Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Its Rules Regarding How the System Handles Market Orders in Series With No Bid or No Offer
Federal Register, Volume 83 Issue 227 (Monday, November 26, 2018)
Federal Register Volume 83, Number 227 (Monday, November 26, 2018)
Notices
Pages 60530-60533
From the Federal Register Online via the Government Publishing Office www.gpo.gov
FR Doc No: 2018-25734
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Release No. 34-84632; File No. SR-CboeEDGX-2018-052
Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Its Rules Regarding How the System Handles Market Orders in Series With No Bid or No Offer
November 20, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on November 16, 2018, 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 and II 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
-
Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX Options'') proposes to amend its Rules regarding how the System handles Market Orders in series with no bid or no offer.
(additions are italicized; deletions are bracketed)
* * * * *
Rules of Cboe EDGX Exchange, Inc.
* * * * *
Rule 21.17. Additional Price Protection Mechanisms and Risk Controls
The System's acceptance and execution of orders and quotes are subject to the price protection mechanisms and risk controls in Rule 21.16, this Rule 21.17 (related to all orders other than complex orders), Rule 21.20 (related to complex orders) and as otherwise set forth in the Rules. All numeric values established by the Exchange pursuant to this Rule will be maintained by the Exchange in publicly available specifications and/or published in a Regulatory Circular. Unless otherwise specified the price protections set forth in this Rule, including the numeric values established by the Exchange, may not be disabled or adjusted. The Exchange may share any of a User's risk settings with the Clearing Member that clears transactions on behalf of the User.
(a)-(d) No change.
(e) Market Orders in No-Bid (Offer) Series.
(1) If the System receives a sell Market Order in a series after it is open for trading with an NBB of zero:
(A) if the NBO in the series is less than or equal to $0.50, then the System converts the Market Order to a Limit Order with a limit price equal to the minimum trading increment applicable to the series and enters the order into the EDGX Options Book with a timestamp based on the time it enters the Book. If the order has a Time-in-Force of GTC or GTD that expires on a subsequent day, the order remains on the Book as a Limit Order until it executes, expires, or the User cancels it.
(B) if the NBO in the series is greater than $0.50, then the System cancels or rejects the market order.
(2) If the System receives a buy market order in a series after it is open for trading with an NBO of zero, the System cancels or rejects the market order.
* * * * *
The text of the proposed rule change is also available on the Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room.
Page 60531
-
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.
-
Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
-
Purpose
In 2016, the Exchange's parent company, Cboe Global Markets, Inc. (formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is the parent company of Cboe Exchange, Inc. (``Cboe Options'') and Cboe C2 Exchange, Inc., 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, EDGX, EDGA, and BZX, the ``Cboe Affiliated Exchanges''). The Cboe Affiliated Exchanges are working to align certain system functionality, retaining only intended differences between the Cboe Affiliated Exchanges, in the context of a technology migration. Thus, the proposals set forth below are intended to add certain functionality to the Exchange's System that is more similar to functionality offered by 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 Exchange proposes to amend its Rules regarding how the System handles a market order when there is no bid or offer, as applicable, against which the order may execute. A market order is an order to buy or sell at the best price available at the time of execution.\3\ Currently, based on this definition, if the System receives a sell market order when there are no bids against which the order may execute, the System cancels the order. Similarly, if the System receives a buy market order when there are no offers against which the order may execute, the System cancels the order. The proposed rule change first codifies this handling of a buy market order when there national best offer (``NBO'') is zero, which is consistent with current functionality.\4\ As noted above, this handling is consistent with the definition of a market order.\5\ It provides protection for these orders to prevent execution at potentially erroneous prices when a buy order is submitted in a series with no offer.
---------------------------------------------------------------------------
\3\ See Rule 21.1(d)(5).
\4\ See proposed Rule 21.17(e)(2).
\5\ The proposed rule change is also consistent with Cboe Options functionality and C2 Rule 6.14(a)(1).
---------------------------------------------------------------------------
The Exchange also proposes to amend how the System handles sell Market Orders submitted in a series with no bid. Currently, if the System receives a Market Order to sell in a no-bid series, the System cancels or rejects the order. Pursuant to the proposed rule change, if the System receives a Market Order to sell in an option series with an NBB of zero:
(1) if the NBO in the series is less than or equal to $0.50, then the System converts the Market Order to a limit order with a limit price equal to the minimum trading increment applicable to the series and enters the order into the EDGX Options Book with a timestamp based on the time it enters the Book. If the order has a Time-in-Force of GTC or GTD that expires on a subsequent day, the order remains on the Book as a Limit Order until it executes, expires, or the User cancels it.
(2) if the NBO in the series is greater than $0.50, then the System cancels the Market Order.\6\
---------------------------------------------------------------------------
\6\ See proposed Rule 21.17(e)(1).
---------------------------------------------------------------------------
The proposed handling of sell Market Orders in no-bid series when the NBO in the series is greater than $0.50 is consistent with current functionality.
The proposed rule change serves as a protection feature for investors in certain situations, such as when a series is no-bid because the last bid traded just prior to entry of the sell Market Order. The purpose of this threshold is to limit the automatic booking of Market Orders to sell at minimum increments to only those for true zero-bid options, as options in no-bid series with an offer of greater than $0.50 are less likely to be worthless.
For example, if the System receives a sell Market Order in a no-bid series with a minimum increment of $0.01 and the NBO is $0.01, the System will convert the order to a Limit Order with a price of $0.01 and enter it on the EDGX Options Book. Because the order will have a timestamp based on that time of Book entry, it will have priority behind any other Limit Orders to sell at $0.01 that were already resting on the Book. At that point, even if the series is no-bid because, for example, the last bid just traded and the limit order trades at $0.01, the next bid entered after the trade would not be higher than $0.01. If the order has a Time-in-Force of GTC or GTD that expires on a subsequent day, the order remains on the Book until it executes, expires, or the User cancels it.\7\
---------------------------------------------------------------------------
\7\ This functionality is consistent with the purpose of a GTC or GTD that expires on a subsequent trading day, which is to remain on the Book and available for execution until the User cancels it or until the time specified by the User. The Exchange notes that market orders with any other Time-in-Force would no longer be on the Book if they did not execute during the trading day.
---------------------------------------------------------------------------
However, if the System receives a sell Market Order in a no-bid series with a minimum increment of $0.01 and the NBO is $1.20 (because, for example, the last bid of $1.00 just traded and a new bid has not yet populated the disseminated quote), the System will cancel or reject the order. Cancellation prevents an anomalous execution price, since the next bid entered in that series is likely to be much higher than $0.01. It would be unfair to the User to let is Market Order trade as a limit order for $0.01 because, for example, the firm submitted the order during the brief time when there were no disseminated bids in a series trading significantly higher than the minimum increment.
The Exchange believes the threshold of $0.50 is reasonable. The Exchange notes that this threshold is the same as the threshold in the Cboe Options rule,\8\ and is less than the current width for the Market Order NBBO width protection, pursuant to which the System will reject or cancel back to the User a Market Order submitted to the System when the NBBO width is greater than 100% of the midpoint of the NBBO, subject to a $5 minimum and $10 maximum.\9\ Notwithstanding this provision, the proposed rule change would allow for the potential execution
Page 60532
of sell Market Orders in no-bid series with offers less than or equal to $0.50. If the threshold in the proposed rule change was higher, there would be increased risk of having a Market Order trade a minimum increment in a series that is not truly no-bid. The proposed rule change is substantially the same as Cboe Options Rule 6.13(b)(vi).
---------------------------------------------------------------------------
\8\ See Cboe Options Rule 6.13(b)(vi).
\9\ See Rule 21.17(a); see also Exchange Notice, BZX and EDGX Options Exchanges Feature Pack 2--Update (December 14, 2017), available at http://markets.cboe.com/resources/release_notes/2017/Update-2-Cboe-BZX-and-EDGX-Options-Exchanges-Feature-Pack-2.pdf, for current settings. Pursuant to this protection, if the NBBO for a series was $0.00-$0.50, the width of the NBBO (0.50) is greater than 100% of the midpoint (0.25); however, pursuant to the minimum, a market order would be accepted pursuant to this protection because the width is less than the 5.00 minimum. The proposed rule change provides additional price protection for market orders in no-bid series.
---------------------------------------------------------------------------
-
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.\10\ Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) \11\ 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) \12\ requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
\12\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes the proposed rule change regarding the handling of sell Market Orders in no-bid series assists with the maintenance of fair and orderly markets and protects investors and the public interest, because it provides for automated handling of orders in series that are likely truly no-bid, ultimately resulting in more efficient executions of these orders. Additionally, the proposed rule change prevents executions of sell Market Orders in no-bid series with higher offers at potentially extreme prices in series that are not truly no-bid. The Exchange believes this threshold appropriately reflects the interests of investors, as options in no-bid series with offers higher than $0.50 are less likely to be worthless than no-bid series with offers no higher than $0.50, and cancelling the orders will prevent execution of these orders at unfavorable prices. The Exchange also believes the $0.50 threshold promotes fair and orderly markets, because sell Market Orders in no-bid series with offers of $0.50 or less are likely to be individuals seeking to close out a worthless position, for which the proposed automatic handling is appropriate. The proposed change is also substantially the same as Cboe Options Rule 6.13(b)(vi).
The proposed handling of buy Market Orders in no-offer series benefits investors, because it codifies current order handling and thus provides investors with more transparency in the Rules with respect to how the System will handle these orders. The proposed change is also substantially the same as C2 Rule 6.14(a)(1).
When Cboe Options migrates to the same technology as that of the Exchange and other Cboe Affiliated Exchanges, Users of the Exchange and other Cboe Affiliated Exchanges will have access to similar functionality on all Cboe Affiliated Exchanges and similar language can be incorporated into the rules of all Cboe Affiliated Exchanges. As such, the proposed rule change would foster cooperation and coordination with persons engaged in facilitating transactions in securities and would remove impediments to and perfect the mechanism of a free and open market and a national market system.
-
-
Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange does not believe the proposed rule changes will impose any burden on intramarket competition, because it will apply in the same manner to all buy or sell Market Orders submitted in no-offer or no-bid series, respectively. Additionally, the proposed rule change has no impact on sell Market Orders submitted in no-bid series with an offer of more than $0.50 or on buy Market Orders submitted in no-offer series, which orders will continue to be handled in the same manner as they are today (i.e. they will be cancelled or rejected). The Exchange does not believe the proposed rule change will impose any burden on intermarket competition, as it will provide sell Market Orders in true no-bid series with additional execution opportunities (either on the Exchange or at away markets pursuant to linkage rules) while providing an additional protection measure for sell Market Orders in no-bid series that may not be truly no-bid. As noted above, the proposed rule change has no impact on the handling of all other sell Market Orders in no-bid series or on buy Market Orders in no-offer series. The Exchange believes this price protection will allow Members to sell Market Orders with reduced fear of inadvertent exposure to excessive risk, which will benefit investors through increased liquidity for the execution of their orders.
The proposed rule change related to the handling of buy Market Orders is consistent with current Exchange functionality and will have no impact on how those orders will handled, and it is substantially the same as C2 Rule 6.14(a)(1). The proposed rule change related to the handling of sell Market Orders is substantially the same as Cboe Options Rule 6.13(b)(vi).\13\
---------------------------------------------------------------------------
\13\ The Exchange notes other options exchanges have similar rules that convert sell market orders in no-bid series to limit orders with a price of a minimum increment if the offer in the series is below a certain threshold (the thresholds differ in those rules). See, e.g., Miami International Securities Exchange, LLC (``MIAX'') Rule 519(a)(1); and NASDAQ ISE, LLC (``ISE'') Rule 713(b).
---------------------------------------------------------------------------
-
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.
-
-
Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act \14\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(3)(A)(iii).
\15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6)\16\ normally does not become operative prior to 30 days after the date of the filing. However, Rule 19b-4(f)(6)(iii)\17\ permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public
Page 60533
interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposed rule change may become effective and operative on November 29, 2018. The Exchange states that waiver of the operative delay will provide Users with additional flexibility to manage and display their orders and provide additional control over their executions on the Exchange as soon as possible. The Exchange further states that waiver of the operative delay will allow the Exchange to continue to strive towards a complete technology integration of the Cboe Affiliated Exchanges, with gradual roll-outs of new functionality to ensure the stability of the System. The Exchange notes that the proposed rule change is generally intended to codify and to add certain system functionality to the Exchange's System in order to provide a consistent technology offering for the Cboe Affiliated Exchanges. The Exchange further notes that a consistent technology offering will simplify the technology implementation changes and maintenance by Trading Permit Holders of the Exchange that are also participants on Cboe Affiliated Exchanges. The Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. Therefore, the Commission hereby waives the 30-day operative delay and designates the proposed rule change as operative on November 29, 2018.\18\
---------------------------------------------------------------------------
\16\ 17 CFR 240.19b-4(f)(6).
\17\ 17 CFR 240.19b-4(f)(6)(iii).
\18\ For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.
-
Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to email protected. Please include File Number SR-CboeEDGX-2018-052 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-2018-052. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CboeEDGX-2018-052 and should be submitted on or before December 17, 2018.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
FR Doc. 2018-25734 Filed 11-23-18; 8:45 am
BILLING CODE 8011-01-P
