83 FR 60516 - Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Its Rules Regarding How the System Handles Market Orders in Series With No Bid or No Offer

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 227 (November 26, 2018)

[Federal Register Volume 83, Number 227 (Monday, November 26, 2018)]
[Notices]
[Pages 60516-60519]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-25739]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84637; File No. SR-C2-2018-023]


Self-Regulatory Organizations; Cboe C2 Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
To Amend Its Rules Regarding How the System Handles Market Orders in 
Series With No Bid or No Offer

November 20, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 60517]]

notice is hereby given that on November 6, 2018, Cboe C2 Exchange, Inc. 
(the ``Exchange'' or ``C2'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. The Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe C2 Exchange, Inc. (the ``Exchange'' or ``C2'') proposes to 
amend its Rules regarding how the System handles market orders in 
series with no bid or no offer.
    (additions are italicized; deletions are [bracketed])
* * * * *
    Rules of Cboe C2 Exchange, Inc.
* * * * *
    Rule 6.14. Order and Quote Price Protection Mechanisms and Risk 
Controls
    The System's acceptance and execution of orders and quotes pursuant 
to the Rules, including Rules 6.11 through 6.13, are subject to the 
following price protection mechanisms and risk controls, as applicable.
    (a) Simple Orders.
    (1) Market Orders in No-Bid (Offer) Series. [If a User submits a 
sell (buy) market order to the System after a series is open when there 
is no NBB (NBO), the System cancels or rejects the market order.]
    (A) If the System receives a sell market order in a series after it 
is open for trading with an NBB of zero:
    (i) if the NBO in the series is less than or equal to $0.50, then 
the System converts the market order to a limit order with a limit 
price equal to the minimum trading increment applicable to the series 
and enters the order into the Book with a timestamp based on the time 
it enters the Book. If the order has a Time-in-Force of GTC or GTD that 
expires on a subsequent day, the order remains on the Book as a limit 
order until it executes, expires, or the User cancels it.
    (ii) if the NBO in the series is greater than $0.50, then the 
System cancels or rejects the market order.
    (B) If the System receives a buy market order in a series after it 
is open for trading with an NBO of zero, the System cancels or rejects 
the market order.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    In 2016, the Exchange's parent company, Cboe Global Markets, Inc. 
(formerly named CBOE Holdings, Inc.) (``Cboe Global''), which is also 
the parent company of Cboe Exchange, Inc. (``Cboe Options'') and Cboe 
C2 Exchange, Inc., acquired the Cboe EDGA Exchange, Inc. (``EDGA''), 
Cboe EDGX Exchange, Inc. (``EDGX or EDGX Options''), Cboe BZX Exchange, 
Inc. (``BZX'' or ``BZX Options''), and Cboe BYX Exchange, Inc. (``BYX'' 
and, together with C2, Cboe Options, EDGX, EDGA, and BZX, the ``Cboe 
Affiliated Exchanges''). The Cboe Affiliated Exchanges are working to 
align certain system functionality, retaining only intended differences 
between the Cboe Affiliated Exchanges, in the context of a technology 
migration. Thus, the proposals set forth below are intended to add 
certain functionality to the Exchange's System that is more similar to 
functionality offered by Cboe Options in order to ultimately provide a 
consistent technology offering for market participants who interact 
with the Cboe Affiliated Exchanges. Although the Exchange intentionally 
offers certain features that differ from those offered by its 
affiliates and will continue to do so, the Exchange believes that 
offering similar functionality to the extent practicable will reduce 
potential confusion for Users.
    The Exchange proposes to amend its Rules regarding how the System 
handles a sell market order when there is no bid against which the 
order may execute. A market order is an order to buy or sell at the 
best price available at the time of execution.\5\ Currently, pursuant 
to Rule 6.14(a)(1), if a User submits a sell market order to the System 
after a series is open when there is no national best bid (``NBB''), 
the System cancels or rejects the market order.\6\ The Exchange 
proposes to amend how the System handles sell market orders submitted 
in a series with no bid. Specifically, if the System receives a market 
order to sell in an option series with an NBB of zero:
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    \5\ See Rule 1.1, definition of order.
    \6\ Current Rule 6.14(a)(1) also provides that if a User submits 
a buy market order to the System after a series is open when there 
is no national best offer (``NBO''), the System cancels or rejects 
the market order. The proposed rule change does not modify this 
handling, and moves this provision (with nonsubstantive changes) to 
proposed Rule 6.14(a)(1)(B).
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    (1) if the NBO in the series is less than or equal to $0.50, then 
the System converts the market order to a limit order with a limit 
price equal to the minimum trading increment applicable to the series 
and enters the order into the Book with a timestamp based on the time 
it enters the Book. If the order has a Time-in-Force of GTC or GTD that 
expires on a subsequent day, the order remains on the Book as a Limit 
Order until it executes, expires, or the User cancels it.
    (2) if the NBO in the series is greater than $0.50, then the System 
cancels the market order.\7\
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    \7\ See proposed Rule 6.14(a)(1).
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    The proposed rule change serves as a protection feature for 
investors in certain situations, such as when a series is no-bid 
because the last bid traded just prior to entry of the sell market 
order. The purpose of this threshold is to limit the automatic booking 
of market orders to sell at minimum increments to only those for true 
zero-bid options, as options in no-bid series with an offer of greater 
than $0.50 are less likely to be worthless.
    For example, if the System receives a sell market order in a no-bid 
series with a minimum increment of $0.01 and the NBO is $0.01, the 
System will convert the order to a limit order with a price of $0.01 
and enter it on the Book. Because the order will have a timestamp based 
on that time of Book entry, it will have priority behind any other 
limit orders to sell at $0.01 that were already resting on the Book. At 
that point, even if the series is no-bid because, for

[[Page 60518]]

example, the last bid just traded and the limit order trades at $0.01, 
the next bid entered after the trade would not be higher than $0.01. If 
the order has a Time-in-Force of GTC or GTD that expires on a 
subsequent day, the order remains on the Book as a Limit Order until it 
executes, expires, or the User cancels it.\8\
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    \8\ This functionality is consistent with the purpose of a GTC 
or GTD that expires on a subsequent trading day, which is to remain 
on the Book and available for execution until the User cancels it or 
until the time specified by the User. The Exchange notes that market 
orders with any other Time-in-Force would no longer be on the Book 
if they did not execute during the trading day.
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    However, if the System receives a sell market order in a no-bid 
series with a minimum increment of $0.01 and the NBO is $1.20 (because, 
for example, the last bid of $1.00 just traded and a new bid has not 
yet populated the disseminated quote), the System will cancel or reject 
the order. Cancellation prevents an anomalous execution price, since 
the next bid entered in that series is likely to be much higher than 
$0.01. It would be unfair to the User to let is market order trade as a 
limit order for $0.01 because, for example, the firm submitted the 
order during the brief time when there were no disseminated bids in a 
series trading significantly higher than the minimum increment.
    The Exchange believes the threshold of $0.50 is reasonable. The 
Exchange notes that this threshold the same as the threshold in the 
Cboe Options rule,\9\ and is less than the current width for the market 
order NBBO width protection, pursuant to which the System will reject 
or cancel back to the User a market order submitted to the System when 
the NBBO width is greater than 100% of the midpoint of the NBBO, 
subject to a $5 minimum and $10 maximum.\10\ Notwithstanding this 
provision, the proposed rule change would allow for the potential 
execution of sell market orders in no-bid series with offers less than 
or equal to $0.50. If the threshold in the proposed rule change was 
higher, there would be increased risk of having a market order trade a 
minimum increment in a series that is not truly no-bid. The proposed 
rule change is substantially the same as Cboe Options Rule 6.13(b)(vi).
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    \9\ See Cboe Options Rule 6.13(b)(vi).
    \10\ See Rule 21.17(a); see also Exchange Notice, BZX and EDGX 
Options Exchanges Feature Pack 2--Update (December 14, 2017), 
available at http://markets.cboe.com/resources/release_notes/2017/Update-2-Cboe-BZX-and-EDGX-Options-Exchanges-Feature-Pack-2.pdf, for 
current settings. Pursuant to this protection, if the NBBO for a 
series was $0.00-$0.50, the width of the NBBO (0.50) is greater than 
100% of the midpoint (0.25); however, pursuant to the minimum, a 
market order would be accepted pursuant to this protection because 
the width is less than the 5.00 minimum. The proposed rule change 
provides additional price protection for market orders in no-bid 
series.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\11\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    In particular, the Exchange believes the proposed rule change 
regarding the handling of sell Market Orders in no-bid series assists 
with the maintenance of fair and orderly markets and protects investors 
and the public interest, because it provides for automated handling of 
orders in series that are likely truly no-bid, ultimately resulting in 
more efficient executions of these orders. Additionally, the proposed 
rule change prevents executions of sell market orders in no-bid series 
with higher offers at potentially extreme prices in series that are not 
truly no-bid. The Exchange believes this threshold appropriately 
reflects the interests of investors, as options in no-bid series with 
offers higher than $0.50 are less likely to be worthless than no-bid 
series with offers no higher than $0.50, and cancelling the orders will 
prevent execution of these orders at unfavorable prices. The Exchange 
also believes the $0.50 threshold promotes fair and orderly markets, 
because sell market orders in no-bid series with offers of $0.50 or 
less are likely to be individuals seeking to close out a worthless 
position, for which the proposed automatic handling is appropriate. The 
proposed change is also substantially the same as Cboe Options Rule 
6.13(b)(vi).
    When Cboe Options migrates to the same technology as that of the 
Exchange and other Cboe Affiliated Exchanges, Users of the Exchange and 
other Cboe Affiliated Exchanges will have access to similar 
functionality on all Cboe Affiliated Exchanges and similar language can 
be incorporated into the rules of all Cboe Affiliated Exchanges. As 
such, the proposed rule change would foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities and would remove impediments to and perfect the mechanism of 
a free and open market and a national market system.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule changes will impose any burden on intramarket 
competition, because it will apply in the same manner to all sell 
market orders submitted in no-offer or no-bid series, respectively. 
Additionally, the proposed rule change has no impact on sell market 
orders submitted in no-bid series with an offer of more than $0.50, 
which orders will continue to be handled in the same manner as they are 
today (i.e. they will be cancelled or rejected). The Exchange does not 
believe the proposed rule change will impose any burden on intermarket 
competition, as it will provide sell market orders in true no-bid 
series with additional execution opportunities (either on the Exchange 
or at away markets pursuant to linkage rules) while providing an 
additional protection measure for sell market orders in no-bid series 
that may not be truly no-bid. The Exchange believes this price 
protection will allow Trading Permit Holders to submit sell market 
orders with reduced fear of inadvertent exposure to excessive risk, 
which will benefit investors through increased liquidity for the 
execution of their orders.
    The proposed rule change is substantially the same as Cboe Options 
Rule 6.13(b)(vi).\14\
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    \14\ The Exchange notes other options exchanges have similar 
rules that convert sell market orders in no-bid series to limit 
orders with a price of a minimum increment if the offer in the 
series is below a certain threshold (the thresholds differ in those 
rules). See, e.g., Miami International Securities Exchange, LLC 
(``MIAX'') Rule 519(a)(1); and NASDAQ ISE, LLC (``ISE'') Rule 
713(b).

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[[Page 60519]]

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

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

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

    Because the 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) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \18\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become effective and operative on November 29, 2018. 
The Exchange states that waiver of the operative delay will provide 
Users with additional flexibility to manage and display their orders 
and provide additional control over their executions on the Exchange as 
soon as possible. The Exchange further states that waiver of the 
operative delay will allow the Exchange to continue to strive towards a 
complete technology integration of the Cboe Affiliated Exchanges, with 
gradual roll-outs of new functionality to ensure the stability of the 
System. The Exchange notes that the proposed rule change is generally 
intended to codify and to add certain system functionality to the 
Exchange's System in order to provide a consistent technology offering 
for the Cboe Affiliated Exchanges. The Exchange further notes that a 
consistent technology offering will simplify the technology 
implementation changes and maintenance by Trading Permit Holders of the 
Exchange that are also participants on Cboe Affiliated Exchanges. The 
Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Therefore, the Commission hereby waives the 30-day operative delay and 
designates the proposed rule change as operative on November 29, 
2018.\19\
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    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6)(iii).
    \19\ 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).
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    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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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 change 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:

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-C2-2018-023 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-C2-2018-023. 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. All submissions should refer to 
File Number SR-C2-2018-023 and should be submitted on or before 
December 17, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25739 Filed 11-23-18; 8:45 am]
 BILLING CODE 8011-01-P