[Federal Register Volume 84, Number 48 (Tuesday, March 12, 2019)]
[Notices]
[Pages 8921-8931]
[FR Doc No: 2019-04421]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85253; File No. SR-CboeEDGX-2019-009]

Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice
of Filing of a Proposed Rule Change To Adopt Rule 21.21 (Solicitation
Auction Mechanism)

March 6, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on February 21, 2019, Cboe EDGX Exchange, Inc. (the ``Exchange''
or ``EDGX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
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 the
Substance of the Proposed Rule Change

    Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX'') proposes to
adopt Rule 21.21. The text of the proposed rule change is provided in
Exhibit 5.
    The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/options/regulation/rule_filings/edgx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

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

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

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

1. Purpose
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc.
(``Cboe Global''), which is the parent company of Cboe Exchange, Inc.
(``Cboe Options'') and Cboe C2 Exchange, Inc. (``C2''), acquired the
Exchange, Cboe EDGA Exchange, Inc. (``EDGA''), Cboe BZX Exchange, Inc.
(``BZX or BZX Options''), and Cboe BYX Exchange, Inc. (``BYX'' and,
together with C2, Cboe Options, the Exchange, EDGA, and BZX, the ``Cboe
Affiliated Exchanges''). The Cboe Affiliated Exchanges are working to
align certain system functionality, retaining only intended differences
between the Cboe Affiliated Exchanges, in the context of a technology
migration. Cboe Options intends to migrate its technology to the same
trading platform used by the Exchange, C2, and BZX Options in the
fourth quarter of 2019. The proposal set forth below is intended to add
certain functionality to the Exchange's System that is available on
Cboe Options in order to ultimately provide a consistent technology
offering for market participants who interact with the Cboe Affiliated
Exchanges. Although the Exchange intentionally offers certain features
that differ from those offered by its affiliates and will continue to
do so, the Exchange believes that offering similar functionality to the
extent practicable will reduce potential confusion for Users.
    The purpose of the proposed rule change is to adopt the
Solicitation Auction Mechanism (``SAM''), which is a solicited order
mechanism for larger-sized orders. SAM will provide an additional
method for market participants to effect orders in a price improvement
auction. The proposed rule change is similar to the solicited order
mechanism of Cboe Options and other options exchanges. Many aspects of
the proposed rule change are similar to the corresponding aspects of
the Automated Improvement Mechanism (``AIM''), which is the Exchange's
current electronic crossing mechanism.\3\ The Exchange believes the
similarity of SAM to the Exchange's AIM mechanism and the mechanisms of
other exchanges will allow the Exchange's proposed price improvement
functionality to fit seamlessly into the options market and benefit
market participants who are already familiar with this similar
functionality. The Exchange also believes this will encourage Users to
compete vigorously to provide the opportunity for price improvement for
larger-sized customer orders in a competitive auction process.
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    \3\ See Rule 21.19; see also SR-CboeEDGX-2019-007 (February 19,
2019).
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    An Options Member (the ``Initiating Member'') may electronically
submit for execution an order it represents as agent (``Agency Order'')
against a solicited order(s) \4\ provided it submits the Agency Order
for electronic execution into a SAM Auction pursuant to proposed Rule
21.21.\5\
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    \4\ The solicited order(s) cannot be for the same EFID as the
Agency Order or for the account of any Options Market Maker
registered in the applicable series on the Exchange. Cboe Options
Rule 6.74B is silent on how it determines whether both orders
submitted to a SAM Auction are solicited for different accounts. The
Agency Order and Solicited Order cannot both be for the accounts of
a customer. Cboe Options Rule 6.74B does not contain a similar
prohibition. The Exchange believes it is appropriate for such
customer-to-customer crosses to be submitted to an AIM Auction
pursuant to Rule 6.74A, as that rule contains a provision for
Customer-to-Customer Immediate AIM Crosses.
    \5\ For purposes of proposed Rule 21.21, the term ``NBBO'' means
the national best bid or national best offer at the particular point
in time applicable to the reference, and the term ``Initial NBBO''
means the national best bid or national best offer at the time a SAM
Auction is initiated.
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    The Initiating Member may initiate a SAM Auction if all of the
following conditions are met:
     The Agency Order may be in any class traded on the
Exchange.\6\
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    \6\ See proposed Rule 21.21(a)(1). Cboe Options Rule 6.74B(a)(1)
permits Cboe Options to make SAM available on a class-by-class
basis. The Exchange does not believe it currently needs this
flexibility.
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     The Initiating Member must mark an Agency Order for SAM
Auction processing.\7\
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    \7\ See proposed Rule 21.21(a)(2); see also Cboe Options Rule
6.74B(b)(1)(A).
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     The Agency Order must be for at least the minimum size
designated by the Exchange (which may not be less than 500 standard
option contracts or 5,000 mini-option contracts). The Solicited Order
must be for (or must total, if the Solicited Order is comprised of
multiple solicited orders) \8\ the same size as the Agency Order. The
Initiating Member must designate each of the Agency Order and Solicited
Order as all-or-none (``AON'').\9\
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    \8\ Cboe Options Rule 6.74B does not permit the solicited order
to consist of multiple contras. See additional discussion below
regarding the provision to permit multiple contra-parties to be
solicited to trade against an Agency Order.
    \9\ See proposed Rule 21.21(a)(3); see also Cboe Options Rule
6.74B(a)(1) and (2).
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     The price of the Agency Order and Solicited Order must be
in an increment of $0.01.\10\
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    \10\ See proposed Rule 21.21(a)(4). Cboe Options Rule
6.74B(a)(3) permits Cboe Options to determine the minimum price
increment for the Agency Order and Solicited Order, which may not be
smaller than $0.01. The Exchange does not believe it needs this
flexibility, and thus the proposed rule change applies the $0.01
increment to all classes.

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     An Initiating Member may not designate an Agency Order or
Solicited Order as Post Only.\11\
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    \11\ See proposed Rule 21.21(a)(5). The Post Only designation is
not available on Cboe Options. The Exchange believes this is
appropriate, as the purpose of a Post Only order is to not execute
upon entry and instead rest in the EDGX Options Book, while the
purpose of a SAM Auction is to receive an execution following the
auction but prior to entering the EDGX Options Book. See also Rule
21.19(a)(5).
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     An Initiating Member may only submit an Agency Order to a
SAM Auction after the market open.\12\
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    \12\ See proposed Rule 21.21(a)(6). Cboe Options Rule 6.74B is
silent on when a SAM Auction may be initiated. However, the Exchange
understands that the proposed rule change is consistent with Cboe
Options functionality. See also Rule 21.19(a)(6).
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     An Initiating Member may not submit an Agency Order if the
NBBO is crossed (unless the Agency Order is a SAM ISO).\13\
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    \13\ See proposed Rule 21.21(a)(7). Cboe Options Rule 6.74B is
silent on whether a SAM Auction may be initiated when the NBBO is
crossed. However, the proposed rule change is consistent with the
proposed requirement (and Cboe Options Rule 6.74B(b)(1)(A) and
(2)(A)(1)) that the stop price and execution price be at or better
than the initial NBBO (as discussed below), as well as linkage rules
that do not permit executions at prices that trade through the NBBO
(see Rule 27.2).
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    The System rejects or cancels both an Agency Order and Solicited
Order submitted to a SAM Auction that do not meet these conditions.\14\
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    \14\ See proposed Rule 21.21(a). Cboe Options Rule 6.74B does
not specify whether an Agency Order and Solicited Order will be
rejected or cancelled if they do not meet the SAM eligibility
requirements. However, the Exchange understands that the proposed
rule change is consistent with Cboe Options functionality. The
proposed SAM Auction eligibility requirements (other than the
minimum size) are the same as the AIM Auction eligibility
requirements. See Rule 21.19(a).
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    As defined, the Solicited Order may be comprised of multiple
solicited orders, in which case they must total the same size as the
Agency Order (and thus be for a total of at least 500 contracts). This
will accommodate multiple contra-parties and increase the opportunities
for customer orders to be submitted into an AIM Auction with the
potential for price improvement, since the Initiating Order must stop
the full size of the Agency Order. This will have no impact on the
execution of the Agency Order, which may trade against multiple contra-
parties depending on the final auction price, as set forth in proposed
paragraph (e). The Exchange notes that with regard to order entry, the
first order submitted into the system is marked as the initiating/
agency side and the second order is marked as the contra-side.
Additionally, the Solicited Order will always be entered as a single
order, even if that order consists of multiple contra-parties who are
allocated their portion of the trade in a post-trade allocation.\15\
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    \15\ The Exchange notes that while other exchange rules do not
specify whether the contra-side order in a solicitation auction
mechanism may consist of multiple orders, the contra-side order for
Qualified Contingent Cross Orders (see Rule 21.1(d)(10)), which
similarly have a minimum quantity requirement and are fully crossed
against an initiating order that must be for a minimum number of
contracts, may consist of multiple contra-side orders. However, ISE
Regulatory Information Circular 2014-013 states that the contra-side
order submitted into a crossing mechanism (including the ISE
solicited order mechanism) may consist of one or more parties.
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    The Solicited Order must stop the entire Agency Order at a price
that satisfies the following conditions:
     The stop price for a buy (sell) Agency Order must be at or
better than the then-current NBO (NBB).\16\
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    \16\ See proposed Rule 21.21(b)(1); see also Cboe Options Rule
6.74B(b)(1)(A).
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     If the Agency Order is to buy (sell) and the Exchange best
bid (offer) represents (a) a Priority Customer order on the EDGX
Options Book, the stop price must be at least $0.01 better than the
Exchange best bid (offer); or (b) a quote or order that is not a
Priority Customer order on the EDGX Options Book, the auction price
must be at least $0.01 better than the Exchange best bid (offer) unless
the agency Order is a Priority Customer order and the Exchange has
applied the Customer Overlay set forth in Rule 21.8(d)(1), in which
case the auction price must be at or better than the Exchange best bid
(offer).\17\ The Exchange believes this condition protects orders
resting on the EDGX Options Book, including Priority Customer orders.
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    \17\ See proposed Rule 21.21(b)(2). These conditions regarding
orders on the same side as the Agency Order are the same as those
applicable to AIM for orders of 50 contracts or more. See Rule
21.19(b). Cboe Options Rule 6.74B is silent regarding whether the
stop price must be at or better than the same-side Cboe Options best
bid or offer; however, the execution price must be at or better than
the Cboe Options best bid or offer.
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     If the Agency Order is to buy (sell) and the Exchange best
offer (bid) represents (a) a Priority Customer order on the EDGX
Options Book, the auction price must be at least $0.01 better than the
Exchange best offer (bid); or (b) a quote or order that is not a
Priority Customer order on the EDGX Options Book, the auction price
must be at or better than the Exchange best offer (bid).\18\ The
Exchange believes this condition protects orders resting on the EDGX
Options Book, including Priority Customer orders.
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    \18\ See proposed Rule 21.21(b)(3). Cboe Options Rule 6.74B is
silent regarding whether the auction price must be at or better than
the opposite-side Cboe Options best bid or offer; however, the
execution price may not be at the same price as priority customer
orders resting on the book on the opposite side of the Agency Order
(unless the priority customer orders execute against the Agency
Order).
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     If the Initiating Member submits a SAM sweep order to a
SAM Auction, the stop price, SAM responses, and executions are
permitted at a price inferior to the Initial NBBO. A ``SAM sweep
order'' or ``SAM ISO'' is the submission of two orders for crossing in
a SAM Auction without regard for better-priced Protected Quotes (as
defined in Rule 27.1) because the submitting Options Member routed an
ISO(s) simultaneously with the routing of the SAM ISO to execute
against the full displayed size of any Protected Quote that is better
than the stop price and has swept all interest in the EDGX Options Book
with a price better than the stop price. Any execution(s) resulting
from these sweeps accrue to the AIM Agency Order.\19\
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    \19\ See proposed Rule 21.21(b)(4). Cboe Options Rule 6.74B is
silent on whether ISOs are permitted with respect to SAM auctions.
However, ISOs are similarly permitted for AIM Auctions, and the
proposed definition of a SAM ISO is consistent with linkage rules.
See Rules 21.19(b)(3)(A) and 27.1.
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    The System rejects or cancels both an Agency Order and Solicited
Order submitted to a SAM Auction that do not meet these conditions.\20\
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    \20\ See proposed Rule 21.21(b).
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    Upon receipt of an Agency Order that meets the above conditions,
the SAM Auction process commences. One or more SAM Auctions in the same
series may occur at the same time. To the extent there is more than one
SAM Auction in a series underway at a time, the SAM Auctions conclude
sequentially based on the exact time each SAM Auction commenced, unless
terminated early pursuant to proposed paragraph (d). At the time each
SAM Auction concludes, the System allocates the Agency Order pursuant
to proposed paragraph (e) and takes into account all SAM Auction
responses and unrelated orders in place at the exact time of
conclusion. In the event there are multiple SAM Auctions underway that
are each terminated early pursuant to proposed paragraph (d), the
System processes the SAM Auctions sequentially based on the exact time
each SAM Auction commenced.\21\
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    \21\ See proposed Rule 21.21(c)(1). This provision regarding
concurrent SAM Auctions is similar to the AIM provision that permits
concurrent AIM Auctions for Agency Orders of 50 contracts or more.
See Rule 21.19(c)(1). The Cboe Options rule does not permit
concurrent SAM Auctions.
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    The Exchange notes it is also possible for various types of
auctions (such as an AIM Auction or a complex order

auction (``COA'')) to occur concurrently in the same series, and at the
end of each auction, it is possible for interest resting in the EDGX
Options Book to trade against any of the auctioned orders in the
series. While these auctions may be occurring at the same time, they
will be processed in the order in which they are terminated (similar to
how the System processes SAM Auctions as discussed above). In other
words, suppose there is an AIM Auction, a SAM Auction, and a COA all
occurring in the same series, which began and will terminate in that
order, and each of which last 100 milliseconds. While it is possible
for all three auctions to terminate nearly simultaneously, the System
will still process them in the order in which they terminate. When the
AIM Auction terminates, the System will process it in accordance with
Rule 21.19, and the auctioned order may trade against any resting
interest (in addition to the contra-side order and responses submitted
to that AIM Auction, which may only trade against the order auctioned
in that AIM pursuant to Rule 21.19). The System will then process the
SAM Auction when it terminates, and the auctioned order may trade
against any resting interest that did not execute against the AIM order
(in addition to the contra-side order and responses submitted to that
SAM Auction, which may only trade against the order auctioned in that
SAM pursuant to proposed Rule 21.21). Finally, the System will then
process the COA Auction when it terminates, and the COA order may leg
into the EDGX Options Book and trade against any resting interest that
did not execute against the AIM order or SAM order (in addition to any
interest resting on the complex order book and COA responses pursuant
to Rule 21.20).
    The Exchange System initiates the SAM Auction process by sending a
SAM Auction notification message detailing the side, size, auction
price, Auction ID, and options series of the Agency Order to all
Options Members that elect to receive SAM Auction notification
messages. SAM Auction notification messages are not included in the
disseminated BBO or OPRA.\22\ The SAM Auction lasts for a period of
time determined by the Exchange, which may be no less than 100
milliseconds and no more than one second (the Exchange will announce
this time period to Options Members via Exchange Notice and/or
technical specifications).\23\ An Initiating Member may not modify or
cancel an Agency Order or Solicited Order after submission to a SAM
Auction.\24\
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    \22\ See proposed Rule 21.21(c)(2); see also Cboe Options Rule
6.74B(b)(1)(B).
    \23\ See proposed Rule 21.21(c)(3); see also Cboe Options Rule
6.74B(b)(1)(C).
    \24\ See proposed Rule 21.21(c)(4); see also Rule 21.19(c)(4)
(corresponding provision in AIM). Cboe Options Rule 6.74B does not
contain this detail; however, the Exchange understands this is
consistent with current Cboe Options functionality.
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    Any User other than the Initiating Member (determined by EFID) may
submit responses to a SAM Auction that are properly marked specifying
size, side of the market, and the Auction ID for the SAM Auction to
which the User is submitting the response. A SAM response may specify a
limit price or be treated as market. A SAM response may only
participate in the SAM Auction with the Auction ID specified in the
response.\25\
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    \25\ See proposed Rule 21.21(c)(5); see also Rule 21.19(c)(5)
(corresponding provision in AIM). Cboe Options Rule 6.74B does not
specify that a response may be market as well as limit or that a
response may only participate in the auction specific in the
response.
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     The minimum price increment for SAM responses is $0.01.
The System rejects a SAM response that is not in a $0.01 increment.\26\
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    \26\ See proposed Rule 21.21(c)(5)(A). Cboe Options permits it
to determine the minimum increment of SAM responses, which may not
be less than $0.01. See Cboe Options Rule 6.74B(b)(1)(E). The
Exchange does not believe it needs that flexibility.
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     SAM responses that cross the Initial NBBO are capped at
the Initial NBBO on the same side as the Agency Order and $0.01 better
than the EDGX BBO on the same side as the Agency Order if the EDGX BBO
is represented by a Priority Customer on the EDGX Options Book (unless
the Agency Order is a SAM ISO). The System executes SAM responses, if
possible, at the most aggressive permissible price not outside the
Initial NBBO.\27\ This will ensure the execution price does not cross
the Initial NBBO in accordance with linkage rules.
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    \27\ See proposed Rule 21.21(c)(5)(B). Cboe Options does not
have a corresponding provision; however, this is the same as the
corresponding provision for the Exchange's AIM Auction. See Rule
21.19(c)(5)(B).
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     A User may submit multiple SAM response at the same or
multiple prices to a SAM Auction. The System aggregates all of a User's
SAM response and orders and quotes on the EDGX Options Book for the
same EFID at the same price.\28\ The Exchange believes this is
appropriate since all interest at a single price is considered for
execution against the Agency Order at that price, and can then together
be subject to the size cap, as discussed below. This (combined with the
proposed size cap) will prevent an Options Member from submitting
multiple orders, quotes, or responses at the same price to obtain a
larger pro-rata share of the Agency Order.
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    \28\ See proposed Rule 21.21(c)(5)(C). Cboe Options does not
specify whether a participant may submit multiple responses at the
same price or whether the size of all of a participant's interest at
the same price will be aggregated; however, this is the same as the
corresponding provision for the Exchange's AIM Auction. See Rule
21.19(c)(5)(C).
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     SAM responses, or the aggregate size of a User's orders,
quotes, and SAM responses for the same EFID at the same price, that
exceed the size of the Agency Order are capped at the size of the
Agency Order.\29\ This Exchange believes this is responsible to prevent
an Options Member from submitting an order, quote, or response with an
extremely large size in order to obtain a larger pro-rata share of the
Agency Order.
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    \29\ See proposed Rule 21.21(c)(5)(D). This is in contrast to
Cboe Options, which requires responses to not exceed the size of the
Agency Order. See Cboe Options Rule 6.74B(b)(1)(F). However, this is
the same as the corresponding provision for the Exchange's AIM
Auction. See Rule 21.19(c)(5)(D).
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     SAM responses must be on the opposite side of the market
as the Agency Order. The System rejects a SAM response on the same side
of the market as the Agency Order.\30\
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    \30\ See proposed Rule 21.21(c)(5)(E). Cboe Options does not
specify whether a response will be rejected if it is not on the
opposite side of the Agency Order; however, the Exchange understands
this is consistent with Cboe Options functionality and the same as
the corresponding provision for the Exchange's AIM Auction.
Additionally, it is reasonable given that the purpose of a response
is to trade against the Agency Order. See Rule 21.19(c)(5)(E).
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     SAM responses are not visible to SAM Auction participants
or disseminated to OPRA.\31\
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    \31\ See proposed Rule 21.21(c)(5)(F); see also Cboe Options
Rule 6.74B(b)(1)(D).
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     A User may modify or cancel its SAM responses during the
SAM Auction.\32\
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    \32\ See proposed Rule 21.21(c)(5)(G). Cboe Options does not
specify whether responses may be cancelled during the auction;
however, this is the same as the corresponding provision for the
Exchange's AIM Auction. See Rule 21.19(c)(5)(I). Unlike Cboe Options
Rule 6.74B, the proposed rule change permits responses for the
account of an options market-maker from another options exchange.
Other options exchanges similarly permit such responses in solicited
auction mechanisms. See, e.g., ISE Rule 716(e); and MIAX Rule
515A(b).
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    A SAM Auction concludes at the earliest to occur of the following
times:
     The end of the SAM Auction period;
     upon receipt by the System of a Priority Customer order on
the same side of the market with a price the same as or better than the
stop price that would post to the EDGX Options Book;
     upon receipt by the System of an unrelated, nonmarketable
order or quote that is not a Priority Customer order on the same side
of the market as the

Agency Order that would cause the stop price to be outside of the EDGX
BBO;
     the market close; and
     any time the Exchange halts trading in the affected
series, provided, however, that in such instance the SAM Auction
concludes without execution.
    An unrelated market or marketable limit order (against the EDGX
BBO), including a Post Only Order, on the opposite side of the Agency
Order received during the SAM Auction does not cause the SAM Auction to
end early and executes against interest outside of the SAM Auction. If
contracts remain from such unrelated order at the time the SAM Auction
ends, they may be allocated for execution against the Agency Order
pursuant to proposed paragraph (e).\33\ Because these orders may have
the opportunity to trade against the Agency Order following the
conclusion of the SAM Auction, which execution must still be at or
better than the NBBO and EDGX Options BBO, the Exchange does not
believe it is necessary to cause a SAM Auction to conclude early in the
event the Exchange receives such orders. This will provide more time
for potential price improvement, and the unrelated order will have the
opportunity to trade against the Agency Order in the same manner as all
other contra-side interest.
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    \33\ See proposed Rule 21.21(d). The proposed reasons why a SAM
Auction may conclude early differ from the reasons why a Cboe
Options SAM Auction may conclude early, but the proposed reasons are
the same as those that will cause an AIM Auction to conclude early.
See Rule 21.19(d). Similarly, a Cboe Options SAM Auction will
conclude early for the same reasons that cause a Cboe Options AIM
Auction to terminate early. See Cboe Options Rule 6.74B(b)(2).
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    At the conclusion of the SAM Auction, the System executes the
Agency Order against the Solicited Order or contra-side interest (which
includes SAM responses and orders and quotes resting in the EDGX
Options Book) at the best price(s) as follows, which price(s) must be
at or between the Initial NBBO and at or between the EDGX BBO at the
conclusion of the SAM Auction: \34\
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    \34\ See proposed Rule 21.21(e); see also Cboe Options Rule
6.74B(b)(2)(A) (which provides the execution price must be at or
better than the initial auction NBBO and that an execution will
occur at prices equal to or better than the Cboe Options BBO).
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     The System executes the Agency Order against the Solicited
Order at the stop price if (a) there is insufficient size among contra-
side trading interest at a price(s) better than the stop price to
satisfy the Agency Order, and (b) there are no displayed Priority
Customer Orders on the opposite side of the Agency Order resting in the
EDGX Options Book at the auction price.
     The System executes the Agency Order against contra-side
interest (and cancels the Solicited Order) if the aggregate size of (a)
any contra-side interest at a price(s) better than the stop price and
(b) any displayed Priority Customer Orders on the opposite side of the
Agency Order resting on the EDGX Options Book at the stop price is
sufficient to satisfy the Agency Order. Execution of the Agency Order
against such contra-side interest occurs at each price level better
than the stop price in the following order:
    [cir] Priority Customer orders on the EDGX Options Book (in time
priority);
    [cir] remaining contra-side trading interest (including non-
Priority Customer orders and quotes on the EDGX Options Book and SAM
responses) pursuant to Rule 21.8(c); and
    [cir] any nondisplayed Reserve Quantity (Priority Customer before
non-Priority Customer, each in time priority).
    Execution of the Agency Order against Priority Customer orders on
the opposite side of the Agency Order resting on the EDGX Options Book
at the stop price execute at that price in time priority.
     The System cancels the Agency Order and Solicited Order
with no execution if:
    [cir] Execution of the Agency Order against the Solicited Order at
the stop price would not be at or between the EDGX BBO at the
conclusion of the SAM Auction or at or between the Initial NBBO; or
    [cir] there is a Priority Customer Order(s) resting on the opposite
side of the Agency Order at the stop price on the EDGX Options Book,
and the aggregate size of that Priority Customer Order(s) at the stop
price and any contra-side interest at a price(s) better than the stop
price is insufficient to satisfy the Agency Order.\35\
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    \35\ See proposed Rule 21.21(e). Cboe Rule 6.74B(b)(2) is silent
regarding how the Agency Order will be allocated against contra-side
interest. The proposed allocation of contra-side interest is
consistent with current Exchange allocation rules. See Rule 21.8.
This will ensure the Agency Order is allocated consistent with the
standard priority of allocation on the Exchange rules that
distinguish between Priority Customers and displayed and
nondisplayed interest in a manner that will help ensure a fair and
orderly market by maintaining priority of orders and quotes while
still affording the opportunity for price improvement in each SAM
Auction commenced on the Exchange.
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     The System cancels or rejects any unexecuted SAM responses
(or unexecuted portions) at the conclusion of the SAM Auction.
    The proposed provisions regarding the execution of the Agency Order
at the conclusion of a SAM Auction is consistent with the corresponding
provisions for a Cboe Options SAM, except as proposed, if there is a
Priority Customer order resting on the EDGX Options Book at the stop
price and, with other contra-side interest at the stop price, there is
sufficient size to satisfy the Agency Order, the Agency Order will be
cancelled, while it would execute against such Priority Customer order
and contra-side interest at the stop price on Cboe Options.\36\ The
Exchange believes the proposed rule change is consistent with the AON
nature of solicitation mechanisms and the priority order applicable to
executions following a SAM Auction at the stop price, as well as
general priority provisions,\37\ which is:
---------------------------------------------------------------------------

    \36\ See Cboe Options Rule 6.74B(b)(2)(A) (which states if there
are priority customer orders and there is sufficient size
(considering all resting orders, electronic quotes and responses) to
execute the Agency Order, the Agency Order will be executed against
these interests and the solicited order will be cancelled, and if
there are priority customer orders and there is not sufficient size
(considering all resting orders, electronic quotes and responses),
both the Agency Order and the solicited order will be cancelled).
    \37\ See Rule 21.8, which provides that at a single price level:
(a) Priority Customer orders have priority over non-Priority
Customer orders, and Priority Customer orders at the same price are
allocated in time priority; (b) non-customer orders have next
priority and are allocated in a pro-rata manner; and (c) displayed
orders have priority over nondisplayed orders, and nondisplayed
portions of Reserve Orders are allocated in a pro-rata manner,
except nondisplayed portions of Priority Customer Reserve Orders
trade ahead of non-customer Reserve Orders. The Exchange notes it
may apply an entitlement for Designated Primary Market Makers or
Preferred market Makers, which entitlement would apply after
Priority Customer orders. This entitlement is inapplicable in the
setting of an auction; however, it is comparable to order when a
Solicited Order receives priority.
---------------------------------------------------------------------------

     Priority Customer orders resting on the EDGX Options Book;
     Solicited Order;
     non-Priority Customer orders and quotes resting on the
EDGX Options Book and SAM responses; and
     nondisplayed orders resting on the EDGX Options Book
(Priority Customers ahead of non-Priority Customers).

For example, pursuant to Cboe Options Rule 6.74B(b)(2) and proposed
Rule 21.21(e), if there are no Priority Customer orders resting on the
book at the stop price, if there is not sufficient contra-side interest
to satisfy the Agency Order at a better price but there is sufficient
non-Priority Customer contra-side interest at the stop price, the
Solicited Order has priority and executes against the Agency Order at
the stop price. The purpose of SAM is to provide a facility for Options
Members that locate liquidity for their large customer orders to
execute these orders (and potentially obtain better prices). Given the
large size of these orders and

the work involved to locate sufficient interest that will trade against
these customers order completely at the best then available price,
Options Members that solicit this interest in exchange receive priority
to trade against the entire size of these customer orders at the stop
price over non-Priority Customer orders. The Exchange believes this
will protect Priority Customer orders resting on the EDGX Options Book
while encouraging Options Members to continue to seek liquidity against
which their customers may execute their large orders, as well as
encourage non-Priority Customer orders to submit interest at improved
prices if they seek to execute against Agency Orders. The Exchange does
not believe it is fair for non-Priority Customer interest at the stop
price to trade ahead of the Solicited Order because there happens to be
a Priority Customer order at that price, when that interest would not
otherwise trade ahead of the Solicited Order.
    Proposed Rule 21.21, Interpretation and Policy .01 provides that
prior to entering Agency Orders into a SAM Auction on behalf of
customers, Initiating Members must deliver to the customer a written
notification informing the customer that his order may be executed
using the SAM Auction. The written notification must disclose the terms
and conditions contained in this Rule 21.21 and be in a form approved
by the Exchange.\38\
---------------------------------------------------------------------------

    \38\ See also Cboe Options Rule 6.74B, Interpretation and Policy
.02.
---------------------------------------------------------------------------

    Rule 22.12 prevents an Options Member from executing agency orders
to increase its economic gain from trading against the order without
first giving other trading interests on the Exchange an opportunity to
either trade with the agency order or to trade at the execution price
when the Options Member was already bidding or offering on the book.
However, the Exchange recognizes that it may be possible for an Options
Member to establish a relationship with a Priority Customer or other
person to deny agency orders the opportunity to interact on the
Exchange and to realize similar economic benefits as it would achieve
by executing agency order as principal. Under Rule 21.21, Initiating
Members may enter contra-side orders that are solicited. SAM provides a
facility for Options Members that locate liquidity for their customer
orders. Options Members may not use the SAM Auction to circumvent Rule
21.19 or 22.12 limiting principal transactions. This may include, but
is not limited to, Options Members entering contra-side orders that are
solicited from (a) affiliated broker-dealers or (b) broker-dealers with
which the Options Member has an arrangement that allows the Options
Member to realize similar economic benefits from the solicited
transaction as it would achieve by executing the customer order in
whole or in part as principal.\39\
---------------------------------------------------------------------------

    \39\ See proposed Interpretation and Policy .02; see also Cboe
Options Rule 6.74B, Interpretation and Policy .03. The proposed rule
change also amends Rule 22.12 to add a reference to SAM as an
exception to the general restriction on the execution of orders as
principal against orders they represent as agent. See proposed Rule
22.12(c); see also Cboe Options Rule 6.45, Interpretation and Policy
.01.
---------------------------------------------------------------------------

    The following examples demonstrate how orders will be executed in a
SAM Auction:

Example #1
    XYZ Jan 50 Calls
    NBBO: 1.10-1.25
    BBO: 1.10-1.30 (no Priority Customer orders included in the BBO)
    Paired order to execute 2,000 contracts AON (Agency Order to sell)
at 1.10

    A SAM Auction notification message is sent to all Options Members
that elect to receive SAM Auction notification messages, which shows
the option, size, side, and price. The SAM Auction timer begins, and
the System starts the SAM Auction to sell at 1.10.
    During the SAM Auction, the System receives the following responses
in the following order:

 Response 1 to buy 2,000 at 1.10
 Response 2 to buy 2,000 at 1.10
 Response 3 to buy 5,000 at 1.10
 Response 4 to buy 1,000 at 1.20

The aggregate responses did not improve the price of the entire Agency
Order, and there are no displayed Priority Customer orders at the stop
price, so at the conclusion of the SAM Auction, the System executes the
Solicited Order against the Agency Order at a price of 1.10 and cancels
the SAM responses.

Example #2
    XYZ Jan 50 Calls
    NBBO: 1.10-1.25
    BBO: 1.10-1.30 (no Priority Customer orders included in the BBO)
    Paired order to execute 2,000 contracts AON (Agency Order to sell)
at 1.10

    A SAM Auction notification message is sent to all Options Members
that elect to receive SAM Auction notification messages, which shows
the option, size, side, and price. The SAM Auction timer begins, and
the System starts the SAM Auction to sell at 1.10.
    During the SAM Auction, the System receives the following responses
in the following order:

 Response 1 to buy 2,000 at 1.10
 Response 2 to buy 2,000 at 1.10
 Response 3 to buy 5,000 at 1.10
 Response 4 to buy 1,000 at 1.20
 Response 5 to buy 2,000 at 1.15

    There is sufficient size among the SAM responses to improve the
price of the entire Agency Order, so at the conclusion of the SAM
Auction, the System executes 1,000 contracts of the Agency Order at a
price of 1.20 against Response 4 and 1,000 contracts of the Agency
Order at a price of 1.15 against Response 5, and cancels the Solicited
Order and Responses 1, 2, 3, and 5 (the remaining 1,000).

Example #3
    XYZ Jan 50 Calls
    NBBO: 1.10-1.25
    BBO: 1.10 (200)-1.30 (no Priority Customer orders included in the
BBO)
    Paired order to execute 2,000 contracts AON (Agency Order to sell)
at 1.11

    A SAM Auction notification message is sent to all Options members
that elect to receive SAM Auction notification messages, which shows
the option, size, side, and price. The SAM Auction timer begins, and
the System starts the SAM Auction to sell at 1.11.
    During the SAM Auction, the System receives the following responses
in the following order:

 Response 1 to buy 2,000 at 1.11
 Response 2 to buy 2,000 at 1.11
 Response 3 to buy 5,000 at 1.11
 Response 4 to buy 1,000 at 1.12
 Unrelated Order A to sell 500 at 1.10

The SAM Auction terminates when the System receives Unrelated Order A,
because it is marketable against the EDGX best bid of 1.10, and would
cause the stop price to be outside of the EDGX BBO if it immediately
executed. The aggregate responses did not improve the price of the
entire Agency Order, and there are no displayed Priority Customer
orders at the stop price, so at the conclusion of the SAM Auction, the
System executes the Solicited Order against the Agency Order at a price
of 1.11 and cancels the SAM responses. The System then executes 200
contracts of Unrelated Order A against the resting order at a 1.10 at
that price, and then enters 300 contracts of Unrelated Order A onto the
Book. The EDGX BBO then becomes 1.08--1.10 (which, as noted above,
would have caused the stop price to be outside of the EDGX BBO).

Example #4
    XYZ Jan 50 Calls
    NBBO: 1.10-1.25
    BBO: 1.10-1.30 (Priority Customer order for 20 included in the bid,

and no Priority Customer order included in the offer)

    Paired order to execute 2,000 contracts AON (Agency Order to sell)
at 1.11 (one increment better than a resting Priority Customer order on
the opposite side of the EDGX Options Book).
    A SAM Auction notification message is sent to all Options Members
that elect to receive SAM Auction notification messages, which shows
the option, size, side, and price. The SAM Auction timer begins, and
the System starts the SAM Auction to sell at 1.11.
    During the SAM Auction, the System receives the following responses
in the following order:

 Response 1 to buy 2,000 at 1.11
 Response 2 to buy 2,000 at 1.11
 Response 3 to buy 1,000 at 1.15
 Response 4 to buy 900 at 1.12
 Priority Customer order to buy 100 at 1.11

    There is sufficient size among the SAM responses at prices better
than the stop price and the Priority Customer order at the stop price,
so at the conclusion of the SAM Auction, the System executes 1,000
contracts of the Agency Order at a price of 1.15 against Response 3,
900 contracts of the Agency Order at a price of 1.12 against Response
4, and 100 contracts of the Agency Order at a price of 1.11 against the
Priority Customer order, and cancels the Solicited Order and Responses
1 and 2.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\40\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \41\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \42\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78f(b).
    \41\ 15 U.S.C. 78f(b)(5).
    \42\ Id.
---------------------------------------------------------------------------

    The proposed rule change is generally intended to add certain
system functionality currently offered by Cboe Options to the
Exchange's System in order to provide a consistent technology offering
for the Cboe Affiliated Exchanges. A consistent technology offering, in
turn, will simplify the technology implementation, changes and
maintenance by Users of the Exchange that are also participants on Cboe
Affiliated Exchanges. This will provide Users with greater
harmonization of price improvement auction mechanisms available among
the Cboe Affiliated Exchanges.
    The proposed rule change will provide market participants with an
additional auction mechanism that will provide them with greater
flexibility in pricing larger-sized orders and may provide more
opportunities for price improvement.\43\ SAM as proposed will function
in a similar manner as AIM, the Exchange's current price improvement
mechanism--the differences relating primarily to the minimum size
requirement and all-or-none nature of SAM. Additionally, the proposed
auction mechanism provides equal access to the exposed Agency Orders
for all market participants, as all Options Members that subscribe to
the Exchange's data feeds with the opportunity to interact with orders
submitted into SAM Auctions.\44\ SAM is intended to benefit investors,
because it is designed to provide investors seeking to execute large
option orders with opportunities to access additional liquidity and
receive price improvement. It will provide Options Members that locate
liquidity for their customers' larger-sized orders a facility in which
to execute those orders, potentially at improved prices. The proposed
rule change may result in increased liquidity available at improved
prices for larger-sized orders, with competitive final pricing out of
the Initiating Member's control. The Exchange believes SAM will promote
and foster competition and provide more options contracts with the
opportunity for price improvement.
---------------------------------------------------------------------------

    \43\ See Securities Exchange Act Release Nos. 49141 (January 28,
2004), 69 FR 5625 (February 5, 2004) (SR-ISE-2001-22); 57610 (April
3, 2008), 73 FR 19535 (April 10, 2008) (SR-CBOE-2008-14); and 72009
(April 23, 2014), 79 FR 24032 (April 29, 2014) (SR-MIAX-2014-09).
    \44\ Any Options Member can subscribe to the options data
disseminated through the Exchange's data feeds.
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, because the proposed SAM Auction is similar
to other solicitation auction mechanisms currently available at other
options exchanges.\45\ The general framework of the proposed SAM
Auction process (such as the eligibility requirements, the auction
response period, the same-side stop price requirements, response
requirements, and auction notification process),\46\ is substantively
the same as the framework for the AIM price improvement auction the
Exchange's current price improvement auction. The primary features of
the proposed SAM Auction process are similar to the solicitation
auction mechanisms of other options exchanges, including Cboe Options
SAM, as discussed above and below. The clarity in how the proposed
price improvement auction will function and its consistency with
similar auctions at other exchanges will help promote a fair and
orderly national options market system.
---------------------------------------------------------------------------

    \45\ See, e.g., Cboe Options Rule 6.74B; ISE Rule 716(e); and
MIAX Rule 515A(b).
    \46\ See Rule 21.19.
---------------------------------------------------------------------------

    Further, the new functionality may lead to an increase in Exchange
volume and should allow the Exchange to better compete against other
markets that already offer an electronic solicitation mechanism, while
providing an opportunity for price improvement for Agency Orders. The
Exchange believes that its proposal will allow the Exchange to better
compete for solicited transactions, while providing an opportunity for
price improvement for Agency Orders and assuring that Priority
Customers on the EDGX Options Book are protected. The new solicitation
mechanism should promote and foster competition and provide more
options contracts with the opportunity for price improvement, which
should benefit market participants.
    The Exchange believes the proposed rule change will result in
efficient trading and reduce the risk for investors that seek access to
additional liquidity and price improvement for larger-sized orders by
providing additional opportunities to do so. The proposed priority and
allocation rules in the SAM Auction are consistent with the Exchange's
current priority and allocation rules that give priority to displayed
Priority Customer orders,\47\ which will ensure a fair and orderly

market by maintaining priority of orders and quotes while still
affording the opportunity for price improvement during each SAM Auction
commenced on the Exchange. The proposed allocation ensures that the
Agency Order will be filled if there is a displayed Priority Customer
order on the EDGX Options Book at the stop price that, when combined
with price-improving interest that otherwise could not fill the Agency
Order on its own (and thus providing price improvement for part of the
Agency Order).
---------------------------------------------------------------------------

    \47\ Pursuant to Rule 21.8, at a single price level, Priority
Customer orders have priority over non-Priority Customer orders,
which have priority over all nondisplayed orders (i.e., the Reserve
Portion of Priority Customer and non-Priority Customer Reserve
Orders).
---------------------------------------------------------------------------

    The proposed allocation is similar to the priority of orders in
other options' solicitation auction mechanism rules, pursuant to which
interest at improved prices have priority over the stop order (if there
is sufficient size at improved prices to satisfy the entire Agency
Order) and the Solicited Order has priority over non-Priority Customer
interest at the stop price (e.g., if there is sufficient non-Priority
Customer interest and no Priority Customer interest at the stop price).
However, the proposed allocation rules differ in one circumstance. As
proposed, if there is a Priority Customer order resting on the EDGX
Options Book at the stop price and, with other contra-side interest at
the stop price, there is sufficient size to satisfy the Agency Order,
the Agency Order will be cancelled, while it would execute against such
Priority Customer order and contra-side interest at the stop price on
Cboe Options.\48\ The Exchange believes the proposed rule change is
consistent with the AON nature of solicitation mechanisms and the
priority order applicable to executions following a SAM Auction at the
stop price, as well as general priority provisions,\49\ which is:
---------------------------------------------------------------------------

    \48\ See Cboe Options Rule 6.74B(b)(2)(A) (which states if there
are priority customer orders and there is sufficient size
(considering all resting orders, electronic quotes and responses) to
execute the Agency Order, the Agency Order will be executed against
these interests and the solicited order will be cancelled, and if
there are priority customer orders and there is not sufficient size
(considering all resting orders, electronic quotes and responses),
both the Agency Order and the solicited order will be cancelled).
    \49\ See Rule 21.8, which provides that at a single price level:
(a) Priority Customer orders have priority over non-Priority
Customer orders, and Priority Customer orders at the same price are
allocated in time priority; (b) non-customer orders have next
priority and are allocated in a pro-rata manner; and (c) displayed
orders have priority over nondisplayed orders, and nondisplayed
portions of Reserve Orders are allocated in a pro-rata manner,
except nondisplayed portions of Priority Customer Reserve Orders
trade ahead of non-customer Reserve Orders. The Exchange notes it
may apply an entitlement for DPMs and PMM receive this entitlement
after Priority Customers and before all other interest as a benefit
in exchange for the increased quoting they perform. Similarly, the
Solicited Order receives priority after Priority Customers and
before all other interest as a benefit in exchange for the work the
Initiating Member performs to locate sufficient liquidity to execute
against a large customer order
---------------------------------------------------------------------------

     Priority Customer orders resting on the EDGX Options Book;
     Solicited Order (which may only execute in its entirety or
not at all);
     non-Priority Customer orders and quotes resting on the
EDGX Options Book and SAM responses; and
     nondisplayed orders resting on the EDGX Options Book
(Priority Customers ahead of non-Priority Customers).

For example, pursuant to Cboe Options Rule 6.74B(b)(2) and proposed
Rule 21.21(e), if there are no Priority Customer orders resting on the
book at the stop price, and there is not sufficient contra-side
interest to satisfy the Agency Order at a better price but there is
sufficient non-Priority Customer contra-side interest at the stop
price, the Solicited Order has priority and executes against the entire
Agency Order at the stop price. The Exchange does not believe it is
fair for non-Priority Customer interest at the stop price to trade
ahead of the Solicited Order because there happens to be a Priority
Customer order at that price, when that interest would not otherwise
trade ahead of the Solicited Order.
    The purpose of SAM is to provide a facility for Options Members
that locate liquidity for their large customer orders to execute these
orders (and potentially obtain better prices). Given the large size of
a customer order submitted into a SAM Auction, an Initiating Member
that solicits and locates sufficient interest to execute against the
entire order at the best then-available price (or better) receives in
exchange for that effort execution priority over non-Priority Customers
(who do not expend similar efforts to trade against the Agency Order
and do not provide price improvement) to trade against the entire size
of the customer order at the stop price.\50\ The Exchange believes the
proposed rule change promotes just and equitable principles of trade,
because it will protect Priority Customer orders resting on the EDGX
Options Book while encouraging Options Members to continue to seek
liquidity against which their customers may execute their large orders.
The Exchange believes this may also encourage non-Priority Customers to
submit interest at improved prices if they seek to execute against
Agency Orders since they will not have the opportunity to trade against
an Agency Order at the stop price. The Exchange believes any potential
impact related to the elimination of the opportunity for non-Priority
Customers to trade against Agency Orders at the stop price will be
offset by the additional opportunities for price improvement that may
result. Options Members will have additional incentive to submit
customer orders into SAM Auctions, and other market participants will
also have additional incentive to provide liquidity as part of the
Solicited Order, because they will have more certainty and reduced
market risk regarding execution of their orders against the Agency
Order. This may result in additional SAM Auctions, and other
participants will have additional incentive to submit interest at
better prices. Any potential impact is further minimized because, as
proposed, the stop price must be better than the EDGX BBO if there a
Priority Customer order resting at the BBO (except if the Agency Order
is for a Priority Customer), and as a result this situation would only
occur if a Priority Customer order entered the EDGX Options Book at the
stop price during the SAM Auction period and there is also sufficient
other contra-side interest to satisfy the Agency Order.\51\ Non-
Priority Customers will continue to have the opportunity to trade
against Agency Orders at improved prices.
---------------------------------------------------------------------------

    \50\ The Exchange notes, as proposed in Interpretation and
Policy .01, an Initiating Member must provide written notice to its
customers that their orders may be submitted into a SAM Auction,
which notice must disclose the terms and conditions of the auction,
so customers will be aware of the priority provisions applicable to
SAM.
    \51\ As proposed, a Priority Customer order with a price at or
better than the stop price entered during the SAM Auction period
would terminate the Auction.
---------------------------------------------------------------------------

    By keeping the priority and allocation rules for a SAM Auction
similar to the standard allocation used on the Exchange and consistent
across possible outcomes of a SAM Auction, the proposed rule change
reduces the ability of market participants to misuse the SAM Auction to
circumvent standard priority rules in a manner that is designed to
prevent fraudulent and manipulative acts and practices, and to promote
just and equitable principles of trade on the Exchange. The proposed
execution and priority rules will allow orders to interact with
interest in the EDGX Options Book, and will allow interest on the EDGX
Options Book to interact with option orders in the price improvement
mechanisms in an efficient and orderly manner. The Exchange believes
this interaction of orders will benefit investors by increasing the
opportunity for option orders to receive executions, while also
enhancing the execution quality for orders resting on the Book.
    The proposed SAM Auction eligibility requirements are reasonable
and

promote a fair and orderly market and national market system, because
they are substantially similar to the eligibility requirements for
other exchanges' solicited order mechanisms,\52\ and benefit investors
by providing clarity regarding how they may initiate a SAM Auction.
Additionally, other than the minimum size requirement and AON
requirement (which are standard for solicited order mechanisms), the
eligibility requirements are virtually the same as those for AIM, the
Exchange's other price improvement mechanism.\53\ This will further
benefit investors by providing consistency across the Exchange's price
improvement mechanisms.
---------------------------------------------------------------------------

    \52\ See Cboe Options Rule 6.74B(a) and (b)(1) and
Interpretation and Policy .03; and MIAX Rule 515A(b)(1) and (2) and
Interpretation and Policy .04 (which permit applicability to any
class, prohibit appointed market-makers from being solicited, impose
the same minimum size and all-or-none requirement, has the same
minimum increment, and requires Agency Orders to be marked for SAM
processing). The proposed rule change that states a SAM Auction may
not commence until after the market open is reasonable, as execution
following a SAM Auction would not be possible until after the market
open and when there is a BBO and NBBO.
    \53\ See Rule 21.19(a).
---------------------------------------------------------------------------

    The proposed rule that an Initiating Member may not designate an
Agency Order or Initiating Order as Post Only protects investors,
because it provides transparency regarding functionality that will not
be available for SAM. The Exchange believes this is appropriate, as the
purpose of a Post Only order is to not execute upon entry and instead
rest in the EDGX Options Book, while the purpose of submitting orders
to a SAM Auction is to receive an execution following the auction and
not enter the EDGX Options Book. Pursuant to current and proposed Rule
21.21, an Agency Order will fully execute against contra-side interest
(possibly against the Solicited Order, which must be for the same size
as the Agency Order), or will be cancelled in the event there is no
execution following a SAM Auction, and thus there cannot be remaining
contracts in an Agency Order or Solicited Order to enter the EDGX
Options Book.
    The proposed rule change to state that the minimum size requirement
of 500 or more standard option contracts applies to the equivalent
number of mini-option contracts (i.e., 5,000 mini-option contracts)
promotes just and equitable principles of trade. Rule 19.6,
Interpretation and Policy .07 permits the listing of mini-options,
which is an option with a 10 share deliverable of the underlying
security rather than 100 share deliverable of the underlying security
(which is the standard deliverable for a standard option contract). The
proposed change to state that 500 standard option contracts is
consistent with 5,000 mini-option contracts is consistent with this
definition of mini-options. This provides transparency to investors
that SAM functionality and the potential for price improvement is
available to Agency Orders for large orders of mini-options as well as
standard options.
    The proposed rule change to prohibit an Agency Order and Solicited
Order from both being for the accounts of Priority Customers is
reasonable, because the Exchange believes it would be in the interests
of such pairs of orders to be submitted to a Customer-to-Customer AIM
Immediate Cross pursuant to Rule 21.19(f) pursuant to which they can be
executed immediately. The Exchange believes there will be minimal
demand to submit pairs of Priority Customer orders into SAM Auctions
given its offering of immediate cross functionality via AIM.
    The Exchange believes the proposed rule change to permit the
Solicited Order to be comprised of multiple orders that total the size
of the Agency Order may increase liquidity and opportunity for Agency
Orders to participate in SAM Auctions, and therefore provide Agency
Orders with additional opportunities for price improvement, which is
consistent with the principles behind the SAM Auction. The Exchange
believes that this will be beneficial to participants because allowing
multiple contra-parties should foster competition for filling the
contra-side order and thereby result in potentially better prices, as
opposed to only allowing one contra-party and, thereby requiring that
contra-party to do a larger size order which could result in a worse
price for the trade. Another exchange permits the contra-side in a
solicited auction mechanism to be comprised of multiple contra-
parties.\54\ The Exchange notes the contra-side of a Qualified
Contingent Cross order may be comprised of multiple orders.\55\
---------------------------------------------------------------------------

    \54\ See ISE Rule 716(e) and ISE Regulatory Information Circular
2014-013.
    \55\ Unlike orders submitted to a SAM Auction, Qualified
Contingent Cross orders may immediately execute and are not exposed
to the market for possible price improvement.
---------------------------------------------------------------------------

    As discussed above, the Exchange has proposed to allow SAM Auctions
to occur concurrently with other SAM Auctions. Although SAM Auctions
for Agency Orders will be allowed to overlap, the Exchange does not
believe this raises any issues that are not addressed through the
proposed rule change described above. For example, although
overlapping, each SAM Auction will be started in a sequence and with a
time that will determine its processing. Thus, even if there are two
SAM Auctions that commence and conclude, at nearly the same time, each
SAM Auction will have a distinct conclusion at which time the SAM
Auction will be allocated. In turn, when the first Auction concludes,
unrelated orders that then exist will be considered for participation
in the SAM Auction. If unrelated orders are fully executed in such SAM
Auction, then there will be no unrelated orders for consideration when
the subsequent SAM Auction is processed (unless new unrelated order
interest has arrived). If instead there is remaining unrelated order
interest after the first SAM Auction has been allocated, then such
unrelated order interest will be considered for allocation when the
subsequent SAM Auction is processed. As another example, each SAM
response is required to specifically identify the Auction for which it
is targeted and if not fully executed will be cancelled back at the
conclusion of the Auction. Thus, SAM responses will be specifically
considered only in the specified SAM Auction.
    The Exchange does not believe that allowing multiple auctions to
overlap for Agency Orders presents any unique issues that differ from
functionality already in place on the Exchange or other exchanges.
Pursuant to Rule 21.19(c)(1), multiple AIM Auctions for Agency Orders
for 50 or more contracts may overlap. Additionally, other options
exchanges permit other auctions to overlap.\56\
---------------------------------------------------------------------------

    \56\ See, e.g., ISE Rule 716(d), which governs ISE's
facilitation mechanism and does not restrict such auctions to one
auction at a time; and Boston Options Exchange (``BOX'') Rule 7270.
---------------------------------------------------------------------------

    The proposed auction process will promote a free and open market,
because it ensures equal access to information regarding SAM Auctions
and the exposed Agency Orders for all market participants, as all
Options Members that subscribe to the Exchange's data feeds with the
opportunity to interact with orders submitted into SAM Auctions.\57\
The Exchange has proposed a range between no less than 100 milliseconds
and no more than one second for the duration of a SAM Auction.\58\ This
will provide investors with more timely execution of their options
orders than a mechanism that has a one second auction, while

ensuring there is an adequate exposure of orders in EDGX SAM. This
proposed auction response time should provide investors with the
opportunity to receive price improvement for larger-sized orders
through SAM while reducing market risk. The Exchange believes a briefer
time period reduces the market risk for the Initiating Member, versus
an auction with a longer period, as well as for any Options Member
providing responses to a broadcast. As such, the Exchange believes the
proposed rule change would help perfect the mechanism for a free and
open national market system, and generally help protect investors and
the public interest. All Options Members will have an equal opportunity
to respond with their best prices during the SAM Auction. Since the
Exchange considers all interest present in the System, and not solely
SAM response, for execution against the Agency Order, those
participants who are not explicit responders to a SAM Auction may
receive executions via SAM as well.
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    \57\ Any Options Member can subscribe to the options data
disseminated through the Exchange's data feeds.
    \58\ See also Cboe Options Rule 6.74B(b)(1)(C); ISE Rule 716,
Supplementary Material .04; and MIAX Rule 515A(b)(2)(1)(C).
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    The proposed SAM Auction response requirements are reasonable and
promote a fair and orderly market and national market system, because
they are substantially similar to the response requirements for other
exchanges' solicited order mechanisms,\59\ and benefit investors by
providing clarity regarding how they may respond to a SAM Auction.
Additionally, other than not restricting Times in Force or MTP
Modifiers available for responses (which restrictions the Exchange does
not currently believe are necessary for SAM responses), the eligibility
requirements are virtually the same as those for AIM responses, the
Exchange's other price improvement mechanism.\60\ This will further
benefit investors by providing consistency across the Exchange's price
improvement mechanisms.
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    \59\ See Cboe Options Rule 6.74B(a) and (b)(1) and
Interpretation and Policy .03; and MIAX Rule 515A(b)(1) and (2) and
Interpretation and Policy .04 (which permit applicability to any
class, prohibit appointed market-makers from being solicited, impose
the same minimum size and all-or-none requirement, has the same
minimum increment, and requires Agency Orders to be marked for SAM
processing). The proposed rule change that states a SAM Auction may
not commence until after the market open is reasonable, as execution
following a SAM Auction would not be possible until after the market
open and when there is a BBO and NBBO.
    \60\ See Rule 21.19(a).
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    The proposed rule change will also perfect the mechanism of a free
and open market and a national market system, as it is consistent with
linkage rules. Proposed Rule 21.21 does not permit Agency Orders to be
submitted when the NBBO is crossed and requires Agency Order execution
prices at the end of SAM Auctions to be at or between the Initial NBBO
and the EDGX BBO at the conclusion of the SAM Auction. The proposed
stop price requirements and the events to terminate a SAM Auction early
further ensure execution prices at or better than the NBBO and EDGX
BBO. Additionally, the proposed SAM ISO order type (which is similar to
current AIM ISO functionality) will provide Options Members with an
efficient method to initiate a SAM Auction while preventing trade-
throughs.
    Unlike the rules of other exchanges, the Exchange will not conclude
a SAM Auction early due to the receipt of an opposite side order. The
Exchange believes this promotes just and equitable principles of trade,
because these orders may have the opportunity to trade against the
Agency Order following the conclusion of the SAM Auction, which
execution must still be at or better than the NBBO and EDGX Options
BBO. The Exchange believes this will protect investors, because it will
provide more time for price improvement, and the unrelated order will
have the opportunity to trade against the Agency Order in the same
manner as all other contra-side interest.
    With respect to trading halts, as described herein, in the case of
a trading halt on the Exchange in the affected series, the Auction will
be cancelled without execution. Cancelling Auctions without execution
in this circumstance is consistent with Exchange handling of trading
halts in the context of continuous trading on EDGX Options and promotes
just and equitable principles of trade and, in general, protects
investors and the public interest.\61\
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    \61\ The Exchange notes that trading on the Exchange in any
option contract will be halted whenever trading in the underlying
security has been paused or halted by the primary listing market and
other circumstances. See Rule 20.3.
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    The proposed rule change is also consistent with Section 11(a)(1)
of the Act \62\ and the rules promulgated thereunder. Generally,
Section 11(a)(1) of the Act restricts any member of a national
securities exchange from effecting any transaction on such exchange for
(i) the member's own account, (ii) the account of a person associated
with the member, or (iii) an account over which the member or a person
associated with the member exercises discretion (collectively referred
to as ``covered accounts''), unless a specific exemption is available.
Examples of common exemptions include the exemption for transactions by
broker dealers acting in the capacity of a market maker under Section
11(a)(1)(A),\63\ the ``G'' exemption for yielding priority to non-
members under Section 11(a)(1)(G) of the Act and Rule 11a1-1(T)
thereunder,\64\ and ``Effect vs. Execute'' exemption under Rule 11a2-
2(T) under the Act.\65\ The ``Effect vs. Execute'' exemption permits an
exchange member, subject to certain conditions, to effect transactions
for covered accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\66\ may not be affiliated with the executing member; and (iv) with
respect to an account over which the member has investment discretion,
neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule. For the reasons set forth below, the Exchange
believes that Exchange Members entering orders into SAM would satisfy
the requirements of Rule 11a2-2(T).
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    \62\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person,
or an account over which it or its associated person exercises
discretion unless an exception applies.
    \63\ 15 U.S.C. 78k(a)(1)(A).
    \64\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
    \65\ 17 CFR 240.11a2-2(T).
    \66\ The member may, however, participate in clearing and
settling the transaction.
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    The Exchange does not operate a physical trading floor. In the
context of automated trading systems, the Commission has found that the
off-floor transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\67\

The Exchange represents that the System and the proposed SAM Auction
receive all orders electronically through remote terminals or computer-
to-computer interfaces. The Exchange represents that orders for covered
accounts from Options Members will be transmitted from a remote
location directly to the proposed SAM mechanism by electronic means.
---------------------------------------------------------------------------

    \67\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SRBSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
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    The second condition of Rule 11a2-2(T) requires that neither a
member nor an associated person participate in the execution of its
order once the order is transmitted to the floor for execution. The
Exchange represents that, upon submission to the SAM Auction, an order
will be executed automatically pursuant to the rules set forth for SAM.
In particular, execution of an order sent to the mechanism depends not
on the Initiating Member entering the order, but rather on what other
orders are present and the priority of those orders. Thus, at no time
following the submission of an order is a Member able to acquire
control or influence over the result or timing of order execution.\68\
Once the Agency Order has been transmitted, the Initiating Member that
transmitted the order will not participate in the execution of the
Agency Order. Initiating Members submitting Agency Orders will
relinquish control to modify their Agency Orders upon transmission to
the System. Further, no Member, including the Initiating Member, will
see a SAM response submitted into SAM and therefore and will not be
able to influence or guide the execution of their Agency Orders.
---------------------------------------------------------------------------

    \68\ The Exchange notes that an Options Member may not cancel or
modify an order after it has been submitted into SAM.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s third condition requires that the order be
executed by an exchange member who is unaffiliated with the member
initiating the order. The Commission has stated that the requirement is
satisfied when automated exchange facilities, such as the BAM Auction
are used, as long as the design of these systems ensures that members
do not possess any special or unique trading advantages in handling
their orders after transmitting them to the exchange.\69\ The Exchange
represents that the SAM Auction is designed so that no Options Member
has any special or unique trading advantage in the handling of its
orders after transmitting its orders to the mechanism.
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    \69\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s fourth condition requires that, in the case of a
transaction effected for an account with respect to which the
initiating member or an associated person thereof exercises investment
discretion, neither the initiating member nor any associated person
thereof may retain any compensation in connection with effecting the
transaction, unless the person authorized to transact business for the
account has expressly provided otherwise by written contract referring
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\70\ The
Exchange recognizes that Options Members relying on Rule 11a2-2(T) for
transactions effected through the SAM Auction must comply with this
condition of the Rule and the Exchange will enforce this requirement
pursuant to its obligations under Section 6(b)(1) of the Act to enforce
compliance with federal securities laws.
---------------------------------------------------------------------------

    \70\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement which amount must be exclusive of all amounts paid to
others during that period for services rendered to effect such
transactions. See also 1979 Release (stating ``[t]he contractual and
disclosure requirements are designed to assure that accounts
electing to permit transaction-related compensation do so only after
deciding that such arrangements are suitable to their interests'').
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    The Exchange believes that the instant proposal is consistent with
Rule 11a2-2(T), and that therefore the exception should apply in this
case.
    The Exchange also believes that the proposed rule changes would
further the objectives of the Act to protect investors by promoting the
intermarket price protection goals of the Options Intermarket Linkage
Plan.\71\ The Exchange believes its proposal would help ensure inter-
market competition across all exchanges and facilitate compliance with
best execution practices.
---------------------------------------------------------------------------

    \71\ See Rule 27.3 regarding Locked and Crossed Markets.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed SAM Auction is
voluntary for Options Members to use and will be available to all
Options Members. As discussed above, the Exchange believes the proposed
rule change should encourage Options Members to compete amongst each
other by responding with their best price and size for a particular
auction.
    The Exchange does not believe the proposed rule change will impose
any burden on intramarket competition, as the proposed rule change will
apply in the same manner to all orders submitted to a SAM Auction. With
respect to the restriction on appointed market-makers being solicited,
the Exchange believes market-makers will still have opportunities to
provide liquidity to trade against Agency Orders by submitting quotes
to rest on the EDGX Options Book or responses to an Auction. With
respect to the restriction on permitting a pair of Priority Customer
orders to a SAM Auction, the Exchange believes this is appropriate
given the immediate cross functionality available to pairs of Priority
Customer orders. Options Members will continue to be able to
immediately cross these pairs of orders via AIM.\72\
---------------------------------------------------------------------------

    \72\ See Rule 21.19(f).
---------------------------------------------------------------------------

    The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition, because the proposed changes, as
described above and below, are based on rules for similar price
improvement auction mechanisms at other options exchanges.\73\  The
general framework and primary features of the proposed SAM Auction
process (such as the eligibility requirements, auction response period,
same-side stop price requirements, response requirements, and auction
notification process),\74\ are substantively the same as the framework
for the AIM price improvement auction the Exchange's current price
improvement auction.
---------------------------------------------------------------------------

    \73\ See, e.g., Cboe Options Rule 6.74B; ISE Rule 716(e); and
MIAX Rule 515A(b).
    \74\ See Rule 21.19.
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change will relieve
any burden on, or otherwise promote, competition. The Exchange believes
this proposed rule change is necessary to permit fair competition among
the options exchanges and to establish more uniform price improvement
auction rules on the various options exchanges. The Exchange
anticipates that this auction proposal will create new opportunities
for the Exchange to attract

new business and compete on equal footing with those options exchanges
with auctions and for this reason the proposal does not create an undue
burden on intermarket competition. Rather, the Exchange believes that
the proposed rule would bolster intermarket competition by promoting
fair competition among individual markets, while at the same time
assuring that market participants receive the benefits of markets that
are linked together, through facilities and rules, in a unified system,
which promotes interaction among the orders of buyers and sellers. The
Exchange believes its proposal would help ensure inter-market
competition across all exchanges and facilitate compliance with best
execution practices. In addition, the Exchange believes that the
proposed rule change would help promote fair and orderly markets by
helping ensure compliance with Options Order Protection and Locked and
Crossed Market Rules. Thus, the Exchange does not believe the proposal
creates a significant impact on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-CboeEDGX-2019-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeEDGX-2019-009. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeEDGX-2019-009, and should be
submitted on or before April 2, 2019.
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    \75\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\75\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-04421 Filed 3-11-19; 8:45 am]
 BILLING CODE 8011-01-P