[Federal Register Volume 86, Number 119 (Thursday, June 24, 2021)]
[Notices]
[Pages 33425-33427]
[FR Doc No: 2021-13244]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92203; File No. SR-CBOE-2021-025]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendment
No. 1, To Amend Cboe Rules 5.37 and 5.38 in Connection With Allocations
at the Conclusion of the Exchange's Automated Improvement Mechanism
(``AIM'') and Complex AIM (``C-AIM'') Auctions

June 17, 2021.

I. Introduction

    On April 14, 2021, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt a Priority Order Plus status in
connection with the allocation of exclusively listed index option
classes at the conclusion of the Exchange's Automated Improvement
Mechanism (``AIM'' or ``AIM Auction'') and Complex AIM (``C-AIM'' or
``C-AIM Auction'') auctions. The proposed rule change was published for
comment in the Federal Register on May 3, 2021.\3\ The Commission
received no comments regarding the proposal. On June 8, 2021, the
Exchange submitted Amendment No. 1 to the proposed rule change.\4\ The
Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 91689 (April 27,
2021), 86 FR 23453 (``Notice'').
    \4\ In Amendment No. 1, the Exchange updated Exhibit 5 of the
proposed rule change to reflect another proposed rule change
unrelated to this proposed rule change. Because Amendment No. 1 is a
technical amendment that does not materially alter the substance of
the proposed rule change or raise unique or novel regulatory issues,
it is not subject to notice and comment. Amendment No. 1 to the
proposed rule change is available on the Commission's website at:
https://www.sec.gov/rules/sro/cboe.htm#SR-CBOE-2021-025.

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II. Description of the Proposed Rule Change

    The AIM and C-AIM are electronic auctions intended to provide an
Agency Order with the opportunity to receive price improvement (over
the National Best Bid or Offer (``NBBO'') in AIM, or the synthetic best
bid or offer (``SBBO'') on the Exchange in C-AIM).\5\ Upon submitting
an Agency Order into one of these auctions, the initiating Trading
Permit Holder (``Initiating TPH'') must also submit a contra-side
second order (``Initiating Order'') for the same size as the Agency
Order. The Initiating Order guarantees that the Agency Order will
receive an execution. Upon commencement of an auction, market
participants may submit responses to trade against the agency order. At
the conclusion of the auction, the System \6\ allocates the Agency
Order, taking into account all auction responses, unrelated orders, and
quotes.\7\ Depending on the contra-side interest available, the
Initiating Order may be allocated a certain percentage of the Agency
Order.\8\ Any execution prices at the conclusion of an AIM Auction must
be at or better than both sides of the BBO existing at the conclusion
of the AIM Auction and at or better than both sides of the Initial
NBBO,\9\ and any execution prices at the conclusion of a C-AIM Auction
must be at or between the SBBO and the best prices of any complex
orders resting on each side of the Complex Order Book (``COB'') at the
conclusion of the C-AIM Auction.
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    \5\ See Rules 5.38 (AIM) and 5.38 (C-AIM).
    \6\ The term ``System'' means the Exchange's hybrid trading
platform that integrates electronic and open outcry trading of
option contracts on the Exchange, and includes any connectivity to
the foregoing trading platform that is administered by or on behalf
of the Exchange, such as a communications hub. See Rule 1.1.
    \7\ See Rules 5.37(e) and 5.38(e).
    \8\ Id.
    \9\ The term ``Initial NBBO'' means the national best bid or
national best offer at the time an Auction is initiated. See Rule
5.37.
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    Currently, the Exchange may offer Priority Order \10\ status to
Users \11\ for allocations at the conclusion of an AIM Auction. If the
Exchange designates a class as eligible for Priority Order status, then
at the conclusion of an AIM Auction, Users with Priority Orders receive
executions against the Agency Order after Priority Customers \12\ and
the Initiating TPH have received their Agency Order allocations.\13\
Priority Order status is only valid for the duration of the particular
AIM Auction.\14\
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    \10\ The term ``Priority Order'' refers to displayed resting
quotes and orders that were at a price equal to the Initial NBBO on
the opposite side of the market form the Agency Order. See Rule
5.37(e)(4). See also Securities Exchange Release No. 87972
(September 24, 2019), 84 FR 51673, 51678 (September 30, 2019)
(defining the term ``Priority Order'' and providing that these
orders will have priority at each price level).
    \11\ The term ``User'' means any TPH or Sponsored User who is
authorized to obtain access to the System pursuant to Rule 5.5. See
Rule 1.1.
    \12\ The term ``Priority Customer'' means a person or entity
that is a Public Customer and is not a Professional. See Rule 1.1.
    \13\ Priority Orders receive priority pursuant to the order of
allocation as set forth in Rule 5.37(e)(1) (if the Auction results
in no price improvement), Rule 5.37(e)(2) (if the Auction results in
price improvement for the Agency Order and the Initiating TPH
selected a single-price submission) or Rule 5.37(e)(3) (if the
Auction results in price improvement for the Agency Order and the
Initiating TPH selected auto-match).
    \14\ The Exchange states that Priority Order status is currently
activated for numerous classes in AIM.
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    The Exchange proposes to adopt a new Priority Order Plus status in
connection with the allocation of exclusively listed index option
classes at the conclusion of the Exchange's AIM and C-AIM auctions. An
``exclusively listed option'' is an option that trades exclusively on
an exchange because the exchange has an exclusive license to list and
trade the option or has the proprietary rights in the interest
underlying the option.\15\
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    \15\ See Notice, supra note 3, at 23453, n.3. The Exchange
states that an exclusively listed option is different than a
``singly listed option,'' which is an option that is not an
``exclusively listed option'' but that is listed by one exchange and
not by any other national securities exchange. See id.
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A. Priority Order Plus and Priority Order Status in AIM

    Proposed Rule 5.37(e)(4) would provide that the Exchange may
designate any exclusively listed index option class as eligible for
Priority Order Plus status and any class as eligible for Priority Order
status. A class designated as eligible for one status would not be
eligible for the other status.\16\ If the Exchange designates a class
as eligible for Priority Order Plus or Priority Order status, Users
would have priority for their contra-side interest Priority Orders up
to their size in the Initial NBBO at each price level at or better than
the Initial NBBO.\17\ Each status is only valid for the duration of the
particular AIM Auction.\18\
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    \16\ See Proposed Rule 5.37(e)(4).
    \17\ See id.
    \18\ See id.
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    The proposed rule change amends Rule 5.37(e)(1)(B), which describes
the allocation priority where the AIM results in no price improvement
to the Agency Order, to provide that Users with Priority Order Plus
status may be allocated directly following Priority Customer
allocations but prior to Initiating TPH allocations. The proposed rule
change also amends Rule 5.37(e)(2)(B), which sets forth the allocation
priority where the AIM results in price improvement and the Initiating
TPH has selected a single-price submission, to provide that Users with
Priority Order status or Priority Order Plus status (as designated by
the Exchange) may be allocated directly following Priority Customer
allocations.
    Additionally, proposed Rule 5.37(e)(1)(B) would provide that
Priority Orders eligible for Priority Order Plus status are allocated
in a pro-rata manner. Likewise, the proposed rule change updates Rules
5.37(e)(1)(C) and (D) and (e)(2)(B), (C) and (D) to reflect that
Priority Orders, all other contra-side interest (including AIM
responses and orders and quotes on the Book) and non-Priority Customer
non-displayed Reserve Quantity pursuant to these Rules are allocated in
a pro-rata manner.\19\
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    \19\ The proposed rule change also updates Rule 5.39(e)(2)(C),
which provides for generally similar order of allocations at the
conclusion of a Solicitation Auction Mechanism (``SAM'' or ``SAM
Auction''), to likewise reflect that non-Priority Customer non-
displayed Reserve Quantity is allocated in a pro-rata manner.
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B. Priority Complex Order Plus Status in C-AIM

    With respect to allocation priority in C-AIM, the proposed Rule
5.38(e)(4) would permit the Exchange to designate any exclusively
listed index option class as eligible for Priority Complex Order Plus
status, pursuant to which proposed Priority Complex Orders may receive
Agency Order executions after Priority Customers at the conclusion of a
C-AIM Auction. Specifically, proposed Rule 5.38(e)(4) provides that, if
the Exchange designates a class as eligible for Priority Complex Order
Plus status, Users with contra-side complex interest at the conclusion
of the C-AIM Auction and displayed resting quotes and orders that were
at a price equal to the BBO on the opposite side of the market from any
of the components of the Agency Order at the time the C-AIM Auction
commenced (``Priority Complex Orders''), have priority in their contra-
side complex interest up to their largest size in a BBO in a pro-rata
manner (after Priority Customers have received allocations, as set
forth in subparagraphs (e)(1) through (3) above). Priority Complex
Order Plus status is only valid for the duration of the particular C-
AIM Auction.\20\ The proposed change also adopts new Rules
5.38(e)(1)(B) and 5.38(e)(2)(B),\21\ which provide for the allocation
of Priority

Complex Orders (in a pro-rata manner), if the Exchange has designated
the class as eligible for Priority Complex Order Plus status,
immediately following Priority Customer allocations and prior to any
Initiating TPH allocations, pursuant to Rule 5.38(e)(1)(A) (if the C-
AIM Auction results in no price improvement) and Rule 5.38(e)(2) (if
the C-AIM Auction results in price improvement for the Agency Order and
the Initiating TPH selected a single-price submission).
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    \20\ See proposed Rule 5.38(e)(4).
    \21\ The proposed rule change also updates the numbering of
current Rule 5.38(e)(1)(B) through (e)(1)(D) and current Rule
5.38(e)(2)(B) to reflect the addition of new Rules 5.38(e)(1)(B) and
(e)(2)(B).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with Section 6(b) of the Act.\22\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\23\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, 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, and that the
rules of a national securities exchange not be designed to permit
unfair discrimination between customers, issuers, brokers or dealers.
The Commission believes that the proposed new Priority Order Plus
allocation status may encourage further competition in the AIM and C-
AIM in exclusively listed classes, by encouraging aggressive quoting
from Users. According to the Exchange, price improvement auctions have
provided the market with benefits (such as providing an efficient
manner of access to liquidity for customers), however, the options
industry overall has observed that quoted liquidity on the book has
decreased, quotes have widened, and options market makers have reduced
their participation in the market, which the Exchange believes has
impacted market quality.\24\ By providing market participants,
particularly Market-Makers and other liquidity providers, the
opportunity to receive priority over the Initiating TPH in exclusively
listed index classes if they post more aggressive markets, the
Commission believes the potential for increased competition within an
individual AIM or C-AIM auction may enhance displayed liquidity,
provide for tighter markets, and ultimately provide better execution
prices for all market participants in classes available exclusively for
trading on the Exchange.
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    \22\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ See Letter to Brett Redfearn, Director, Division of Trading
& Markets, from Cboe Global Markets, Inc. the Listed Options Trading
Committee of the Securities Industry and Financial Markets
Association (``SIFMA''), and the Listed Options Committee of the
Security Traders Association (``STA''), dated June 4, 2018,
available at http://cdn.batstrading.com/resources/comment_letters/Cboe-Joint-Letter-with-SIFMA-and-The-STA-on-Options-Market-Structure.pdf.
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    While the Commission recognizes that the loss of Initiating TPH
priority to Users with Priority Order Plus status may potentially
result in fewer auctions being initiated, the Commission believes that
those individual auctions should be more competitive, as Users may be
encouraged by the prospect of Priority Order Plus status to submit
competitive orders/quotes. This may benefit the Agency Order by
providing more opportunity for price improvement within an individual
auction. The AIM Auction in particular should benefit from potentially
increased competition, especially since the AIM Auction no longer
provides guaranteed price improvement for smaller orders (except where
the NBBO spread is $0.01).\25\
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    \25\ See Securities Exchange Act Release No. 91609 (April 19,
2021), 86 FR 21773 (April 23, 2021) (SR-CBOE-2021-024).
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    The Commission also believes that updating the allocation of
Priority Orders and other contra-side interest (including non-Priority
Customer non-displayed Reserve Quantity) to be pro-rata for all AIM- or
SAM-eligible classes (as applicable), as opposed to price-time, may
enhance competition by encouraging market participants to bring more
liquidity into the auctions and provide competitive bids and offers
throughout an auction. The Commission notes that pro-rata allocation is
consistent with the manner in which other options exchanges allocate
agency orders at the conclusion of comparable price improvement
auctions \26\ and solicitation auctions on those exchanges.\27\
Further, the proposed pro-rata allocation for Priority Orders and all
other contra-side interest at the conclusion of an AIM Auction is
consistent with the manner in which the same orders currently receive
allocations at the conclusion of an AIM auction on the Exchange's
affiliated options exchange, Cboe EDGX Exchange, Inc. (``EDGX
Options'').\28\
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    \26\ See Nasdaq ISE Options 3, Section 13(d)(3), which governs
allocations at the conclusion of ISE's price improvement mechanism
and allocates an agency order across non-Priority Customer interest
``based upon the percentage of the total number of contracts
available at the price that is represented by the size of such
interest''; and MIAX Options Rule 515A(a)(2)(iii), which governs
allocations at the conclusion of MIAX's price improvement mechanism
and allocates an agency order across Professional interest on a pro-
rata basis.
    \27\ See Nasdaq ISE Options 3, Section 11(d)(3), which governs
the allocations at the conclusion of ISE's solicitation mechanism
and allocates an agency order across non-Priority Customer interest
``based upon the percentage of the total number of contracts
available at the best price that is represented by the size of the
non-Priority Customer [interest]''.
    \28\ Pursuant to EDGX Options Rules 21.19(e)(1)(C)-(D) and
(e)(2)(B)-(C), Priority Orders or all other contra-side interest, as
applicable, are allocated pursuant to EDGX Options Rule 21.8(c),
which provides that all option classes on EDGX Options have a pro-
rata base algorithm for orders resting at the same best price.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-CBOE-2021-025), is approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13244 Filed 6-23-21; 8:45 am]
BILLING CODE 8011-01-P