83 FR 35291 - Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Exchange Rule 11.13, Order Execution and Routing, To Amend the Operation of the Super Aggressive Order Instruction

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 143 (July 25, 2018)

[Federal Register Volume 83, Number 143 (Wednesday, July 25, 2018)]
[Notices]
[Pages 35291-35295]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-15848]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83673; File No. SR-CboeBZX-2018-051]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change to 
Exchange Rule 11.13, Order Execution and Routing, To Amend the 
Operation of the Super Aggressive Order Instruction

July 19, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 11, 2018, Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange has designated this 
proposal as a ``non-controversial'' proposed rule change pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders it effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to amend the operation of the Super 
Aggressive order instruction under paragraph (b)(4)(C) of Exchange Rule 
11.13.
    The text of the proposed rule change is available at the Exchange's 
website at www.markets.cboe.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

[[Page 35292]]

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
    The Exchange proposes to amend the description of the Super 
Aggressive Re-Route instruction (``Super Aggressive instruction'') 
under paragraph (b)(4)(C) of Exchange Rule 11.13, Order Execution and 
Routing to: (i) Specify that an incoming BZX Post Only Order or Partial 
Post Only at Limit Order that locks a resting order with a Super 
Aggressive instruction must be designated as eligible for display on 
the Exchange (a ``displayed order'') for the order with a Super 
Aggressive instruction to engage in a liquidity swap and execute 
against that incoming order; and (ii) modify language from the 
description of the Super Aggressive instruction that states if an order 
that does not contain a Super Aggressive instruction maintains higher 
priority than one or more Super Aggressive eligible orders, the Super 
Aggressive eligible order(s) with lower priority will not be converted 
and an incoming BZX Post Only Order or Partial Post Only at Limit Order 
will be posted or cancelled in accordance with Exchange Rule 11.9(c)(6) 
or 11.9(c)(7).
    Super Aggressive is an optional order instruction that directs the 
System \5\ to route an order when an away Trading Center locks or 
crosses the limit price of the order resting on the BZX Book.\6\ When 
an order with a Super Aggressive instruction is locked by an incoming 
BZX Post Only Order or Partial Post Only at Limit Order (hereafter 
collectively referred to as a ``Post Only Order'') that does not remove 
liquidity pursuant to Rule 11.9(c)(6) or 11.9(c)(7), respectively,\7\ 
the order with a Super Aggressive instruction is converted to an 
executable order and will remove liquidity against such incoming order.
---------------------------------------------------------------------------

    \5\ The term ``System'' is defined as ``the electronic 
communications and trading facility designated by the Board through 
which securities orders of Users are consolidated for ranking, 
execution and, when applicable, routing away.'' See Exchange Rule 
1.5(aa).
    \6\ See Exchange Rule 1.5(e).
    \7\ A BZX Post Only Order will remove contra-side liquidity from 
the BZX Book if the order is an order to buy or sell a security 
priced below $1.00 or if the value of such execution when removing 
liquidity equals or exceeds the value of such execution if the order 
instead posted to the BZX Book and subsequently provided liquidity, 
including the applicable fees charged or rebates provided. See 
Exchange Rule 11.9(c)(6). A Partial Post Only at Limit Order will 
remove liquidity from the BZX Book up to the full size of the order 
if, at the time of receipt, it can be executed at prices better than 
its limit price. See Exchange Rule 11.9(c)(7).
---------------------------------------------------------------------------

    First, the Exchange proposes to modify the behavior of the Super 
Aggressive instruction to require that the incoming Post Only Order 
that locks a resting order with a Super Aggressive instruction must be 
designated as a displayed order for an execution to occur. The Super 
Aggressive instruction is generally utilized for best execution 
purposes because it enables the order to immediately attempt to access 
displayed liquidity on another Trading Center that is either priced 
equal to or better than the order with a Super Aggressive instruction's 
limit price. The Super Aggressive instruction also enables the order to 
execute against an equally priced incoming Post Only Order that would 
otherwise not execute by being willing to act as the liquidity remover 
in such a scenario. Today, the incoming Post Only Order may either be a 
displayed order or a non-displayed order for it to engage in a 
liquidity swap with an order with a Super Aggressive instruction 
resting on the BZX Book.
    Consistent with the Super Aggressive instruction to access 
liquidity displayed on other Trading Centers, the Exchange proposes to 
amend the Super Aggressive instruction such that an order with such 
instruction will execute against an equally priced incoming Post Only 
Order only when such order is to be displayed on the BZX Book. The 
order with a Super Aggressive instruction would continue to act as a 
liquidity remover in such a scenario. Should such an equally priced 
incoming Post Only Order not be designated as a displayed order, the 
resting order with a Super Aggressive instruction would remain on the 
BZX Book and await an execution where it may act as a liquidity 
provider. The incoming Post Only Order that is also designated as a 
non-displayed order would be posted to the BZX Book at its limit price, 
creating an internally locked non-displayed book. As is the case today, 
an execution would continue to occur where an incoming Post Only Order 
is priced more aggressively than the order with a Super Aggressive 
instruction resting on the BZX Book, regardless of whether the incoming 
Post Only Order was designated as a displayed order or a non-displayed 
order.\8\
---------------------------------------------------------------------------

    \8\ See id.
---------------------------------------------------------------------------

    The Exchange notes that Users seeking to act as a liquidity remover 
once resting on the BZX Book in all cases (i.e., seeking to execute 
against incoming Post Only orders regardless of the display 
instruction) may attach the Non-Displayed Swap (``NDS'') instruction to 
their order.\9\ The NDS instruction is similar to the Super Aggressive 
instruction, in that it also is an optional order instruction that a 
User may include on an order that directs the Exchange to have such 
order, when resting on the BZX Book, execute against an incoming Post 
Only Order rather than have it be locked by the incoming order. Today, 
because orders with either instruction (i.e., Super Aggressive and NDS) 
will execute against incoming Post Only Orders regardless of whether 
the order is to be displayed, the instructions are currently identical 
with two exceptions. First, an order with a Super Aggressive 
instruction will not convert into a liquidity removing order and 
execute against a Post Only Order if there is an order on the order 
book with priority over such order that does not also contain a Super 
Aggressive instruction. As further described below, the Exchange is 
proposing to modify this feature of the Super Aggressive instruction. 
The second current distinction between the two instructions, which 
would remain, is that an order with a Super Aggressive instruction can 
be displayed on the Exchange whereas an order with the NDS instruction 
must be non-displayed. As amended, the additional distinction between 
the two instructions would be whether an order would become a liquidity 
removing order against any Post Only Order that would lock it (i.e., 
NDS) or only when the Post Only Order that would lock it also is a 
displayed order (i.e., Super Aggressive).
---------------------------------------------------------------------------

    \9\ See Exchange Rule 11.9(c)(12).
---------------------------------------------------------------------------

    The below examples illustrate the proposed behavior. Assume the 
National Best Bid and Offer (``NBBO'') is $10.00 by $10.10. An order to 
buy is displayed on the BZX Book at $10.00 with a Super Aggressive 
instruction. There are no other orders resting on the BZX Book. An 
order to sell at $10.00 with a Post Only that is designated as a 
displayed order is entered. The incoming order to sell would execute 
against the resting order to buy at $10.00, the locking price, because 
the incoming order was designated as a displayed order. The order to 
buy would act as the liquidity remover and the order to sell would act 
as the liquidity adder. However, no execution would occur if the 
incoming order to sell was designated as a non-displayed order. 
Instead, the incoming order to sell would be posted non-displayed to 
the BZX Book at $10.00, its limit price, causing the BZX Book to be 
internally locked.

[[Page 35293]]

    Second, the Exchange proposes to enable a Post Only Order that is 
designated as a displayed order to execute against an equally priced 
non-displayed order with a Super Aggressive instruction where a non-
displayed order without a Super Aggressive instruction maintains time 
priority over the Super Aggressive eligible order at that price. In 
such case, the non-displayed, non-Super Aggressive order seeks to 
remain a liquidity provider and would cede time priority to the order 
with a Super Aggressive instruction, which is willing to act as a 
liquidity remover to facilitate the execution. The Exchange proposes to 
effect this change by modifying language in the description of the 
Super Aggressive instruction to state that if an order displayed on the 
BZX Book does not contain a Super Aggressive instruction and maintains 
higher priority than one or more Super Aggressive eligible orders, the 
Super Aggressive eligible order(s) with lower priority will not be 
converted and the incoming Post Only Order will be posted or cancelled 
in accordance with Exchange Rule 11.9(c)(6) or Rule 11.9(c)(7). Thus, 
an order with a Super Aggressive instruction, whether displayed on the 
Exchange or non-displayed, will never execute ahead of a displayed 
order that maintains time priority.
    The Super Aggressive instruction is designed to facilitate 
executions that would otherwise not occur due to Post Only Order 
requirement to not remove liquidity. Users entering orders with the 
Super Aggressive instruction tend to be fee agnostic because an order 
with a Super Aggressive instruction is willing to route to an away 
Trading Center displaying an equally or better priced order (i.e., pay 
a fee at such Trading Center). Meanwhile, an order without the Super 
Aggressive instruction elects to remain on the BZX Book as the 
liquidity provider until it may execute against an incoming order that 
would act as the liquidity remover. Therefore, enabling the Super 
Aggressive order to execute against an incoming order, regardless of 
whether a non-displayed order without a Super Aggressive instruction 
maintains priority, is consistent with the User's intent for both 
orders--one choses to remain the liquidity provider and forgo the 
execution while the other is willing to execute irrespective of whether 
it is the liquidity provider or remover. The Exchange notes that 
similar behavior occurs for orders utilizing the NDS instruction,\10\ 
which also seeks to engage in a liquidity swap against incoming Post 
Only Orders. The Exchange, however, has proposed to retain the existing 
limitation with respect to orders displayed on the BZX Book.
---------------------------------------------------------------------------

    \10\ See Exchange Rule 11.9(c)(12). See also Securities Exchange 
Act Release No. 83537 (June 28, 2018), (SR-CboeBZX-2018-042) 
(including an example where an order cedes execution priority to an 
order with an NDS instruction).
---------------------------------------------------------------------------

    The following example illustrates the operation of an order with a 
Super Aggressive instruction under the proposed rule change. Assume the 
NBBO is $10.00 by $10.04. There is a non-displayed Limit Order to buy 
resting on the BZX Book at $10.03 (``Order A''). A second non-displayed 
Limit Order to buy at $10.03 is then entered with a Super Aggressive 
instruction and has time priority behind the first Limit Order (``Order 
B''). A Post Only Order to sell priced at $10.03 is entered. Under 
current behavior, the incoming sell Post Only Order would not execute 
against Order A and would post to the BZX Book \11\ because the value 
of such execution against the resting buy order when removing liquidity 
does not equal or exceed the value of such execution if the order 
instead posted to the BZX Book and subsequently provided liquidity, 
including the applicable fees charged or rebates provided. Further, the 
incoming sell Post Only Order could not execute against Order B because 
Order A is on the BZX Book and maintains time priority over Order B. 
Under the proposed change, the incoming sell order, if it was 
designated as a displayed order, would execute against Order B and 
Order B would become the remover of liquidity while the incoming sell 
Post Only Order would become the liquidity provider. In such case, 
Order A cedes priority to Order B because Order A did not also include 
a Super Aggressive instruction \12\ and thus the User that submitted 
the order did not indicate the preference to be treated as the remover 
of liquidity in favor of an execution; instead, by not using Super 
Aggressive, a User indicates the preference to remain posted on the BZX 
Book as a liquidity provider. However, if the incoming sell order was 
priced at $10.02, it would receive sufficient price improvement to 
execute upon entry against all resting buy Limit Orders in time 
priority at $10.03.\13\ Also, if Order A was displayed on the BZX Book, 
no execution would occur, as the proposed change would only apply to 
non-displayed liquidity.
---------------------------------------------------------------------------

    \11\ Such order would be posted to the BZX Book in accordance 
with the Exchange's re-pricing instructions to comply with Rule 
610(d) of Regulation NMS. See Exchange Rules 11.9(g)(1) and (g)(2). 
See also 242 CFR 242.610(d).
    \12\ This behavior is consistent with the operation of the 
Exchange's NDS instruction. See supra note 10.
    \13\ The execution occurs here because the value of the 
execution against the buy order when removing liquidity exceeds the 
value of such execution if the order instead posted to the BZX Book 
and subsequently provided liquidity, including the applicable fees 
charged or rebates provided. See supra note 7.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \15\ in particular, in that it is 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 mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed changes to the Super Aggressive order instruction are 
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 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest. The Super 
Aggressive instruction is an optional feature that is intended to 
reflect the order management practices of various market participants. 
The proposal to limit the execution of an order with a Super Aggressive 
instruction to execute against incoming Post Only Orders that also are 
designated as displayed orders promotes just and equitable principles 
of trade because it enables Users to elect an order instruction 
consistent with their intent to execute only against displayed orders, 
in part, for best execution purposes. The amended Super Aggressive 
instruction would ensure executions at the best available price 
displayed on another Trading Center or against an incoming order that 
would have been displayed on the BZX Book. Users seeking to act as a 
liquidity remover once resting on the BZX Book and execute against an 
incoming Post Only Order that is also designated as a non-displayed 
order may attach the NDS instruction to their order.\16\
---------------------------------------------------------------------------

    \16\ See Exchange Rule 11.9(c)(12).
---------------------------------------------------------------------------

    The proposed change to the Super Aggressive instruction also 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system because it

[[Page 35294]]

is designed to facilitate executions that would otherwise not occur due 
to the Post Only Order requirement to not remove liquidity. The 
proposal enables non-displayed Super Aggressive orders to execute 
against an incoming order, regardless of whether another non-displayed 
order without a Super Aggressive instruction maintains priority 
consistent with the User's intent for both orders--one chooses to 
remain the liquidity provider and forgo the execution while the other 
is willing to execute irrespective of whether it is the liquidity 
provider or remover. The non-Super Aggressive order seeks to remain a 
liquidity provider and cede its time priority to the order with a Super 
Aggressive instruction, which is willing to act as a liquidity remover 
to facilitate the execution. It also enables an order without the Super 
Aggressive instruction to remain on the BZX Book as a liquidity 
provider, consistent with the expected operation of their resting 
order. The Exchange notes that similar behavior occurs for orders 
utilizing the NDS \17\ instruction, which also seeks to engage in a 
liquidity swap against incoming Post Only Orders. Finally, by limiting 
the proposed change to non-displayed orders, the proposal remains 
consistent with NDS and also retains existing functionality with 
respect to the handling of displayed orders.
---------------------------------------------------------------------------

    \17\ See supra note 10.
---------------------------------------------------------------------------

    For the reasons set forth above, the Exchange believes the proposal 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system, and, in general, protects 
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, as amended. On 
the contrary, the proposed changes to the Super Aggressive order 
instruction are intended to improve the usefulness of the instruction 
and to align its operation with the intention of the User, resulting in 
enhanced competition through increased usage and execution quality on 
the Exchange. Thus, to the extent the change is intended to improve 
functionality on the Exchange to encourage Users to direct their orders 
to the Exchange, the change is competitive, but the Exchange does not 
believe the proposed change will result in any burden on intermarket 
competition as it is a minor change to available functionality. The 
proposed changes to the Super Aggressive order instruction also promote 
intramarket competition because they will facilitate the execution of 
orders that would otherwise remain unexecuted consistent with the 
intent of the User entering the order, thereby increasing the efficient 
functioning of the Exchange. Further, the Super Aggressive order 
instruction will remain available to all Users in the same way it is 
today. Thus, Users can continue to choose between various optional 
order instructions, including Super Aggressive, NDS, and others, 
depending on the order handling they prefer the Exchange to utilize. 
Therefore, the Exchange does not believe the proposed rule change will 
result in any burden on intramarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act.

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

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

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \18\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of the filing. However, 
Rule 19b-4(f)(6)(iii) \20\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. In its filing, BZX requested that 
the Commission waive the 30-day operative delay so that the Exchange 
can implement the proposed rule change promptly after filing. The 
Exchange stated that the proposal to allow an order with a Super 
Aggressive instruction to execute against an incoming Post Only order 
only if the Post Only order is displayable is consistent with the use 
of the Super Aggressive instruction to access liquidity displayed on 
other Trading Centers. Further, according to the Exchange, users 
seeking to execute against incoming non-displayable Post Only orders 
will continue to be able to attach the NDS order instruction, as well 
as other order instructions that may permit such executions. In 
addition, the Exchange stated that the proposed priority change where 
non-displayed orders without a Super Aggressive instruction would cede 
priority to non-displayed orders with a Super Aggressive instruction is 
similar to, and consistent with, the Exchange's priority ceding 
functionality for orders with an NDS instruction and would facilitate 
executions that would otherwise not occur due to an incoming Post Only 
order's requirement not to remove liquidity. The Commission believes 
that waiver of the 30-day operative delay is consistent with the 
protection of investors and the public interest, as the proposed rule 
change relates to optional functionality that is consistent with 
existing functionality and, if selected by Exchange users, may enable 
them to better manage their orders and may increase order interaction 
on the Exchange. Accordingly, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change operative upon 
filing.\21\
---------------------------------------------------------------------------

    \20\ 17 CFR 240.19b-4(f)(6)(iii).
    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

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:

[[Page 35295]]

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-CboeBZX-2018-051 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2018-051. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2018-051, and should be 
submitted on or before August 15, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12) and (59).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15848 Filed 7-24-18; 8:45 am]
 BILLING CODE 8011-01-P