82 FR 33170 - Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt New Rules That Describe the Trading of Complex Orders on the Exchange for the Exchange's Equity Options Platform

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 137 (July 19, 2017)

Page Range		33170-33187
FR Document		2017-15098
Federal Register, Volume 82 Issue 137 (Wednesday, July 19, 2017)
[Federal Register Volume 82, Number 137 (Wednesday, July 19, 2017)]
[Notices]
[Pages 33170-33187]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-15098]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34- 81137; File No. SR-BatsEDGX-2017-29]


Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing of a Proposed Rule Change To Adopt New Rules That Describe 
the Trading of Complex Orders on the Exchange for the Exchange's Equity 
Options Platform

July 13, 2017.
    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 June 30, 2017, Bats EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal for the Exchange's equity options 
platform (``EDGX Options'') to adopt new rules that describe the 
trading of complex orders on the Exchange.
    The text of the proposed rule change is available at the Exchange's 
Web site at www.bats.com, at the principal office of the Exchange, 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 parts of such 
statements.

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

1. Purpose
Overview
    The Exchange proposes to adopt new rules that describe the trading 
of complex orders on the Exchange. Proposed new Rule 21.20, Complex 
Orders, details the functionality of the System \3\ in the handling of 
complex orders on the Exchange. The proposed rules are based 
substantially on similar rules of other exchanges.\4\ The Exchange 
believes that the similarity of its proposed complex order rules to 
those of other exchanges will allow the Exchange's proposed complex 
order functionality to fit seamlessly into the greater options 
marketplace and benefit market participants who are already familiar 
with similar functionality offered on other exchanges. The Exchange 
notes that for simplicity it has omitted from its proposal certain 
functionality that is offered by other options exchanges in connection 
with their complex order platforms but that the Exchange does not 
proposed to offer

[[Page 33171]]

initially, including stock-option orders and derived orders.
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    \3\ The term ``System'' means the automated trading system used 
by EDGX Options for the trading of options contracts. See Exchange 
Rule 16.1(a)(59).
    \4\ See, e.g., Chicago Board Options Exchange, Inc. (``CBOE'') 
Rule 6.53C; C2 Options Exchange, Inc. (``C2'') Rule 6.13; Miami 
International Securities Exchange (``MIAX'') Rule 518; International 
Securities Exchange LLC (``ISE'') Rule 722; NYSE MKT LLC (``NYSE 
MKT'') Rule 980NY; BOX Options Exchange LLC (``BOX'') Rule 7240; 
NASDAQ OMX PHLX LLC (``PHLX'') Rule 1098; NYSE Arca, Inc. 
(``NYSEArca'') Rule 6.91.
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    Additionally, the Exchange is proposing to amend Exchange Rule 
21.1, Definitions, to add two new Times in Force to be added in 
conjunction with the proposed change, ``Good Til Cancelled'' (or 
``GTC'') and ``At the Open'' (or ``OPG''). The Exchange is also 
proposing to amend: Exchange Rule 21.15, Data Dissemination, to add 
references to data feeds to be added in conjunction with the proposed 
change; and Rule 21.16, Risk Monitor Mechanism, to make clear that 
complex orders are considered in connection with existing risk 
protections offered by the Exchange.\5\
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    \5\ The Exchange represents that prior to operating the proposed 
Complex Order Book it will separately file to propose amendments to 
Exchange Rule 20.6, Nullification and Adjustment of Options 
Transactions Including Obvious Errors, to establish the process for 
handling complex order obvious errors based on the rules of other 
exchanges that offer complex order functionality. See, e.g., CBOE 
Rule 6.25, Interpretation and Policy .07.
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Definitions
    Proposed Rule 21.20(a) provides definitions of terms that apply to 
the trading of complex orders, and such terms are used throughout this 
proposed rule change. The Exchange proposes to specify that for 
purposes of Rule 21.20, the included terms will have the meanings 
specified in proposed paragraph (a). A term defined elsewhere in 
Exchange Rules will have the same meaning with respect to Rule 21.20, 
unless otherwise defined in paragraph (a). Below is a summary of the 
proposed definitions.
    The term ``ABBO'' means the best bid(s) or offer(s) disseminated by 
other Eligible Exchanges (as defined in Rule 27.1(a)(7)) \6\ and 
calculated by the Exchange based on market information received by the 
Exchange from OPRA.
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    \6\ ``Eligible Exchange'' means a national securities exchange 
registered with the SEC in accordance with Section 6(a) of the Act 
that: (a) Is a Participant Exchange in OCC (as that term is defined 
in Section VII of the OCC by-laws); (b) is a party to the OPRA Plan 
(as that term is described in Section I of the OPRA Plan); and (c) 
if the national securities exchange chooses not to become a party to 
the Options Order Protection and Locked/Crossed Markets Plan, is a 
participant in another plan approved by the Commission providing for 
comparable Trade-Through and Locked and Crossed Market protection. 
See Exchange Rule 27.1(a)(7).
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    The term ``BBO'' means the best bid or offer on the Simple Book (as 
defined below) on the Exchange.
    A ``Complex Order Auction'' or ``COA'' is an auction of a complex 
order as set forth in proposed Rule 21.20(d), described below.
    A ``COA-eligible order'' is a complex order designated to be placed 
into a Complex Order Auction upon receipt that meets the requirements 
of Rule 21.20(d)(l), as described below.
    A ``complex order'' is any order involving the concurrent purchase 
and/or sale of two or more different options in the same underlying 
security (the ``legs'' or ``components'' of the complex order),\7\ for 
the same account, in a ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00) and for the 
purposes of executing a particular investment strategy. Only those 
complex orders in the classes designated by the Exchange and 
communicated to Members with no more than the applicable number of 
legs, as determined by the Exchange on a class-by-class basis and 
communicated to Members, are eligible for processing. The Exchange will 
communicate this information to Members via specifications and/or a 
Regulatory Circular.
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    \7\ The different options in the same underlying security that 
comprise a particular complex order are referred to as the ``legs'' 
or ``components'' of the complex order throughout this proposal.
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    The ``Complex Order Book'' or ``COB'' is the Exchange's electronic 
book of complex orders. All Members may submit orders to trade against 
interest or rest in the COB pursuant to the proposed Rule.
    The term ``complex strategy'' means a particular combination of 
components and their ratios to one another. New complex strategies can 
be created as the result of the receipt of a complex instrument 
creation request or complex order for a complex strategy that is not 
currently in the System. The Exchange is thus proposing two methods to 
create a new complex strategy, one of which is a message that a Member 
can send to create the strategy and the other is a message a Member can 
send that will generate the strategy and that is also an order for that 
same strategy. These methods will be equally available to all Members 
but [sic] anticipates that Market Makers and other liquidity providers 
who anticipate providing larger amounts of trading activity in complex 
strategies are the most likely to send in a complex instrument creation 
request (i.e., to prepare for their trading in the complex strategy 
throughout the day), whereas other participants are more likely to 
simply send a complex order that simultaneously creates a new strategy. 
The Exchange may limit the number of new complex strategies that may be 
in the System at a particular time and will communicate any such 
limitation to Members via specifications and/or Regulatory Circular.
    The term ``NBBO'' means the national best bid or offer as 
calculated by the Exchange based on market information received by the 
Exchange from the appropriate Securities Information Processor 
(``SIP'').\8\
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    \8\ All U.S. exchanges and associations that quote and trade 
exchange-listed securities must provide their data to a centralized 
SIP for data consolidation and dissemination. See 15 U.S.C. 
78c(22)(A).
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    The term ``regular trading'' means trading of complex orders that 
occurs during a trading session other than: (i) At the opening or re-
opening of the COB for trading following a halt, or (ii) during the COA 
process (as described below and in proposed Rule 21.20(d)).
    The ``Simple Book'' is the Exchange's regular electronic book of 
orders.
    The ``Synthetic Best Bid or Offer'' (``SBBO'') is calculated using 
the best displayed price for each component of a complex strategy from 
the Simple Book.
    The ``Synthetic National Best Bid or Offer'' (``SNBBO'') is 
calculated using the NBBO for each component of a complex strategy to 
establish the best net bid and offer for a complex strategy.
Types of Complex Orders
    Proposed Rule 21.20(b), Availability of Types of Complex Orders, 
describes the various types and specific times-in-force for complex 
orders handled by the System.
    As an initial matter, proposed Rule 21.20(b) states that the 
Exchange will determine and communicate to Members via specifications 
and/or a Regulatory Circular listing which complex order types, among 
the complex order types set forth in the proposed Rule, are available 
for use on the Exchange. Additional information will be issued as 
additional complex order types, among those complex order types set 
forth in the proposed Rule, become available for use on the Exchange. 
Additional information will also be issued when a complex order type 
that had been in usage on the Exchange will no longer be available for 
use. This is substantially similar to, and based upon, the manner in 
which MIAX determines the available order types for its complex order 
book.\9\ The purpose of this provision is to enable the Exchange to 
modify the complex order types that are available on the Exchange as 
market conditions change. The Exchange believes that this enhances its 
ability to remain competitive as markets and market conditions evolve.
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    \9\ See MIAX Rule 518(b)(1).
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    Among the complex order types that may be submitted are limit 
orders and market orders, and orders with a Time in Force of Good Til 
Day (``GTD''),

[[Page 33172]]

Immediate or Cancel (``IOC''), DAY, GTC, or OPG, as such terms are 
defined in Exchange Rule 21.1(f), as proposed to be amended.\10\ In 
addition, the Exchange proposes to accept the following complex orders: 
Complex Only orders, COA-eligible orders, do-not-COA orders, and orders 
with Match Trade Prevention modifiers, as such terms are defined below.
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    \10\ For a complete description of these order types and Times 
in Force, see Exchange Rule 21.1, as proposed to be amended. The 
Exchange is proposing to offer similar order types and modifiers to 
those offered by other options exchanges. See, e.g., CBOE Rule 
6.53C(b); BOX Rule 7240(b)(4); MIAX Rule 518(b)(1).
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    The Exchange proposes to allow orders with a Time in Force of DAY 
or IOC to only check against the COB (i.e., rather than the COB and the 
Simple Book) (such orders [sic] ``Complex Only Orders''). Unless 
designated as Complex Only, and for all other Times in Force, an order 
will check against both the COB and the Simple Book. The Exchange notes 
that the Complex Only Order option is analogous to functionality on the 
MIAX complex order book, which includes certain types of orders and 
quotes that do not leg into the simple marketplace but instead will 
only execute against or post to the MIAX complex book.\11\ The Exchange 
also believes the proposed functionality is analogous to other types of 
functionality already offered by the Exchange that provides Members the 
ability to direct the Exchange not to route their orders away from the 
Exchange \12\ or not to remove liquidity from the Exchange.\13\ Similar 
to such analogous features, the Exchange believes that Members may 
utilize Complex Only Order functionality as part of their strategy to 
maintain additional control over their executions, in connection with 
their attempt to provide and not remove liquidity, or in connection 
with applicable fees for executions.
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    \11\ See MIAX Rule 518 (c)(2)(iii) (stating that cAOC orders and 
market maker quotes on the MIAX complex order book are not eligible 
for legging to the MIAX simple order book).
    \12\ See EDGX Rule 21.1(d)(7), which describes ``Book Only 
Orders'' as orders that do not route to away options exchanges.
    \13\ See EDGX Rule 21.1(d)(8), which describes ``Post Only 
Orders'' as orders that do not route to away options exchanges or 
remove liquidity from the Exchange.
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    As noted above, the Exchange proposes to define a COA-eligible 
order as a complex order designated to be placed into a Complex Order 
Auction upon receipt that meets the requirements of Rule 21.20(d)(l), 
as described below. The Exchange proposes to allow all types of orders 
to initiate a COA but proposes to have certain types of orders default 
to initiating a COA upon arrival with the ability to opt-out of 
initiating a COA and other types of orders default to not initiating a 
COA upon arrival with the ability to opt-in to initiating a COA.\14\ 
Specifically, as proposed, complex orders that are marked as IOC will, 
by default, not initiate a COA upon arrival, but a Member that submits 
an order marked IOC may elect to opt-in to initiating a COA and any 
quantity of the IOC order not executed will be cancelled at the end of 
the COA. All other Times in Force will by default initiate a COA, but a 
Member may elect to opt-out of initiating a COA. Orders with 
instructions to (or which default to) initiate a COA are referred to as 
COA-eligible orders, subject to the additional eligibility requirements 
set forth in the proposed rule, while orders with instructions not to 
(or which default not to) initiate a COA are referred to as do-not-COA 
orders.
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    \14\ The Exchange believes that this gives market participants 
extra flexibility to control the handling and execution of their 
complex orders by the System by giving them the additional ability 
to determine whether they wish to have their complex order initiate 
a COA. Despite the fact that the Exchange is proposing certain 
defaults that would be in effect, the Exchange believes its proposal 
is similar to CBOE Rule 6.53C(d)(ii)(B), which allows a CBOE Trading 
Permit Holders to affirmatively request, on an order-by-order basis, 
that a COA-eligible order with two legs not be placed into a CBOE 
Complex Order Auction (a ``do-not-COA'' request). The Exchange 
further believes that the proposed default values are consistent 
with the terms of the orders (e.g., IOC is intended as an immediate 
execution or cancellation whereas COA is a process that includes a 
short delay in order to broadcast and provide participants time to 
respond).
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    The Exchange also proposes to allow the use of certain Match Trade 
Prevention (``MTP'') Modifiers, which allow a Member to avoid trading 
against the Member's own orders or orders of affiliates as specified on 
an identifier established by the Member (``Unique Identifiers).\15\ As 
proposed, the System will support, when trading against other complex 
orders on the COB, complex orders with the following MTP Modifiers 
defined in Rule 21.1(g): MTP Cancel Newest,\16\ MTP Cancel Oldest\17\ 
and MTP Cancel Both.\18\ When Legging (as defined below) into the 
Simple Book, a complex order with any MTP Modifier will be cancelled if 
it would execute against any leg on the Simple Book that includes an 
order with an MTP Modifier and the same Unique Identifier as the 
complex order.
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    \15\ See Rule 21.1(g).
    \16\ Pursuant to Rule 21.1(g)(1), an incoming order marked with 
the MTP Cancel Newest (``MCN'') modifier will not execute against 
opposite side resting interest marked with any MTP modifier 
originating from the same Unique Identifier. The incoming order 
marked with the MCN modifier will be cancelled back to the 
originating User(s). The resting order marked with an MTP modifier 
will remain on the EDGX Options Book.
    \17\ Pursuant to Rule 21.1(g)(2), an incoming order marked with 
the MTP Cancel Oldest (``MCO'') modifier will not execute against 
opposite side resting interest marked with any MTP modifier 
originating from the same Unique Identifier. The resting order 
marked with the MTP modifier will be cancelled back to the 
originating User(s). The incoming order marked with the MCO modifier 
will remain on the EDGX Options Book.
    \18\ Pursuant to Rule 21.1(g)(4), an incoming order marked with 
the MTP Cancel Both (``MCB'') modifier will not execute against 
opposite side resting interest marked with any MTP modifier 
originating from the same Unique Identifier. The entire size of both 
orders will be cancelled back to the originating User(s).
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Trading of Complex Orders
    Proposed Rule 21.20(c), Trading of Complex Orders, describes the 
manner in which complex orders will be handled and traded on the 
Exchange. The Exchange will determine and communicate to Members via 
specifications and/or Regulatory Circular which complex order origin 
codes (i.e., non-broker-dealer customers, broker-dealers that are not 
Market Makers on an options exchange, and/or Market Makers on an 
options exchange) are eligible for entry onto the COB.\19\ The proposed 
rule also states that complex orders will be subject to all other 
Exchange Rules that pertain to orders submitted to the Exchange 
generally, unless otherwise provided in proposed Rule 21.20.
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    \19\ See Proposed Rule 21.20(c); see also CBOE Rule 6.53C(c)(i), 
which states that CBOE will determine which classes and which 
complex order origin types (i.e., non-broker-dealer public customer, 
broker-dealers that are not Market-Makers or specialists on an 
options exchange, and/or Market-Makers or specialists on an options 
exchange) are eligible for entry into the Complex Order Book.
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    Proposed Rule 21.20(c)(1)(A) provides that bids and offers on 
complex orders may be expressed in $0.01 increments, and the 
component(s) of a complex order may be executed in $0.01 increments, 
regardless of the minimum increments otherwise applicable to individual 
components of the complex order,\20\ and that if any component of a 
complex strategy would be executed at a price that is equal to a 
Priority Customer \21\ bid or offer on the Simple

[[Page 33173]]

Book, at least one other component of the complex strategy must trade 
at a price that is better than the corresponding BBO.\22\
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    \20\ See Proposed Rule 21.20(c)(l); see also CBOE Rule 6.42(f) 
and MIAX Rule 518(c)(1).
    \21\ The term ``Priority Customer'' means any person or entity 
that is not: (A) A broker or dealer in securities; or (B) a 
Professional. The term ``Priority Customer Order'' means an order 
for the account of a Priority Customer. See Rule 16.1(a)(45). A 
``Professional'' is any person or entity that: (A) Is not a broker 
or dealer in securities; and (B) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s). All Professional orders shall be 
appropriately marked by Options Members. See Rule 16.1(a)(46).
    \22\ See Proposed Rule 21.20(c)(l)(B); see also, ISE Rule 
722(b)(2), which states that in this situation at least one leg must 
trade at a price that is better by at least one minimum trading 
increment, and PHLX Rule 1098(c)(iii), which states in this 
situation that at least one option leg must trade at a better price 
than the established bid or offer for that option contract and no 
option leg is executed at a price outside of the established bid or 
offer for that option contract.
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    Additionally, respecting execution pricing, proposed Rule 
21.20(c)(1)(C) states generally that a complex order will not be 
executed at a net price that would cause any component of the complex 
strategy to be executed: (i) At a price of zero; or (ii) ahead of a 
Priority Customer Order on the Simple Book without improving the BBO of 
at least one component of the complex strategy. These restrictions are 
designed to protect the priority of Priority Customer Orders that is 
established in the Simple Book.
Execution of Complex Orders
    Proposed Rule 21.20(c)(2) describes: The process of accepting 
orders prior to the opening of the COB for trading (and prior to re-
opening after a halt); the process by which the Exchange will open the 
COB or re-open the COB following a halt (the ``Opening Process''); the 
prices at which executions may occur on the Exchange for complex 
strategies, including through the Opening Process; execution of complex 
orders against the individual components or ``legs'' on the Simple 
Book; and the process of evaluation that is conducted by the System on 
an ongoing basis respecting complex orders.
    Proposed Rule 21.20(c)(2)(A) states that Members may submit orders 
to the Exchange as set forth in Rule 21.6, which currently allows 
orders to be entered into the System beginning at 7:30 a.m. Eastern 
Time. The proposed Rule also states that any orders designated for the 
Opening Process will be queued until 9:30 a.m. at which time they will 
be eligible to be executed in the Opening Process. Any orders 
designated for a re-opening following a halt will be queued until the 
halt has ended, at which time they will be eligible to be executed in 
the Opening Process. Finally, proposed Rule 21.20(c)(2)(A) states that 
beginning at 7:30 a.m. and updated every five seconds thereafter, 
indicative prices and order imbalance information associated with the 
Opening Process will be disseminated by the Exchange while orders are 
queued prior to 9:30 a.m. or, in the case of a halt, prior to re-
opening.\23\
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    \23\ See infra Market Data Feeds section.
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    Proposed Rule 21.20(c)(2)(B) states that complex orders do not 
participate in the Opening Process for the individual option series 
conducted pursuant to Rule 21.7.\24\ The proposed rule also states that 
the Opening Process for the COB will operate both at the beginning of 
each trading session and upon re-opening after a halt. The Opening 
Process will commence when all legs of the complex strategy are open on 
the Simple Book. If there are complex orders that have been queued but 
none that can match, the System will open and transition such orders to 
the COB.
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    \24\ This is similar to the opening of complex orders on other 
exchanges. For instance, complex orders on CBOE and NYSE MKT do not 
participate in the respective opening auction processes for 
individual component option series legs. See CBOE Rule 6.53C, 
Interpretation and Policy .11; NYSE MKT Rule 952NY.
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    Proposed Rule 21.20(c)(2)(C) describes the manner in which the 
System determines the equilibrium price to be used for the purpose of 
execution of complex orders in the Opening Process. If there are 
complex orders that can match, the System will determine the 
equilibrium price where the most complex orders can trade. If there are 
multiple price levels that would result in the same number of 
strategies executed, the System will choose the price that would result 
in the smallest remaining imbalance. If there are multiple price levels 
that would result in the same number of strategies executed and would 
leave the same ``smallest'' imbalance, the System will choose the price 
that is closest to the Volume Based Tie Breaker (``VBTB'') as the 
opening price. For purposes of proposed subparagraph (C), the VBTB is 
the midpoint of the SNBBO. If there is no valid VBTB available, the 
System will use the midpoint of the highest and lowest potential 
opening prices as the opening price. If the midpoint price would result 
in an invalid increment, the System will round up to the nearest 
permissible increment and use that as the opening price. If executing 
at the equilibrium price would require printing at the same price as a 
Priority Customer on any leg in the Simple Book, the System will adjust 
the equilibrium price to a price that is better than the corresponding 
bid or offer in the marketplace by at least a $0.01 increment.
    Pursuant to proposed paragraph Proposed Rule 21.20(c)(2)(D), when 
an equilibrium price is established at or within the SNBBO, the 
Exchange will execute matching complex orders in price/time priority at 
the equilibrium price. Any remaining complex order or the remaining 
portion thereof will be entered into the COB, subject to the Member's 
instructions. If the System cannot match orders because it cannot 
determine an equilibrium price (i.e., all queued orders are Market 
Orders) or a permissible equilibrium price (i.e., within the SNBBO that 
also satisfies proposed Rule 21.20(c)(1)(C), as described above), the 
System will open and transition such orders to the COB after a 
configurable time period established by the Exchange. The Exchange 
believes this configurable time period is important because the opening 
price protections are relatively restrictive (i.e., based on the SNBBO) 
and the Exchange wants to have the ability to periodically optimize the 
process in a manner that will allow sufficient opportunity to have 
Opening Process executions without also waiting too long to transition 
to regular trading.
    Next, with respect to the execution of orders on the COB, as 
described in proposed paragraph (c)(2)(E), incoming complex orders will 
be executed by the System in accordance with the provisions below, and 
will not be executed at prices inferior to the SBBO or at a price that 
is equal to the SBBO when there is a Priority Customer Order at the 
best SBBO price. Complex orders will never be executed at a price that 
is outside of the individual component prices on the Simple Book. 
Furthermore, the net price of a complex order executed against another 
complex order on the COB will never be inferior to the price that would 
be available if the complex order legged into the Simple Book. The 
purpose of this provision is to prevent a component of a complex order 
from being executed at a price that is inferior to the best-priced 
contra-side orders on the Simple Book (on which the SBBO is based) and 
to prevent a component of a complex order from being executed at a 
price that compromises the priority already established by a Priority 
Customer on the Simple Book. The Exchange believes that such priority 
should be protected and that such protection should be extended to the 
execution of complex orders on the COB.\25\
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    \25\ The Exchange also notes that this provision is based on and 
substantially similar to MIAX Rule 518(c)(2)(B) [sic]. Exchanges 
other than MIAX also protect Priority and Public Customer priority. 
ISE Priority Customer Orders on the Exchange shall have priority 
over Professional Orders and market maker quotes at the same price 
in the same options series. See ISE Rule 713(c); see also, CBOE Rule 
6.45(a)(ii)(A), which states that CBOE Public Customer orders in the 
electronic book have priority, and NYSE MKT Rule 964NY(b)(2)(A), 
which provides that bids and offers in the Consolidated Book for 
Customer accounts have first priority over other bids or offers at 
the same price.

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[[Page 33174]]

    Incoming complex orders that could not be executed because the 
executions would be priced (i) outside of the SBBO, or (ii) equal to 
the SBBO due to a Priority Customer Order at the best SBBO price, will 
be cancelled if such complex orders are not eligible to be placed on 
the COB. Complex orders will be executed without consideration of any 
prices for the complex strategy that might be available on other 
exchanges trading the same complex strategy provided, however, that 
such complex order price may be subject to the Drill-Through Price 
Protection set forth in Interpretation and Policy .04(f) of proposed 
Rule 21.20.\26\
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    \26\ The Drill-Through Price Protection feature is a price 
protection mechanism under which, when in operation as requested by 
the submitting Member or pursuant to the Exchange's default 
settings, a buy (sell) order will not be executed at a price that is 
higher (lower) than the SNBBO or the SNBBO at the time of order 
entry plus (minus) a buffer amount (the ``Drill-Through Price'').
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    Proposed Rule 21.20(c)(2)(F) describes the Legging process through 
which complex orders, under certain circumstances, are executed against 
the individual components of a complex strategy on the Simple Book. 
Complex orders up to a maximum number of legs (determined by the 
Exchange on a class-by-class basis as either two, three, or four legs 
and communicated to Members via specifications and/or Regulatory 
Circular) may be automatically executed against bids and offers on the 
Simple Book for the individual legs of the complex order (``Legging''), 
provided the complex order can be executed in full or in a permissible 
ratio by such bids and offers.\27\
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    \27\ See proposed Rule 21.20(c)(2)(F). This is similar to CBOE 
Rule 6.53C(c)(ii)(l), which states that complex orders in the COB 
will automatically execute against individual orders or quotes 
residing in the EBook provided the complex order can be executed in 
full (or in a permissible ratio) by the orders and quotes in EBook; 
see also BOX Rule 7240(b)(3)(ii) providing that Complex Orders will 
be automatically executed against bids and offers on the BOX Book 
for the individual legs of the Complex Order to the extent that the 
Complex Order can be executed in full or in a permissible ratio by 
such bids and offers.
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    As proposed, all two leg COA-eligible Customer complex orders will 
be allowed to leg into the Simple Book without restriction. The benefit 
of Legging against the individual components of a complex order on the 
Simple Book is that complex orders can access the full liquidity of the 
Exchange's Simple Book, thus enhancing the possibility of executions at 
the best available prices on the Exchange. The Exchange believes this 
is particularly true for Customer complex orders and, thus, does not 
propose to limit the ability of such orders to leg into the Simple Book 
(when such orders are two leg orders).
    Notwithstanding the foregoing, the Exchange is proposing to 
establish, in proposed Rule 21.20(c)(2)(F), that complex orders that 
could otherwise be eligible for Legging will only be permitted to trade 
against other complex orders in the COB in certain situations. 
Specifically, proposed Rule 21.20(c)(2)(F) would provide that other 
than two leg COA-eligible Customer complex orders, any other complex 
orders (i.e., non-Customer orders or non-COA-eligible Customer orders) 
with two option legs where both legs are buying or both legs are 
selling and both legs are calls or both legs are puts may only trade 
against other complex orders on the COB and will not be permitted to 
leg into the Simple Book. Proposed Rule 21.20(c)(2)(F) would impose a 
similar restriction by stating that complex orders with three or four 
option legs where all legs are buying or all legs are selling may only 
trade against other complex orders on the COB and will not leg into the 
Simple Book (regardless of whether the option leg is a call or a 
put).\28\
---------------------------------------------------------------------------

    \28\ This is substantially similar to ISE Rules 722(b)(3)(ii)(A) 
and (B), which state that complex orders with 2 option legs where 
both legs are buying or both legs are selling and both legs are 
calls or both legs are puts may only trade against other complex 
orders in the complex order book. The trading system will not 
generate legging orders for these complex orders, and complex orders 
with 3 or 4 option legs where all legs are buying or all legs are 
selling may only trade against other complex orders in the complex 
order book. See also Securities Exchange Act Release No. 73023 
(September 9, 2014), 79 FR 55033 (September 15, 2014) (SR-ISE-2014-
10).
---------------------------------------------------------------------------

    Currently, liquidity providers (typically Market Makers, though 
such functionality is not currently limited to registered Market 
Makers) in the Simple Book are protected by way of the Risk Monitor 
Mechanism (``Risk Monitor'')\29\ by limiting the number of contracts 
they execute in an option class on the Exchange within a specified time 
period (a ``specified time period'') or on an absolute basis for the 
trading day (``absolute limits'').\30\ The Risk Monitor automatically 
cancels and removes the liquidity provider's orders from the Exchange's 
disseminated quotation in all series of a particular option class when 
it has determined that a participant has traded a number of contracts 
equal to or above a percentage of their quotations (the ``percentage 
trigger'') during the specified time period or on an absolute basis. 
The purpose of the Risk Monitor is to allow Market Makers and other 
liquidity providers to provide liquidity across potentially hundreds of 
options series without executing the full cumulative size of all such 
quotes before being given adequate opportunity to adjust the price and/
or size of their quotes.
---------------------------------------------------------------------------

    \29\ See Exchange Rule 21.16.
    \30\ As described later in this proposal, the Exchange proposes 
to amend the Rule governing the Risk Monitor, Rule 21.16, with 
respect to complex orders.
---------------------------------------------------------------------------

    All of a participant's quotes in each option class are considered 
firm until such time as the Risk Monitor's threshold has been equaled 
or exceeded and the participant's quotes are removed by the Risk 
Monitor in all series of that option class.\31\ Thus the Legging of 
complex orders presents higher risk to Market Makers and other 
liquidity providers as compared to simple orders being entered in 
multiple series of an options class in the simple market, as it can 
result in such participants exceeding their established risk thresholds 
by a greater number of contracts. Although Market Makers and other 
liquidity providers can limit their risk through the use of the Risk 
Monitor, the participant's quotes are not removed until after a trade 
is executed. As a result, because of the way complex orders leg into 
the regular market as a single transaction, Market Makers and other 
liquidity providers may end up trading more than the cumulative risk 
thresholds they have established, and are therefore exposed to greater 
risk. The Exchange believes that Market Makers and other liquidity 
providers may be compelled to change their quoting and trading behavior 
to account for this additional risk by widening their quotes and 
reducing the size associated with their quotes, which would diminish 
the Exchange's quality of markets and the quality of the markets in 
general.
---------------------------------------------------------------------------

    \31\ See Exchange Rule 612(c) [sic].
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange has proposed to modify the 
Risk Monitor as described in greater detail further below and has also 
proposed limitations to Rule 21.20(c)(2)(F). The purpose of the 
limitations in proposed Rule 21.20(c)(2)(F) is to minimize the impact 
of Legging on single leg Market Makers and other liquidity providers by 
limiting a potential source of unintended risk when certain types of 
complex orders leg into the Simple Book. The Exchange believes that the 
proposed limitation on the availability of Legging to (i) complex 
orders with two option legs where both legs are buying or both legs are 
selling and both legs are calls or both legs are puts, and

[[Page 33175]]

(ii) complex orders with three or four option legs where all legs are 
buying or all legs are selling regardless of whether the option leg is 
a call or a put, should serve to reduce the risk of Market Makers and 
other liquidity providers trading above their risk tolerance levels. 
However, as noted above, the Exchange believes it is appropriate not to 
apply this limitation to two-leg COA-eligible Customer orders in order 
to afford such orders the execution benefit that comes from Legging.
    Proposed Rule 21.20(c)(2)(G) sets forth the process for evaluation 
of complex orders, and the COB, on a regular basis and for various 
conditions and events that result in the System's particular handling 
and execution of complex orders in response to such regular evaluation, 
conditions and events. The System will evaluate complex orders 
initially once all components of the complex strategy are open as set 
forth in proposed Rule 21.20(c)(2)(B)-(D) as described above, upon 
receipt as set forth in proposed Rule 21.20(c)(5)(A) as described 
below, and continually as set forth in proposed Rule 21.20(c)(5)(B) as 
described below.\32\
---------------------------------------------------------------------------

    \32\ MIAX performs similar evaluations in the operation of its 
complex order book. See MIAX Rule 518(c)(2)(v).
---------------------------------------------------------------------------

    The purpose of the evaluation process for complex orders is to 
determine (i) their eligibility to initiate, or to participate in, a 
COA as described in proposed Rule 21.20(d)(1); (ii) their eligibility 
to participate in the managed interest process as described in proposed 
Rule 21.20(c)(4); (iii) their eligibility for full or partial execution 
against a complex order resting on the COB or through Legging into the 
Simple Book (as described in proposed Rule 21.20(c)(2)(F)); (iv) 
whether the complex order should be cancelled; and (v) whether the 
complex order or any remaining portion thereof should be placed or 
remain on the COB.
    The continual and event-triggered evaluation process ensures that 
the System is monitoring and assessing the COB for incoming complex 
orders, and changes in market conditions or events that cause complex 
orders to re-price and/or execute, and conditions or events that result 
in the cancellation of complex orders on the COB. This ensures the 
integrity of the Exchange's System in handling complex orders and 
results in a fair and orderly market for complex orders on the 
Exchange.
Complex Order Priority
    Proposed Rule 21.20(c)(3) describes how the System will establish 
priority for complex orders. As described below, the proposed priority 
structure for the COB differs from the priority structure applicable to 
the Simple Book as established in Exchange Rule 21.8.\33\ A complex 
order may be executed at a net credit or debit price against another 
complex order without giving priority to bids or offers established in 
the marketplace that are no better than the bids or offers comprising 
such net credit or debit; provided, however, that if any of the bids or 
offers established in the marketplace consist of a Priority Customer 
Order, at least one component of the complex strategy must trade at a 
price that is better than the corresponding BBO by at least a $0.01 
increment.\34\
---------------------------------------------------------------------------

    \33\ Exchange Rule 21.8, Priority of Quotes and Orders, 
describes among other things the various execution priority, trade 
allocation and participation guarantees generally applicable to the 
Simple Book. Some sections of Exchange Rule 21.8 are cross-
referenced herein and will apply as noted to complex orders, as the 
context requires.
    \34\ See Proposed Rule 21.20(c)(3)(A); see also MIAX Rule 
518(c)(3), which states that at least one leg must trade at a price 
that is better than the corresponding bid or offer in the 
marketplace by at least a $0.01 increment; ISE Rule 722(b)(2), which 
states that in this situation at least one leg must trade at a price 
that is better by at least one minimum trading increment; and PHLX 
Rule 1098(c)(iii), requiring in this situation that at least one 
option leg is executed at a better price than the established bid or 
offer for that option contract and no option leg is executed at a 
price outside of the established bid or offer for that option 
contract.
---------------------------------------------------------------------------

    Regarding execution and allocation of complex orders, proposed Rule 
21.20(c)(3)(B) establishes that complex orders will be automatically 
executed against bids and offers on the COB in price priority. Bids and 
offers at the same price on the COB will be executed in time priority. 
Complex orders that leg into the Simple Book will be executed in 
accordance with Rule 21.8, which includes Priority Customer priority as 
well as pro rata executions. The Exchange notes that although it has 
proposed a different priority model for its COB (price-time) than its 
Simple Book (pro rata), the Exchange has proposed to operate the COB to 
respect Priority Customer priority on the Simple Book and will also 
continue to execute orders that leg into the Simple Book based on its 
existing priority model. The Exchange believes that operating the COB 
with price-time priority and without providing allocation benefits to 
particular types of Members will allow the Exchange to launch complex 
order functionality with relatively straightforward features and 
results. The Exchange also notes that this same priority model (COB as 
price-time and Simple Book as pro rata) is used by at least one other 
options exchange.\35\
---------------------------------------------------------------------------

    \35\ See ISE Rule 713, which sets forth a pro rata priority 
model for ISE's simple book and ISE Rule 722(b)(3), which provides 
ISE flexibility to vary the application from class to class but 
includes price-time priority on the ISE COB as an option.
---------------------------------------------------------------------------

Managed Interest Process for Complex Orders
    In order to ensure that complex orders (which are non-routable) 
receive the best executions on the Exchange, proposed Rule 21.20(c)(4) 
sets forth the price(s) at which complex orders will be placed on the 
COB. More specifically, the managed interest process is used to manage 
the prices at which a complex order that is not immediately executed 
upon entry is handled by the System, including how such an order is 
priced and re-priced on the COB. The managed interest process is 
initiated when a complex order that is eligible to be placed on the COB 
cannot be executed against either the COB or the Simple Book (with the 
individual legs) at the complex order's net price, and is intended to 
ensure that a complex order to be managed does not result in a locked 
or crossed market on the Exchange. Once initiated, the managed interest 
process for complex orders will be based upon the SBBO.\36\
---------------------------------------------------------------------------

    \36\ A complex order for which the Drill-Through Price 
Protection is engaged will be managed to the Drill-Through Price as 
described below and in proposed Rule 21.20, Interpretations and 
Policy .04(f).
---------------------------------------------------------------------------

    Under the managed interest process, a complex order that is resting 
on the COB and is either a complex market order as described in 
proposed Rule 21.20(c)(6) and discussed below, or has a limit price 
that locks or crosses the current opposite side SBBO when the SBBO is 
the best price, may be subject to the managed interest process for 
complex orders as discussed herein. If the order is not a COA-eligible 
order as defined in proposed Rules 21.20(a)(4) described above and 
21.20(d)(1) described below, the System will first determine if the 
inbound complex order can be matched against other complex orders 
resting on the COB at a price that is at or inside the SBBO (provided 
there are no Priority Customer Orders on the Simple Book at that 
price). Second, the System will determine if the inbound complex order 
can be executed by Legging against individual orders resting on the 
Simple Book at the SBBO. A complex order subject to the managed 
interest process will never be executed at a price that is through the 
individual component prices on the Simple Book. Furthermore, the net 
price of a complex order subject to the managed interest process that 
is executed against another

[[Page 33176]]

complex order on the COB will never be inferior to the price that would 
be available if the complex order legged into the Simple Book. When the 
opposite side SBBO includes a Priority Customer Order, the System will 
book and display such booked complex order on the COB at a price (the 
``book and display price'') that is $0.01 away from the current 
opposite side SBBO. When the opposite side SBBO does not include a 
Priority Customer Order and is not available for execution in the ratio 
of such complex order, or cannot be executed through Legging with the 
Simple Book, the System will place such complex order on the COB and 
display such booked complex order at a book and display price that will 
lock the current opposite side SBBO (i.e., because it is a price at 
which another complex order can trade).
    Example--Complex order managed interest when Priority Customer 
Interest at the SBBO is Present

EDGX Market Maker A quote Mar 50 Call 6.00-6.50 (10x10)
EDGX Market Maker B quote Mar 55 Call 2.00-2.30 (10x10)
EDGX Priority Customer Order Mar 55 Call 2.10 bid (1)

     The Exchange receives an initiating Priority Customer 
complex order to buy 1 Mar 50 Call and sell 2 Mar 55 Calls for a 2.30 
debit, 100 times.
     Assume the do-not-COA instruction is present on this 
order, so the order will not initiate a COA auction upon arrival 
regardless of any other factor.
     The SBBO is 1.40 debit bid at 2.30 credit offer.
     Since the Mar 55 call is 2.10 bid for only one contract 
(the Priority Customer Order), the complex order cannot be legged 
against the Simple Book at a 2.30 debit as a 2.30 debit would require 
selling two March 55 Calls at 2.10 while buying one March 50 Call at 
6.50. Since there is Priority Customer interest on one leg of the 
complex order on the Simple Book, the inbound complex order cannot 
trade at this price by matching with other complex liquidity.
     Thus, the order is managed for display purposes at a price 
one penny inside of the opposite side SBBO, 2.29 and is available to 
trade with other complex liquidity at 2.29. The combination of the 
Simple Book and the COB will be a one penny wide market of 2.29 debit 
bid at 2.30 credit offer.
     If additional interest were to arrive on the Mar 55 Call 
2.10 bid, the inbound complex order would be re-evaluated and would in 
this example become eligible to leg with the Priority Customer interest 
on the Simple Book at the 2.30 credit offer.
    Example--Complex order managed interest when the ratio to allow 
Legging does not exist, and there is no Priority Customer Interest.

EDGX Market Maker A quote Mar 50 call 6.00-6.50 (10x10)
EDGX Market Maker B Mar 55 call 2.00-2.30 (10x10)
EDGX Broker-Dealer A order Mar 55 Call 2.10 bid (1)

     The Exchange receives an initiating Priority Customer 
complex order to buy 1 Mar 50 call and sell 2 Mar 55 calls for a 2.30 
debit, 100 times.
     The SBBO is 1.40 debit bid at 2.30 credit offer.
     Assume the do-not-COA instruction is present on this 
order, so the order will not initiate a COA auction upon arrival 
regardless of any other factor.
     Since the Mar 55 call is 2.10 bid for only one contract 
(the Broker Dealer order), the complex order cannot be legged against 
the Simple Book at a 2.30 debit, as a 2.30 debit would require selling 
two March 55 Calls at 2.10 while buying one March 50 Call at 6.50. 
Although the inbound complex order cannot trade at this time because 
there is insufficient interest to buy the March 55 Call, there is no 
Priority Customer interest on either side of the 2.30 credit offer and 
therefore the order will be able to trade at that price when sufficient 
interest exists. Thus, the order is managed for display purposes at a 
price locking the opposite side SBBO 2.30 and is available to trade 
against other complex interest at 2.30. The combination of the Simple 
Book and the COB will be a locked market of 2.30 debit bid at 2.30 
credit offer.
    Should the SBBO change, the complex order's book and display price 
will continuously re-price to the new SBBO until: (i) The complex order 
has been executed in its entirety; (ii) if not executed, the complex 
order's book and display price has reached its limit price or, in the 
case of a complex market order, the new SBBO, subject to any applicable 
price protections; (iii) the complex order has been partially executed 
and the remainder of the order's book and display price has reached its 
limit price or, in the case of a complex market order, the new SBBO, 
subject to any applicable price protections; or (iv) the complex order 
or any remaining portion of the complex order is cancelled. If the 
Exchange receives a new complex order for the complex strategy on the 
opposite side of the market from the managed complex order that can be 
executed, the System will immediately execute the remaining contracts 
from the managed complex order to the extent possible at the complex 
order's current book and display price. If unexecuted contracts remain 
from the complex order on the COB, the complex order's size will be 
revised and disseminated to reflect the complex order's remaining 
contracts at its current managed book and display price.
    The purpose of using the calculated SBBO is to enable the System to 
determine a valid trading price range for complex strategies and to 
protect orders resting on the Simple Book by ensuring that they are 
executed when entitled. Additionally, the managed interest process is 
designed to ensure that the System will not execute any component of a 
complex order at a price that would trade through an order on the 
Simple Book or that would disrupt the established priority of Priority 
Customer interest resting on the Simple Book.\37\ The Exchange believes 
that this is reasonable because it prevents the components of a complex 
order from trading at a price that is inferior to a price at which the 
individual components may be traded on the Exchange and it maintains 
the priority for Priority Customers resting on the Simple Book.
---------------------------------------------------------------------------

    \37\ For a complete description of priority in the Simple Book, 
see Exchange Rule 21.8.
---------------------------------------------------------------------------

Evaluation Process
    Proposed Rule 21.20(c)(5) describes how and when the System 
determines to execute or otherwise handle complex orders in the System. 
As stated above, the System will evaluate complex orders and the COB on 
a regular basis and will respond to the existence of various conditions 
and/or events that trigger an evaluation. Evaluation results in the 
various manners of handling and executing complex orders as described 
herein. The System will evaluate complex orders initially once all 
components of the complex strategy are open as set forth in proposed 
Rule 21.20(c)(2)(B)-(D), upon receipt as set forth in proposed Rule 
21.20(c)(5)(A), and continually as set forth in proposed Rule 
21.20(c)(5)(B), each of which as described herein.
    Proposed Rule 21.20(c)(5)(A) describes the evaluation process that 
occurs upon receipt of complex orders once a complex strategy is open 
for trading. After a complex strategy is open for trading, all new 
complex orders that are received for the complex strategy are evaluated 
upon arrival. The System will determine if such complex orders are COA-
eligible orders using the process and criteria described in proposed 
Rule 21.20(d). The System will also evaluate: (i) Whether such complex 
orders are

[[Page 33177]]

eligible for full or partial execution against a complex order resting 
on the COB; (ii) whether such complex orders are eligible for full or 
partial execution through Legging with the Simple Book (as described in 
proposed Rule 21.20(c)(2)(F) and discussed above); (iii) whether all or 
any remaining portion of a complex order should be placed on the COB; 
(iv) the eligibility of such complex orders (as applicable) to 
participate in the managed interest process as described above; \38\ 
and (v) whether such complex orders should be cancelled.\39\
---------------------------------------------------------------------------

    \38\ See proposed Rule 21.20(c)(4).
    \39\ For example, an order might be cancelled based on 
applicable price protections or MTP Modifiers, as described above.
---------------------------------------------------------------------------

    Proposed Rule 21.20(c)(5)(B) describes the System's ongoing regular 
evaluation of the COB. The System will continue, on a regular basis, to 
evaluate the factors listed in (i)-(v) described above with respect to 
evaluation performed on receipt.
    The System will also continue to evaluate whether there is a halt 
affecting any component of a complex strategy, and, if so, the System 
will handle complex orders in the manner set forth in proposed 
Interpretation and Policy .05, as described below.
    Proposed Rule 21.20(c)(5)(C) states that if the System determines 
that a complex order is a COA-eligible order (described below), such 
complex order will be submitted into the COA process as described in 
proposed Rule 21.20(d) and discussed below.
    Proposed Rule 21.20(c)(5)(D) describes the handling of orders that 
are determined not to be COA-eligible. If the System determines that a 
complex order is not a COA-eligible order, such complex order may be, 
as applicable: (i) Immediately matched and executed against a complex 
order resting on the COB; (ii) executed against the individual 
components of the complex order on the Simple Book through Legging (as 
described in proposed Rule 21.20(c)(2)(F) above); placed on the COB and 
managed pursuant to the managed interest process as described in 
proposed Rule 21.20(c)(4) and discussed above; or cancelled by the 
System if the time-in-force (e.g., IOC) of the complex order does not 
allow it to rest on the COB.
    Proposed Rule 21.20(c)(6) states that complex orders may be 
submitted as market orders and may be designated as COA-eligible. The 
proposed rule then distinguishes between complex market orders 
designated as COA-eligible and those that are not so designated. 
Proposed Rule 21.20(c)(6)(A) states that complex market orders 
designated as COA-eligible may initiate a COA upon arrival. The COA 
process is set forth in proposed Rule 21.20(d) and discussed below. 
Proposed Rule 21.20(c)(6)(B) states that complex market orders not 
designated as COA-eligible will trade immediately with any contra-side 
complex orders, or against the individual legs, up to and including the 
SBBO, and if not fully executed due to applicable price protections, 
may be posted to the COB subject to the managed interest process, and 
the Evaluation Process, each as described above.
Complex Order Auction Process
    Proposed Rule 21.20(d), COA Process, describes the process for 
determining if a complex order is eligible to begin a COA. All option 
classes will be eligible to participate in a COA.
    Proposed Rule 21.20(d)(l) defines and describes the handling of a 
COA eligible order. A ``COA-eligible order'' means a complex order 
that, as determined by the Exchange, is eligible to initiate a COA 
based upon the Member's instructions, the order's marketability (i.e., 
if the price of such order is equal to or better than the current SBBO, 
subject to applicable restrictions when a Priority Customer Order 
comprises a portion of the SBBO) as determined by the Exchange, number 
of components, and complex order origin codes (i.e., non-broker-dealer 
customers, broker-dealers that are not market makers on an options 
exchange, and/or market makers on an options exchange as determined by 
the Exchange). Determinations by the Exchange with respect to COA 
eligibility will be communicated to Members via specifications and/or 
Regulatory Circular).\40\ Other exchanges also have limited auction 
eligibility for complex orders based on order origin code.\41\
---------------------------------------------------------------------------

    \40\ See MIAX Rule 518(d)(1); see also CBOE Rule 6.53C(d)(i) and 
NYSE MKT Rule 980NY(e)(l), which list Customers, broker-dealers that 
are not Market-Makers or specialists on an options exchange, and/or 
Market-Makers or specialists on an options exchange.
    \41\ See id. See also, e.g., CBOE Regulatory Circular RG14-143 
(October 14, 2014), limiting Complex Order Auction (``COA'') 
eligibility to non-broker-dealer public customer orders and 
professional customer orders.
---------------------------------------------------------------------------

    In order to initiate a COA upon receipt, a COA-eligible order must 
be designated as such (either affirmatively or by default) and must 
meet the criteria described in proposed Rule 21.20, Interpretation and 
Policy .02, as described below.
    Complex orders processed through a COA may be executed without 
consideration to prices of the same complex interest that might be 
available on other exchanges. A COA will be allowed to occur at the 
same time as other COAs for the same complex strategy. The Exchange has 
not proposed to limit the frequency of COAs for a complex strategy and 
could have multiple COAs occurring concurrently with respect to a 
particular complex strategy.\42\ The Exchange represents that it has 
systems capacity to process multiple overlapping COAs consistent with 
the proposal, including systems necessary to conduct surveillance of 
activity occurring in such auctions.\43\
---------------------------------------------------------------------------

    \42\ The Exchange notes that ISE historically has permitted 
multiple complex auctions in the same strategy to run concurrently, 
though this functionality is currently dormant in connection with 
the transition to Nasdaq INET Technology. See Securities Exchange 
Act Release No. 80524 (April 25, 2017), 82 FR 20405 (May 1, 2017) 
(SR-ISE-2017-33).
    \43\ See also proposed Interpretation and Policy .02 to Rule 
21.20, as described below in the COA Eligibility section.
---------------------------------------------------------------------------

    Proposed Rule 21.20(d)(2) describes the circumstances under which a 
COA is begun. Upon receipt of a COA-eligible order, the Exchange will 
begin the COA process by sending a COA auction message to all 
subscribers to the Exchange's data feeds that deliver COA auction 
messages.\44\ The COA auction message will identify the COA auction ID, 
instrument ID (i.e., complex strategy), origin code, quantity, and side 
of the market of the COA-eligible order. The Exchange may also 
determine to include the price in COA auction messages and if it does 
so it will announce such determination in published specifications and/
or a Regulatory Circular to Members. The price included in the COA 
auction message will be the limit order price, unless the COA is 
initiated by a complex market order, in which case such price will be 
the SBBO, subject to any applicable price protections.
---------------------------------------------------------------------------

    \44\ See infra Market Data Feeds section.
---------------------------------------------------------------------------

    Proposed Rule 21.20(d)(3) defines the amount of time within which 
participants may respond to a COA auction message. The term ``Response 
Time Interval'' means the period of time during which responses to the 
RFR may be entered. The Exchange will determine the duration of the 
Response Time Interval, which shall not exceed 500 milliseconds, and 
will communicate it to Members via specifications and/or Regulatory 
Circular.\45\
---------------------------------------------------------------------------

    \45\ The Exchange has based its Response Time Interval on MIAX 
Rule 518(d)(3), which similarly does not have a minimum Response 
Time Interval and has a maximum of 500 milliseconds. The Exchange 
believes that 500 milliseconds is a reasonable amount of time within 
which participants can respond to a COA auction message.

---------------------------------------------------------------------------

[[Page 33178]]

    Proposed Rule 21.20(d)(4) states that Members may submit a response 
to the COA auction message (a ``COA Response'') during the Response 
Time Interval. COA Responses can be submitted by a Member with any 
origin code, including Priority Customer. COA Responses may be 
submitted in $0.01 increments and must specify the price, size, side of 
the market (i.e., a response to a buy COA as a sell or a response to a 
sell COA as a buy) and COA auction ID for the COA to which the response 
is targeted. Multiple COA Responses from the same Member may be 
submitted during the Response Time Interval. COA Responses represent 
non-firm interest that can be modified or withdrawn at any time prior 
to the end of the Response Time Interval, though any modification to a 
COA Response other than a decrease of size will result in a new 
timestamp and a loss of priority. COA Responses will not be displayed 
by the Exchange. At the end of the Response Time Interval, COA 
Responses are firm (i.e., guaranteed at their price and size). Any COA 
Responses not executed in full will expire at the end of the COA.\46\ 
Any COA Responses not executable based on the price of the COA will be 
cancelled immediately.
---------------------------------------------------------------------------

    \46\ This differs slightly from, but has the same effect as, the 
language in CBOE Rule 6.53C(d)(vii), which states that any COA 
Responses not accepted in whole or in a permissible ratio will 
expire at the end of the Response Time Interval.
---------------------------------------------------------------------------

    Proposed Rule 21.20(d)(5) describes how COA-eligible orders are 
handled following the Response Time Interval. At the end of the 
Response Time Interval, COA-eligible orders may be executed in whole or 
in part. COA-eligible orders will be executed against the best priced 
contra side interest, and any unexecuted portion of a COA-eligible 
order remaining at the end of the Response Time Interval will be placed 
on the COB and ranked pursuant to proposed Rule 21.20(c)(3) as 
discussed above or cancelled, if IOC.
    The COA will terminate: (i) Upon receipt of a new non-COA-eligible 
order on the same side as the COA but with a better price, in which 
case the COA will be processed and the new order will be posted to the 
COB; (ii) if an order is received that would improve the SBBO on the 
same side as the COA in progress to a price better than the auction 
price, in which case the COA will be processed, the new order will be 
posted to the Simple Book and the SBBO will be updated; or (iii) if a 
Priority Customer Order is received that would join or improve the SBBO 
on the same side as the COA in progress to a price equal to or better 
than the auction price, in which case the COA will be processed, the 
new order will be posted to the Simple Book and the SBBO will be 
updated. Additionally, a COA will terminate immediately without trading 
if any individual component or underlying security of a complex 
strategy in the COA process is subject to a halt as described in 
proposed Rule 21.20, Interpretation and Policy .05.
COA Pricing
    Proposed Rule 21.20(d)(6) describes the manner in which the System 
prices and executes complex orders at the conclusion of the Response 
Time Interval.
    The proposed Rule initially states the broader pricing policy and 
functionality of all trading of complex orders in the System (whether a 
trade is executed in the COA process or in regular trading). 
Specifically, a complex strategy will not be executed at a net price 
that would cause any component of the complex strategy to be executed: 
(A) At a price of zero; or (B) ahead of a Priority Customer Order on 
the Simple Book without improving the BBO on at least one component of 
the complex strategy by at least $.01. At the conclusion of the 
Response Time Interval, COA-eligible orders will be allocated pursuant 
to proposed Rule 21.20(d)(7).
    Example--COA takes place $.01 inside of the SBBO to avoid a 
situation where nothing can trade and the incoming order cannot be 
satisfied at the COA price.

EDGX Market Maker (``MM'')-A Mar 50 Call 0.99-1.05 (10x10)
EDGX MM-B Mar 55 Call 0.80-0.95 (10x10)
EDGX Priority Customer Order to buy a Mar 50 Call for 1.00 (2)

     The Exchange receives an initiating Priority Customer 
complex order to sell 3 Mar 50 calls and buy 2 Mar 55 calls at a 1.10 
credit, 100 times. The COA-eligible instruction is present on this 
complex order, so the complex order will initiate a COA upon arrival if 
it equals or improves the SBBO.
     The SBBO is 1.10 debit bid at 1.55 credit offer.
     Since the initiating Priority Customer Order price would 
equal or improve the SBBO upon arrival, the COA meets the eligibility 
requirements and a COA auction message is broadcast showing the COA 
auction ID, instrument ID, origin code, quantity, side of the market, 
and price, and a 500 millisecond Response Time Interval is started.
     The System starts the COA at the initiating Priority 
Customer price offering to sell 100 strategies at 1.10 (but will be 
restricted to executing at 1.11 or better). The following responses are 
received:

[cir] @50 milliseconds MM-C COA Response to buy 100 @1.10 debit arrives
[cir] @150 milliseconds MM-D COA Response to buy 50 @1.11 debit arrives
     @500 milliseconds the Response Time Interval expires, the 
COA ends and the trade is allocated against initiating Priority 
Customer in the following manner:

[cir] 50 trade vs. MM-D @1.11
[cir] Nothing can trade at 1.10 due to the presence of Priority 
Customer interest in the March 50 Call on the Simple Book at 1.00 in 
insufficient quantity to meet the ratio required by the Priority 
Customer Order. Therefore, the 1.10 COA Response by MM-C expires 
untraded at the end of the COA and the balance of the initiating 
Priority Customer complex order to sell is placed on the COB at a 
managed and displayed price of 1.11.
Trade Allocation Following the COA
    Proposed Rule 21.20(d)(7) describes the allocation of complex 
orders that are executed in a COA. Once the COA is complete (at the end 
of the Response Time Interval), such orders will be allocated first in 
price priority based on their original limit price, and thereafter as 
stated herein.
    Priority Customer Orders resting on the Simple Book have first 
priority. COA Responses and all other interest on the COB will have 
second priority and will be allocated in time priority (i.e., Priority 
Customer complex orders do not receive a priority advantage over other 
orders). Remaining individual orders in the Simple Book (i.e., non-
Priority Customer orders) will have third and final priority and will 
allocated pursuant to the Simple Book's priority algorithm, as 
described in Exchange Rule 21.8.
    The following examples illustrate the manner in which complex 
orders are allocated at the conclusion of the COA as well as the 
Exchange's initiation of a second COA process in the event a same-side 
COA-eligible order is received while a COA is already underway (in 
contrast to such order ``joining'' the COA that had already begun).
    Example--Priority Customer Response does not have priority over 
other responding participants.

EDGX MM-A Mar 50 Call 6.00-6.50 (10x10)
EDGX MM-B Mar 55 Call 3.00-3.30 (10x10)


[[Page 33179]]


     The Exchange receives an initiating Priority Customer 
complex order to buy 1 Mar 50 call and Sell 1 Mar 55 call for a 3.20 
debit, 1000 times.
     The COA-eligible instruction is present on this complex 
order, so the complex order will initiate a COA upon arrival if it 
equals or improves the SBBO.
     The SBBO is 2.70 debit bid at 3.50 credit offer.
     Since the initiating Priority Customer Order price would 
improve the SBBO upon arrival, the COA meets the eligibility 
requirements and a COA auction message is broadcast showing the COA 
auction ID, instrument ID, origin code, quantity, side of the market, 
and price, and a 500 millisecond Response Time Interval is started.
     The System starts the auction at the initiating Priority 
Customer price bidding 3.20 to buy 1000 contracts. The following 
responses are received:

[cir] @50 milliseconds MM-A COA Response @3.10 credit sell of 250 
arrives
[cir] @150 milliseconds MM-C COA Response @3.00 credit sell of 500 
arrives
[cir] @200 milliseconds MM-D COA Response @3.20 credit sell of 500 
arrives
[cir] @250 milliseconds Priority Customer 2 COA Response @3.10 credit 
sell of 250 arrives

     @500 milliseconds the Response Time Interval ends, the COA 
ends and the trade is allocated against the initiating Priority 
Customer using the single best price at which the greatest quantity can 
trade in the following manner:

[cir] 500 trade vs. MM-C @3.00 (MM-C achieved price priority by 
offering at 3.00)
[cir] 250 trade vs. MM-A @3.10 (other interest allocated in time 
priority, including Priority Customer)
[cir] 250 trade vs. Priority Customer 2 response @3.10 (other interest 
allocated in time priority, including Priority Customer)

    Example--Arrival of unrelated marketable complex order on the same 
side.
EDGX MM-A Mar 50 Call 6.00-6.50 (10x10)
EDGX MM-B Mar 55 Call 3.00-3.30 (10x10)

     The Exchange receives an initiating Priority Customer 
complex order to buy 1 Mar 50 call and Sell l Mar 55 call for a 3.20 
debit, 1000 times.
     The COA-eligible order instruction is present on this 
order, so the order will initiate an auction upon arrival if it equals 
or improves the SBBO.
     The SBBO is 2.70 debit bid at 3.50 credit offer.
     Since the initiating Priority Customer Order price would 
improve the SBBO upon arrival, the COA meets the eligibility 
requirements and a COA auction message is broadcast showing the COA 
auction ID, instrument ID, origin code, quantity, side of the market, 
and price, and a 500 millisecond Response Time Interval is started.
     The System starts the auction (``COA #1'') at the 
initiating Priority Customer price bidding 3.20 to buy 1000 contracts. 
The following responses are received:

[cir] @50 milliseconds BD1 COA Response @3.10 credit sell of 250 
arrives
[cir] @150 milliseconds MM-A COA Response @3.00 credit sell of 500 
arrives
[cir] @200 milliseconds MM-B COA Response @3.20 credit sell of 500 
arrives
[cir] @250 milliseconds MM-C COA Response @3.10 credit sell of 250 
arrives
[cir] @350 milliseconds BD2 submits an unrelated complex order @3.20 
debit buy of 200

     The System starts the auction at the initiating Broker-
Dealer (BD2) price bidding 3.20 to buy 200 contracts. The following 
responses are received:

[cir] @50 milliseconds BD1 COA Response @3.10 credit sell of 250 
arrives
[cir] @100 milliseconds MM-A COA Response @3.00 credit sell of 100 
arrives
[cir] @200 milliseconds MM-B COA Response @3.20 credit sell of 500 
arrives

     @500 milliseconds the Response Time Interval for COA #1 
ends, COA #1 ends and the trade is allocated against the initiating 
Priority Customer in the following manner:

[cir] Initiating Priority Customer buys 500 vs. MM-A @3.00 (the 
Priority Customer initiating order has origin code priority over BD2. 
MM-A achieved price priority over other responses by offering at 3.00)
[cir] Initiating Priority Customer buys 250 vs. BD1 @3.10 (BD 1 
achieved price priority over MM-B and BD2 and time priority over MM-C)
[cir] Initiating Priority Customer buys 250 vs. MM-C @3.10 (MM-C 
achieved price priority over MM-B and BD2 by offering at 3.10)
[cir] Initiating Priority Customer's order is fulfilled and all COA 
Responses and portions thereof are cancelled.

     @500 milliseconds the Response Time Interval for COA #2 
ends, COA #2 ends and the trade is allocated against the initiating 
Broker-Dealer in the following manner:

[cir] Initiating Broker-Dealer buys 100 vs. MM-A @3.00 (MM-A achieved 
price priority over other responses by offering at 3.00)
[cir] Initiating Broker-Dealer buys 100 vs. BD1 @3.10 (BD1 achieved 
price priority over MM-B)
[cir] Initiating Broker-Dealer's order is fulfilled and all remaining 
COA Responses and portions thereof are cancelled.

    Proposed Rule 21.20(d)(8) states that, consistent with Exchange 
Rule 21.1(d)(5), the System will reject a complex market order received 
when the underlying security is subject to a ``Limit State'' or 
``Straddle State'' as defined in the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act 
(the ``Limit Up-Limit Down Plan''). If the underlying security of a 
COA-eligible order that is a market order enters a Limit State or 
Straddle State, the COA will end early without trading and all COA 
Responses will be cancelled.
    Proposed Rule 21.20(d)(9), states that if, during a COA, the 
underlying security and/or any component of a COA-eligible order is 
subject to a trading halt, the COA will be handled as set forth in 
proposed Rule 21.20, Interpretation and Policy .05 as described in 
detail below.
    The Exchange believes that the provisions regarding the COA provide 
a framework that will enable the efficient trading of complex orders in 
a manner that is similar to other options exchanges as stated above. 
Further, this clarity in the operation of the COA and its consistency 
with other exchanges will help promote a fair and orderly options 
market. As described above, the COA is designed to work in concert with 
the COB and with a simple priority of allocation that continues to 
respect the priority of allocations on the Simple Book (via the 
Exchange's pro rata allocation methodology).
Interpretations and Policies
    The Exchange also proposes several Interpretations and Policies to 
proposed Rule 21.20.
Market Maker Quoting
    The Exchange has not proposed different standards for participation 
by Market Makers on the COB (e.g., no specific benefits or 
obligations). Proposed Rule 21.20, Interpretation and Policy .01 makes 
clear that Market Makers are not required to quote on the COB. Thus, 
unlike the continuous

[[Page 33180]]

quoting requirements in the simple order market, there are no 
continuous quoting requirements respecting complex orders.\47\ Complex 
strategies are not subject to any requirements that are applicable to 
Market Makers in the simple market for individual options series or 
classes. Volume executed in complex strategies is not taken into 
consideration when determining whether Market Makers are meeting 
quoting obligations applicable to Market Makers in the simple market 
for individual options.\48\
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    \47\ This is similar to ISE, where market makers are not 
required to enter quotes on the complex order book. Quotes for 
complex orders are not subject to any quotation requirements that 
are applicable to market maker quotes in the regular market for 
individual options series or classes. See ISE Rule 722, 
Supplementary Material .03.
    \48\ See Proposed Rule 21.20, Interpretation and Policy .01. 
This is substantially similar to complex quoting functionality 
currently operative on both MIAX and ISE, where market makers may 
enter quotes for complex order strategies on the complex order book 
in their appointed options classes. Just as with the proposed rules, 
neither MIAX market makers nor ISE market makers are required to 
enter quotes on the complex order book. Quotes for complex orders 
are not subject to any quotation requirements that are applicable to 
MIAX market maker or ISE Market Maker quotes in the regular market 
for individual options series or classes, nor is any volume executed 
in complex orders taken into consideration when determining whether 
MIAX or ISE market makers are meeting quoting obligations applicable 
to market maker quotes in the regular market for individual options 
series. See MIAX Rule 518, Interpretation and Policy .02; ISE Rule 
722, Supplementary Material .03.
---------------------------------------------------------------------------

COA Eligibility
    Proposed Rule 21.20, Interpretation and Policy .02 establishes the 
method by which the Exchange will determine whether complex order 
interest is qualified to initiate a COA and also describes the 
operation of the proposed functionality with respect to the fact 
multiple COAs would be allowed to operate concurrently. If a COA-
eligible order is priced equal to, or improves, the SBBO and is also 
priced to improve other complex orders resting at the top of the COB, 
the complex order will be eligible to initiate a COA, provided that if 
any of the bids or offers on the Simple Book that comprise the SBBO 
consists of a Priority Customer Order, the COA will only be initiated 
if it will trade at a price that is better than the corresponding bid 
or offer by at least a $0.01 increment.
    Pursuant to the proposed Rule, a COA will be allowed to commence 
even to the extent a COA for the same complex strategy is already 
underway. The Exchange notes at the outset that based on how Exchange 
Systems operate (and computer processes generally), it is impossible 
for COAs to occur ``simultaneously'', meaning that they would commence 
and conclude at exactly the same time. Thus, although it is possible as 
proposed for one or more COAs to overlap, each COA will be started in a 
sequence and with a time that will determine its processing. The 
Exchange proposes to codify in Interpretation and Policy .02 that to 
the extent there is more than one COA for a specific complex strategy 
underway at a time, each COA will conclude sequentially based on the 
exact time each COA commenced, unless terminated early pursuant to 
proposed paragraph (d)(5)(C) of the Rule.\49\ At the time each COA 
concludes, such COA will be allocated pursuant to the proposed Rule and 
will take into account all COA Responses and unrelated complex orders 
on the COB at the exact time of conclusion.
---------------------------------------------------------------------------

    \49\ In the event there are multiple COAs underway that are each 
terminated early pursuant to proposed Rule 21.20(d)(5)(C), the COAs 
will be processed sequentially based on the order in which they 
commenced.
---------------------------------------------------------------------------

    Thus, even if there are two COAs that commence and conclude at 
nearly the same time each COA will have a distinct conclusion at which 
time the COA will be allocated. In turn, when the first COA concludes, 
orders on the Simple Book and unrelated complex orders that then exist 
will be considered for participation in the COA. If unrelated orders 
are fully executed in such COA, then there will be no unrelated orders 
for consideration when the subsequent COA is processed (unless new 
unrelated order interest has arrived). If instead there is remaining 
unrelated order interest after the first COA has been allocated, then 
such unrelated order interest will be considered for allocation when 
the subsequent COA is processed. As another example, each COA Response 
is required to specifically identify the COA for which it is targeted 
\50\ and if not fully executed will be cancelled back at the conclusion 
of the COA.\51\ Thus, COA Responses will only be considered in the 
specified COA.
---------------------------------------------------------------------------

    \50\ See proposed Rule 21.20(d)(4).
    \51\ See id.
---------------------------------------------------------------------------

Dissemination of Information
    Proposed Rule 21.20, Interpretation and Policy .03 is a regulatory 
provision that prohibits the dissemination of information related to 
COA-eligible orders by the submitting Member to third parties. Such 
conduct will be deemed conduct inconsistent with just and equitable 
principles of trade as described in Exchange Rule 3.1.
Price and Other Protections
    Proposed Interpretation and Policy .04 establishes Price Protection 
standards that are intended to ensure that certain types of complex 
strategies will not be executed outside of a preset standard minimum 
and/or maximum price limit. These Rules are based on and similar to 
portions of Interpretation and Policy .08 to CBOE Rule 6.53C.
    First, in paragraph (a) of Proposed Rule 21.20, Interpretation and 
Policy .04, the Exchange proposed to define various terms necessary for 
such Interpretation,\52\ as follows:
---------------------------------------------------------------------------

    \52\ See paragraph (a) to Proposed Rule 21.20, Interpretation 
and Policy .04; see also CBOE Rule 6.53C, Interpretation and Policy 
.08.
---------------------------------------------------------------------------

     A ``vertical'' spread is a two-legged complex order with 
one leg to buy a number of calls (puts) and one leg to sell the same 
number of calls (puts) with the same expiration date but different 
exercise prices.
     A ``butterfly'' spread is a three-legged complex order 
with two legs to buy (sell) the same number of calls (puts) and one leg 
to sell (buy) twice as many calls (puts), all with the same expiration 
date but different exercise prices, and the exercise price of the 
middle leg is between the exercise prices of the other legs. If the 
exercise price of the middle leg is halfway between the exercise prices 
of the other legs, it is a ``true'' butterfly; otherwise, it is a 
``skewed'' butterfly.
     A ``box'' spread is a four-legged complex order with one 
leg to buy calls and one leg to sell puts with one strike price, and 
one leg to sell calls and one leg to buy puts with another strike 
price, all of which have the same expiration date and are for the same 
number of contracts.
    Second, in paragraph (b), the Exchange has proposed to specify 
credit-to-debit parameters that would prevent execution of, and instead 
cancel, market orders that would be executed at a net debit price after 
receiving a partial execution at a net credit price.\53\
---------------------------------------------------------------------------

    \53\ See paragraph (b) to Proposed Rule 21.20, Interpretation 
and Policy .04; see also CBOE Rule 6.53C, Interpretation and Policy 
.08(b).
---------------------------------------------------------------------------

    Next, in paragraph (c), the Exchange proposes to set forth various 
Debit/Credit Price Reasonability Checks, as follows. To the extent a 
price check parameter is applicable, the Exchange will not accept a 
complex order that is a limit order for a debit strategy with a net 
credit price that exceeds a pre-set buffer, a limit order for a credit 
strategy with a net debit price that exceeds a pre-set buffer, or a 
market order for a credit strategy that would be executed at a net

[[Page 33181]]

debit price that exceeds a pre-set buffer.\54\ The Exchange will 
determine these pre-set buffer amounts and communicate them to Members 
via specifications and/or Regulatory Circular.\55\
---------------------------------------------------------------------------

    \54\ As proposed, the System would not apply this check to an 
order for which the System cannot define whether it is a debit or 
credit. This would primarily be prior to the opening of trading as 
orders are being queued because prices may not be available in order 
to make such determination.
    \55\ The Exchange notes that ISE also employs variable ``pre-set 
values'' in connection with analogous price protections offered by 
ISE with respect to its complex order book. See Supplementary 
Material .07(c) to ISE Rule 722.
---------------------------------------------------------------------------

    As proposed in paragraph (c)(2), the System would define a complex 
order as a debit or credit as follows: (A) A call butterfly spread for 
which the middle leg is to sell (buy) and twice the exercise price of 
that leg is greater than or equal to the sum of the exercise prices of 
the buy (sell) legs is a debit (credit); (B) a put butterfly spread for 
which the middle leg is to sell (buy) and twice the exercise price of 
that leg is less than or equal to the sum of the exercise prices of the 
buy (sell) legs is a debit (credit); and (C) an order for which all 
pairs and loners are debits (credits) is a debit (credit).\56\
---------------------------------------------------------------------------

    \56\ See paragraph (c) to Proposed Rule 21.20, Interpretation 
and Policy .04; see also CBOE Rule 6.53C, Interpretation and Policy 
.08(c).
---------------------------------------------------------------------------

    For purposes of Debit/Credit Price Reasonability Checks, a ``pair'' 
is a pair of legs in an order for which both legs are calls or both 
legs are puts, one leg is a buy and one leg is a sell, and both legs 
have the same expiration date but different exercise prices or, for all 
options except European-style index options, the same exercise price 
but different expiration dates. A ``loner'' is any leg in an order that 
the System cannot pair with another leg in the order (including legs in 
orders for European-style index options that have the same exercise 
price but different expiration dates). The proposed rule would further 
specify: that the System first pairs legs to the extent possible within 
each expiration date, pairing one leg with the leg that has the next 
highest exercise price; and that the System then, for all options 
except European-style index options, pairs legs to the extent possible 
with the same exercise prices across expiration dates, pairing one leg 
with the leg that has the next nearest expiration date.\57\
---------------------------------------------------------------------------

    \57\ See id.
---------------------------------------------------------------------------

    A pair of calls is a credit (debit) if the exercise price of the 
buy (sell) leg is higher than the exercise price of the sell (buy) leg 
(if the pair has the same expiration date) or if the expiration date of 
the sell (buy) leg is farther than the expiration date of the buy 
(sell) leg (if the pair has the same exercise price). A pair of puts is 
a credit (debit) if the exercise price of the sell (buy) leg is higher 
than the exercise price of the buy (sell) leg (if the pair has the same 
expiration date) or if the expiration date of the sell (buy) leg is 
farther than the expiration date of the buy (sell) leg (if the pair has 
the same exercise price). A loner to buy is a debit, and a loner to 
sell is a credit.\58\
---------------------------------------------------------------------------

    \58\ See id.
---------------------------------------------------------------------------

    In addition to the definitions and parameters described above, 
proposed paragraph (c)(3) would also state that the System rejects or 
cancels back to the Member any limit order or any market order (or any 
remaining size after partial execution of the order), that does not 
satisfy this check. Also, proposed paragraph (c)(4) would make clear 
that the check applies to auction responses in the same manner as it 
does to orders.
    In addition to the proposed Debit/Credit Price Reasonability Checks 
described above, the Exchange proposes to adopt specific Buy Strategy 
Parameters that would be set forth in paragraph (d) to Interpretation 
and Policy .04. As proposed, the System will reject a limit order where 
all the components of the strategy are to buy and the order is priced 
at zero, any net credit price that exceeds a pre-set buffer, or a net 
debit price that is less than the number of individual option series 
legs in the strategy (or applicable ratio) multiplied by the applicable 
minimum net price increment for the complex order.\59\
---------------------------------------------------------------------------

    \59\ See paragraph (d) to Proposed Rule 21.20, Interpretation 
and Policy .04; see also CBOE Rule 6.53C, Interpretation and Policy 
.08(d).
---------------------------------------------------------------------------

    Proposed paragraph (e) to Interpretation and Policy .04 would set 
forth a Maximum Value Acceptable Price Range as an additional price 
check for vertical, true butterfly or box spreads as well as certain 
limit and market orders.\60\ Specifically, the System will reject an 
order if the order is a vertical, true butterfly or box spread, or a 
limit order or market order if it would execute at a price that is 
outside of an acceptable price range. The acceptable price range is set 
by the minimum and maximum possible value of the spread, subject to an 
additional buffer amount determined by the Exchange and communicated to 
Members via specifications and/or a Regulatory Circular. The maximum 
possible value of a vertical, true butterfly and box spread is the 
difference between the exercise prices of (A) the two legs; (B) the 
middle leg and the legs on either side; and (C) each pair of legs, 
respectively. The minimum possible value of the spread is zero.
---------------------------------------------------------------------------

    \60\ See paragraph (e) to Proposed Rule 21.20, Interpretation 
and Policy .04; see also CBOE Rule 6.53C, Interpretation and Policy 
.08(g).
---------------------------------------------------------------------------

    The last paragraph of proposed Interpretation and Policy .04, 
paragraph (f), would set forth the Exchange's Drill-Through Price 
Protection. The Drill-Through Price Protection feature is a price 
protection mechanism applicable to all complex orders under which a buy 
(sell) order will not be executed at a price that is higher (lower) 
than the SNBBO or the SNBBO at the time of order entry plus (minus) a 
buffer amount (the ``Drill-Through Price'').\61\ The Exchange will 
adopt a default buffer amount for the Drill-Through Price Protection 
and will publish this amount in publicly available specifications and/
or a Regulatory Circular. A Member may modify the buffer amount 
applicable to Drill-Through Price Protections to either a larger or 
smaller amount than the Exchange default. If a buy (sell) order would 
execute or post to the COB at a price higher (lower) than the Drill-
Through Price, the System will instead post the order to the COB at the 
Drill-Through Price, unless the terms of the order instruct otherwise. 
Any order (or unexecuted portion thereof) will rest in the COB (based 
on the time at which it enters the book for priority purposes) for a 
time period in milliseconds that may not exceed three seconds (which 
the Exchange will determine and communicate to Members via 
specifications and/or Regulatory Circular) with a price equal to the 
Drill-Through Price. If the order (or unexecuted portion thereof) does 
not execute during that time period, the System will cancel it.
---------------------------------------------------------------------------

    \61\ The Exchange notes that ISE also applies configurable 
values in connection with an analogous price protection offered by 
ISE with respect to its complex order book. See Supplementary 
Material .07(a) to ISE Rule 722.
---------------------------------------------------------------------------

    Example--Application of Drill-Through Protection.

EDGX--quote Mar 50 Call 6.00-6.50 (10x10)
EDGX--quote Mar 55 Call 2.00-2.30 (10x10)
CBOE--Mar 50 Call 6.00-6.50 (10x10)
CBOE--Mar 55 Call 2.00-2.10 (10x10)
ISE--Mar 50 Call 6.00-6.50 (10x10)
ISE--Mar 55 Call 2.10-2.30 (10x10)

     The Exchange receives an initiating Priority Customer 
Order to buy 1 Mar 50 call and sell 2 Mar 55 calls for a 2.50 debit x 
100.
     Assume the Exchange has established two seconds as the 
amount of time an order will rest in the COB with a price equal to the 
Drill-Through Price before cancellation.

[[Page 33182]]

     The SBBO is 1.40 debit bid at 2.50 credit offer.
     The SNBBO is 1.80 debit bid (CBOE) at 2.30 credit offer 
(ISE).
     Assume the do-not-COA instruction is present on this 
order, so the order will not initiate a COA auction upon arrival 
regardless of any other factor.
     Further assume the Member has set its Drill-Through Price 
Protection with zero tolerance to execute through the SNBBO, so the 
Exchange will protect the order to the best bid for the strategy or 
best offer for the strategy available from any single exchange's 
protected quotation in the Simple Order Market, including the Exchange.
     Due to the Drill-Through Price Protection, the inbound 
order cannot be legged against the Simple Book for a 2.50 debit (the 
strategy is offered at 2.30 on ISE). In order to display the order at 
its maximum tradable price, the inbound order is managed on the COB and 
displayed at its protected limit of 2.30 debit bid. While the (EDGX) 
SBBO remains 1.40 debit bid at 2.50 credit offer, the combination of 
the Simple Book and the COB becomes 2.30 debit bid at 2.50 credit 
offer.
     If the order managed and displayed at its protected limit 
of 2.30 debit bid is not executed within 2 seconds it will be 
cancelled.
Trading Halts
    The Exchange is proposing to establish in proposed Rule 21.20, 
Interpretation and Policy .05, the details regarding the Exchange's 
handling of complex orders in the context of a trading halt.
    Proposed Interpretation and Policy .05, paragraph (a) would govern 
halts during regular trading and would state that if a trading halt 
exists for the underlying security or a component of a complex 
strategy, trading in the complex strategy will be suspended. The COB 
will remain available for Members to enter and manage complex orders. 
Incoming complex orders that could otherwise execute or initiate a COA 
in the absence of a halt will be placed on the COB. This is similar to 
functionality that is currently operative on other exchanges.\62\ 
Incoming complex orders with a time in force of IOC will be cancelled.
---------------------------------------------------------------------------

    \62\ The proposed rule is based on and similar to the MIAX 
process for trading halts, except that MIAX reopens through 
potential complex auctions whereas the Exchange has proposed 
reopening through its standard Opening Process. See MIAX Rule 518, 
Interpretation and Policy .05(e)(3); see also PHLX Rule 
1098(c)(ii)(C), which states that complex orders will not trade on 
the PHLX system during a trading halt for any options component of 
the Complex Order.
---------------------------------------------------------------------------

    Proposed in Interpretation and Policy .05, paragraph (b) would 
govern halts during a COA and would state that if, during a COA, any 
component(s) and/or the underlying security of a COA-eligible order is 
halted, the COA will end early without trading and all COA Responses 
will be cancelled. Remaining complex orders will be placed on the COB 
if eligible, or cancelled. When trading in the halted component(s) and/
or underlying security of the complex order resumes, the System will 
evaluate and re-open the COB pursuant to subparagraph (c)(2)(B)-(D) 
described above.
    Other investor protections proposed by the Exchange are described 
in Interpretation and Policy .06. Specifically, the Exchange proposes 
an additional price protection referred to as Fat Finger Price 
Protection as well as a complex order size protection. Both of these 
protections will be will be [sic] available for complex orders as 
determined by the Exchange and communicated to Members via 
specifications and/or Regulatory Circular.
    Pursuant to the Fat Finger Price Protection, the Exchange will 
define a price range outside of which a complex limit order will not be 
accepted by the System.\63\ The price range will be a number defined by 
the Exchange and communicated to Members via specifications and/or 
Regulatory Circular.\64\ A Member may also establish a more aggressive 
or restrictive value than the Exchange default. The default price range 
for Fat Finger Price Protection will be greater than or equal to a 
price through the SNBBO for the complex strategy to be determined by 
the Exchange and communicated to Members via specifications and/or 
Regulatory Circular. A complex limit order to sell will not be accepted 
at a price that is lower than the SNBBO bid, and a complex limit order 
to buy will not be accepted at a price that is higher than the SNBBO 
offer, by more than the Exchange defined or Member established price 
range. A complex limit order that is priced through this range will be 
rejected.
---------------------------------------------------------------------------

    \63\ See paragraph (a) of proposed Interpretation and Policy .06 
to Rule 21.20.
    \64\ The Exchange notes that ISE also applies configurable 
values in connection with an analogous price protection offered by 
ISE with respect to its complex order book. See Supplementary 
Material .07(d) to ISE Rule 722.
---------------------------------------------------------------------------

    With respect to the proposed order size protection, the System will 
prevent certain complex orders from executing or being placed on the 
COB if the size of the complex order exceeds the complex order size 
protection designated by the Member.\65\ If the maximum size of complex 
orders is not designated by the Member, the Exchange will set a maximum 
size of complex orders on behalf of the Member by default. Members may 
designate the complex order size protection on a firm wide basis. The 
default maximum size for complex orders will be determined by the 
Exchange and communicated to Members via specifications and/or 
Regulatory Circular.\66\
---------------------------------------------------------------------------

    \65\ See paragraph (b) of proposed Interpretation and Policy .06 
to Rule 21.20.
    \66\ The Exchange notes that ISE also applies configurable 
values in connection with an analogous size protection offered by 
ISE with respect to its complex order book. See Supplementary 
Material .07(e) to ISE Rule 722.
---------------------------------------------------------------------------

Additional Times in Force
    As noted above, the Exchange proposes to adopt two new Times in 
Force not currently available on the Exchange in connection with the 
proposal, GTC and OPG. The Exchange notes that as proposed, both of 
these Times in Force will ultimately be available on both the Simple 
Book and the COB. The Exchange proposes to include GTC and OPG within 
Rule 21.1(f), which currently lists all Times in Force available for 
use on EDGX Options. As proposed, ``Good Til Cancelled or ``GTC'' shall 
mean, for an order so designated, that if after entry into the System, 
the order is not fully executed, the order (or the unexecuted portion 
thereof) shall remain available for potential display and/or execution 
unless cancelled by the entering party, or until the option expires, 
whichever comes first. ``At the Open'' or ``OPG'' shall mean, for an 
order so designated, an order that shall only participate in the 
opening process on the Exchange. An OPG order not executed in the 
opening process will be cancelled.
Market Data Feeds
    The Exchange currently offers various data feeds that contain 
information regarding activity on EDGX Options, including auctions 
conducted by EDGX Options. The Exchange proposes to amend Rule 21.15 to 
specify the data feeds the Exchange proposes to adopt in connection 
with this proposal. As set forth in current Rule 21.15, all data 
products are free of charge, except as otherwise noted in the Fee 
Schedule; thus, if the Exchange proposes to adopt fees in connection 
with any of these data feeds, it will file a separate fee filing and 
will add such fees to the Fee Schedule. The proposed data feeds and 
related changes are described below.
    First, the Exchange currently offers a Multicast PITCH data feed, 
which is an

[[Page 33183]]

uncompressed data feed that offers depth of book quotations and 
execution information based on options orders entered into the System. 
The Exchange proposes to adopt a similar, but separate, Multicast PITCH 
data feed for the COB.
    Second, although it offers a ``top of book'' feed for its equities 
trading platform, EDGX Options does not currently offer such a feed. In 
connection with this proposal, the Exchange proposes to offer a 
Multicast TOP data feed. As proposed, Multicast TOP would be an 
uncompressed data feed that offers top of book quotations and execution 
information based on options orders entered into the System. The 
Exchange proposes to offer separate Multicast TOP data feeds for the 
Exchange's Simple Book and the COB.
    Third, the Exchange currently offers an Auction Feed, which is an 
uncompressed data product that provides information regarding the 
current status of price and size information related to auctions 
conducted by the Exchange. The Exchange proposes to adopt a similar, 
but separate, Auction data feed for the COB.
    Fourth, pursuant to current Rule 21.15(c)(2), the Exchange 
identifies Priority Customer Orders and trades as such on messages 
disseminated by the Exchange through its Multicast PITCH and Auction 
data feeds. The Exchange proposes to also disseminate this information 
on its Multicast TOP data feed.
    Finally, the Exchange proposes to re-number the provisions for the 
DROP and Historical Data products, but does not propose any changes 
with respect to such products.
Risk Monitor Mechanism
    The Exchange proposes to adopt Interpretation and Policy .01 to 
Rule 21.16 to state that complex orders will participate in the 
Exchange's existing risk functionality, the Risk Monitor. As noted 
above, the Risk Monitor functions by counting Member activity both 
within a specified time period and also on an absolute basis for the 
trading day and then rejecting or cancelling orders that exceed Member-
designated volume, notional, count or percentage triggers. The Exchange 
proposes to make clear in this Interpretation that for purposes of 
counting within a specified time period and for purposes of calculating 
absolute limits, the Exchange will count individual trades executed as 
part of a complex order when determining whether a volume trigger, 
notional trigger or count trigger has been reached. Further, the 
Exchange proposes to make clear that for purposes of counting within a 
specified time period and for purposes of calculating absolute limits, 
the Exchange will count the percentage executed of a complex order when 
determining whether the percentage trigger has been reached.
Implementation Date
    If the proposed changes are approved by the Commission, the 
Exchange proposes to implement the System changes described herein on 
October 23, 2017.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of the Act,\67\ in general, and with Section 
6(b)(5) of the Act,\68\ in particular, in that it is designed 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; and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78a et seq.
    \68\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes in particular that its proposal regarding 
executions of complex orders against the Simple Book is consistent with 
the Act and furthers the objectives of Section 6(b)(5) of the Act \69\ 
because it provides greater liquidity to the marketplace as a whole by 
fostering the interaction between the components of complex orders on 
the COB and the Simple Book. This should enhance the opportunity for 
executions of both complex orders and simple orders.
---------------------------------------------------------------------------

    \69\ Id.
---------------------------------------------------------------------------

    The Exchange also believes the interaction of orders will benefit 
investors by increasing the opportunity for complex orders to receive 
execution, while also enhancing execution quality for orders on the 
Simple Book. Generally, the options industry rules for the execution of 
complex orders provide that two complex orders may execute against one 
another if the execution prices of the component legs result in a net 
price that is better than the best customer limit order available for 
the individual component legs. This permits an exchange, when executing 
two complex orders against one another, to execute each component leg 
on the market's best bid or offer so long as the execution does not 
trade ahead of customer interest.
    The Exchange believes it is reasonable to permit complex orders 
that are the subject of this rule change to leg into the Simple Book. 
The proposed rule concerning Legging will facilitate the execution of 
more complex orders, and will thus benefit investors and the general 
public because complex orders will have a greater chance of execution 
when they are allowed to leg into the simple market. This will increase 
the execution rate for these orders, thus providing market participants 
with an increased opportunity to execute these orders on the Exchange. 
The prohibition (though inapplicable to two-leg COA-eligible Customer 
complex orders) against the Legging of complex orders with two option 
legs where both legs are buying or both legs are selling and both legs 
are calls or both legs are puts, and on complex orders with three or 
four option legs where all legs are buying or all legs are selling 
regardless of whether the option leg is a call or a put, protects 
investors and the public interest by ensuring that Market Makers 
providing liquidity do not trade above their established risk tolerance 
levels, as described above.
    Despite the enhanced execution opportunities provided by legging, 
as described above, the Exchange believes it is reasonable and 
consistent with the Act to permit Members to submit orders designated 
as Complex Only Orders that will not leg into the Simple Book. As 
described above, the Exchange notes that the Complex Only Order option 
is analogous to functionality on the MIAX complex order book, which 
includes certain types of orders and quotes that do not leg into the 
simple marketplace but instead will only execute against or post to the 
MIAX complex book.\70\ The Exchange also believes the proposed 
functionality is analogous to other types of functionality already 
offered by the Exchange that provides Members the ability to direct the 
Exchange not to route their orders away from the Exchange \71\ or not 
to remove liquidity from the Exchange.\72\ Similar to such analogous 
features, the Exchange believes that Members may utilize Complex Only 
Order functionality as part of their strategy to maintain additional 
control over their executions, in connection with their attempt to 
provide and not remove liquidity, or in connection with applicable fees 
for executions. Based on the foregoing, the Exchange does not believe 
that Complex

[[Page 33184]]

Only Order functionality raises any new or novel concepts under the 
Act, and instead is consistent with the goals of the Act to remove 
impediments to and to perfect the mechanism of a free and open market 
and a national market system, and to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \70\ See supra note 11.
    \71\ See supra note 12.
    \72\ See supra note 13.
---------------------------------------------------------------------------

    The Exchange also believes it is reasonable to limit other types of 
complex orders that are eligible to leg into the Simple Book. The 
Exchange believes that the vast majority of complex orders sent to the 
Exchange will be unaffected by this proposed rule, including two leg 
COA-eligible Customer complex orders, which will still be allowed to 
leg into the Simple Book without restriction. Moreover, the Exchange 
believes that the potential risk of offering Legging functionality for 
complex orders such as those impacted by the proposed rule could limit 
the amount of liquidity that Market Makers are willing to provide in 
the Simple Book. In particular, Market Makers, without the proposed 
limitation, are at risk of executing the cumulative size of their 
quotations across multiple options series without an opportunity to 
adjust their quotes. Market Makers may be compelled to change their 
quoting and trading behavior to account for this additional risk by 
widening their quotes and reducing the size associated with their 
quotes, which would diminish the Exchange's quality of markets and the 
quality of the markets in general. The limitations in proposed Rule 
21.20(c)(2)(F) substantially diminish a potential source of unintended 
Market Maker risk when certain types of complex orders leg into the 
Simple Book, thereby removing impediments to and perfecting the 
mechanisms of a free and open market and a national market system and, 
in general, protecting investors and the public interest by adding 
confidence and stability in the Exchange's marketplace. This benefit to 
investors far exceeds the small amount of potential liquidity provided 
by the few complex orders to which this aspect of the proposal applies.
    Additionally, investors will have greater opportunities to manage 
risk with the new availability of trading in complex orders. The 
proposed adoption of rules governing complex order auctions will 
facilitate the execution of complex orders while providing 
opportunities to access additional liquidity and fostering price 
improvement. The Exchange believes the proposed rules are appropriate 
in that complex orders are widely recognized by market participants as 
invaluable, both as an investment, and a risk management strategy. The 
proposed rules will provide an efficient mechanism for carrying out 
these strategies. In addition, the proposed complex order rules promote 
equal access by providing Members that subscribe to the Exchange's data 
feeds that include auction notifications with the opportunity to 
interact with orders in the COA. In this regard, any Member can 
subscribe to the options data provided through the Exchange's data 
feeds that include auction notifications.
    The Exchange believes that the general provisions regarding the 
trading of complex orders provide a clear framework for trading of 
complex orders in a manner consistent with other options exchanges. 
This consistency should promote a fair and orderly national options 
market system. The Exchange believes that the proposed rules will 
result in efficient trading and reduce the risk for investors that 
complex orders could fail to execute by providing additional 
opportunities to fill complex orders.
    The proposed execution and priority rules will allow complex orders 
to interact with interest in the Simple Book and, conversely, interest 
on the Simple Book to interact with complex orders in an efficient and 
orderly manner. Consistent with other exchanges and with well-
established principles of customer protection, the proposed rules state 
that a complex order may be executed at a net credit or debit price 
against another complex order without giving priority to bids or offers 
established in the marketplace that are no better than the bids or 
offers comprising such net credit or debit; provided, however, that if 
any of the bids or offers established in the marketplace consist of a 
Priority Customer Order, at least one component of the complex strategy 
must trade at a price that is better than the corresponding BBO.\73\ 
Additionally, before executing against another complex order, a complex 
order on the Exchange will execute first against orders on the Simple 
Book (except in the limited circumstance described in proposed Rule 
21.20(c)(2)(F)) if any of the bids or offers established in the simple 
marketplace consist of a Priority Customer Order. Further, although it 
would not leg into the Simple Book, a Complex Only Order will similarly 
be constrained by the pricing provisions of the Rule to the extent a 
Priority Customer Order is resting on the Simple Book.
---------------------------------------------------------------------------

    \73\ See proposed Rule 21.20(c)(3)(A).
---------------------------------------------------------------------------

    For the reasons set forth above, the Exchange believes the proposed 
rule change regarding complex order execution is consistent with the 
goals of the Act to remove impediments to and to perfect the mechanism 
of a free and open market and a national market system, and to protect 
investors and the public interest.
Types of Complex Orders
    The Exchange proposes that complex orders may be submitted as limit 
orders and market orders, and orders with a Time in Force of GTD, IOC, 
DAY, GTC, or OPG, as each such term is defined in Exchange Rule 21.1, 
or as a Complex Only order, COA-eligible or do-not-COA order.\74\ In 
particular, the Exchange believes that limit orders, GTD, IOC, DAY, 
GTC, and OPG orders all provide valuable limitations on execution price 
and time that help to protect Exchange participants and investors in 
both the Simple Book and in the proposed COB. In addition, the Exchange 
believes that offering participants the ability to utilize MTP 
Modifiers for complex orders in a similar way to the way they are used 
on the Simple Book provides such participants with the ability to 
protect themselves from inadvertently matching against their own 
interest. The Exchange believes that permitting complex orders to be 
entered with these varying order types and modifiers will give the 
Exchange participants greater control and flexibility over the manner 
and circumstances in which their orders may be executed, modified, or 
cancelled, and thus will provide for the protection of investors and 
contribute to market efficiency. In particular, the Exchange notes that 
while both the Complex Only Order and the do-not-COA instruction may 
reduce execution opportunities for the entering Member, the Exchange 
believes that similar features are already offered by other options 
exchanges in connection with complex order functionality \75\ and that 
they are reasonable limitations a Member may wish to include on their 
order in order to participate on the COB.
---------------------------------------------------------------------------

    \74\ See proposed Rule 21.20(b).
    \75\ See, e.g., CBOE Rule 6.53C(d)(ii)(B) (describing do-not-COA 
functionality on CBOE); MIAX Rule 518(b)(2)(i) and (c)(2)(iii) 
(describing cAOC orders, which, in addition to market maker quotes 
on the MIAX complex order book, are not eligible for legging to the 
MIAX simple order book).
---------------------------------------------------------------------------

    Further, the Exchange believes it is reasonable and appropriate to 
add GTC and OPG modifiers as new Times in Force that will be generally 
available for use on the Simple Book or the COB. The Exchange notes 
that GTC orders are offered by other exchanges \76\ as are times in 
force that, similar to OPG, limit

[[Page 33185]]

an order to participating in an exchange's opening process.\77\
---------------------------------------------------------------------------

    \76\ See, e.g., C2 Rule 6.10(e)(2); ISE Rule 715(r).
    \77\ See, e.g., C2 Rule 6.10(c)(7); ISE Rule 715(o).
---------------------------------------------------------------------------

Evaluation
    The Exchange believes that the regular and event-driven evaluation 
of the COB for the eligibility of complex orders to initiate a COA, and 
to determine their eligibility to participate in the managed interest 
process, their eligibility for full or partial execution against a 
complex order resting on the COB or through Legging with the Simple 
Book, whether the complex order should be cancelled, and whether the 
complex order or any remaining portion thereof should be placed on the 
COB are consistent with the principles of the Act to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest.
    Evaluation of the executability of complex orders and for the 
determination as to whether a complex order is COA-eligible is central 
to the removal of impediments to, and the perfection of, the mechanisms 
of a free and open market and a national market system and, in general, 
the protection of investors and the public interest. The evaluation 
process ensures that the System will capture and act upon complex 
orders that are due for execution or placed in a COA. The regular and 
event-driven evaluation process removes potential impediments to the 
mechanisms of the free and open market and the national market system 
by ensuring that complex orders are given the best possible chance at 
execution at the best price, evaluating the availability of complex 
orders to be handled in a number of ways as described in this proposal. 
Any potential impediments to the order handling and execution process 
respecting complex orders are substantially removed due to their 
continual and event-driven evaluation for subsequent action to be taken 
by the System. This protects investors and the public interest by 
ensuring that complex orders in the System are continually monitored 
and evaluated for potential action(s) to be taken on behalf of 
investors that submit their complex orders to the Exchange.
COA Process
    The COA process is also designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
    Following evaluation, a COA-eligible order may begin a new COA. The 
COA process promotes just and equitable principles of trade, fosters 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, removes impediments to and perfects the 
mechanisms of a free and open market and a national market system and, 
in general, protects investors and the public interest by ensuring that 
eligible complex orders are given every opportunity to be executed at 
the best prices against an increased level of contra-side liquidity 
responding to the COA auction message. This mechanism of a free and 
open market is designed to enhance liquidity and the potential for 
better execution prices during the Response Time Interval, all to the 
benefit of investors on the Exchange, and thereby consistent with the 
Act.
    The Exchange believes that the determination to initiate a COA 
removes impediments to, and perfects the mechanisms of, a free and open 
market and a national market system and, in general, protects investors 
and the public interest, by ensuring that a COA is conducted for a 
complex order only when there is a reasonable and realistic chance for 
price improvement through a COA. As described above, the Exchange has 
proposed to initiate a COA if a COA-eligible order is priced equal to, 
or improves, the SBBO and is also priced to improve other complex 
orders resting at the top of the COB, provided that if any of the bids 
or offers on the Simple Book that comprise the SBBO consists of a 
Priority Customer Order, the COA will only be initiated if it will 
trade at a price that is better than the corresponding bid or offer by 
at least a $0.01 increment. The purpose of this provision is to ensure 
that a complex order will not initiate a COA if it is priced through 
the bid or offer at a point where it is not reasonable to anticipate 
that it would generate a meaningful number of COA Responses such that 
there would be price improvement of the complex order's limit price. 
Promoting the orderly initiation of a COA is essential to maintaining a 
fair and orderly market for complex orders; otherwise, the initiation 
of COAs that are unlikely to result in price improvement might result 
in unnecessary activity in the marketplace when there is no meaningful 
opportunity for price improvement.
    If a complex order is not priced equal to, or better than, the SBBO 
or is not priced to improve other complex orders resting at the top of 
the COB, the Exchange does not believe that it is reasonable to 
anticipate that it would generate a meaningful number of COA Responses 
such that there would be price improvement of the complex order's limit 
price. Promoting the orderly initiation of COAs is essential to 
maintaining a fair and orderly market for complex orders; otherwise, 
the initiation of COAs that are unlikely to result in price improvement 
could affect the orderliness of the marketplace in general. The 
Exchange believes that this removes impediments to and perfects the 
mechanisms of a free and open market and a national market system by 
promoting the orderly initiation of COAs, and by limiting the 
likelihood of unnecessary COAs that are not expected to result in price 
improvement.
    The Exchange believes the proposed maximum 500 millisecond Response 
Time Interval promotes just and equitable principles of trade and 
removes impediments to a free and open market because it allows 
sufficient time for Members participating in a COA to submit COA 
Responses and would encourage competition among participants, thereby 
enhancing the potential for price improvement for complex orders in the 
COA to the benefit of investors and public interest. The Exchange 
believes the proposed rule change is not unfairly discriminatory 
because it establishes a Response Time Interval applicable to all 
Exchange participants participating in a COA.
    The Exchange again notes that it has not proposed to limit the 
frequency of COAs for a complex strategy and could have multiple COAs 
occurring concurrently with respect to a particular complex strategy. 
The Exchange represents that it has systems capacity to process 
multiple overlapping COAs consistent with the proposal, including 
systems necessary to conduct surveillance of activity occurring in such 
auctions. Further, the Exchange reiterates that at least one options 
exchange has permitted multiple complex auctions in the same strategy 
to run concurrently and intends to reintroduce such functionality.\78\ 
The Exchange also notes that other options exchanges offer auctions for 
orders 50 contracts or greater (generally referred to as ``facilitation 
auctions'') that are

[[Page 33186]]

permitted to overlap.\79\ The Exchange has adopted similar 
functionality in connection with its Bats Auction Mechanism (``BAM''), 
which permits overlapping BAM auctions to the extent the order is an 
order for 50 contracts or greater.\80\
---------------------------------------------------------------------------

    \78\ See supra note 42.
    \79\ 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. See also Boston Options Exchange (``BOX'') Rule 
7270.
    \80\ See EDGX Rule 21.19(a)(3). See also Interpretation and 
Policy .02 to Rule 21.19, which was the basis for related language 
in Interpretation and Policy .04 of the proposed Rule.
---------------------------------------------------------------------------

    The Exchange does not anticipate overlapping auctions necessarily 
to be a common occurrence, however, after considerable review, believes 
that such behavior is more fair and reasonable with respect to Members 
who submit orders to the COB because the alternative presents other 
issues to such Members. Specifically, if the Exchange does not permit 
overlapping COAs then a Member who wishes to submit a COA-eligible 
order but has its order rejected because another COA is already 
underway in the complex strategy must either wait for such COA to 
conclude and re-submit the order to the Exchange (possibly constantly 
resubmitting the complex order to ensure it is received by the Exchange 
before another COA commences) or must send the order to another options 
exchange that accepts complex orders.
    The COA process also protects investors and the public interest by 
creating more opportunities for price improvement of complex orders, 
all to the benefit of Exchange participants and the marketplace as a 
whole.
Complex Order Price Protections
    The Exchange believes that the proposed complex order price 
protections will provide market participants with valuable price and 
order size protections in order to enable them to better manage their 
risk exposure when trading complex orders. In particular, the Exchange 
believes the proposed price protection mechanisms will protect 
investors and the public interest and maintain fair and orderly markets 
by mitigating potential risks associated with market participants 
entering orders at clearly unintended prices and orders trading at 
prices that are extreme and potentially erroneous, which may likely 
have resulted from human or operational error.
Other Protections
    The Exchange is proposing to suspend trading in complex orders, to 
remove certain complex orders from the COB, and to end a COA early when 
there is a halt in the underlying security of, or in an individual 
component of, a complex order. This protection is intended to protect 
investors and the public interest by causing the System not to execute 
during potentially disruptive conditions or events that could affect 
customer protection, and to resume trading in complex orders to the 
extent possible upon the conclusion or resolution of the potentially 
disruptive condition or event. The System's proposed functionality 
during a trading halt protects investors and the public interest by 
ensuring that the execution of complex orders on behalf of investors 
and the public will only occur at times when there is a fair and 
orderly market.
Market Data Feeds
    The Exchange believes it is reasonable and appropriate to offer the 
proposed data feeds described above in order to provide information 
regarding activity on the COB, including COA auction messages. Each of 
the proposed data feeds is based on and similar to an existing data 
feed offered by EDGX Options and/or the EDGX equities trading platform 
(``EDGX Equities'').\81\ Further, information to identify orders as 
Priority Customer Orders is already being included on the Exchange's 
Multicast PITCH and Auction data feeds, and the Exchange does not 
believe that also including this information on the new Multicast TOP 
data feed raises any novel issues.
---------------------------------------------------------------------------

    \81\ See EDGX Rule 13.8 for a description of the EDGX Equities 
TOP feed and other data feeds and EDGX Rule 21.15 for a description 
of the current EDGX Options data feeds, including Multicast PITCH 
and the Auction Feed.
---------------------------------------------------------------------------

Risk Monitor Mechanism
    The proposed amendment to Exchange Rule 21.16, Risk Monitor 
Mechanism, to reject complex orders that exceed Member-designated 
volume, notional, count or percentage triggers is designed to protect 
investors and the public interest by assisting Members submitting 
complex orders in their risk management. Members are vulnerable to the 
risk from system or other error or a market event that may cause them 
to send a large number of orders or receive multiple, automatic 
executions before they can adjust their order exposure in the market. 
Without adequate risk management tools, such as the Risk Monitor 
Mechanism, Members could reduce the amount of order flow and liquidity 
that they provide to the market. Such actions may undermine the quality 
of the markets available to customers and other market participants. 
Accordingly, the proposed amendments to the Risk Protection Monitor 
should instill additional confidence in Members that submit orders to 
the Exchange that their risk tolerance levels are protected, and thus 
should encourage such Members to submit additional order flow and 
liquidity to the Exchange with the understanding that they have this 
protection respecting all orders they submit to the Exchange, including 
complex orders, thereby removing impediments to and perfecting the 
mechanisms of a free and open market and a national market system and, 
in general, protecting investors and the public interest.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The competition 
among the options exchanges is vigorous and this proposal is intended 
to afford market participants on EDGX Options the opportunity to 
execute complex orders in a manner that is similar to that allowed on 
other options exchanges.
    The Exchange believes that the proposal will enhance competition 
among the various markets for complex order execution, potentially 
resulting in more active complex order trading on all exchanges.
    The Exchange notes that as to intramarket competition, its proposal 
is designed to treat all Exchange participants in the same category of 
participant equally. The Exchange believes that it is equitable and 
reasonable to afford trade allocation priority to certain categories of 
participants. The proposal to establish first priority to Priority 
Customer orders resting on the Simple Book is consistent with the long-
standing policies of customer protection found throughout the Act and 
maintains the Exchange's current practice by affording such 
priority.\82\
---------------------------------------------------------------------------

    \82\ See Exchange Rule 21.8.
---------------------------------------------------------------------------

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

    Written comments were neither solicited nor received.

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 (i)

[[Page 33187]]

as the Commission may designate up to 90 days of such date 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 protected]. Please 
include File Number SR-BatsEDGX-2017-29 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsEDGX-2017-29. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BatsEDGX-2017-29 and should 
be submitted on or before August 9, 2017.
---------------------------------------------------------------------------

    \83\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\83\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2017-15098 Filed 7-18-17; 8:45 am]
BILLING CODE 8011-01-P
33170 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Notices

C. Self-Regulatory Organization’s those that may be withheld from the that describe the trading of complex
Statement on Comments on the public in accordance with the orders on the Exchange.
Proposed Rule Change Received From provisions of 5 U.S.C. 552, will be The text of the proposed rule change
Members, Participants, or Others available for Web site viewing and is available at the Exchange’s Web site
No written comments were either printing in the Commission’s Public at www.bats.com, at the principal office
solicited or received. Reference Room, 100 F Street NE., of the Exchange, and at the
Washington, DC 20549, on official Commission’s Public Reference Room.
III. Date of Effectiveness of the business days between the hours of
Proposed Rule Change and Timing for 10:00 a.m. and 3:00 p.m. Copies of the II. Self-Regulatory Organization’s
Commission Action filing also will be available for Statement of the Purpose of, and
The foregoing rule change has become inspection and copying at the principal Statutory Basis for, the Proposed Rule
effective pursuant to Section office of the Exchange. All comments Change
19(b)(3)(A)(ii) of the Act.18 At any time received will be posted without change;
In its filing with the Commission, the
within 60 days of the filing of the the Commission does not edit personal
Exchange included statements
proposed rule change, the Commission identifying information from
concerning the purpose of and basis for
summarily may temporarily suspend submissions. You should submit only
the proposed rule change and discussed
such rule change if it appears to the information that you wish to make
any comments it received on the
Commission that such action is: (i) available publicly. All submissions
should refer to File Number SR–GEMX– proposed rule change. The text of these
Necessary or appropriate in the public statements may be examined at the
interest; (ii) for the protection of 2017–29, and should be submitted on or
before August 9, 2017. places specified in Item IV below. The
investors; or (iii) otherwise in Exchange has prepared summaries, set
furtherance of the purposes of the Act. For the Commission, by the Division of forth in Sections A, B, and C below, of
If the Commission takes such action, the Trading and Markets, pursuant to delegated
the most significant parts of such
Commission shall institute proceedings authority.19
statements.
to determine whether the proposed rule Jill M. Peterson,
should be approved or disapproved. Assistant Secretary. A. Self-Regulatory Organization’s
[FR Doc. 2017–15097 Filed 7–18–17; 8:45 am] Statement of the Purpose of, and
IV. Solicitation of Comments
BILLING CODE 8011–01–P
Statutory Basis for, the Proposed Rule
Interested persons are invited to Change
submit written data, views, and
arguments concerning the foregoing, 1. Purpose
SECURITIES AND EXCHANGE
including whether the proposed rule COMMISSION Overview
change is consistent with the Act.
Comments may be submitted by any of [Release No. 34- 81137; File No. SR– The Exchange proposes to adopt new
the following methods: BatsEDGX–2017–29] rules that describe the trading of
complex orders on the Exchange.
Electronic Comments Self-Regulatory Organizations; Bats Proposed new Rule 21.20, Complex
• Use the Commission’s Internet EDGX Exchange, Inc.; Notice of Filing Orders, details the functionality of the
comment form (http://www.sec.gov/ of a Proposed Rule Change To Adopt System 3 in the handling of complex
rules/sro.shtml); or New Rules That Describe the Trading orders on the Exchange. The proposed
• Send an email to rule-comments@ of Complex Orders on the Exchange rules are based substantially on similar
sec.gov. Please include File Number SR– for the Exchange’s Equity Options rules of other exchanges.4 The Exchange
GEMX–2017–29 on the subject line. Platform believes that the similarity of its
Paper Comments July 13, 2017. proposed complex order rules to those
Pursuant to Section 19(b)(1) of the of other exchanges will allow the
• Send paper comments in triplicate Exchange’s proposed complex order
Securities Exchange Act of 1934 (the
to Secretary, Securities and Exchange functionality to fit seamlessly into the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
Commission, 100 F Street NE., greater options marketplace and benefit
notice is hereby given that on June 30,
Washington, DC 20549–1090. market participants who are already
2017, Bats EDGX Exchange, Inc. (the
All submissions should refer to File ‘‘Exchange’’ or ‘‘EDGX’’) filed with the familiar with similar functionality
Number SR–GEMX–2017–29. This file Securities and Exchange Commission offered on other exchanges. The
number should be included on the (‘‘Commission’’) the proposed rule Exchange notes that for simplicity it has
subject line if email is used. To help the change as described in Items I, II, and omitted from its proposal certain
Commission process and review your III below, which Items have been functionality that is offered by other
comments more efficiently, please use prepared by the Exchange. The options exchanges in connection with
only one method. The Commission will Commission is publishing this notice to their complex order platforms but that
post all comments on the Commission’s solicit comments on the proposed rule the Exchange does not proposed to offer
Internet Web site (http://www.sec.gov/ change from interested persons.
rules/sro.shtml). Copies of the 3 The term ‘‘System’’ means the automated

submission, all subsequent I. Self-Regulatory Organization’s trading system used by EDGX Options for the
Statement of the Terms of Substance of
asabaliauskas on DSKBBXCHB2PROD with NOTICES

amendments, all written statements trading of options contracts. See Exchange Rule
the Proposed Rule Change 16.1(a)(59).
with respect to the proposed rule 4 See, e.g., Chicago Board Options Exchange, Inc.
change that are filed with the The Exchange filed a proposal for the (‘‘CBOE’’) Rule 6.53C; C2 Options Exchange, Inc.
Commission, and all written Exchange’s equity options platform (‘‘C2’’) Rule 6.13; Miami International Securities
communications relating to the (‘‘EDGX Options’’) to adopt new rules Exchange (‘‘MIAX’’) Rule 518; International
proposed rule change between the Securities Exchange LLC (‘‘ISE’’) Rule 722; NYSE
MKT LLC (‘‘NYSE MKT’’) Rule 980NY; BOX
Commission and any person, other than 19 17 CFR 200.30–3(a)(12). Options Exchange LLC (‘‘BOX’’) Rule 7240;
1 15 U.S.C. 78s(b)(1). NASDAQ OMX PHLX LLC (‘‘PHLX’’) Rule 1098;
18 15 U.S.C. 78s(b)(3)(A)(ii). 2 17 CFR 240.19b–4. NYSE Arca, Inc. (‘‘NYSEArca’’) Rule 6.91.

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initially, including stock-option orders Complex Order Auction upon receipt The term ‘‘NBBO’’ means the national
and derived orders. that meets the requirements of Rule best bid or offer as calculated by the
Additionally, the Exchange is 21.20(d)(l), as described below. Exchange based on market information
proposing to amend Exchange Rule A ‘‘complex order’’ is any order received by the Exchange from the
21.1, Definitions, to add two new Times involving the concurrent purchase and/ appropriate Securities Information
in Force to be added in conjunction or sale of two or more different options Processor (‘‘SIP’’).8
with the proposed change, ‘‘Good Til in the same underlying security (the The term ‘‘regular trading’’ means
Cancelled’’ (or ‘‘GTC’’) and ‘‘At the ‘‘legs’’ or ‘‘components’’ of the complex trading of complex orders that occurs
Open’’ (or ‘‘OPG’’). The Exchange is also order),7 for the same account, in a ratio during a trading session other than: (i)
proposing to amend: Exchange Rule that is equal to or greater than one-to- At the opening or re-opening of the COB
21.15, Data Dissemination, to add three (.333) and less than or equal to for trading following a halt, or (ii)
references to data feeds to be added in three-to-one (3.00) and for the purposes during the COA process (as described
conjunction with the proposed change; of executing a particular investment below and in proposed Rule 21.20(d)).
and Rule 21.16, Risk Monitor The ‘‘Simple Book’’ is the Exchange’s
strategy. Only those complex orders in
Mechanism, to make clear that complex regular electronic book of orders.
the classes designated by the Exchange The ‘‘Synthetic Best Bid or Offer’’
orders are considered in connection and communicated to Members with no
with existing risk protections offered by (‘‘SBBO’’) is calculated using the best
more than the applicable number of displayed price for each component of
the Exchange.5 legs, as determined by the Exchange on a complex strategy from the Simple
Definitions a class-by-class basis and communicated Book.
to Members, are eligible for processing. The ‘‘Synthetic National Best Bid or
Proposed Rule 21.20(a) provides
The Exchange will communicate this Offer’’ (‘‘SNBBO’’) is calculated using
definitions of terms that apply to the
information to Members via the NBBO for each component of a
trading of complex orders, and such
specifications and/or a Regulatory complex strategy to establish the best
terms are used throughout this proposed
Circular. net bid and offer for a complex strategy.
rule change. The Exchange proposes to
specify that for purposes of Rule 21.20, The ‘‘Complex Order Book’’ or ‘‘COB’’
Types of Complex Orders
the included terms will have the is the Exchange’s electronic book of
complex orders. All Members may Proposed Rule 21.20(b), Availability
meanings specified in proposed
submit orders to trade against interest or of Types of Complex Orders, describes
paragraph (a). A term defined elsewhere
rest in the COB pursuant to the the various types and specific times-in-
in Exchange Rules will have the same
proposed Rule. force for complex orders handled by the
meaning with respect to Rule 21.20,
System.
unless otherwise defined in paragraph The term ‘‘complex strategy’’ means a
As an initial matter, proposed Rule
(a). Below is a summary of the proposed particular combination of components
21.20(b) states that the Exchange will
definitions. and their ratios to one another. New determine and communicate to
The term ‘‘ABBO’’ means the best complex strategies can be created as the Members via specifications and/or a
bid(s) or offer(s) disseminated by other result of the receipt of a complex Regulatory Circular listing which
Eligible Exchanges (as defined in Rule instrument creation request or complex complex order types, among the
27.1(a)(7)) 6 and calculated by the order for a complex strategy that is not complex order types set forth in the
Exchange based on market information currently in the System. The Exchange proposed Rule, are available for use on
received by the Exchange from OPRA. is thus proposing two methods to create the Exchange. Additional information
The term ‘‘BBO’’ means the best bid a new complex strategy, one of which is will be issued as additional complex
or offer on the Simple Book (as defined a message that a Member can send to order types, among those complex order
below) on the Exchange. create the strategy and the other is a types set forth in the proposed Rule,
A ‘‘Complex Order Auction’’ or message a Member can send that will become available for use on the
‘‘COA’’ is an auction of a complex order generate the strategy and that is also an Exchange. Additional information will
as set forth in proposed Rule 21.20(d), order for that same strategy. These also be issued when a complex order
described below. methods will be equally available to all type that had been in usage on the
A ‘‘COA-eligible order’’ is a complex Members but [sic] anticipates that Exchange will no longer be available for
order designated to be placed into a Market Makers and other liquidity use. This is substantially similar to, and
providers who anticipate providing based upon, the manner in which MIAX
5 The Exchange represents that prior to operating
larger amounts of trading activity in determines the available order types for
the proposed Complex Order Book it will separately
file to propose amendments to Exchange Rule 20.6,
complex strategies are the most likely to its complex order book.9 The purpose of
Nullification and Adjustment of Options send in a complex instrument creation this provision is to enable the Exchange
Transactions Including Obvious Errors, to establish request (i.e., to prepare for their trading to modify the complex order types that
the process for handling complex order obvious in the complex strategy throughout the
errors based on the rules of other exchanges that are available on the Exchange as market
offer complex order functionality. See, e.g., CBOE
day), whereas other participants are conditions change. The Exchange
Rule 6.25, Interpretation and Policy .07. more likely to simply send a complex believes that this enhances its ability to
6 ‘‘Eligible Exchange’’ means a national securities order that simultaneously creates a new remain competitive as markets and
exchange registered with the SEC in accordance strategy. The Exchange may limit the market conditions evolve.
with Section 6(a) of the Act that: (a) Is a Participant number of new complex strategies that Among the complex order types that
asabaliauskas on DSKBBXCHB2PROD with NOTICES

Exchange in OCC (as that term is defined in Section
VII of the OCC by-laws); (b) is a party to the OPRA may be in the System at a particular may be submitted are limit orders and
Plan (as that term is described in Section I of the time and will communicate any such market orders, and orders with a Time
OPRA Plan); and (c) if the national securities limitation to Members via specifications in Force of Good Til Day (‘‘GTD’’),
exchange chooses not to become a party to the and/or Regulatory Circular.
Options Order Protection and Locked/Crossed
8 All U.S. exchanges and associations that quote
Markets Plan, is a participant in another plan
approved by the Commission providing for 7 The
different options in the same underlying and trade exchange-listed securities must provide
comparable Trade-Through and Locked and security that comprise a particular complex order their data to a centralized SIP for data consolidation
Crossed Market protection. See Exchange Rule are referred to as the ‘‘legs’’ or ‘‘components’’ of the and dissemination. See 15 U.S.C. 78c(22)(A).
27.1(a)(7). complex order throughout this proposal. 9 See MIAX Rule 518(b)(1).

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Book, at least one other component of in the case of a halt, prior to re- execute matching complex orders in
the complex strategy must trade at a opening.23 price/time priority at the equilibrium
price that is better than the Proposed Rule 21.20(c)(2)(B) states price. Any remaining complex order or
corresponding BBO.22 that complex orders do not participate the remaining portion thereof will be
Additionally, respecting execution in the Opening Process for the entered into the COB, subject to the
pricing, proposed Rule 21.20(c)(1)(C) individual option series conducted Member’s instructions. If the System
states generally that a complex order pursuant to Rule 21.7.24 The proposed cannot match orders because it cannot
will not be executed at a net price that rule also states that the Opening Process determine an equilibrium price (i.e., all
would cause any component of the for the COB will operate both at the queued orders are Market Orders) or a
complex strategy to be executed: (i) At beginning of each trading session and permissible equilibrium price (i.e.,
a price of zero; or (ii) ahead of a Priority upon re-opening after a halt. The within the SNBBO that also satisfies
Customer Order on the Simple Book Opening Process will commence when proposed Rule 21.20(c)(1)(C), as
without improving the BBO of at least all legs of the complex strategy are open described above), the System will open
one component of the complex strategy. on the Simple Book. If there are and transition such orders to the COB
These restrictions are designed to complex orders that have been queued after a configurable time period
protect the priority of Priority Customer but none that can match, the System established by the Exchange. The
Orders that is established in the Simple will open and transition such orders to Exchange believes this configurable
Book. the COB. time period is important because the
Proposed Rule 21.20(c)(2)(C) opening price protections are relatively
Execution of Complex Orders describes the manner in which the restrictive (i.e., based on the SNBBO)
Proposed Rule 21.20(c)(2) describes: System determines the equilibrium and the Exchange wants to have the
The process of accepting orders prior to price to be used for the purpose of ability to periodically optimize the
the opening of the COB for trading (and execution of complex orders in the process in a manner that will allow
prior to re-opening after a halt); the Opening Process. If there are complex sufficient opportunity to have Opening
process by which the Exchange will orders that can match, the System will Process executions without also waiting
open the COB or re-open the COB determine the equilibrium price where too long to transition to regular trading.
following a halt (the ‘‘Opening the most complex orders can trade. If Next, with respect to the execution of
Process’’); the prices at which there are multiple price levels that orders on the COB, as described in
executions may occur on the Exchange would result in the same number of proposed paragraph (c)(2)(E), incoming
for complex strategies, including strategies executed, the System will complex orders will be executed by the
through the Opening Process; execution choose the price that would result in the System in accordance with the
of complex orders against the individual smallest remaining imbalance. If there provisions below, and will not be
components or ‘‘legs’’ on the Simple are multiple price levels that would executed at prices inferior to the SBBO
Book; and the process of evaluation that result in the same number of strategies or at a price that is equal to the SBBO
is conducted by the System on an executed and would leave the same when there is a Priority Customer Order
ongoing basis respecting complex ‘‘smallest’’ imbalance, the System will at the best SBBO price. Complex orders
orders. choose the price that is closest to the will never be executed at a price that is
Proposed Rule 21.20(c)(2)(A) states Volume Based Tie Breaker (‘‘VBTB’’) as outside of the individual component
that Members may submit orders to the the opening price. For purposes of prices on the Simple Book.
Exchange as set forth in Rule 21.6, proposed subparagraph (C), the VBTB is Furthermore, the net price of a complex
which currently allows orders to be the midpoint of the SNBBO. If there is order executed against another complex
entered into the System beginning at no valid VBTB available, the System order on the COB will never be inferior
7:30 a.m. Eastern Time. The proposed will use the midpoint of the highest and to the price that would be available if
Rule also states that any orders lowest potential opening prices as the the complex order legged into the
designated for the Opening Process will opening price. If the midpoint price Simple Book. The purpose of this
be queued until 9:30 a.m. at which time would result in an invalid increment, provision is to prevent a component of
they will be eligible to be executed in the System will round up to the nearest a complex order from being executed at
the Opening Process. Any orders permissible increment and use that as a price that is inferior to the best-priced
designated for a re-opening following a the opening price. If executing at the contra-side orders on the Simple Book
halt will be queued until the halt has equilibrium price would require (on which the SBBO is based) and to
ended, at which time they will be printing at the same price as a Priority prevent a component of a complex order
eligible to be executed in the Opening Customer on any leg in the Simple from being executed at a price that
Process. Finally, proposed Rule compromises the priority already
Book, the System will adjust the
21.20(c)(2)(A) states that beginning at established by a Priority Customer on
equilibrium price to a price that is better
7:30 a.m. and updated every five the Simple Book. The Exchange believes
than the corresponding bid or offer in
seconds thereafter, indicative prices and that such priority should be protected
the marketplace by at least a $0.01
order imbalance information associated and that such protection should be
increment.
with the Opening Process will be Pursuant to proposed paragraph extended to the execution of complex
disseminated by the Exchange while Proposed Rule 21.20(c)(2)(D), when an orders on the COB.25
orders are queued prior to 9:30 a.m. or, equilibrium price is established at or
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25 The Exchange also notes that this provision is
22 See
within the SNBBO, the Exchange will
Proposed Rule 21.20(c)(l)(B); see also, ISE based on and substantially similar to MIAX Rule
Rule 722(b)(2), which states that in this situation at 518(c)(2)(B) [sic]. Exchanges other than MIAX also
23 See
infra Market Data Feeds section.
least one leg must trade at a price that is better by protect Priority and Public Customer priority. ISE
at least one minimum trading increment, and PHLX 24 This
is similar to the opening of complex Priority Customer Orders on the Exchange shall
Rule 1098(c)(iii), which states in this situation that orders on other exchanges. For instance, complex have priority over Professional Orders and market
at least one option leg must trade at a better price orders on CBOE and NYSE MKT do not participate maker quotes at the same price in the same options
than the established bid or offer for that option in the respective opening auction processes for series. See ISE Rule 713(c); see also, CBOE Rule
contract and no option leg is executed at a price individual component option series legs. See CBOE 6.45(a)(ii)(A), which states that CBOE Public
outside of the established bid or offer for that option Rule 6.53C, Interpretation and Policy .11; NYSE Customer orders in the electronic book have
contract. MKT Rule 952NY. Continued

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Incoming complex orders that could Exchange. The Exchange believes this is contracts equal to or above a percentage
not be executed because the executions particularly true for Customer complex of their quotations (the ‘‘percentage
would be priced (i) outside of the SBBO, orders and, thus, does not propose to trigger’’) during the specified time
or (ii) equal to the SBBO due to a limit the ability of such orders to leg period or on an absolute basis. The
Priority Customer Order at the best into the Simple Book (when such orders purpose of the Risk Monitor is to allow
SBBO price, will be cancelled if such are two leg orders). Market Makers and other liquidity
complex orders are not eligible to be Notwithstanding the foregoing, the providers to provide liquidity across
placed on the COB. Complex orders will Exchange is proposing to establish, in potentially hundreds of options series
be executed without consideration of proposed Rule 21.20(c)(2)(F), that without executing the full cumulative
any prices for the complex strategy that complex orders that could otherwise be size of all such quotes before being
might be available on other exchanges eligible for Legging will only be given adequate opportunity to adjust the
trading the same complex strategy permitted to trade against other complex price and/or size of their quotes.
provided, however, that such complex orders in the COB in certain situations. All of a participant’s quotes in each
order price may be subject to the Drill- Specifically, proposed Rule option class are considered firm until
Through Price Protection set forth in 21.20(c)(2)(F) would provide that other such time as the Risk Monitor’s
Interpretation and Policy .04(f) of than two leg COA-eligible Customer threshold has been equaled or exceeded
proposed Rule 21.20.26 complex orders, any other complex and the participant’s quotes are
Proposed Rule 21.20(c)(2)(F) describes orders (i.e., non-Customer orders or removed by the Risk Monitor in all
the Legging process through which non-COA-eligible Customer orders) with series of that option class.31 Thus the
complex orders, under certain two option legs where both legs are Legging of complex orders presents
circumstances, are executed against the buying or both legs are selling and both higher risk to Market Makers and other
individual components of a complex legs are calls or both legs are puts may liquidity providers as compared to
strategy on the Simple Book. Complex only trade against other complex orders simple orders being entered in multiple
orders up to a maximum number of legs on the COB and will not be permitted series of an options class in the simple
(determined by the Exchange on a class- to leg into the Simple Book. Proposed market, as it can result in such
by-class basis as either two, three, or Rule 21.20(c)(2)(F) would impose a participants exceeding their established
four legs and communicated to similar restriction by stating that risk thresholds by a greater number of
Members via specifications and/or complex orders with three or four contracts. Although Market Makers and
Regulatory Circular) may be option legs where all legs are buying or other liquidity providers can limit their
automatically executed against bids and all legs are selling may only trade risk through the use of the Risk Monitor,
offers on the Simple Book for the against other complex orders on the the participant’s quotes are not removed
individual legs of the complex order COB and will not leg into the Simple until after a trade is executed. As a
(‘‘Legging’’), provided the complex Book (regardless of whether the option result, because of the way complex
order can be executed in full or in a leg is a call or a put).28 orders leg into the regular market as a
permissible ratio by such bids and Currently, liquidity providers single transaction, Market Makers and
offers.27 (typically Market Makers, though such other liquidity providers may end up
As proposed, all two leg COA-eligible functionality is not currently limited to trading more than the cumulative risk
Customer complex orders will be registered Market Makers) in the Simple thresholds they have established, and
allowed to leg into the Simple Book Book are protected by way of the Risk are therefore exposed to greater risk.
without restriction. The benefit of Monitor Mechanism (‘‘Risk Monitor’’)29 The Exchange believes that Market
Legging against the individual by limiting the number of contracts they Makers and other liquidity providers
components of a complex order on the execute in an option class on the may be compelled to change their
Simple Book is that complex orders can Exchange within a specified time period quoting and trading behavior to account
access the full liquidity of the (a ‘‘specified time period’’) or on an for this additional risk by widening
Exchange’s Simple Book, thus absolute basis for the trading day their quotes and reducing the size
enhancing the possibility of executions (‘‘absolute limits’’).30 The Risk Monitor associated with their quotes, which
at the best available prices on the automatically cancels and removes the would diminish the Exchange’s quality
liquidity provider’s orders from the of markets and the quality of the
priority, and NYSE MKT Rule 964NY(b)(2)(A), Exchange’s disseminated quotation in markets in general.
which provides that bids and offers in the all series of a particular option class Based on the foregoing, the Exchange
Consolidated Book for Customer accounts have first when it has determined that a has proposed to modify the Risk
priority over other bids or offers at the same price. Monitor as described in greater detail
26 The Drill-Through Price Protection feature is a
participant has traded a number of
further below and has also proposed
price protection mechanism under which, when in
operation as requested by the submitting Member 28 This is substantially similar to ISE Rules limitations to Rule 21.20(c)(2)(F). The
or pursuant to the Exchange’s default settings, a buy 722(b)(3)(ii)(A) and (B), which state that complex purpose of the limitations in proposed
(sell) order will not be executed at a price that is orders with 2 option legs where both legs are Rule 21.20(c)(2)(F) is to minimize the
higher (lower) than the SNBBO or the SNBBO at the buying or both legs are selling and both legs are impact of Legging on single leg Market
time of order entry plus (minus) a buffer amount calls or both legs are puts may only trade against
(the ‘‘Drill-Through Price’’). other complex orders in the complex order book. Makers and other liquidity providers by
27 See proposed Rule 21.20(c)(2)(F). This is The trading system will not generate legging orders limiting a potential source of
similar to CBOE Rule 6.53C(c)(ii)(l), which states for these complex orders, and complex orders with unintended risk when certain types of
3 or 4 option legs where all legs are buying or all
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that complex orders in the COB will automatically complex orders leg into the Simple
execute against individual orders or quotes residing legs are selling may only trade against other
complex orders in the complex order book. See also Book. The Exchange believes that the
in the EBook provided the complex order can be
executed in full (or in a permissible ratio) by the Securities Exchange Act Release No. 73023 proposed limitation on the availability
orders and quotes in EBook; see also BOX Rule (September 9, 2014), 79 FR 55033 (September 15, of Legging to (i) complex orders with
7240(b)(3)(ii) providing that Complex Orders will 2014) (SR–ISE–2014–10). two option legs where both legs are
29 See Exchange Rule 21.16.
be automatically executed against bids and offers on buying or both legs are selling and both
the BOX Book for the individual legs of the 30 As described later in this proposal, the

Complex Order to the extent that the Complex Exchange proposes to amend the Rule governing the legs are calls or both legs are puts, and
Order can be executed in full or in a permissible Risk Monitor, Rule 21.16, with respect to complex
ratio by such bids and offers. orders. 31 See Exchange Rule 612(c) [sic].

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(ii) complex orders with three or four for complex orders. As described below, Simple Book as pro rata) is used by at
option legs where all legs are buying or the proposed priority structure for the least one other options exchange.35
all legs are selling regardless of whether COB differs from the priority structure Managed Interest Process for Complex
the option leg is a call or a put, should applicable to the Simple Book as Orders
serve to reduce the risk of Market established in Exchange Rule 21.8.33 A
Makers and other liquidity providers complex order may be executed at a net In order to ensure that complex orders
trading above their risk tolerance levels. (which are non-routable) receive the
credit or debit price against another
However, as noted above, the Exchange best executions on the Exchange,
complex order without giving priority to
believes it is appropriate not to apply proposed Rule 21.20(c)(4) sets forth the
bids or offers established in the price(s) at which complex orders will be
this limitation to two-leg COA-eligible marketplace that are no better than the
Customer orders in order to afford such placed on the COB. More specifically,
bids or offers comprising such net credit the managed interest process is used to
orders the execution benefit that comes or debit; provided, however, that if any
from Legging. manage the prices at which a complex
of the bids or offers established in the order that is not immediately executed
Proposed Rule 21.20(c)(2)(G) sets
marketplace consist of a Priority upon entry is handled by the System,
forth the process for evaluation of
complex orders, and the COB, on a Customer Order, at least one component including how such an order is priced
regular basis and for various conditions of the complex strategy must trade at a and re-priced on the COB. The managed
and events that result in the System’s price that is better than the interest process is initiated when a
particular handling and execution of corresponding BBO by at least a $0.01 complex order that is eligible to be
complex orders in response to such increment.34 placed on the COB cannot be executed
regular evaluation, conditions and Regarding execution and allocation of against either the COB or the Simple
events. The System will evaluate complex orders, proposed Rule Book (with the individual legs) at the
complex orders initially once all 21.20(c)(3)(B) establishes that complex complex order’s net price, and is
components of the complex strategy are orders will be automatically executed intended to ensure that a complex order
open as set forth in proposed Rule to be managed does not result in a
against bids and offers on the COB in
21.20(c)(2)(B)–(D) as described above, locked or crossed market on the
price priority. Bids and offers at the
upon receipt as set forth in proposed Exchange. Once initiated, the managed
same price on the COB will be executed
Rule 21.20(c)(5)(A) as described below, interest process for complex orders will
in time priority. Complex orders that leg be based upon the SBBO.36
and continually as set forth in proposed into the Simple Book will be executed Under the managed interest process, a
Rule 21.20(c)(5)(B) as described in accordance with Rule 21.8, which complex order that is resting on the
below.32 includes Priority Customer priority as
The purpose of the evaluation process COB and is either a complex market
well as pro rata executions. The order as described in proposed Rule
for complex orders is to determine (i) Exchange notes that although it has
their eligibility to initiate, or to 21.20(c)(6) and discussed below, or has
proposed a different priority model for a limit price that locks or crosses the
participate in, a COA as described in
its COB (price-time) than its Simple current opposite side SBBO when the
proposed Rule 21.20(d)(1); (ii) their
Book (pro rata), the Exchange has SBBO is the best price, may be subject
eligibility to participate in the managed
proposed to operate the COB to respect to the managed interest process for
interest process as described in
Priority Customer priority on the Simple complex orders as discussed herein. If
proposed Rule 21.20(c)(4); (iii) their
Book and will also continue to execute the order is not a COA-eligible order as
eligibility for full or partial execution
orders that leg into the Simple Book defined in proposed Rules 21.20(a)(4)
against a complex order resting on the
based on its existing priority model. The described above and 21.20(d)(1)
COB or through Legging into the Simple
Exchange believes that operating the described below, the System will first
Book (as described in proposed Rule
COB with price-time priority and determine if the inbound complex order
21.20(c)(2)(F)); (iv) whether the complex
without providing allocation benefits to can be matched against other complex
order should be cancelled; and (v) orders resting on the COB at a price that
whether the complex order or any particular types of Members will allow
the Exchange to launch complex order is at or inside the SBBO (provided there
remaining portion thereof should be are no Priority Customer Orders on the
placed or remain on the COB. functionality with relatively
straightforward features and results. The Simple Book at that price). Second, the
The continual and event-triggered
System will determine if the inbound
evaluation process ensures that the Exchange also notes that this same
complex order can be executed by
System is monitoring and assessing the priority model (COB as price-time and
Legging against individual orders
COB for incoming complex orders, and resting on the Simple Book at the SBBO.
changes in market conditions or events 33 Exchange Rule 21.8, Priority of Quotes and
A complex order subject to the managed
that cause complex orders to re-price Orders, describes among other things the various
interest process will never be executed
and/or execute, and conditions or execution priority, trade allocation and
participation guarantees generally applicable to the at a price that is through the individual
events that result in the cancellation of Simple Book. Some sections of Exchange Rule 21.8 component prices on the Simple Book.
complex orders on the COB. This are cross-referenced herein and will apply as noted Furthermore, the net price of a complex
ensures the integrity of the Exchange’s to complex orders, as the context requires.
order subject to the managed interest
34 See Proposed Rule 21.20(c)(3)(A); see also
System in handling complex orders and process that is executed against another
MIAX Rule 518(c)(3), which states that at least one
results in a fair and orderly market for
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leg must trade at a price that is better than the
complex orders on the Exchange. corresponding bid or offer in the marketplace by at 35 See ISE Rule 713, which sets forth a pro rata
least a $0.01 increment; ISE Rule 722(b)(2), which priority model for ISE’s simple book and ISE Rule
Complex Order Priority states that in this situation at least one leg must 722(b)(3), which provides ISE flexibility to vary the
Proposed Rule 21.20(c)(3) describes trade at a price that is better by at least one application from class to class but includes price-
minimum trading increment; and PHLX Rule time priority on the ISE COB as an option.
how the System will establish priority 1098(c)(iii), requiring in this situation that at least 36 A complex order for which the Drill-Through
one option leg is executed at a better price than the Price Protection is engaged will be managed to the
32 MIAX performs similar evaluations in the established bid or offer for that option contract and Drill-Through Price as described below and in
operation of its complex order book. See MIAX Rule no option leg is executed at a price outside of the proposed Rule 21.20, Interpretations and Policy
518(c)(2)(v). established bid or offer for that option contract. .04(f).

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complex order on the COB will never be Example—Complex order managed complex order’s current book and
inferior to the price that would be interest when the ratio to allow Legging display price. If unexecuted contracts
available if the complex order legged does not exist, and there is no Priority remain from the complex order on the
into the Simple Book. When the Customer Interest. COB, the complex order’s size will be
opposite side SBBO includes a Priority EDGX Market Maker A quote Mar 50 revised and disseminated to reflect the
Customer Order, the System will book call 6.00–6.50 (10x10) complex order’s remaining contracts at
and display such booked complex order EDGX Market Maker B Mar 55 call 2.00– its current managed book and display
on the COB at a price (the ‘‘book and 2.30 (10x10) price.
display price’’) that is $0.01 away from EDGX Broker-Dealer A order Mar 55 The purpose of using the calculated
the current opposite side SBBO. When Call 2.10 bid (1) SBBO is to enable the System to
the opposite side SBBO does not determine a valid trading price range for
• The Exchange receives an initiating
include a Priority Customer Order and complex strategies and to protect orders
Priority Customer complex order to buy
is not available for execution in the ratio resting on the Simple Book by ensuring
1 Mar 50 call and sell 2 Mar 55 calls for
of such complex order, or cannot be that they are executed when entitled.
a 2.30 debit, 100 times.
executed through Legging with the Additionally, the managed interest
• The SBBO is 1.40 debit bid at 2.30
Simple Book, the System will place process is designed to ensure that the
credit offer.
System will not execute any component
such complex order on the COB and • Assume the do-not-COA instruction
display such booked complex order at a of a complex order at a price that would
is present on this order, so the order
book and display price that will lock the trade through an order on the Simple
will not initiate a COA auction upon
current opposite side SBBO (i.e., Book or that would disrupt the
arrival regardless of any other factor.
established priority of Priority Customer
because it is a price at which another • Since the Mar 55 call is 2.10 bid for
complex order can trade). interest resting on the Simple Book.37
only one contract (the Broker Dealer
Example—Complex order managed The Exchange believes that this is
order), the complex order cannot be
interest when Priority Customer Interest reasonable because it prevents the
legged against the Simple Book at a 2.30
at the SBBO is Present components of a complex order from
debit, as a 2.30 debit would require
EDGX Market Maker A quote Mar 50 trading at a price that is inferior to a
selling two March 55 Calls at 2.10 while
Call 6.00–6.50 (10x10) price at which the individual
buying one March 50 Call at 6.50.
EDGX Market Maker B quote Mar 55 components may be traded on the
Although the inbound complex order
Call 2.00–2.30 (10x10) Exchange and it maintains the priority
cannot trade at this time because there
EDGX Priority Customer Order Mar 55 for Priority Customers resting on the
is insufficient interest to buy the March
Call 2.10 bid (1) Simple Book.
55 Call, there is no Priority Customer
• The Exchange receives an initiating interest on either side of the 2.30 credit Evaluation Process
Priority Customer complex order to buy offer and therefore the order will be able Proposed Rule 21.20(c)(5) describes
1 Mar 50 Call and sell 2 Mar 55 Calls to trade at that price when sufficient how and when the System determines
for a 2.30 debit, 100 times. interest exists. Thus, the order is to execute or otherwise handle complex
• Assume the do-not-COA instruction managed for display purposes at a price orders in the System. As stated above,
is present on this order, so the order locking the opposite side SBBO 2.30 the System will evaluate complex orders
will not initiate a COA auction upon and is available to trade against other and the COB on a regular basis and will
arrival regardless of any other factor. complex interest at 2.30. The respond to the existence of various
• The SBBO is 1.40 debit bid at 2.30 combination of the Simple Book and the conditions and/or events that trigger an
credit offer. COB will be a locked market of 2.30 evaluation. Evaluation results in the
• Since the Mar 55 call is 2.10 bid for debit bid at 2.30 credit offer. various manners of handling and
only one contract (the Priority Customer Should the SBBO change, the executing complex orders as described
Order), the complex order cannot be complex order’s book and display price herein. The System will evaluate
legged against the Simple Book at a 2.30 will continuously re-price to the new complex orders initially once all
debit as a 2.30 debit would require SBBO until: (i) The complex order has components of the complex strategy are
selling two March 55 Calls at 2.10 while been executed in its entirety; (ii) if not open as set forth in proposed Rule
buying one March 50 Call at 6.50. Since executed, the complex order’s book and 21.20(c)(2)(B)–(D), upon receipt as set
there is Priority Customer interest on display price has reached its limit price forth in proposed Rule 21.20(c)(5)(A),
one leg of the complex order on the or, in the case of a complex market and continually as set forth in proposed
Simple Book, the inbound complex order, the new SBBO, subject to any Rule 21.20(c)(5)(B), each of which as
order cannot trade at this price by applicable price protections; (iii) the described herein.
matching with other complex liquidity. complex order has been partially Proposed Rule 21.20(c)(5)(A)
• Thus, the order is managed for executed and the remainder of the describes the evaluation process that
display purposes at a price one penny order’s book and display price has occurs upon receipt of complex orders
inside of the opposite side SBBO, 2.29 reached its limit price or, in the case of once a complex strategy is open for
and is available to trade with other a complex market order, the new SBBO, trading. After a complex strategy is open
complex liquidity at 2.29. The subject to any applicable price for trading, all new complex orders that
combination of the Simple Book and the protections; or (iv) the complex order or are received for the complex strategy are
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COB will be a one penny wide market any remaining portion of the complex evaluated upon arrival. The System will
of 2.29 debit bid at 2.30 credit offer. order is cancelled. If the Exchange determine if such complex orders are
• If additional interest were to arrive receives a new complex order for the COA-eligible orders using the process
on the Mar 55 Call 2.10 bid, the inbound complex strategy on the opposite side of and criteria described in proposed Rule
complex order would be re-evaluated the market from the managed complex 21.20(d). The System will also evaluate:
and would in this example become order that can be executed, the System (i) Whether such complex orders are
eligible to leg with the Priority will immediately execute the remaining
Customer interest on the Simple Book at contracts from the managed complex 37 For a complete description of priority in the

the 2.30 credit offer. order to the extent possible at the Simple Book, see Exchange Rule 21.8.

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eligible for full or partial execution complex market orders designated as complex interest that might be available
against a complex order resting on the COA-eligible may initiate a COA upon on other exchanges. A COA will be
COB; (ii) whether such complex orders arrival. The COA process is set forth in allowed to occur at the same time as
are eligible for full or partial execution proposed Rule 21.20(d) and discussed other COAs for the same complex
through Legging with the Simple Book below. Proposed Rule 21.20(c)(6)(B) strategy. The Exchange has not
(as described in proposed Rule states that complex market orders not proposed to limit the frequency of COAs
21.20(c)(2)(F) and discussed above); (iii) designated as COA-eligible will trade for a complex strategy and could have
whether all or any remaining portion of immediately with any contra-side multiple COAs occurring concurrently
a complex order should be placed on complex orders, or against the with respect to a particular complex
the COB; (iv) the eligibility of such individual legs, up to and including the strategy.42 The Exchange represents that
complex orders (as applicable) to SBBO, and if not fully executed due to it has systems capacity to process
participate in the managed interest applicable price protections, may be multiple overlapping COAs consistent
process as described above; 38 and (v) posted to the COB subject to the with the proposal, including systems
whether such complex orders should be managed interest process, and the necessary to conduct surveillance of
cancelled.39 Evaluation Process, each as described activity occurring in such auctions.43
Proposed Rule 21.20(c)(5)(B) above. Proposed Rule 21.20(d)(2) describes
describes the System’s ongoing regular Complex Order Auction Process the circumstances under which a COA
evaluation of the COB. The System will is begun. Upon receipt of a COA-eligible
continue, on a regular basis, to evaluate Proposed Rule 21.20(d), COA Process,
describes the process for determining if order, the Exchange will begin the COA
the factors listed in (i)–(v) described process by sending a COA auction
above with respect to evaluation a complex order is eligible to begin a
COA. All option classes will be eligible message to all subscribers to the
performed on receipt. Exchange’s data feeds that deliver COA
The System will also continue to to participate in a COA.
Proposed Rule 21.20(d)(l) defines and auction messages.44 The COA auction
evaluate whether there is a halt affecting message will identify the COA auction
any component of a complex strategy, describes the handling of a COA eligible
order. A ‘‘COA-eligible order’’ means a ID, instrument ID (i.e., complex
and, if so, the System will handle strategy), origin code, quantity, and side
complex orders in the manner set forth complex order that, as determined by
the Exchange, is eligible to initiate a of the market of the COA-eligible order.
in proposed Interpretation and Policy The Exchange may also determine to
.05, as described below. COA based upon the Member’s
instructions, the order’s marketability include the price in COA auction
Proposed Rule 21.20(c)(5)(C) states messages and if it does so it will
that if the System determines that a (i.e., if the price of such order is equal
to or better than the current SBBO, announce such determination in
complex order is a COA-eligible order published specifications and/or a
(described below), such complex order subject to applicable restrictions when a
Priority Customer Order comprises a Regulatory Circular to Members. The
will be submitted into the COA process price included in the COA auction
as described in proposed Rule 21.20(d) portion of the SBBO) as determined by
the Exchange, number of components, message will be the limit order price,
and discussed below. unless the COA is initiated by a
Proposed Rule 21.20(c)(5)(D) and complex order origin codes (i.e.,
non-broker-dealer customers, broker- complex market order, in which case
describes the handling of orders that are such price will be the SBBO, subject to
determined not to be COA-eligible. If dealers that are not market makers on an
options exchange, and/or market makers any applicable price protections.
the System determines that a complex
order is not a COA-eligible order, such on an options exchange as determined Proposed Rule 21.20(d)(3) defines the
by the Exchange). Determinations by the amount of time within which
complex order may be, as applicable: (i)
Exchange with respect to COA participants may respond to a COA
Immediately matched and executed
eligibility will be communicated to auction message. The term ‘‘Response
against a complex order resting on the
Members via specifications and/or Time Interval’’ means the period of time
COB; (ii) executed against the
Regulatory Circular).40 Other exchanges during which responses to the RFR may
individual components of the complex
also have limited auction eligibility for be entered. The Exchange will
order on the Simple Book through
complex orders based on order origin determine the duration of the Response
Legging (as described in proposed Rule
code.41 Time Interval, which shall not exceed
21.20(c)(2)(F) above); placed on the COB In order to initiate a COA upon
and managed pursuant to the managed 500 milliseconds, and will
receipt, a COA-eligible order must be communicate it to Members via
interest process as described in designated as such (either affirmatively
proposed Rule 21.20(c)(4) and discussed specifications and/or Regulatory
or by default) and must meet the criteria Circular.45
above; or cancelled by the System if the described in proposed Rule 21.20,
time-in-force (e.g., IOC) of the complex Interpretation and Policy .02, as 42 The Exchange notes that ISE historically has
order does not allow it to rest on the described below. permitted multiple complex auctions in the same
COB. Complex orders processed through a strategy to run concurrently, though this
Proposed Rule 21.20(c)(6) states that COA may be executed without
functionality is currently dormant in connection
complex orders may be submitted as with the transition to Nasdaq INET Technology. See
consideration to prices of the same Securities Exchange Act Release No. 80524 (April
market orders and may be designated as 25, 2017), 82 FR 20405 (May 1, 2017) (SR–ISE–
COA-eligible. The proposed rule then 2017–33).
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40 See MIAX Rule 518(d)(1); see also CBOE Rule
distinguishes between complex market 6.53C(d)(i) and NYSE MKT Rule 980NY(e)(l), which 43 See also proposed Interpretation and Policy .02

orders designated as COA-eligible and list Customers, broker-dealers that are not Market- to Rule 21.20, as described below in the COA
Makers or specialists on an options exchange, and/ Eligibility section.
those that are not so designated.
or Market-Makers or specialists on an options 44 See infra Market Data Feeds section.
Proposed Rule 21.20(c)(6)(A) states that exchange. 45 The Exchange has based its Response Time
41 See id. See also, e.g., CBOE Regulatory Circular Interval on MIAX Rule 518(d)(3), which similarly
38 See proposed Rule 21.20(c)(4). RG14–143 (October 14, 2014), limiting Complex does not have a minimum Response Time Interval
39 For example, an order might be cancelled based Order Auction (‘‘COA’’) eligibility to non-broker- and has a maximum of 500 milliseconds. The
on applicable price protections or MTP Modifiers, dealer public customer orders and professional Exchange believes that 500 milliseconds is a
as described above. customer orders. Continued

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Proposed Rule 21.20(d)(4) states that same side as the COA in progress to a offering to sell 100 strategies at 1.10 (but
Members may submit a response to the price equal to or better than the auction will be restricted to executing at 1.11 or
COA auction message (a ‘‘COA price, in which case the COA will be better). The following responses are
Response’’) during the Response Time processed, the new order will be posted received:
Interval. COA Responses can be to the Simple Book and the SBBO will Æ @50 milliseconds MM–C COA
submitted by a Member with any origin be updated. Additionally, a COA will Response to buy 100 @1.10 debit
code, including Priority Customer. COA terminate immediately without trading arrives
Responses may be submitted in $0.01 if any individual component or Æ @150 milliseconds MM–D COA
increments and must specify the price, underlying security of a complex Response to buy 50 @1.11 debit
size, side of the market (i.e., a response strategy in the COA process is subject to arrives
to a buy COA as a sell or a response to a halt as described in proposed Rule • @500 milliseconds the Response
a sell COA as a buy) and COA auction 21.20, Interpretation and Policy .05. Time Interval expires, the COA ends
ID for the COA to which the response and the trade is allocated against
COA Pricing
is targeted. Multiple COA Responses initiating Priority Customer in the
from the same Member may be Proposed Rule 21.20(d)(6) describes following manner:
submitted during the Response Time the manner in which the System prices Æ 50 trade vs. MM–D @1.11
Interval. COA Responses represent non- and executes complex orders at the Æ Nothing can trade at 1.10 due to the
firm interest that can be modified or conclusion of the Response Time presence of Priority Customer interest
withdrawn at any time prior to the end Interval. in the March 50 Call on the Simple
of the Response Time Interval, though The proposed Rule initially states the Book at 1.00 in insufficient quantity
any modification to a COA Response broader pricing policy and functionality to meet the ratio required by the
other than a decrease of size will result of all trading of complex orders in the Priority Customer Order. Therefore,
in a new timestamp and a loss of System (whether a trade is executed in the 1.10 COA Response by MM–C
priority. COA Responses will not be the COA process or in regular trading). expires untraded at the end of the
displayed by the Exchange. At the end Specifically, a complex strategy will not COA and the balance of the initiating
of the Response Time Interval, COA be executed at a net price that would Priority Customer complex order to
Responses are firm (i.e., guaranteed at cause any component of the complex sell is placed on the COB at a
their price and size). Any COA strategy to be executed: (A) At a price managed and displayed price of 1.11.
Responses not executed in full will of zero; or (B) ahead of a Priority
Customer Order on the Simple Book Trade Allocation Following the COA
expire at the end of the COA.46 Any
COA Responses not executable based on without improving the BBO on at least Proposed Rule 21.20(d)(7) describes
the price of the COA will be cancelled one component of the complex strategy the allocation of complex orders that are
immediately. by at least $.01. At the conclusion of the executed in a COA. Once the COA is
Proposed Rule 21.20(d)(5) describes Response Time Interval, COA-eligible complete (at the end of the Response
how COA-eligible orders are handled orders will be allocated pursuant to Time Interval), such orders will be
following the Response Time Interval. proposed Rule 21.20(d)(7). allocated first in price priority based on
At the end of the Response Time Example—COA takes place $.01 their original limit price, and thereafter
Interval, COA-eligible orders may be inside of the SBBO to avoid a situation as stated herein.
executed in whole or in part. COA- where nothing can trade and the Priority Customer Orders resting on
eligible orders will be executed against incoming order cannot be satisfied at the Simple Book have first priority.
the best priced contra side interest, and the COA price. COA Responses and all other interest on
any unexecuted portion of a COA- EDGX Market Maker (‘‘MM’’)–A Mar 50 the COB will have second priority and
eligible order remaining at the end of Call 0.99–1.05 (10x10) will be allocated in time priority (i.e.,
the Response Time Interval will be EDGX MM–B Mar 55 Call 0.80–0.95 Priority Customer complex orders do
placed on the COB and ranked pursuant (10x10) not receive a priority advantage over
to proposed Rule 21.20(c)(3) as EDGX Priority Customer Order to buy a other orders). Remaining individual
discussed above or cancelled, if IOC. Mar 50 Call for 1.00 (2) orders in the Simple Book (i.e., non-
The COA will terminate: (i) Upon • The Exchange receives an initiating Priority Customer orders) will have
receipt of a new non-COA-eligible order Priority Customer complex order to sell third and final priority and will
on the same side as the COA but with 3 Mar 50 calls and buy 2 Mar 55 calls allocated pursuant to the Simple Book’s
a better price, in which case the COA at a 1.10 credit, 100 times. The COA- priority algorithm, as described in
will be processed and the new order eligible instruction is present on this Exchange Rule 21.8.
will be posted to the COB; (ii) if an complex order, so the complex order The following examples illustrate the
order is received that would improve will initiate a COA upon arrival if it manner in which complex orders are
the SBBO on the same side as the COA equals or improves the SBBO. allocated at the conclusion of the COA
in progress to a price better than the • The SBBO is 1.10 debit bid at 1.55 as well as the Exchange’s initiation of a
auction price, in which case the COA credit offer. second COA process in the event a
will be processed, the new order will be • Since the initiating Priority same-side COA-eligible order is
posted to the Simple Book and the Customer Order price would equal or received while a COA is already
SBBO will be updated; or (iii) if a improve the SBBO upon arrival, the underway (in contrast to such order
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Priority Customer Order is received that COA meets the eligibility requirements ‘‘joining’’ the COA that had already
would join or improve the SBBO on the and a COA auction message is broadcast begun).
showing the COA auction ID, Example—Priority Customer
reasonable amount of time within which instrument ID, origin code, quantity, Response does not have priority over
participants can respond to a COA auction message. side of the market, and price, and a 500 other responding participants.
46 This differs slightly from, but has the same
millisecond Response Time Interval is EDGX MM–A Mar 50 Call 6.00–6.50
effect as, the language in CBOE Rule 6.53C(d)(vii),
which states that any COA Responses not accepted started. (10x10)
in whole or in a permissible ratio will expire at the • The System starts the COA at the EDGX MM–B Mar 55 Call 3.00–3.30
end of the Response Time Interval. initiating Priority Customer price (10x10)

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• The Exchange receives an initiating • The SBBO is 2.70 debit bid at 3.50 the initiating Broker-Dealer in the
Priority Customer complex order to buy credit offer. following manner:
1 Mar 50 call and Sell 1 Mar 55 call for • Since the initiating Priority Æ Initiating Broker-Dealer buys 100 vs.
a 3.20 debit, 1000 times. Customer Order price would improve MM–A @3.00 (MM–A achieved price
• The COA-eligible instruction is the SBBO upon arrival, the COA meets priority over other responses by
present on this complex order, so the the eligibility requirements and a COA offering at 3.00)
complex order will initiate a COA upon auction message is broadcast showing Æ Initiating Broker-Dealer buys 100 vs.
arrival if it equals or improves the the COA auction ID, instrument ID, BD1 @3.10 (BD1 achieved price
SBBO. origin code, quantity, side of the market, priority over MM–B)
• The SBBO is 2.70 debit bid at 3.50 and price, and a 500 millisecond Æ Initiating Broker-Dealer’s order is
credit offer. Response Time Interval is started. fulfilled and all remaining COA
• Since the initiating Priority • The System starts the auction Responses and portions thereof are
Customer Order price would improve (‘‘COA #1’’) at the initiating Priority cancelled.
the SBBO upon arrival, the COA meets Customer price bidding 3.20 to buy Proposed Rule 21.20(d)(8) states that,
the eligibility requirements and a COA 1000 contracts. The following responses consistent with Exchange Rule
auction message is broadcast showing are received: 21.1(d)(5), the System will reject a
the COA auction ID, instrument ID, Æ @50 milliseconds BD1 COA Response complex market order received when
origin code, quantity, side of the market, @3.10 credit sell of 250 arrives the underlying security is subject to a
and price, and a 500 millisecond Æ @150 milliseconds MM–A COA ‘‘Limit State’’ or ‘‘Straddle State’’ as
Response Time Interval is started. Response @3.00 credit sell of 500
• The System starts the auction at the defined in the Plan to Address
arrives Extraordinary Market Volatility
initiating Priority Customer price Æ @200 milliseconds MM–B COA
bidding 3.20 to buy 1000 contracts. The Pursuant to Rule 608 of Regulation NMS
Response @3.20 credit sell of 500 under the Act (the ‘‘Limit Up-Limit
following responses are received: arrives Down Plan’’). If the underlying security
Æ @50 milliseconds MM–A COA Æ @250 milliseconds MM–C COA of a COA-eligible order that is a market
Response @3.10 credit sell of 250 Response @3.10 credit sell of 250 order enters a Limit State or Straddle
arrives arrives State, the COA will end early without
Æ @150 milliseconds MM–C COA Æ @350 milliseconds BD2 submits an trading and all COA Responses will be
Response @3.00 credit sell of 500 unrelated complex order @3.20 debit cancelled.
arrives buy of 200 Proposed Rule 21.20(d)(9), states that
Æ @200 milliseconds MM–D COA
• The System starts the auction at the if, during a COA, the underlying
Response @3.20 credit sell of 500
initiating Broker-Dealer (BD2) price security and/or any component of a
arrives
Æ @250 milliseconds Priority Customer bidding 3.20 to buy 200 contracts. The COA-eligible order is subject to a
2 COA Response @3.10 credit sell of following responses are received: trading halt, the COA will be handled as
250 arrives Æ @50 milliseconds BD1 COA Response set forth in proposed Rule 21.20,
@3.10 credit sell of 250 arrives Interpretation and Policy .05 as
• @500 milliseconds the Response described in detail below.
Time Interval ends, the COA ends and Æ @100 milliseconds MM–A COA
Response @3.00 credit sell of 100 The Exchange believes that the
the trade is allocated against the provisions regarding the COA provide a
initiating Priority Customer using the arrives
Æ @200 milliseconds MM–B COA framework that will enable the efficient
single best price at which the greatest trading of complex orders in a manner
quantity can trade in the following Response @3.20 credit sell of 500
arrives that is similar to other options
manner: exchanges as stated above. Further, this
Æ 500 trade vs. MM–C @3.00 (MM–C • @500 milliseconds the Response
Time Interval for COA #1 ends, COA #1 clarity in the operation of the COA and
achieved price priority by offering at its consistency with other exchanges
3.00) ends and the trade is allocated against
the initiating Priority Customer in the will help promote a fair and orderly
Æ 250 trade vs. MM–A @3.10 (other options market. As described above, the
interest allocated in time priority, following manner:
COA is designed to work in concert
including Priority Customer) Æ Initiating Priority Customer buys 500 with the COB and with a simple priority
Æ 250 trade vs. Priority Customer 2 vs. MM–A @3.00 (the Priority of allocation that continues to respect
response @3.10 (other interest Customer initiating order has origin the priority of allocations on the Simple
allocated in time priority, including code priority over BD2. MM–A Book (via the Exchange’s pro rata
Priority Customer) achieved price priority over other allocation methodology).
Example—Arrival of unrelated responses by offering at 3.00)
marketable complex order on the same Æ Initiating Priority Customer buys 250 Interpretations and Policies
side. vs. BD1 @3.10 (BD 1 achieved price The Exchange also proposes several
EDGX MM–A Mar 50 Call 6.00–6.50 priority over MM–B and BD2 and Interpretations and Policies to proposed
(10x10) time priority over MM–C) Rule 21.20.
EDGX MM–B Mar 55 Call 3.00–3.30 Æ Initiating Priority Customer buys 250
(10x10) vs. MM–C @3.10 (MM–C achieved Market Maker Quoting
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• The Exchange receives an initiating price priority over MM–B and BD2 by The Exchange has not proposed
Priority Customer complex order to buy offering at 3.10) different standards for participation by
1 Mar 50 call and Sell l Mar 55 call for Æ Initiating Priority Customer’s order is Market Makers on the COB (e.g., no
a 3.20 debit, 1000 times. fulfilled and all COA Responses and specific benefits or obligations).
• The COA-eligible order instruction portions thereof are cancelled. Proposed Rule 21.20, Interpretation and
is present on this order, so the order • @500 milliseconds the Response Policy .01 makes clear that Market
will initiate an auction upon arrival if Time Interval for COA #2 ends, COA #2 Makers are not required to quote on the
it equals or improves the SBBO. ends and the trade is allocated against COB. Thus, unlike the continuous

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33180 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Notices

quoting requirements in the simple would commence and conclude at Price and Other Protections
order market, there are no continuous exactly the same time. Thus, although it Proposed Interpretation and Policy
quoting requirements respecting is possible as proposed for one or more .04 establishes Price Protection
complex orders.47 Complex strategies COAs to overlap, each COA will be standards that are intended to ensure
are not subject to any requirements that started in a sequence and with a time that certain types of complex strategies
are applicable to Market Makers in the that will determine its processing. The will not be executed outside of a preset
simple market for individual options Exchange proposes to codify in standard minimum and/or maximum
series or classes. Volume executed in Interpretation and Policy .02 that to the price limit. These Rules are based on
complex strategies is not taken into extent there is more than one COA for and similar to portions of Interpretation
consideration when determining a specific complex strategy underway at and Policy .08 to CBOE Rule 6.53C.
whether Market Makers are meeting a time, each COA will conclude First, in paragraph (a) of Proposed
quoting obligations applicable to Market sequentially based on the exact time Rule 21.20, Interpretation and Policy
Makers in the simple market for .04, the Exchange proposed to define
each COA commenced, unless
individual options.48 various terms necessary for such
terminated early pursuant to proposed
COA Eligibility paragraph (d)(5)(C) of the Rule.49 At the Interpretation,52 as follows:
Proposed Rule 21.20, Interpretation time each COA concludes, such COA • A ‘‘vertical’’ spread is a two-legged
and Policy .02 establishes the method will be allocated pursuant to the complex order with one leg to buy a
by which the Exchange will determine proposed Rule and will take into number of calls (puts) and one leg to sell
whether complex order interest is account all COA Responses and the same number of calls (puts) with the
qualified to initiate a COA and also unrelated complex orders on the COB at same expiration date but different
describes the operation of the proposed the exact time of conclusion. exercise prices.
functionality with respect to the fact • A ‘‘butterfly’’ spread is a three-
Thus, even if there are two COAs that legged complex order with two legs to
multiple COAs would be allowed to commence and conclude at nearly the
operate concurrently. If a COA-eligible buy (sell) the same number of calls
same time each COA will have a distinct (puts) and one leg to sell (buy) twice as
order is priced equal to, or improves, conclusion at which time the COA will
the SBBO and is also priced to improve many calls (puts), all with the same
be allocated. In turn, when the first COA expiration date but different exercise
other complex orders resting at the top
concludes, orders on the Simple Book prices, and the exercise price of the
of the COB, the complex order will be
eligible to initiate a COA, provided that and unrelated complex orders that then middle leg is between the exercise
if any of the bids or offers on the Simple exist will be considered for prices of the other legs. If the exercise
Book that comprise the SBBO consists participation in the COA. If unrelated price of the middle leg is halfway
of a Priority Customer Order, the COA orders are fully executed in such COA, between the exercise prices of the other
will only be initiated if it will trade at then there will be no unrelated orders legs, it is a ‘‘true’’ butterfly; otherwise,
a price that is better than the for consideration when the subsequent it is a ‘‘skewed’’ butterfly.
corresponding bid or offer by at least a COA is processed (unless new unrelated • A ‘‘box’’ spread is a four-legged
$0.01 increment. order interest has arrived). If instead complex order with one leg to buy calls
Pursuant to the proposed Rule, a COA there is remaining unrelated order and one leg to sell puts with one strike
will be allowed to commence even to interest after the first COA has been price, and one leg to sell calls and one
the extent a COA for the same complex allocated, then such unrelated order leg to buy puts with another strike price,
strategy is already underway. The interest will be considered for allocation all of which have the same expiration
Exchange notes at the outset that based when the subsequent COA is processed. date and are for the same number of
on how Exchange Systems operate (and As another example, each COA contracts.
computer processes generally), it is Response is required to specifically Second, in paragraph (b), the
impossible for COAs to occur identify the COA for which it is Exchange has proposed to specify
‘‘simultaneously’’, meaning that they targeted 50 and if not fully executed will credit-to-debit parameters that would
be cancelled back at the conclusion of prevent execution of, and instead
47 This is similar to ISE, where market makers are
the COA.51 Thus, COA Responses will cancel, market orders that would be
not required to enter quotes on the complex order
only be considered in the specified executed at a net debit price after
book. Quotes for complex orders are not subject to receiving a partial execution at a net
any quotation requirements that are applicable to COA.
market maker quotes in the regular market for credit price.53
individual options series or classes. See ISE Rule Dissemination of Information Next, in paragraph (c), the Exchange
722, Supplementary Material .03. proposes to set forth various Debit/
48 See Proposed Rule 21.20, Interpretation and Proposed Rule 21.20, Interpretation Credit Price Reasonability Checks, as
Policy .01. This is substantially similar to complex and Policy .03 is a regulatory provision
quoting functionality currently operative on both
follows. To the extent a price check
MIAX and ISE, where market makers may enter
that prohibits the dissemination of parameter is applicable, the Exchange
quotes for complex order strategies on the complex information related to COA-eligible will not accept a complex order that is
order book in their appointed options classes. Just orders by the submitting Member to a limit order for a debit strategy with a
as with the proposed rules, neither MIAX market third parties. Such conduct will be
makers nor ISE market makers are required to enter
net credit price that exceeds a pre-set
quotes on the complex order book. Quotes for deemed conduct inconsistent with just buffer, a limit order for a credit strategy
and equitable principles of trade as with a net debit price that exceeds a pre-
asabaliauskas on DSKBBXCHB2PROD with NOTICES

complex orders are not subject to any quotation
requirements that are applicable to MIAX market described in Exchange Rule 3.1. set buffer, or a market order for a credit
maker or ISE Market Maker quotes in the regular
market for individual options series or classes, nor
strategy that would be executed at a net
49 In the event there are multiple COAs underway
is any volume executed in complex orders taken
into consideration when determining whether that are each terminated early pursuant to proposed 52 See paragraph (a) to Proposed Rule 21.20,

MIAX or ISE market makers are meeting quoting Rule 21.20(d)(5)(C), the COAs will be processed Interpretation and Policy .04; see also CBOE Rule
obligations applicable to market maker quotes in sequentially based on the order in which they 6.53C, Interpretation and Policy .08.
the regular market for individual options series. See commenced. 53 See paragraph (b) to Proposed Rule 21.20,
50 See proposed Rule 21.20(d)(4).
MIAX Rule 518, Interpretation and Policy .02; ISE Interpretation and Policy .04; see also CBOE Rule
Rule 722, Supplementary Material .03. 51 See id. 6.53C, Interpretation and Policy .08(b).

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debit price that exceeds a pre-set expiration date of the buy (sell) leg (if the middle leg and the legs on either
buffer.54 The Exchange will determine the pair has the same exercise price). A side; and (C) each pair of legs,
these pre-set buffer amounts and pair of puts is a credit (debit) if the respectively. The minimum possible
communicate them to Members via exercise price of the sell (buy) leg is value of the spread is zero.
specifications and/or Regulatory higher than the exercise price of the buy The last paragraph of proposed
Circular.55 (sell) leg (if the pair has the same Interpretation and Policy .04, paragraph
As proposed in paragraph (c)(2), the expiration date) or if the expiration date (f), would set forth the Exchange’s Drill-
System would define a complex order as of the sell (buy) leg is farther than the Through Price Protection. The Drill-
a debit or credit as follows: (A) A call expiration date of the buy (sell) leg (if Through Price Protection feature is a
butterfly spread for which the middle the pair has the same exercise price). A price protection mechanism applicable
leg is to sell (buy) and twice the exercise loner to buy is a debit, and a loner to to all complex orders under which a buy
price of that leg is greater than or equal sell is a credit.58 (sell) order will not be executed at a
to the sum of the exercise prices of the In addition to the definitions and price that is higher (lower) than the
buy (sell) legs is a debit (credit); (B) a parameters described above, proposed SNBBO or the SNBBO at the time of
put butterfly spread for which the paragraph (c)(3) would also state that order entry plus (minus) a buffer
middle leg is to sell (buy) and twice the the System rejects or cancels back to the amount (the ‘‘Drill-Through Price’’).61
exercise price of that leg is less than or Member any limit order or any market The Exchange will adopt a default
equal to the sum of the exercise prices order (or any remaining size after partial buffer amount for the Drill-Through
of the buy (sell) legs is a debit (credit); execution of the order), that does not Price Protection and will publish this
and (C) an order for which all pairs and satisfy this check. Also, proposed amount in publicly available
loners are debits (credits) is a debit paragraph (c)(4) would make clear that specifications and/or a Regulatory
(credit).56 the check applies to auction responses Circular. A Member may modify the
For purposes of Debit/Credit Price in the same manner as it does to orders. buffer amount applicable to Drill-
Reasonability Checks, a ‘‘pair’’ is a pair In addition to the proposed Debit/ Through Price Protections to either a
of legs in an order for which both legs Credit Price Reasonability Checks larger or smaller amount than the
are calls or both legs are puts, one leg described above, the Exchange proposes Exchange default. If a buy (sell) order
is a buy and one leg is a sell, and both to adopt specific Buy Strategy would execute or post to the COB at a
legs have the same expiration date but Parameters that would be set forth in price higher (lower) than the Drill-
different exercise prices or, for all paragraph (d) to Interpretation and Through Price, the System will instead
options except European-style index Policy .04. As proposed, the System will post the order to the COB at the Drill-
options, the same exercise price but reject a limit order where all the Through Price, unless the terms of the
different expiration dates. A ‘‘loner’’ is components of the strategy are to buy order instruct otherwise. Any order (or
any leg in an order that the System and the order is priced at zero, any net unexecuted portion thereof) will rest in
cannot pair with another leg in the order credit price that exceeds a pre-set buffer, the COB (based on the time at which it
(including legs in orders for European- or a net debit price that is less than the enters the book for priority purposes) for
style index options that have the same number of individual option series legs a time period in milliseconds that may
exercise price but different expiration in the strategy (or applicable ratio) not exceed three seconds (which the
dates). The proposed rule would further multiplied by the applicable minimum Exchange will determine and
specify: that the System first pairs legs net price increment for the complex communicate to Members via
to the extent possible within each order.59 specifications and/or Regulatory
expiration date, pairing one leg with the Proposed paragraph (e) to Circular) with a price equal to the Drill-
leg that has the next highest exercise Interpretation and Policy .04 would set Through Price. If the order (or
forth a Maximum Value Acceptable unexecuted portion thereof) does not
price; and that the System then, for all
Price Range as an additional price check execute during that time period, the
options except European-style index
for vertical, true butterfly or box spreads System will cancel it.
options, pairs legs to the extent possible
as well as certain limit and market Example—Application of Drill-
with the same exercise prices across
orders.60 Specifically, the System will Through Protection.
expiration dates, pairing one leg with
reject an order if the order is a vertical, EDGX—quote Mar 50 Call 6.00–6.50
the leg that has the next nearest
true butterfly or box spread, or a limit (10x10)
expiration date.57
A pair of calls is a credit (debit) if the order or market order if it would EDGX—quote Mar 55 Call 2.00–2.30
execute at a price that is outside of an (10x10)
exercise price of the buy (sell) leg is
acceptable price range. The acceptable CBOE—Mar 50 Call 6.00–6.50 (10x10)
higher than the exercise price of the sell
price range is set by the minimum and CBOE—Mar 55 Call 2.00–2.10 (10x10)
(buy) leg (if the pair has the same ISE—Mar 50 Call 6.00–6.50 (10x10)
maximum possible value of the spread,
expiration date) or if the expiration date ISE—Mar 55 Call 2.10–2.30 (10x10)
subject to an additional buffer amount
of the sell (buy) leg is farther than the
determined by the Exchange and • The Exchange receives an initiating
54 As proposed, the System would not apply this
communicated to Members via Priority Customer Order to buy 1 Mar 50
check to an order for which the System cannot specifications and/or a Regulatory call and sell 2 Mar 55 calls for a 2.50
define whether it is a debit or credit. This would Circular. The maximum possible value debit x 100.
primarily be prior to the opening of trading as of a vertical, true butterfly and box • Assume the Exchange has
orders are being queued because prices may not be established two seconds as the amount
asabaliauskas on DSKBBXCHB2PROD with NOTICES

available in order to make such determination.
spread is the difference between the
55 The Exchange notes that ISE also employs exercise prices of (A) the two legs; (B) of time an order will rest in the COB
variable ‘‘pre-set values’’ in connection with with a price equal to the Drill-Through
analogous price protections offered by ISE with 58 See
id. Price before cancellation.
respect to its complex order book. See 59 See
paragraph (d) to Proposed Rule 21.20,
Supplementary Material .07(c) to ISE Rule 722. Interpretation and Policy .04; see also CBOE Rule 61 The Exchange notes that ISE also applies
56 See paragraph (c) to Proposed Rule 21.20, 6.53C, Interpretation and Policy .08(d). configurable values in connection with an
Interpretation and Policy .04; see also CBOE Rule 60 See paragraph (e) to Proposed Rule 21.20, analogous price protection offered by ISE with
6.53C, Interpretation and Policy .08(c). Interpretation and Policy .04; see also CBOE Rule respect to its complex order book. See
57 See id. 6.53C, Interpretation and Policy .08(g). Supplementary Material .07(a) to ISE Rule 722.

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Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Notices 33185

an order to participating in an trade, to foster cooperation and when there is no meaningful
exchange’s opening process.77 coordination with persons engaged in opportunity for price improvement.
facilitating transactions in securities, to If a complex order is not priced equal
Evaluation
remove impediments to and perfect the to, or better than, the SBBO or is not
The Exchange believes that the mechanisms of a free and open market priced to improve other complex orders
regular and event-driven evaluation of and a national market system and, in resting at the top of the COB, the
the COB for the eligibility of complex general, to protect investors and the Exchange does not believe that it is
orders to initiate a COA, and to public interest. reasonable to anticipate that it would
determine their eligibility to participate Following evaluation, a COA-eligible generate a meaningful number of COA
in the managed interest process, their order may begin a new COA. The COA Responses such that there would be
eligibility for full or partial execution process promotes just and equitable price improvement of the complex
against a complex order resting on the principles of trade, fosters cooperation order’s limit price. Promoting the
COB or through Legging with the and coordination with persons engaged orderly initiation of COAs is essential to
Simple Book, whether the complex in facilitating transactions in securities, maintaining a fair and orderly market
order should be cancelled, and whether removes impediments to and perfects for complex orders; otherwise, the
the complex order or any remaining the mechanisms of a free and open initiation of COAs that are unlikely to
portion thereof should be placed on the market and a national market system result in price improvement could affect
COB are consistent with the principles and, in general, protects investors and the orderliness of the marketplace in
of the Act to promote just and equitable the public interest by ensuring that general. The Exchange believes that this
principles of trade, to foster cooperation removes impediments to and perfects
eligible complex orders are given every
and coordination with persons engaged the mechanisms of a free and open
opportunity to be executed at the best
in facilitating transactions in securities, market and a national market system by
prices against an increased level of
to remove impediments to and perfect promoting the orderly initiation of
contra-side liquidity responding to the
the mechanisms of a free and open COAs, and by limiting the likelihood of
COA auction message. This mechanism
market and a national market system unnecessary COAs that are not expected
of a free and open market is designed to
and, in general, to protect investors and to result in price improvement.
enhance liquidity and the potential for
the public interest.
Evaluation of the executability of better execution prices during the The Exchange believes the proposed
complex orders and for the Response Time Interval, all to the maximum 500 millisecond Response
determination as to whether a complex benefit of investors on the Exchange, Time Interval promotes just and
order is COA-eligible is central to the and thereby consistent with the Act. equitable principles of trade and
removal of impediments to, and the The Exchange believes that the removes impediments to a free and open
perfection of, the mechanisms of a free determination to initiate a COA removes market because it allows sufficient time
and open market and a national market impediments to, and perfects the for Members participating in a COA to
system and, in general, the protection of mechanisms of, a free and open market submit COA Responses and would
investors and the public interest. The and a national market system and, in encourage competition among
evaluation process ensures that the general, protects investors and the participants, thereby enhancing the
System will capture and act upon public interest, by ensuring that a COA potential for price improvement for
complex orders that are due for is conducted for a complex order only complex orders in the COA to the
execution or placed in a COA. The when there is a reasonable and realistic benefit of investors and public interest.
regular and event-driven evaluation chance for price improvement through a The Exchange believes the proposed
process removes potential impediments COA. As described above, the Exchange rule change is not unfairly
to the mechanisms of the free and open has proposed to initiate a COA if a COA- discriminatory because it establishes a
market and the national market system eligible order is priced equal to, or Response Time Interval applicable to all
by ensuring that complex orders are improves, the SBBO and is also priced Exchange participants participating in a
given the best possible chance at to improve other complex orders resting COA.
execution at the best price, evaluating at the top of the COB, provided that if The Exchange again notes that it has
the availability of complex orders to be any of the bids or offers on the Simple not proposed to limit the frequency of
handled in a number of ways as Book that comprise the SBBO consists COAs for a complex strategy and could
described in this proposal. Any of a Priority Customer Order, the COA have multiple COAs occurring
potential impediments to the order will only be initiated if it will trade at concurrently with respect to a particular
handling and execution process a price that is better than the complex strategy. The Exchange
respecting complex orders are corresponding bid or offer by at least a represents that it has systems capacity
substantially removed due to their $0.01 increment. The purpose of this to process multiple overlapping COAs
continual and event-driven evaluation provision is to ensure that a complex consistent with the proposal, including
for subsequent action to be taken by the order will not initiate a COA if it is systems necessary to conduct
System. This protects investors and the priced through the bid or offer at a point surveillance of activity occurring in
public interest by ensuring that complex where it is not reasonable to anticipate such auctions. Further, the Exchange
orders in the System are continually that it would generate a meaningful reiterates that at least one options
monitored and evaluated for potential number of COA Responses such that exchange has permitted multiple
complex auctions in the same strategy to
asabaliauskas on DSKBBXCHB2PROD with NOTICES

action(s) to be taken on behalf of there would be price improvement of
investors that submit their complex the complex order’s limit price. run concurrently and intends to
orders to the Exchange. Promoting the orderly initiation of a reintroduce such functionality.78 The
COA is essential to maintaining a fair Exchange also notes that other options
COA Process and orderly market for complex orders; exchanges offer auctions for orders 50
The COA process is also designed to otherwise, the initiation of COAs that contracts or greater (generally referred to
promote just and equitable principles of are unlikely to result in price as ‘‘facilitation auctions’’) that are
improvement might result in
77 See, e.g., C2 Rule 6.10(c)(7); ISE Rule 715(o). unnecessary activity in the marketplace 78 See supra note 42.

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Document Created: 2017-07-19 06:17:43
Document Modified: 2017-07-19 06:17:43
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		82 FR 33170