initiating a COA upon arrival with the ability to opt-in
to initiating a COA.\22\ Current Rule 6.53C(d)(ii)(B) permits TPHs to
request that an order not initiate a COA, so the proposed rule change
is consistent with current functionality.
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    \22\ Current Rule 6.53C(d)(i)(2) permits the Exchange to
determine which order types may initiate a COA, so the proposed rule
change is consistent with this Rule. Current Rule 6.53C(d)(i)(2)
also permits the Exchange to impose size eligibility requirements on
COA-eligible orders. The Exchange does not currently impose any size
requirement for an order to be eligible to COA, and the Exchange no
longer believes it needs this flexibility, so the proposed rule
change deletes it from the Rules.
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    [cir] A ``COA-eligible'' complex order is a buy (sell) complex
order with User instructions to (or which default to) initiate a COA
that is priced (i) equal to or lower (higher) than the SBO (SBB)
provided that if any of the bids or offers on the Simple Book that
comprise the SBO (SBB) is represented by a Priority Customer order, the
complex order must be priced at least one minimum increment lower
(higher) than the SBO (SBB) and (ii) lower (higher) than the price of
sell (buy) complex orders resting at the top of the COB. Current Rule
6.53C(d)(ii)(A) indicates a COA will initiate if the COA-eligible order
is marketable against the SBBO, so the proposed marketability
requirement in the definition of a COA-eligible is consistent with
current COA rules as well as the proposed rule provisions regarding the
priority of complex orders with respect to orders in the Simple
Book.\23\
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    \23\ See proposed Rule 5.33(f)(2).
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    [cir] A ``do-not-COA'' complex order is a complex order with User
instructions not to (or which default not to) initiate a COA or that
does not satisfy the COA-eligibility requirements in the preceding
bulleted paragraph. The Exchange believes that this will continue to
give

market participants extra flexibility to control the handling and
execution of their complex orders by the System by giving them the
additional ability to determine whether they wish to have their complex
order initiate a COA.
    [cir] Upon receipt of an IOC complex order, the System does not
initiate a COA unless a User marked the order to initiate a COA, in
which case the System cancels any unexecuted portion at the end of the
COA. Upon receipt of a complex order with any Time-in-Force other than
IOC (except OPG \24\), the System initiates a COA unless a User marked
the order to not initiate a COA. The Exchange further believes this is
consistent with the terms of an IOC order, which is intended to execute
immediately upon entry or be cancelled, whereas COA is a process that
includes a short delay in order to broadcast and provide participants
time to respond).
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    \24\ An OPG order is cancelled if it does not execute during the
opening process. See Rule 5.6(d) of the shell Rulebook.
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    [cir] A Post Only complex order with any Time-in-Force does not
initiate a COA, and if a User marks a Post Only complex order to
initiate a COA, the System cancels the order. This is consistent with
the purposes of a Post Only complex order, which is to add liquidity to
the COB, and an auction order is treated as a ``taker.''
    [cir] An incoming AON complex order initiates a COA, and if a User
marks an AON complex order to not initiate a COA, or an AON complex
order does not satisfy the COA eligibility criteria described above,
the System cancels the AON order. The Exchange believes that, like AON
simple orders, AON complex orders that would rest on the COB would have
last priority, and would have even fewer execution opportunities
because they would not be able to execute at the same price as resting
interest until after both simple and complex order interest executed.
Therefore, an AON complex order resting on the COB would have minimal
execution opportunities given its size contingency. The Exchange
believes there would be little value, in terms of executing
opportunities, in permitting AON complex orders to rest in the COB. As
discussed above, the Exchange does not currently permit AON complex
orders to rest in the COB.\25\
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    \25\ See also EDGX Options Rule 21.20(b).
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     Complex Only Orders: A ``Complex Only'' order is a Day or
IOC complex order a Market-Maker may designate to execute only against
complex orders in the COB and may not Leg into the Simple Book. Unless
designated as Complex Only, and for all other Times-in-Force and
Capacities, a complex order may execute against complex orders in the
COB and may Leg into the Simple Book. The Exchange believes the
proposed functionality is analogous to other types of functionality the
Exchange currently provides Trading Permit Holders, including Market-
Makers, such as the ability to direct the Exchange to not to route
their orders away from the Exchange (Book Only). Similar to such
analogous features, the Exchange believes that Market-Makers may
utilize Complex Only Order functionality as part of their strategies to
maintain additional control over their executions, in connection with
their attempt to provide and not remove liquidity, or in connection
with applicable fees for executions.\26\
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    \26\ See also C2 Rule 6.13(b) and EDGX Options Rule 21.20(b).
---------------------------------------------------------------------------

     MTP Modifiers: Users may apply the following MTP Modifiers
to complex orders: MTP Cancel Newest, MTP Cancel Oldest, and MTP Cancel
Both. If a complex order would execute against a complex order in the
COB with an MTP Modifier and the same Unique Identifier, the System
handles the complex orders with these MTP Modifiers as described in
Rule 5.6(c) of the shell Rulebook. If a complex order with an MTP
Modifier would Leg into the Simple Book and execute against any leg on
the Simple Book with an MTP Modifier and the same Unique Identifier,
the System cancels the complex order. This will allow a User to avoid
trading complex orders against its own complex orders or orders of
affiliates, providing Users with an additional way to maintain control
over their complex order executions.\27\
---------------------------------------------------------------------------

    \27\ Id.
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     Post Only: The proposed definition of a ``Post Only''
complex order corresponds to the definition of a ``Post Only'' simple
order in Rule 5.6(c) in the shell Rulebook. The proposed rule change
provides Users with the ability to exercise more control over the
circumstances in which their complex orders are executed and be
encouraged to add liquidity in the complex order market. Any additional
liquidity will subsequently benefit all participants who trade complex
orders on the Exchange.\28\ A User may not designate a Post Only
complex order as Direct to PAR, as the purpose of a Post Only complex
order is to rest in the COB to provide liquidity.
---------------------------------------------------------------------------

    \28\ Id.
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     RTH Only: The proposed definition of an ``RTH Only''
complex order corresponds to the definition of an ``RTH Only'' simple
order in Rule 5.6(c) in the shell Rulebook. This provides a User with
the ability to ensure a complex order will only execute during the RTH
trading session if the User does not want a complex order to be
available for execution during the GTH trading session.\29\
---------------------------------------------------------------------------

    \29\ Id.
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     QCC with Stock Order: The proposed rule change adds this
definition to proposed Rule 5.33(b).\30\ A User may not designate a QCC
with Stock Order as Direct to PAR, because the purpose of a QCC with
Stock Order is to execute immediately upon entry without exposure.
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    \30\ See also EDGX Options Rule 21.20(b). The current definition
of QCC with Stock Orders is in Rule 6.53 of the current Rulebook.
The Exchange previously deleted Rule 6.53 from the current Rulebook
(to be effective on October 7, 2019) in a separate filing, with the
intention of including the definition of QCC with Stock Orders in
the proposed rule, so that all types of complex orders (which QCC
with Stock is) are included within the same rule in the shell
Rulebook. See Securities Exchange Act Release No. 86173 (June 20,
2019), 84 FR 30267 (June 26, 2019) (SR-CBOE-2019-027).
---------------------------------------------------------------------------

    Proposed Rule 5.33(b) is substantively the same as the
corresponding provisions in C2 Rule 6.13(b) and EDGX Options Rule
21.20(b), except those rules do not include references to PAR, as those
exchanges only offer electronic trading.\31\
---------------------------------------------------------------------------

    \31\ The Exchange notes that C2 Rule 6.13(b) also makes Complex
Reserve Orders available. The Exchange currently offers complex
reserves orders, but does not intend to make those available
following the technology migration due to lack of demand on the
Exchange. The Exchange currently has authority pursuant to Rule 6.53
and 6.53C to determine which order types are available for complex
order trading, and therefore no longer making complex reserve orders
available is consistent with that authority.
---------------------------------------------------------------------------

    Proposed Rule 5.33(c) describes the process used to open the COB at
the beginning of each trading session and after a trading halt. The
proposed COB opening process is substantively the same as the COB
Opening Process used on C2 and EDGX Options.\32\ The System will accept
complex orders for inclusion in the COB Opening Process at the times
set forth in Rules 5.7 and 5.31(b) of the shell Rulebook, except the
Queuing Period for complex orders ends when the complex strategy opens.
Complex orders entered during the Queuing Period are not eligible for
execution until the initiation of the COB Opening Process. This is
similar to current functionality, which permits orders to be entered at
2:00 a.m. Eastern Time.
---------------------------------------------------------------------------

    \32\ See C2 Rule 6.13(c) and EDGX options Rule 21.20(c).
---------------------------------------------------------------------------

    Beginning at (1) 2:00 a.m. Eastern Time for All Sessions classes
for the GTH trading session and (2) 8:30 a.m. for RTH Only classes and
9:15 a.m. for All Sessions classes for the RTH trading

session, and updated every five seconds thereafter until the initiation
of the COB Opening Process, the Exchange disseminates indicative prices
and order imbalance information based on complex orders queued in the
System for the COB Opening Process. This is new functionality that will
provide Users with information regarding the expected COB opening,
which the Exchange believes may contribute additional transparency and
price discovery to the COB Opening Process.\33\
---------------------------------------------------------------------------

    \33\ See also C2 Rule 6.13(c)(1) and EDGX Options Rule
21.20(c)(1).
---------------------------------------------------------------------------

    The System initiates the COB Opening Process for a complex strategy
after a number of seconds (which number the Exchange determines) after
all legs of the strategy in the Simple Book are open for trading. This
is consistent with the current COB Opening Process, as set forth in
current Interpretation and Policy .11(a). All complex orders the System
receives prior to opening a complex strategy pursuant to the COB
Opening Process, including any delay applied by the Exchange, are
eligible to be matched in the COB Opening Process and not during the
Opening Process described in Rule 5.31 in the shell Rulebook.\34\ The
Exchange similarly applies a delay period during the regular Opening
Process, as set forth in current Rule 6.2 (which the Exchange has
proposed to amend and move to Rule 5.31 in the shell Rulebook).\35\
---------------------------------------------------------------------------

    \34\ See current Rule 6.53C, Interpretation and Policy .11(a).
    \35\ See also C2 Rule 6.13(c)(2) and EDGX Options Rule
21.20(c)(2).
---------------------------------------------------------------------------

    If there are matching complex orders in a complex strategy, the
System determines the COB opening price, which is the price at which
the most complex orders can trade. If there are multiple prices that
would result in the same number of complex orders executed, the System
chooses the price that would result in the smallest remaining imbalance
as the COB opening price. If there are multiple prices that would
result in the same number of complex orders executed and the same
``smallest'' imbalance, the System chooses the price closest to the
midpoint of the (i) SNBBO or (ii) if there is no SNBBO available, the
highest and lowest potential opening prices as the COB opening price.
If the midpoint price would result in an invalid increment, the System
rounds the COB opening price up to the nearest permissible increment.
If the COB opening price equals the SBBO, the System adjust the COB
opening price to a price that is better than the corresponding bid or
offer in the Simple Book by at least one minimum increment. If the COB
opening price would require printing at the same price as a Priority
Customer on any leg in the Simple Book, the System adjusts the COB
opening price to a price that is better than the corresponding bid or
offer in the marketplace by at least one minimum increment.\36\
---------------------------------------------------------------------------

    \36\ See also C2 Rule 6.13(c)(2)(A) and EDGX Options Rule
21.20(c)(2)(A).
---------------------------------------------------------------------------

    After the System determines a COB opening price, the Exchange
executes matching complex orders in price priority (i.e., orders better
than the COB opening price are executed first and thereafter orders at
the COB opening price are executed), and then pursuant to the
allocation algorithm applicable to the class pursuant as set forth in
proposed subparagraph (d)(5)(A)(ii) below. Therefore, all complex
interest in a class will execute in accordance with the same allocation
algorithm, which provides simplicity and consistency regarding the
execution of complex orders to Users. The System enters any remaining
complex orders (or unexecuted portions) into the COB, subject to a
User's instructions.\37\
---------------------------------------------------------------------------

    \37\ See also C2 Rule 6.13(c)(2)(B) and EDGX Options Rule
21.20(c)(2)(B).
---------------------------------------------------------------------------

    If there are no matching complex orders in a complex strategy, the
System opens the complex strategy without a trade. If after an
Exchange-established period of time that may not exceed 30 seconds, the
System cannot match orders because (i) the System cannot determine a
COB opening price (i.e., all queued orders are market orders) or (ii)
the COB opening price is outside the SNBBO, the System opens the
complex strategy without a trade. In both cases, the System enters any
orders in the complex strategy in the COB (in time priority), subject
to a User's instructions, except it Legs any complex orders it can into
the Simple Book. The proposed rule change provides additional detail
regarding how the COB will open if there are no matching trades.
Additionally, the Exchange believes the proposed configurable time
period is important because the opening price protections are
relatively restrictive (i.e., based on the SNBBO), and the configurable
time period provides the Exchange with the ability to periodically
review the process and modify it as necessary to ensure there is
sufficient opportunity to have Opening Process executions without also
waiting too long to transition to regular trading.\38\
---------------------------------------------------------------------------

    \38\ See also C2 Rule 6.13(c)(2)(C) and EDGX Options Rule
21.20(c)(2)(C).
---------------------------------------------------------------------------

    Currently on the Exchange, the System opens the COB in a similar
manner, however it first attempts to match complex orders against
orders in the Simple Book, then matches complex orders against each
other. As proposed, complex orders will not leg into the book upon the
COB open (unless there are no matching complex orders and a complex
strategy opens without a trade); however, the COB opening price must
improve the SBBO by at least one minimum increment if there is a
Priority Customer order on any leg, thus providing protection to
Priority Customers in the leg markets. The proposed matching process
for complex orders on the COB is similar to the process in current
Interpretation and Policy .11(a)(ii). Additionally, the Exchange
currently restricts valid opening trade prices to be within the SBBO
rather than the SNBBO as the proposed opening process does. The
Exchange believes using the SNBBO is an enhancement to the COB opening
process, as it reflects the then-current prices throughout the entire
market, rather than just on the Exchange, and thus the Exchange
believes it is a better measure to use for purposes of determining the
reasonability of the prices of orders.
    Proposed Rule 5.33(c) is substantively the same as the
corresponding provisions in C2 Rule 6.13(c) and EDGX Options Rule
21.20(c), except the times at which opening auction messages begin to
disseminate pursuant to the proposed rule are different than the times
in the C2 and EDGX Options Rules, as the Exchange's GTH trading session
begins at 3:00 a.m. Eastern Time, while the GTH trading session on
those Cboe Affiliated Exchanges begins at 8:30 a.m. Eastern Time.
Additionally, because C2 does not have a Priority Customer overlay, C2
Rule 6.13(c) does not include references to Priority Customers as
proposed Rule 5.33(c) does. The proposed rule change also provides that
the allocation algorithm applied to complex orders during the COB
opening process may vary by class (which is consistent with current
Rule 6.53C, Interpretation and Policy .011(a)), as C2 does, while EDGX
Options will always apply price-time. Additionally, the proposed rule
change references an applicable minimum increment, while the C2 Rule
and EDGX Options Rule each reference $0.01. Pursuant to Rule 5.4(b) in
the shell Rulebook, the Exchange may determine the minimum increment
for complex orders eligible for electronic processing, which must be at
least $0.01. As set forth in C2 Rule 6.13(f) and EDGX Options Rule
21.20(f),

the minimum increment for complex orders in all classes is $0.01.
    Proposed Rule 5.33(d) describes the COA process for COA-eligible
orders. Orders in all classes will be eligible to participate in
COA.\39\ Upon receipt of a COA-eligible order, the System initiates the
COA process by sending a COA auction message to all subscribers to the
Exchange's data feeds that deliver COA auction messages.\40\ A COA
auction message identifies the COA auction ID, instrument ID (i.e.,
complex strategy), quantity, and side of the market of the COA-eligible
order.\41\ The Exchange may also determine to include in COA auction
messages the price, which will be the limit order price or the SBBO (if
initiated by a market complex order), or the drill-through price if the
order is subject to the drill-through protection in Rule 5.34(b) of the
shell Rulebook.\42\
---------------------------------------------------------------------------

    \39\ Current Rule 6.53C(d)(i)(2) provides that the Exchange may
make COA available on a class-by-class basis. The Exchange makes COA
available in any class in which it makes complex order functionality
available, so the Exchange no longer believes it needs separate
flexibility for COA. See also C2 Rule 6.13(d)(1) and EDGX Options
Rule 21.20(d)(1).
    \40\ See current Rule 6.53C(d)(ii)(A). The Exchange notes this
current provision imposes additional eligibility requirements based
on the number of legs in the complex order. As discussed below, the
proposed rule change replaces those protective measures with certain
Legging restrictions.
    \41\ Current Rule 6.53C(d)(ii) states the current COA
notification messages (referred to as RFR messages in the current
Rulebook) include the component series (i.e., complex strategy),
size, side of the market, and contingencies. The proposed rule
change adds that the notification messages will include the Auction
ID, and potentially the Capacity and price (including detail
regarding what the auction price will be), but will not include any
contingencies. This is the same information that may be included in
the COA notification messages under C2 Rule 6.13(d)(1) and EDGX
Options Rule 21.20(d)(1) (the EDGX Options rule refers to origin
code rather than Capacity), except the Exchange will not include
Capacity on COA notification messages (which it currently does not
include pursuant to current Rule 6.53C(d)(ii)(A).
    \42\ Rule 5.34(b) in the shell Rulebook will be substantially
similar to Rule 6.13(b)(v)(B) in the current Rulebook.
---------------------------------------------------------------------------

    Currently, only one COA in a complex strategy may occur at the same
time (while this is not codified in current rules, it is consistent
with current functionality). Pursuant to proposed Rule 5.33(d)(2), the
System may initiate a COA in a complex strategy even though another COA
in that complex strategy is ongoing. This concurrent COA functionality
is substantively the same as corresponding functionality in C2 Rule
6.13(d)(2) and EDGX Options Rule 21.20(d)(2). The Exchange believes it
will increase price improvement and execution opportunities for complex
orders following the technology migration. The Exchange notes at the
outset that based on how Exchange Systems operate (and computer
processes generally), it is impossible for COAs to occur
``simultaneously'', meaning that they would commence and conclude at
exactly the same time. Thus, although it is possible as proposed for
one or more COAs to overlap, each COA will be started in a sequence and
with a time that will determine its processing. Thus, even if there are
two COAs that commence and conclude at nearly the same time, each COA
will have a distinct conclusion at which time the COA will be
allocated.
    If there are multiple COAs ongoing for a specific complex strategy,
each COA concludes sequentially based on the time each COA commenced,
unless terminated early as described below. At the time each COA
concludes, the System allocates the COA-eligible order pursuant to
proposed paragraph (d)(3) below and takes into account all COA
Responses for that COA, orders in the Simple Book, and unrelated
complex orders on the COB at the time the COA concludes. If there are
multiple COAs ongoing for a specific complex strategy that are each
terminated early as described below, the System processes the COAs
sequentially based on the order in which they commenced. If a COA
Response is not fully executed at the end of the identified COA to
which the COA Response was submitted, the System cancels or rejects it
at the conclusion of the specified COA.
    In turn, when the first COA concludes, orders on the Simple Book
and unrelated complex orders that then exist will be considered for
participation in the COA. If unrelated orders are fully executed in
such COA, then there will be no unrelated orders for consideration when
the subsequent COA is processed (unless new unrelated order interest
has arrived). If instead there is remaining unrelated order interest
after the first COA has been allocated, then such unrelated order
interest will be considered for allocation when the subsequent COA is
processed. As another example, each COA Response is required to
specifically identify the COA for which it is targeted and if not fully
executed will be cancelled at the conclusion of the COA. Thus, COA
Responses will only be considered in the specified COA.
    Proposed Rule 5.33(d)(3) defines the Response Time Interval as the
period of time during which Users may submit responses to the COA
auction message (``COA Responses''). The Exchange determines the
duration of the Response Time Interval, which may not exceed 500
milliseconds. This is similar to current Rule 6.53C(d)(iii)(2), except
the proposed rule change reduces the maximum time period from three
seconds to 500 milliseconds. The Exchange believes that 500
milliseconds is a reasonable amount of time within which participants
can respond to a COA auction message. The current timer on the Exchange
is 100 milliseconds, and therefore the Exchange believes a maximum
response time of 500 milliseconds is sufficient to respond to
auctions.\43\
---------------------------------------------------------------------------

    \43\ See also C2 Rule 6.13(d)(3) and EDGX Options Rule
21.20(d)(3).
---------------------------------------------------------------------------

    However, the Response Time Interval terminates prior to the end of
that time duration:
    (1) When the System receives a non-COA-eligible order on the same
side as the COA-eligible order that initiated the COA but with a price
better than the COA price, in which case the System terminates the COA
and processes the COA-eligible order as described below and posts the
new order to the COB;
    (2) when the System receives an order in a leg of the complex order
that would improve the SBBO on the same side as the COA-eligible order
that initiated the COA to a price equal to or better than the COA
price, in which case the System terminates the COA and processes the
COA-eligible order as described below, posts the new order to the COB,
and updates the SBBO; or
    (3) if the System receives a Priority Customer order that would
join or improve the SBBO on the same side as the COA in progress to a
price equal to or better than the COA price, in which case the System
terminates the COA and processes the COA-eligible order as described
below, posts the new order to the Simple Book, and updates the SBBO.
    Current Rule 6.53C(d)(viii)(3) describes how the System currently
handles incoming COA-eligible orders on the same side of the original
COA order at a better price. The proposed rule change deletes that
provision, as it is being replaced by the functionality above (which
order terminates a COA in that circumstance rather than joins the COA,
but still provides execution opportunities for the new incoming order
by placing it on the COB). The proposed rule change deletes the
remainder of current Rule 6.53C(d)(viii), which describes current
circumstances that cause a COA to end early, as those will no long
apply following the technology migration. The proposed rule change
deletes current Rule 6.53C(d)(viii)(1) and (2) regarding incoming COA-
eligible orders received during the Response Time Interval, as those
orders may initiate a separate COA under the proposed rule change

that permits concurrent COAs. The proposed rule change deletes current
6.53C(d)(viii)(4) and (5) relating to incoming do-not-COA orders and
changes in the leg markets that would terminate an ongoing COA, as
under the proposed rules, those new orders would not terminate a COA
but would be eligible to execute against the COA-eligible order at the
end of the COA) (see proposed subparagraph (d)(5), which states
execution will occur against orders in the Simple Book and COB at the
time the COA concludes). Ultimately, these incoming orders are eligible
for execution against a COA-eligible order under current and proposed
rules. The proposed rule change merely changes the potential execution
time to the end of the full response interval time from an abbreviated
response interval time.\44\
---------------------------------------------------------------------------

    \44\ See also C2 Rule 6.13(d)(3) (which does not include a
provision that corresponds to proposed subparagraph (d)(3)(C)
because it relates to prioritizing Priority Customer orders, which
have no allocation priority on C2); and EDGX Rule 21.20(d)(3).
---------------------------------------------------------------------------

    Proposed Rule 5.33(d)(4) describes COA Responses that may be
submitted during the Response Time Interval for a specific COA. The
Exchange determines on a class-by-class basis whether all Users or
Market-Makers with an appointment in the class and TPHs acting as agent
for orders resting at the top of the COB in the relevant complex
strategy may submit COA Responses.\45\ The System accepts a COA
Response(s) with a permissible Capacity in the applicable minimum
increment during the Response Time Interval.\46\ A COA Response must
specify the price, size, side of the market (i.e., a response to a buy
COA as a sell or a response to a sell COA as a buy) and COA auction ID
for the COA to which the User is submitting the COA Response. While
this is not included in current Rule 6.53C, it is consistent with
System entry requirements for COA Responses. The System aggregates the
size of COA Responses and complex orders on the COB submitted at the
same price for an EFID, and caps the size of the aggregated COA
Responses and complex orders at the size of the COA-eligible order.
This provision is similar to current Rule 6.53(d)(v), which caps order
and response sizes for allocation purposes to prevent Trading Permit
Holders from taking advantage of a pro-rata allocation by submitting
responses larger than the COA-eligible order to obtain a larger
allocation from that order.
---------------------------------------------------------------------------

    \45\ See current Rule 6.53C(d)(iii).
    \46\ See current Rule 6.53C(d)(iii)(1).
---------------------------------------------------------------------------

    During the Response Time Interval, COA Responses are not firm, and
Users can modify or withdraw them at any time prior to the end of the
Response Time Interval, although the System applies a new timestamp to
any modified COA Response (unless the modification was to decrease its
size), which will result in loss of priority. The Exchange does not
display COA Responses. At the end of the Response Time Interval, COA
Responses are firm (i.e., guaranteed at their price and size). A COA
Response may only execute against the COA-eligible order for the COA to
which a User submitted the COA Response. The System cancels or rejects
any unexecuted COA Responses (or unexecuted portions) at the conclusion
of the COA. This is substantively the same as current Rule
6.53C(d)(vii).
    Proposed Rule 5.33(d)(4) is substantively the same as C2 Rule
6.13(d)(4) and EDGX Options Rule 5.33(d)(4), except, as noted above,
the proposed rule change provides flexibility regarding Capacities that
may submit COA Responses, which C2 and EDGX Options do not, and the
proposed rule change accounts for classes potentially having different
minimum increments.
    Proposed Rule 5.33(d)(5) describes how COA-eligible orders are
processed at the end of the Response Time Interval. At the end of the
Response Time Interval, the System executes a COA-eligible order (in
whole or in part) against contra-side interest in price priority. If
there is contra-side interest at the same price, the System allocates
the contra side interest as follows:
    (1) Priority Customer orders resting on the Simple Book for the
individual leg components of the complex order through Legging (subject
to proposed paragraph (g), as described below) in time priority;
    (2) COA Responses and unrelated orders on the COB pursuant to the
allocation algorithm applicable to the class, or another allocation
algorithm from Rule 5.32 in the shell Rulebook determined by the
Exchange on a class-by-class basis; and
    (3) remaining orders in the Simple Book for the individual leg
components of the complex order through Legging (subject to proposed
paragraph (g), as described below), which the System allocates in
accordance with the base allocation algorithm applicable to the class
pursuant to Rule 5.32(b).
    This allocation is similar to the current allocation priority on
the Exchange following a COA, as set forth in current Rule 6.53C(d)(iv)
and (v), except the proposed rule change prioritizes Priority Customer
orders on the Simple Book first (rather than all interest on the Simple
Book), and non-Priority Customer orders on the Simple Book may execute
after any complex order interest at the same price. Additionally, the
Exchange may determine on a class-by-class basis whether to apply the
Priority Customer overlay to complex interest. This will provide
consistency for executions of complex interest in all settings, as
executions of complex orders in the COB occur pursuant to the
allocation algorithm applicable the class, or another algorithm as
determined by the Exchange on a class-by-class basis.\47\ The proposed
priority is consistent with general customer priority principles, as it
protects Priority Customer orders on the Simple Book. It is also the
same as the priority order in EDGX Options Rule 21.20(d)(5), although
the Exchange notes that EDGX Options applies different allocation
algorithms to complex interest and simple interest.
---------------------------------------------------------------------------

    \47\ See current Rule 6.53C(c)(i)(2); see also proposed Rule
5.34(e).
---------------------------------------------------------------------------

    Notwithstanding the foregoing, at the conclusion of a COA of an AON
complex order, the AON complex order may only execute against COA
Responses and unrelated orders on the COB pursuant to the allocation
algorithm applicable to the class pursuant to proposed paragraph
(d)(5)(A)(ii) if there is sufficient size to satisfy the AON complex
order (and may not execute against orders in the Simple Book). If there
is insufficient size to satisfy the AON complex order, the System
routes the order to PAR for manual handling or cancels the order,
subject to a User's instructions.\48\
---------------------------------------------------------------------------

    \48\ See EDGX Options Rule 21.20(d)(5)(A), which handles AON
complex orders in the same manner (except EDGX Options does not have
the option to route an unexecuted AON complex order to PAR, as EDGX
Options is an electronic only exchange).
---------------------------------------------------------------------------

    As provided above, following a COA, a complex order will be
allocated first in price priority and then at each price level against
Priority Customer orders in the Simple Book, COA responses and complex
orders in the COB, and then remaining individual orders in the Simple
Book. The Simple Book and the COB are separate, and orders on each do
not interact unless a complex order Legs into the Simple Book. As a
result, the System is not able to calculate the aggregate size of COA
responses and complex orders on the COB and the size of simple orders
in the legs that comprise the complex strategy at each potential
execution price (as executions may occur at multiple prices) prior to
execution of an order following a COA. Following a COA, the System
first looks to determine whether there are Priority Customer orders
resting in the Simple

Book at the final auction price (and in the applicable ratio). If there
are, the System executes the complex order against those simple orders.
Following that execution, the System then looks back at the COA
responses and complex orders resting in the COB to determine whether
there is interest against which the order can execute. If there is, the
System executes the remaining portion of the complex order against that
complex contra-side interest. Finally, if there is any size left, the
System looks back at the Simple Book to determine whether any orders in
the legs are able to trade against any remaining contracts in the
complex order. If there is, the System executes the remaining portion
of the complex order again against orders in the Simple Book.
    Because of this process, prior to execution against any Priority
Customer orders, the System would not know whether there is sufficient
aggregate interest in both the Simple book and COB to satisfy the
entire size of the AON. Additionally, it is possible for a complex
order to execute at multiple price levels. This process would have to
occur at each price level. Therefore, if the Exchange were to permit
Legging of AON complex orders into the Simple Book, it would be
possible for a partial execution to occur, which is inconsistent with
the AON instruction. The Exchange notes there would be significant
technical complexities associated with reprogramming priority within
the System to permit AON complex orders to Leg into the Simple Book and
provide AON orders with priority consistent with these standard
priority principles. Only permitting an AON complex order to execute
against COA responses and complex orders in the COB ensures the size
contingency of the AON complex order can be satisfied.\49\ To ensure
protection of orders on the Simple Book given this restriction on
Legging, an AON complex order may only execute following a COA if it
improves the then-current (i.e., existing at the conclusion of the COA)
SBBO.\50\
---------------------------------------------------------------------------

    \49\ The Exchange does not currently restrict AON orders from
legging into its simple book, because the current priority is
different than it will be as proposed. However, other options
exchanges restrict AON orders from legging into the simple book
during the complex order opening process, from the complex order
book, and following a complex order price improvement auction
(similar to COA). See, e.g., EDGX Options Rule 21.20(d)(5) and
(f)(2)(A)(ii); and Nasdaq Phlx LLC (``Phlx'') Rule
1098(d)(ii)(C)(2), (e)(vi)(A), (e)(viii)(C)(3), and (f)(iii)(A).
Phlx also only permits non-broker-dealer customers to submit AON
complex orders. See Phlx Rule 1098(b)(v).
    \50\ See proposed Rule 5.34(f)(2)(A)(ii).
---------------------------------------------------------------------------

    Proposed Rule 5.33(d)(5)(B) states the System enters any COA-
eligible order (or unexecuted portion) that does not execute at the end
of the COA that is eligible to rest into the COB, and applies a
timestamp based on the time it enters the COB.\51\ The System routes to
PAR for manual handling or cancels any COA-eligible order (or
unexecuted portion) that does not execute at the end of the COA if not
eligible for entry into the COB, subject to the User's instructions.
Once in the COB, the order may execute pursuant to proposed paragraph
(e) following evaluation pursuant to proposed paragraph (i), both as
described below, and remain on the COB until they execute or are
cancelled or rejected.
---------------------------------------------------------------------------

    \51\ See current Rule 6.53C(d)(vi).
---------------------------------------------------------------------------

    Proposed Rule 5.33(d)(5) is substantively the same as EDGX Options
Rule 21.20(d)(5), except the proposed rule change permits the Exchange
to apply allocations algorithms on a class-by-class basis to the
execution of complex orders following a COA, which is consistent with
current Exchange authority. Additionally, the proposed rule change
provides that complex orders may route to PAR for manual handling in
certain circumstances, while those orders would be cancelled on EDGX
Options, as it is an electronic only exchange.
    Proposed Rule 5.33(e) describes how the System will handle Do-Not-
COA orders (i.e., orders that do not initiate a COA upon entry to the
System) and orders resting in the COB. Upon receipt of a do-not-COA
order, or if the System determines an order resting on the COB is
eligible for execution following evaluation as described below, the
System executes it (in whole or in part) against contra-side interest
in price priority. If there is contra side interest at the same price,
the System allocates the contra-side interest as follows:
    (1) Priority Customer orders resting on the Simple Book for the
individual leg components of the complex order through Legging (as
described below) in time priority;
    (2) unrelated complex orders resting on the COB, which the System
allocates pursuant to the allocation algorithm set forth in proposed
subparagraph (d)(5)(A)(ii) (as described above); and
    (3) remaining orders in the Simple Book for the individual leg
components of the complex order through Legging (as described below),
which the System allocations in accordance with the base allocation
algorithm applicable to the class pursuant to Rule 5.32(b) in the shell
Rulebook.
    The System enters any do-not-COA order (or unexecuted portion) that
cannot execute against the individual leg markets or complex orders and
is eligible to rest into the COB, and applies a timestamp based on the
time it enters the COB. The System routes to PAR for manual handling or
cancels any do-not-COA order (or unexecuted portion) that would execute
at a price outside of the SBBO or equal to the SBBO when there is a
Priority Customer order at the SBBO and is not eligible for entry into
the COB, subject to the User's instructions. Complex orders resting on
the COB may execute pursuant to proposed paragraph (e) following
evaluation pursuant to proposed paragraph (i), both as described below,
and remain on the COB until they execute or are cancelled or rejected.
    The proposed rule change is similar to current Rule 6.53C(c)(i),
except as discussed above, the Exchange will prioritize Priority
Customer orders on the Simple Book, and then execute any non-Priority
Customer orders on the Simple Book after complex interest has executed.
The proposed priority is consistent with general customer priority
principles, as it protects Priority Customer orders on the Simple
Book.\52\
---------------------------------------------------------------------------

    \52\ See also EDGX Options Rule 21.20(e).
---------------------------------------------------------------------------

    Proposed Rule 5.33(f)(1)(A) states the minimum increment for bids
and offers on a complex order, and the increments at which components
of a complex order may be executed, is set forth in Rule 5.4(b) in the
shell Rulebook.\53\ This is consistent with current Rule 6.53C(c)(i).
Proposed Rule 5.33(f)(1)(B) states that Users may express bids and
offers for a stock-option order (including a QCC with Stock Order, as
discussed below) in any decimal price the Exchange determines. The
option leg(s) of a stock-option order may be executed in the minimum
increment applicable to the class pursuant to proposed subparagraph
(A), as discussed above, and the stock leg of a stock-option order may
be executed in any decimal price permitted in the equity market.\54\
Smaller minimum increments are appropriate for stock-option orders as
the stock component can trade at finer decimal increments permitted by
the equity market. Furthermore, the

Exchange notes that even with the flexibility provided in the proposed
rule, the individual options and stock legs must trade at increments
allowed by the Commission in the options and equities markets.
---------------------------------------------------------------------------

    \53\ Rule 5.4(b) in the shell Rulebook that the minimum
increment for bids and offers on complex orders with any ratio equal
to or greater than one-three and less than or equal to three-to-one
is $0.01 or greater, which may be determined by the Exchange on a
class-by-class basis, and the legs may be executed in $0.01
increments. Pursuant to the definition of complex orders in Rule 1.1
of the shell Rulebook, only complex orders with these ratios are
eligible for electronic trading.
    \54\ This is consistent with the flexibility in current Rule
6.53C(c)(ii). Other options exchanges have the same minimum
increment requirements for stock-option orders. See EDGX Options
Rule 21.20(f)(1)(B); and Nasdaq ISE, LLC (``ISE'') Options 3,
Section 14(c)(1).
---------------------------------------------------------------------------

    Proposed Rule 5.33(f)(2)(A) provides that the System does not
execute a complex order pursuant to Rule 5.33 at a net price (1) that
would cause any component of the complex strategy to be executed at a
price of zero, (2) worse than the SBBO or equal to the SBBO when there
is a Priority Customer order at the SBBO, except AON complex orders may
only execute at prices better than the SBBO (as discussed above), (3)
that would cause any component of the complex strategy to be executed
at a price worse than the individual component price on the Simple
Book, (4) worse than the price that would be available if the complex
order Legged into the Simple Book, or (5) that would cause any
component of the complex strategy to be executed at a price ahead of a
Priority Customer order on the Simple Book without improving the BBO on
at least one component by at least one applicable minimum increment.
    The option component of a stock-option order executes in accordance
with same priority principles as any other option order. Pursuant to
proposed Rule 5.33(f)(2)(B), for a stock-option order with one option
leg, the option leg may not trade at a price worse than the individual
component price on the Simple Book or at the same price as a Priority
Customer Order on the Simple Book. For a stock-option order with more
than one option leg, the option legs must trade at prices consistent
with priority applicable to a complex order with all option legs as set
forth above.\55\
---------------------------------------------------------------------------

    \55\ See current Rule 6.53C, Interpretation and Policy .06(b);
see also EDGX Options Rule 21.20(f).
---------------------------------------------------------------------------

    A stock-option order may only execute if the stock leg is
executable at the price(s) necessary to achieve the desired net
price.\56\ To facilitate the execution of the stock leg and option
leg(s) of an executable stock-option order at valid increments pursuant
to proposed subparagraph (f)(1)(B), as described above, the legs may
trade outside of their expected notional trade value by a specified
amount (which the Exchange determines). In a small subset of cases,
generally as a result of unusual leg ratios, in calculating the total
notional value a stock leg may result in a price outside of the NBBO,
thus cannot execute pursuant to proposed Rule 5.33(f)(2)(B).\57\ In
order to allow for the strategy to execute, the proposed rule change
would offer functionality that allows the legs of the stock option
order to trade outside of their expected notional value by a specified
amount determined by the Exchange.\58\ Therefore, the System could
ensure that options legs and stock leg were priced in line with the
other provisions of proposed Rule 5.33(f)(2), as described above.
Although this would result in a negligible difference (i.e. residual
amount) between the expected notional value of the trade and the actual
trade value, Users generally prefer not to forgo an execution for their
stock-option strategies when the residual amount is miniscule compared
to the total value of the trade. The value allowance would work, for
example, as follows:
---------------------------------------------------------------------------

    \56\ See current Rule 6.53C, Interpretation and Policy .06(a).
    \57\ Pursuant to proposed Rule 5.33(f)(2)(B), the System will
only execute the stock leg of a stock-option order up to a buffer
amount outside of the stock leg NBBO and that 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). While the QCT
exemption permits a stock leg to execute outside of the NBBO, the
Exchange still offers price protections to prevent execution too far
away from the NBBO, which it understands is consistent with market
participants' desire. The Exchange intends to set this buffer to
zero, so the Exchange will not permit execution of the stock leg of
a stock-option order outside of the NBBO (other than a QCC with
stock order, which will execute immediately without exposure and
thus is unlikely to trade too far outside of the NBBO). Current
rules of other exchanges (such as Cboe Options) prevent execution of
the stock component from being too far away from the NBBO, as do the
rules of stock exchanges.
    \58\ The Exchange announces determinations to market
participants pursuant to Rule 1.5 in the shell Rulebook.
---------------------------------------------------------------------------

     Assume the Exchange has determined a trade value allowance
of $0.50 from the expected trade value.
     Assume also that:

(Equity) NBBO: 10.00 x 11.00
(Option) NBBO: 1.00 x 1.05, BBO: 1.00 x 1.05
SNBBO: 7.70 x 8.32 (i.e., bid = (47 x 10.00/100) + (3 x 1.00) = 7.70,
and offer = (47 x 11.00/100) + (3 x 1.05) = 8.32)

     A User enters a stock-option order to Buy 47 shares of XYZ
stock and Buy 3 June 10 XYZ calls with a net price of 8.30 and a
quantity of 3.
     The order matches with corresponding contra order on the
COB.
     The expected trade value based on the order's limit price,
quantity and a contract multiplier of 100 is $2,490.00 (i.e., 8.30 x 3
x 100).
     The calculated options match price is 1.00 based on market
prices and the stock match price is 11.2766 (rounded four decimals),
therefore, outside of the NBBO.
     The trade value allowance then calculates the stock match
price that results in a total notional trade value of $2489.9934:

Options leg notional = $1.05 x 100 x 3 x 3 = $945
Stock leg notional = $10.9574 x 47 x 3 = $1,544.9934
Notional trade value = $2,489.9934, which is within the $0.50 trade
value allowance.

    The Exchange notes that a valid trade price within the NBBO for the
stock leg with the smallest residual between the difference in actual
trade value and expected notional trade value is $10.9574. Therefore,
in this example, the corresponding options leg match price would be
$1.05 because it is the options match price that could be paired with a
valid stock trade price that would also allow for the smallest residual
between the difference in actual trade value and expected notional
trade value. If, for example, the next allowable options increment \59\
within the BBO ($1.04) was used, the stock leg notional trade value
matched to meet the notional value closest to the expected trade value
would be $11.0213, and therefore still outside of the NBBO.\60\ The
Exchange also notes that $1.05 is consistent with the BBO in this
example.
---------------------------------------------------------------------------

    \59\ See proposed Rule 5.33(f)(1)(B), which states that the
option leg(s) of a stock-option order may be executed in $0.01
increments.
    \60\ The notional trade value would be: ($1.04 x 100 x 3 x 3) +
($11.0213 x 47 x 3) = $2,490.0033.
---------------------------------------------------------------------------

    Under the proposed rule, the System will not apply the trade value
allowance to orders with a ``C'' capacity code (for the account of a
Priority Customer). This limitation is intended to function as an
additional protection for customers who may not have the same levels of
trading sophistication or technological and informational advantages as
that of Professionals or broker-dealers. Therefore, customers may not
have measures in place to assume any level of risk that may be
associated with trading outside of the expected trade value (which risk
the Exchange believes is de minimis given that the Exchange will impose
a reasonable cap, as described below, on the amount by which the actual
trade value may differ from the expected trade level). As a result, the
Exchange believes that not applying the trade value allowance to
customer orders will further protect customers from assuming this
potential risk for which they may not have calculated.
    Overall, this proposed functionality is a helpful feature which
will allow Users to receive an expeditious execution, and trade the
stock and options components of a stock-option strategy in a moving

market without introducing legging risk. Without this functionality
members would be forced to resubmit their orders and potentially
receive a much worse price or miss an execution. The Exchange will
announce to all market participants the determined trade value
allowance amount pursuant to Rule 1.5. The Exchange would determine an
allowance amount that would reasonably account for the average
differences in notional trade values as well as the cost benefit to
market participants between the differences in actual trade value
versus expected notional trade value and the imposition of resubmitting
their orders and potentially receiving a much worse price or missing an
execution.\61\ The Exchange notes that, if, however, a User determines
that the trade value allowance is more attractive or favorable on
another venue, Users are free to execute on other such venues. The
proposed Exchange determination of a value allowance outside of the
expected notional value is currently in place on other exchanges.\62\
---------------------------------------------------------------------------

    \61\ The Exchange expects this value to be initially set at
$0.50 as represented in the example above.
    \62\ See ISE Options 3, Section 14, Supplementary Material .03;
and Nasdaq MRX, LLC (``MRX'') Options 3, Section 14, Supplementary
Material .03.
---------------------------------------------------------------------------

    If a stock-option order can execute, the System executes the buy
(sell) stock leg of a stock-option order pursuant to proposed Rule
5.33(f)(2)(B) up to a buffer amount above (below) the NBO (NBB), which
amount the Exchange determines.\63\ The Exchange believes that Users
may be willing to trade a stock-option order with the stock leg at a
price outside of the NBBO (which is permissible pursuant to the QCT
exemption) of the stock leg in order to achieve the desired net price.
However, the buffer may prevent execution with a stock price ``too
far'' away from the market price, which may be inconsistent with then-
current market conditions.\64\ This may ultimately prevent execution at
potentially erroneous prices. This is similar to the Exchange's current
fat finger protection (which will not permit a complex order to be more
than a specified amount outside of the SNBBO, which will include the
NBBO of the stock leg,\65\ except it also applies a buffer to the
individual stock leg as opposed to the net price.
---------------------------------------------------------------------------

    \63\ See proposed Rule 5.33(f)(2)(B).
    \64\ As noted above, the Exchange expects the buffer amount to
be initially set at zero. The Exchange may change the buffer amount
in the future by announcing it pursuant to Rule 1.5 of the shell
Rulebook.
    \65\ See current Rule 6.12(a)(4) in the current Rulebook.
Additionally, stock exchanges provide similar protections for
execution prices of stock orders. See, e.g., NASDAQ Stock Market
Rule 4757(c) (which prevents stock limit orders from being accepted
at prices outside of pre-set standard limits, which is based on the
NBBO).
---------------------------------------------------------------------------

    Proposed Rule 5.33(f)(3) states the System executes complex orders
without consideration of any prices for the complex strategy that might
be available on other exchanges trading the same complex strategy; \66\
provided, however, that such complex order price may be subject to the
drill-through price protection in current Rule 6.53C, Interpretation
and Policy .08 Proposed Rule 5.33(f) is the same as EDGX Rule 21.20(f),
except the proposed rule change, as noted above, incorporates the fact
that the Exchange has (and will continue to have) flexibility to
determine the minimum increment for complex orders on a class-by-class
basis.
---------------------------------------------------------------------------

    \66\ See current Rule 6.53C(c)(i).
---------------------------------------------------------------------------

    Proposed Rule 5.33(g) adopts restrictions on the ability of complex
orders to Leg into the Simple Book. Specifically, a complex order may
Leg into the Simple Book pursuant to proposed subparagraphs (d)(5)(A)
and (e), subject to the restrictions in proposed paragraph (g), if it
can execute in full or in a permissible ratio \67\ and if it has no
more than a maximum number of legs (which the Exchange determines on a
class-by-class basis and may be two, three or four) \68\ (``Legging''),
subject to the following restrictions:
---------------------------------------------------------------------------

    \67\ See current Rule 6.53C(c)(i)(1) and (d)(v)(1).
    \68\ See current Rule 6.53C(a)(1).
---------------------------------------------------------------------------

    (1) All two leg COA-eligible Customer complex orders may Leg into
the Simple Book without restriction.
    (2) Complex orders for any other Capacity with two option legs that
are both buy or both sell and that are both calls or both puts may not
Leg into the Simple Book. These orders may execute against other
complex orders on the COB.
    (3) All complex orders with three or four option legs that are all
buy or all sell (regardless of whether the option legs are calls or
puts) may not Leg into the Simple Book. These orders may execute
against other complex orders on the COB.
    (4) Post Only complex orders and AON complex orders may not Leg
into the Simple Book.
    (5) Stock-option orders may not Leg into the Simple Book and may
only execute against other stock-option orders.\69\
---------------------------------------------------------------------------

    \69\ See current Rule 6.53C, Interpretation and Policy .06.
Current Rule 6.53C, Interpretation and Policy .06(d) provides the
Exchange with authority to determine on a class-by-class basis to
permit unexecuted option legs of stock-option market orders to leg
following a COA. The Exchange does not permit this legging in any
class and does not intend to following the technology migration, and
therefore the proposed rule change deletes that provision.
---------------------------------------------------------------------------

    (6) If the Exchange determines to list SPX or VIX on a group basis
pursuant to Rule 4.14, a complex order consisting of legs in different
groups of series in the class may not Leg into the Simple Book. A
complex order consisting of legs in the same group may Leg, subject to
the other restrictions in proposed paragraph (g).\70\
---------------------------------------------------------------------------

    \70\ See current Rule 6.53C, Interpretation and Policy .02.
---------------------------------------------------------------------------

    Proposed paragraph (g) is the same as EDGX Options Rule 21.20(g)
(except that Rule does not reference the ability to list classes on a
group basis, as EDGX Options does not have a Rule that permits that
type of listing). These restrictions serve the same purpose as the
protection included in current 6.53C(d)(ii), which is to ensure that
Market-Makers providing liquidity do not trade above their established
risk tolerance levels. Currently, liquidity providers (typically Market
Makers, though such functionality is not currently limited to
registered Market Makers) in the Simple Book are protected by way of
the Quote Risk Monitor (``QRM'') by limiting the number of contracts
they execute as described above. QRM allows Market-Makers and other
liquidity providers to provide liquidity across potentially hundreds of
options series without executing the full cumulative size of all such
quotes before being given adequate opportunity to adjust the price and/
or size of their quotes.
    All of a participant's quotes in each option class are considered
firm until such time as QRM's threshold has been equaled or exceeded
and the participant's quotes are removed by QRM in all series of that
option class. Thus the Legging of complex orders presents higher risk
to Market-Makers and other liquidity providers as compared to simple
orders being entered in multiple series of an options class in the
simple market, as it can result in such participants exceeding their
established risk thresholds by a greater number of contracts. Although
Market-Makers and other liquidity providers can limit their risk
through the use of QRM, the participant's quotes are not removed until
after a trade is executed. As a result, because of the way complex
orders leg into the regular market as a single transaction, Market-
Makers and other liquidity providers may end up trading more than the
cumulative risk thresholds they have established, and are therefore
exposed to greater risk. The Exchange believes that Market Makers and
other liquidity providers may be compelled to change their quoting and
trading behavior to

account for this additional risk by widening their quotes and reducing
the size associated with their quotes, which would diminish the
Exchange's quality of markets and the quality of the markets in
general.
    Proposed Rule 5.33(h) contains additional provisions regarding the
handling of complex orders: \71\
---------------------------------------------------------------------------

    \71\ See also C2 Rule 6.13(h) and EDGX Options Rule 21.20(h).
---------------------------------------------------------------------------

     A complex market order or a limit order with a price that
locks or crosses the then-current opposite side SBBO and does not
execute because the SBBO is the best price but not available for
execution (because it does not satisfy the complex order ratio or the
complex order cannot Leg into the Simple Book) enters the COB with a
book and display price that (a) is one minimum increment away from the
then-current opposite side SBBO if it includes a Priority Customer
order on any leg or (b) locks the then-current opposite side SBBO if it
does not include a Priority Customer order on any leg. If the SBBO
changes, the System continuously reprices the complex order's book and
display price based on the new SBBO (up to the limit price, if it is a
limit order), subject to the drill-through price protection in current
Rule 6.13(b)(v) (to be moved to Rule 5.34(b) of the shell Rulebook),
until: (A) The complex order has been executed in its entirety; or (B)
the complex order (or unexecuted portion) of the complex order is
cancelled or rejected. This provision is the same as EDGX Options Rule
21.20(h)(1), except that, as noted above, the Exchange may apply a
different minimum increment for complex orders in a class other than
$0.01 (on EDGX Options, each class will have a minimum increment of
$0.01 for complex orders). The purpose of using the calculated SBBO is
to enable the System to determine a valid trading price range for
complex strategies and to protect orders resting on the Simple Book by
ensuring that they are executed when entitled. Additionally, this
process ensures the System will not execute any component of a complex
order at a price that would trade through an order on the Simple Book.
The Exchange believes that this is reasonable because it prevents the
components of a complex order from trading at a price that is inferior
to a price at which the individual components may be traded on the
Exchange or ahead of the leg markets.
     The System cancels or rejects an incoming Post Only
complex order if it locks or crosses a resting complex order in the COB
or the then-current opposite side SBBO. The System cancels a resting
Post Only complex limit order after evaluation pursuant to proposed
paragraph (i), as discussed below, if the System determines the resting
Post Only complex limit order locks or crosses the updated SBBO. For
example, assume there are no orders for a specific strategy resting on
the COB, the SNBBO is $3.00 by $3.15, and the SBBO is $2.95 by $3.15.
Assume next that Complex Order 1 enters the COB to sell 10 contracts of
that strategy at $3.14 and such order is posted to the COB. If Complex
Order 2 then enters the COB to buy 10 contracts of that strategy at
$3.14, but Complex Order 2 also contains the Post Only instruction,
Complex Order 2 is rejected since it locks the resting contra order.
Similarly, assume there are no orders for a specific strategy resting
on the COB, the SNBBO is $3.00 by $3.15, and the SBBO is $2.95 by
$3.20. If a two-leg Complex Order with the Post Only instruction enters
the COB to buy 10 contracts of that strategy at $3.20, that Complex
Order is rejected since it cannot leg in to the Simple Book and it
locks the contra side SBBO. This proposed functionality is consistent
with the purpose of the Post Only instruction and ensures a Post Only
complex order will not remove liquidity from the Book. This is also
consistent with the functionality and purpose of the Post Only order
instruction on simple orders, and the same as C2 Rule 6.13(h)(3) and
EDGX Options Rule 21.20(h)(2).
     If there is a zero NBO for any leg, the System replaces
the zero with a price equal to one minimum increment above NBB to
calculate the SNBBO, and complex orders with any buy legs do not Leg
into the Simple Book. If there is a zero NBB, the System replaces the
zero with a price equal to one minimum increment, and complex orders
with any sell legs do not Leg into the Simple Book. If there is a zero
NBB and zero NBO, the System replaces the zero NBB with a price equal
to one minimum increment and replaces the zero NBO with a price equal
to two minimum increments, and complex orders do not Leg into the
Simple Book. The SBBO and SNBBO may not be calculated if the NBB or NBO
is zero (as noted above, if the best bid or offer on the Exchange is
not available, the System uses the NBB or NBO when calculating the
SBBO). As discussed above, permissible execution prices are based on
the SBBO. If the SBBO is not available, the System cannot determine
permissible posting or execution pricing for a complex order (which are
based on the SBBO), which could reduce execution opportunities for
complex orders. If the System were to use the zero bid or offer when
calculating the SBBO, it may also result in executions at erroneous
prices (since there is no market indication for the price at which the
leg should execute). For example, if a complex order has a buy leg in a
series with no offer, there is no order in the leg markets against
which this leg component could execute. This is the same as C2 Rule
6.13(h)(3) and EDGX Options Rule 21.20(h)(3) (except the proposed rule
change incorporates the fact that the Exchange may apply a different
minimum increment to a class for complex orders). This is also
consistent with the proposed rule change that states complex order
executions are not permitted if the price of a leg would be zero.
Additionally, this is similar to the proposed rule change described
above to improve the posting price of a complex order by one minimum
increment if it would otherwise lock the SBBO. The proposed rule change
is a reasonable process to ensure complex orders receive execution
opportunities, even if there is no interest in the leg markets.\72\
---------------------------------------------------------------------------

    \72\ Current Rule 6.13(b)(vi) states if a market order is
received when the national best bid in a series is zero, if the
Exchange best offer is less than or equal to $0.50, the Cboe Options
system enters the market order into the book as a limit order with a
price equal to the minimum trading increment for the series. Similar
to the proposed rule change, this is an example of an exchange
modifying an order price to provide execution opportunities for the
order when there is a lack of contra-side interest when the order is
received by the exchange.
---------------------------------------------------------------------------

    Proposed Rule 5.33(i) states the System evaluates an incoming
complex order upon receipt after the open of trading to determine
whether it is a COA-eligible order or a do-not-COA order and thus
whether it should be processed pursuant to proposed paragraph (d) or
(e), respectively, routed to PAR for manual handling, or cancelled. The
System also re-evaluates a complex order resting on the COB (including
an order (or unexecuted portion) that did not execute pursuant to
proposed paragraph (d) or (e) upon initial receipt) (1) at time the COB
opens, (2) following a halt, and (3) during the trading day when the
leg market price or quantity changes to determine whether the complex
order can execute (pursuant to proposed paragraph (e)), should be
repriced (pursuant to proposed paragraph (h)), should remain resting on
the COB, or should be cancelled. Proposed paragraph (i) is the same as
C2 Rule 6.13(i) and EDGX Options Rule 21.20(i). This evaluation process
ensures that the System is monitoring and assessing the COB for
incoming complex orders, and changes in market conditions or events

that cause complex orders to reprice or execute, and conditions or
events that result in the cancellation of complex orders on the COB.
This ensures the integrity of the Exchange's System in handling complex
orders and results in a fair and orderly market for complex orders on
the Exchange.
    Proposed Rule 5.33(j) states the System routes to PAR for manual
handling or cancels or rejects a complex market order it receives when
the underlying security is subject to a limit up-limit down state, as
defined in the Limit Up-Limit Down Plan. If during a COA of a market
order, the underlying security enters a Limit State or Straddle State,
the System terminates the COA without trading and cancels or rejects
all COA Responses. The Exchange only executes the stock leg of a stock-
option order at a price permissible under the Limit Up-Limit Down Plan.
If the stock-option order cannot execute, if a limit order, the System
calculates the SBBO or SNBBO with a price for the stock leg that would
be permissible under that Plan and posts it to the COB at that price
(if eligible to rest), or if a market order, routes the stock-option
order to PAR for manual handling, subject to a User's instructions.
This is consistent with handling of simple market orders during a limit
up-limit down state, and is substantively the same as C2 Rule 6.13(j)
(except C2 does not offer stock-option orders) and EDGX Options Rule
21.20(j), except the C2 and EDGX Options do not provide for markets
orders to route to PAR for manual handling, as those are electronic
only exchanges.\73\
---------------------------------------------------------------------------

    \73\ See current Rule 6.53C(d)(ix) and Interpretation and Policy
.06(f).
---------------------------------------------------------------------------

    Proposed Rule 5.33(k) describes the impact of trading halts on the
trading of complex orders. If a trading halt exists for the underlying
security or a component of a complex strategy, trading in the complex
strategy will be suspended, and the System queues a User's complex
orders unless the User instructed the Exchange to cancel its complex
orders upon a trading halt. The COB remains available for Users to
enter and manage complex orders. Incoming complex orders that could
otherwise execute or initiate a COA in the absence of a halt are placed
on the COB or cancelled, subject to a User's instructions.\74\ Incoming
complex orders with a time in force of IOC will be cancelled or
rejected.
---------------------------------------------------------------------------

    \74\ This provision incorporates the fact that the Exchange has
a trading floor. Therefore, if a User designates an order (by adding
the Default or Direct to PAR Order Instruction, as described above)
that is not eligible to rest on the COB as eligible to route to the
PAR workstation for manual handling, if a User submits such a
complex order during a halt, it would route to PAR, rather than be
cancelled in accordance with the User's instructions. If the User
had instead designated this order as Electronic Only, the order
would be cancelled if submitted during a halt in accordance with the
User's instructions.
---------------------------------------------------------------------------

    If, during a COA, any component(s) and/or the underlying security
of a COA-eligible order is halted, the COA ends early without trading
and all COA Responses are cancelled or rejected. The System enters
remaining complex orders on the COB or cancelled, subject to a User's
instructions. When trading in the halted component(s) and/or underlying
security of the complex order resumes, the System will re-open the COB
pursuant to proposed paragraph (c) (as described above). The System
queues any complex orders designated for a re-opening following a halt
until the halt has ended, at which time they are eligible for execution
in the COB opening process. This proposed rule change regarding the
handling of complex orders during a trading halt is substantively the
same as C2 Rule 6.13(k) and EDGX Options Rule 21.20(k).
    Proposed Rule 5.33(l) contains provisions regarding the handling
execution of stock-option orders.\75\ The proposed rule change moves
provisions from current Rule Interpretation and Policy .06 to proposed
Rule 5.33(l) as follows \76\:
---------------------------------------------------------------------------

    \75\ See also EDGX Options Rule 21.20(l) (which is the same as
the proposed rule change). The Exchange notes C2 does not offer
stock-option order functionality.
    \76\ Certain provisions from current Rule 6.53C, Interpretation
and Policy .06 are included in other parts of proposed Rule 5.33,
such as permissible minimum increments and execution prices, as
described above.

----------------------------------------------------------------------------------------------------------------
                                     Current rule  (current   Proposed rule  (shell      Proposed substantive
           Rule provision                   rulebook)               rulebook)                  changes
----------------------------------------------------------------------------------------------------------------
A User may only submit a stock-      Rule 6.53C,             Rule 5.33,              The proposed rule change
 option order (including a QCC        Interpretation and      Interpretation and      applies the same provision
 Stock Order) if it complies with     Policy .06(a) and       Policy .03.             to all stock-option
 the Qualified Contingent Trade       (g)(1)(C).                                      orders, including QCC with
 Exemption (``QCT Exemption'') from                                                   Stock Orders, as all stock-
 Rule 611(a) of Regulation NMS. A                                                     option orders must comply
 User submitting a stock-option                                                       with the QCT Exemption.
 order represents that it complies                                                    The proposed rule change
 with the QCT Exemption. To submit                                                    deletes the requirement in
 a stock-option order to the                                                          current Rule 6.53C,
 Exchange for execution, a User                                                       Interpretation and Policy
 must enter into a brokerage                                                          .06(a) that a TPH identify
 agreement with one or more broker-                                                   a designated give up on a
 dealers that are not affiliated                                                      stock-option order.\77\
 with the Exchange, which broker-                                                     TPHs must identify a give-
 dealers the Exchange has                                                             up on all orders submitted
 identified as having connectivity                                                    to the Exchange, which
 to electronically communicate the                                                    would include all stock-
 stock components of stock-option                                                     option orders, so the
 orders to stock trading venues.                                                      Exchange believes it is
                                                                                redundant to state this in
                                                                                the stock-option order
                                                                                rules. \78\
When a User submits to the System a  Rule 6.53C,             Rule 5.33(l)(1).......  The proposed rule change
 stock-option order, it must          Interpretation and                              applies the same provision
 designate a specific broker-dealer   Policy .06(a) and                               to all stock-option
 with which it has entered into a     (g)(1)(C).                                      orders, including QCC with
 brokerage agreement pursuant to                                                      Stock Orders.
 proposed Interpretation and Policy
 .03 (the ``designated broker-
 dealer'') to which the Exchange
 will electronically communicate
 the stock component of the stock-
 option order on behalf of the User.
A stock-option order may execute     Rule 6.53C,             Rule 5.33(l)(2).......  None.
 against other stock-option orders    Interpretation and
 (or COA responses, if applicable),   Policy .06,
 but may not execute against orders   introductory
 in the Simple Book. A stock-option   paragraph and (a).
 order may only execute if the
 price complies with proposed
 subparagraph (f)(2)(B) (as
 described above).

If a stock-option order can execute  Rule 6.53C,             Rule 5.33(l)(2)(A)....  The proposed rule change
 upon entry or following a COA, or    Interpretation and                              prevents potential
 if it can execute following          Policy .06(b) and                               execution of the stock
 evaluation while resting in the      (g)(2) \79\.                                    component of a qualified
 COB pursuant to paragraph (i), the                                                   contingent transaction
 System executes the option                                                           (``QCT'') where the stock
 component (which may consist of                                                      component by waiting to
 one or more option legs) of a                                                        communicate the stock
 stock-option order against the                                                       component for execution
 option component of other stock-                                                     until after the option
 option orders resting in the COB                                                     component executes. This
 or COA responses pursuant to the                                                     proposed execution process
 allocation algorithm applicable to                                                   is the same process the
 the class pursuant to proposed                                                       Exchange currently uses to
 subparagraph (d)(5)(A)(ii) above,                                                    execute QCC with Stock
 as applicable, but does not                                                          Orders, which are a type
 immediately send the User a trade                                                    of stock-option order (and
 execution report, and then                                                           thus the Exchange merely
 automatically communicates the                                                       expands this process to
 stock component to the designated                                                    all stock-option orders,
 broker-dealer for execution at a                                                     as all stock-option orders
 stock trading venue.                                                                 must satisfy the same QCT
                                                                                Exemption). \80\
If the System receives an execution  Rule 6.53C,             Rule 5.33(l)(2)(B)....  This proposed execution
 report for the stock component       Interpretation and                              process is the same
 from the designated broker-dealer,   Policy .06(g)(3).                               process the Exchange
 the Exchange sends the User the                                                      currently uses to execute
 trade execution report for the                                                       QCC with Stock Orders,
 stock-option order, including                                                        which are a type of stock-
 execution information for the                                                        option order (and thus the
 stock and option components. If                                                      Exchange merely expands
 the System receives a report from                                                    this process to all stock-
 the designated broker-dealer that                                                    option orders, as all
 the stock component cannot                                                           stock-option orders must
 execute, the Exchange nullifies                                                      satisfy the same QCT
 the option component trade and                                                       Exemption). Currently,
 notifies the User of the reason                                                      whenever a stock trading
 for the nullification.                                                               venue nullifies the stock
                                                                                leg of a QCT 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.\81\ 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.\82\
                                                                                Given this requirement, 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
                                                                                stock-option order to
                                                                                request such
                                                                                nullification.\83\ If the
                                                                                stock component does not
                                                                                execute, rather than
                                                                                require the User that
                                                                                submitted the stock-option
                                                                                order to contact the
                                                                                Exchange to request the
                                                                                nullification of the
                                                                                option component execution
                                                                                pursuant to current Rule
                                                                                6.25, Interpretation and
                                                                                Policy .04(c), the
                                                                                proposed rule eliminates
                                                                                this requirement for the
                                                                                submitting User to make
                                                                                such a request. Instead,
                                                                                the proposed rule change
                                                                                provides that 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
                                                                                definition of a QCT order.
                                                                                The proposed rule change
                                                                                merely automates an
                                                                                otherwise manual process
                                                                                for Users. \84\
If a stock-option order cannot       Rule 6.53C,             Rule 5.33(l)(2).......  None.
 execute, it rests in the COB (if     Interpretation and
 eligible to rest) or routes to PAR   Policy .06(b).
 for manual handling, subject to a
 User's instructions.
Handling of QCC with Stock Orders..  Rule 6.53C,             Rule 5.33(l)(3).......  The Exchange notes that
                                      Interpretation and                              pursuant to current Rule
                                      Policy .06(g).                                  6.53 regarding QCC orders,
                                                                                a QCC order may have more
                                                                                than one option leg (i.e.,
                                                                                be comprised of a complex
                                                                                order). Because a QCC with
                                                                                Stock Order is defined as
                                                                                a QCC order submitted with
                                                                                a stock component, current
                                                                                Rule 6.53 (which includes
                                                                                the definition of a QCC
                                                                                with Stock Order) permits
                                                                                a QCC with Stock Order to
                                                                                be a Complex QCC with
                                                                                Stock Order. The proposed
                                                                                rule change merely
                                                                                explicitly states such an
                                                                                order is permitted.
Regulation SHO marking requirement.  Rule 6.53C,             Rule 5.33(l)(4)(A)....  None.
                                      Interpretation and
                                      Policy .06(e).
The Exchange will only execute the   N/A...................  Rule 5.33(l)(4)(B)....  While not explicitly stated
 stock leg of a stock-option order                                                    in the current Rules, the
 at a price permissible under                                                         Exchange will not execute
 Regulation SHO. If a stock-option                                                    the stock leg of a stock-
 order cannot execute, for a limit                                                    option order at a price
 order, the System calculates the                                                     not permissible under
 SBBO or SNBBO with a price for the                                                   Regulation SHO (current
 stock leg that would be                                                              Rule 6.53C, Interpretation
 permissible under Regulation SHO,                                                    and Policy .06(a) states a
 and posts the stock-option order                                                     stock-option order will
 on the COB at that price (if                                                         not execute unless the
 eligible to rest), or if a market                                                    stock leg is executable at
 order, the System routes it to PAR                                                   a price necessary to
 for manual handling, subject to a                                                    achieve the desired net
 User's instructions.                                                                 price). \85\
----------------------------------------------------------------------------------------------------------------

    The Exchange believes the proposed provisions described above
regarding complex order handling and executions provide a framework
that is substantially the same as the framework in place on the
Exchange today, as described above. The Exchange believes it will
continue to enable the efficient trading of complex orders in a manner
that is substantially similar to functionality available on Cboe
Affiliated Exchanges. As described above, complex order executions are
designed to work in concert with a priority of allocation that
continues to respect the priority of allocations on the Simple Book
while protecting orders Priority Customer orders in the Simple Book.
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    \77\ See Rule 6.21 in the current Rulebook (which rule the
Exchange intends to move without any substantive changes to Rule
5.10 of the shell Rulebook in a separate rule filing).
    \78\ See also ISE Options 3, Sections 12(e) and 14.
    \79\ See also ISE Options 3, Section 14, Supplementary Material
.02 (which states a ``trade'' of a stock-option order or stock-
complex order will be automatically cancelled if market conditions
prevent the execution of the stock or option leg(s) at the prices
necessary to achieve the agreed upon net price); and Miami
International Securities Exchange, LLC (``MIAX'') Rule 518,
Interpretation and Policy .01(b) (pursuant to which the stock
components will attempt execution prior to the option components,
but ultimately require both the stock and option components to
execute).
    \80\ See current Rule 6.53C, Interpretation and Policy .06(g).
    \81\ See current Rule 6.25, Interpretation and Policy .04(c).
    \82\ 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''), 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 its
Exemption Request, the Securities Industry Association 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 Letter to Nancy M. Morris,
Secretary, Commission, from Andrew Madoff, SIA Trading Committee,
SIA, dated June 21, 2006 (``SIA Exemption Request''), at 3.
    \83\ See QCT Exemption Order at 52831. In the SIA Exemption
Request, the 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 SIA
Exemption Request at 2.
    \84\ The Exchange believes this automatic nullification will
reduce any compliance risk for the User associated with execution of
a stock-option order and lack of execution of a stock order at or
near the same time. 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. 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.
    \85\ Specifically, Rule 201 of Regulation SHO provides that when
the short sale price test is triggered for an NMS stock, a trading
center (such as the Exchange) must comply with Rule 201. Other
options exchanges have similar marking requirements. See also MIAX
Rule 518, Interpretation and Policy .01(b) (which requires execution
price in accordance with Regulation SHO).
---------------------------------------------------------------------------

    Proposed Interpretation and Policy .01 states Market-Makers are not
required to quote on the COB. Complex strategies are not subject to any
quoting requirements applicable to Market-Makers in the simple market
for individual options series or classes. The Exchange does not take
into account Market-Makers' volume executed in complex strategies when
deterring whether Market-Makers meet their quoting obligations in the
simple market for individual options. This codifies current Exchange
practice and is the same as C2 Rule 6.13, Interpretation and Policy .01
and EDGX Rule 21.20, Interpretation and Policy .01.
    The proposed rule change deletes current Rule 6.53C, Interpretation
and Policy .01 regarding how the Exchange will announce determinations
it may make pursuant to Rule 6.53C. Rule 1.5 in the shell Rulebook
describes how the Exchange will announce determinations it may make
pursuant to the Rules, and thus current Interpretation and Policy .01
is no longer necessary.
    The proposed rule change deletes current Rule 6.53C, Interpretation