83 FR 60530 - Self-Regulatory Organizations; Cboe EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Amend Its Rules Regarding How the System Handles Market Orders in Series With No Bid or No Offer

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 60530-60533]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-25734]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84632; File No. SR-CboeEDGX-2018-052]


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

November 20, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 16, 2018, Cboe EDGX Exchange, Inc. (the ``Exchange'' 
or ``EDGX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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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

    Cboe EDGX Exchange, Inc. (the ``Exchange'' or ``EDGX Options'') 
proposes to amend its Rules regarding how the System handles Market 
Orders in series with no bid or no offer.
    (additions are italicized; deletions are [bracketed])
* * * * *
    Rules of Cboe EDGX Exchange, Inc.
* * * * *
    Rule 21.17. Additional Price Protection Mechanisms and Risk 
Controls
    The System's acceptance and execution of orders and quotes are 
subject to the price protection mechanisms and risk controls in Rule 
21.16, this Rule 21.17 (related to all orders other than complex 
orders), Rule 21.20 (related to complex orders) and as otherwise set 
forth in the Rules. All numeric values established by the Exchange 
pursuant to this Rule will be maintained by the Exchange in publicly 
available specifications and/or published in a Regulatory Circular. 
Unless otherwise specified the price protections set forth in this 
Rule, including the numeric values established by the Exchange, may not 
be disabled or adjusted. The Exchange may share any of a User's risk 
settings with the Clearing Member that clears transactions on behalf of 
the User.
    (a)-(d) No change.
    (e) Market Orders in No-Bid (Offer) Series.
    (1) If the System receives a sell Market Order in a series after it 
is open for trading with an NBB of zero:
    (A) if the NBO in the series is less than or equal to $0.50, then 
the System converts the Market Order to a Limit Order with a limit 
price equal to the minimum trading increment applicable to the series 
and enters the order into the EDGX Options Book with a timestamp based 
on the time it enters the Book. If the order has a Time-in-Force of GTC 
or GTD that expires on a subsequent day, the order remains on the Book 
as a Limit Order until it executes, expires, or the User cancels it.
    (B) if the NBO in the series is greater than $0.50, then the System 
cancels or rejects the market order.
    (2) If the System receives a buy market order in a series after it 
is open for trading with an NBO of zero, the System cancels or rejects 
the market order.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

[[Page 60531]]

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 the 
parent company of Cboe Exchange, Inc. (``Cboe Options'') and Cboe C2 
Exchange, Inc., acquired the Exchange, Cboe EDGA Exchange, Inc. 
(``EDGA''), Cboe BZX Exchange, Inc. (``BZX or BZX Options''), and Cboe 
BYX Exchange, Inc. (``BYX'' and, together with C2, Cboe Options, EDGX, 
EDGA, and BZX, the ``Cboe Affiliated Exchanges''). The Cboe Affiliated 
Exchanges are working to align certain system functionality, retaining 
only intended differences between the Cboe Affiliated Exchanges, in the 
context of a technology migration. Thus, the proposals set forth below 
are intended to add certain functionality to the Exchange's System that 
is more similar to functionality offered by Cboe Options in order to 
ultimately provide a consistent technology offering for market 
participants who interact with the Cboe Affiliated Exchanges. Although 
the Exchange intentionally offers certain features that differ from 
those offered by its affiliates and will continue to do so, the 
Exchange believes that offering similar functionality to the extent 
practicable will reduce potential confusion for Users.
    The Exchange proposes to amend its Rules regarding how the System 
handles a market order when there is no bid or offer, as applicable, 
against which the order may execute. A market order is an order to buy 
or sell at the best price available at the time of execution.\3\ 
Currently, based on this definition, if the System receives a sell 
market order when there are no bids against which the order may 
execute, the System cancels the order. Similarly, if the System 
receives a buy market order when there are no offers against which the 
order may execute, the System cancels the order. The proposed rule 
change first codifies this handling of a buy market order when there 
national best offer (``NBO'') is zero, which is consistent with current 
functionality.\4\ As noted above, this handling is consistent with the 
definition of a market order.\5\ It provides protection for these 
orders to prevent execution at potentially erroneous prices when a buy 
order is submitted in a series with no offer.
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    \3\ See Rule 21.1(d)(5).
    \4\ See proposed Rule 21.17(e)(2).
    \5\ The proposed rule change is also consistent with Cboe 
Options functionality and C2 Rule 6.14(a)(1).
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    The Exchange also proposes to amend how the System handles sell 
Market Orders submitted in a series with no bid. Currently, if the 
System receives a Market Order to sell in a no-bid series, the System 
cancels or rejects the order. Pursuant to the proposed rule change, if 
the System receives a Market Order to sell in an option series with an 
NBB of zero:
    (1) if the NBO in the series is less than or equal to $0.50, then 
the System converts the Market Order to a limit order with a limit 
price equal to the minimum trading increment applicable to the series 
and enters the order into the EDGX Options Book with a timestamp based 
on the time it enters the Book. If the order has a Time-in-Force of GTC 
or GTD that expires on a subsequent day, the order remains on the Book 
as a Limit Order until it executes, expires, or the User cancels it.
    (2) if the NBO in the series is greater than $0.50, then the System 
cancels the Market Order.\6\
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    \6\ See proposed Rule 21.17(e)(1).
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    The proposed handling of sell Market Orders in no-bid series when 
the NBO in the series is greater than $0.50 is consistent with current 
functionality.
    The proposed rule change serves as a protection feature for 
investors in certain situations, such as when a series is no-bid 
because the last bid traded just prior to entry of the sell Market 
Order. The purpose of this threshold is to limit the automatic booking 
of Market Orders to sell at minimum increments to only those for true 
zero-bid options, as options in no-bid series with an offer of greater 
than $0.50 are less likely to be worthless.
    For example, if the System receives a sell Market Order in a no-bid 
series with a minimum increment of $0.01 and the NBO is $0.01, the 
System will convert the order to a Limit Order with a price of $0.01 
and enter it on the EDGX Options Book. Because the order will have a 
timestamp based on that time of Book entry, it will have priority 
behind any other Limit Orders to sell at $0.01 that were already 
resting on the Book. At that point, even if the series is no-bid 
because, for example, the last bid just traded and the limit order 
trades at $0.01, the next bid entered after the trade would not be 
higher than $0.01. If the order has a Time-in-Force of GTC or GTD that 
expires on a subsequent day, the order remains on the Book until it 
executes, expires, or the User cancels it.\7\
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    \7\ This functionality is consistent with the purpose of a GTC 
or GTD that expires on a subsequent trading day, which is to remain 
on the Book and available for execution until the User cancels it or 
until the time specified by the User. The Exchange notes that market 
orders with any other Time-in-Force would no longer be on the Book 
if they did not execute during the trading day.
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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 is the same as the threshold in the 
Cboe Options rule,\8\ and is less than the current width for the Market 
Order NBBO width protection, pursuant to which the System will reject 
or cancel back to the User a Market Order submitted to the System when 
the NBBO width is greater than 100% of the midpoint of the NBBO, 
subject to a $5 minimum and $10 maximum.\9\ Notwithstanding this 
provision, the proposed rule change would allow for the potential 
execution

[[Page 60532]]

of sell Market Orders in no-bid series with offers less than or equal 
to $0.50. If the threshold in the proposed rule change was higher, 
there would be increased risk of having a Market Order trade a minimum 
increment in a series that is not truly no-bid. The proposed rule 
change is substantially the same as Cboe Options Rule 6.13(b)(vi).
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    \8\ See Cboe Options Rule 6.13(b)(vi).
    \9\ See Rule 21.17(a); see also Exchange Notice, BZX and EDGX 
Options Exchanges Feature Pack 2--Update (December 14, 2017), 
available at http://markets.cboe.com/resources/release_notes/2017/Update-2-Cboe-BZX-and-EDGX-Options-Exchanges-Feature-Pack-2.pdf, for 
current settings. Pursuant to this protection, if the NBBO for a 
series was $0.00-$0.50, the width of the NBBO (0.50) is greater than 
100% of the midpoint (0.25); however, pursuant to the minimum, a 
market order would be accepted pursuant to this protection because 
the width is less than the 5.00 minimum. The proposed rule change 
provides additional price protection for market orders in no-bid 
series.
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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.\10\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \11\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \12\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 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).
    The proposed handling of buy Market Orders in no-offer series 
benefits investors, because it codifies current order handling and thus 
provides investors with more transparency in the Rules with respect to 
how the System will handle these orders. The proposed change is also 
substantially the same as C2 Rule 6.14(a)(1).
    When Cboe Options migrates to the same technology as that of the 
Exchange and other Cboe Affiliated Exchanges, Users of the Exchange and 
other Cboe Affiliated Exchanges will have access to similar 
functionality on all Cboe Affiliated Exchanges and similar language can 
be incorporated into the rules of all Cboe Affiliated Exchanges. As 
such, the proposed rule change would foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities and would remove impediments to and perfect the mechanism of 
a free and open market and a national market system.

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 buy or 
sell Market Orders submitted in no-offer or no-bid series, 
respectively. Additionally, the proposed rule change has no impact on 
sell Market Orders submitted in no-bid series with an offer of more 
than $0.50 or on buy Market Orders submitted in no-offer series, which 
orders will continue to be handled in the same manner as they are today 
(i.e. they will be cancelled or rejected). The Exchange does not 
believe the proposed rule change will impose any burden on intermarket 
competition, as it will provide sell Market Orders in true no-bid 
series with additional execution opportunities (either on the Exchange 
or at away markets pursuant to linkage rules) while providing an 
additional protection measure for sell Market Orders in no-bid series 
that may not be truly no-bid. As noted above, the proposed rule change 
has no impact on the handling of all other sell Market Orders in no-bid 
series or on buy Market Orders in no-offer series. The Exchange 
believes this price protection will allow Members to sell Market Orders 
with reduced fear of inadvertent exposure to excessive risk, which will 
benefit investors through increased liquidity for the execution of 
their orders.
    The proposed rule change related to the handling of buy Market 
Orders is consistent with current Exchange functionality and will have 
no impact on how those orders will handled, and it is substantially the 
same as C2 Rule 6.14(a)(1). The proposed rule change related to the 
handling of sell Market Orders is substantially the same as Cboe 
Options Rule 6.13(b)(vi).\13\
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    \13\ The Exchange notes other options exchanges have similar 
rules that convert sell market orders in no-bid series to limit 
orders with a price of a minimum increment if the offer in the 
series is below a certain threshold (the thresholds differ in those 
rules). See, e.g., Miami International Securities Exchange, LLC 
(``MIAX'') Rule 519(a)(1); and NASDAQ ISE, LLC (``ISE'') Rule 
713(b).
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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 foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \14\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6)\16\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii)\17\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public

[[Page 60533]]

interest. The Exchange has asked the Commission to waive the 30-day 
operative delay so that the proposed rule change may become effective 
and operative on November 29, 2018. The Exchange states that waiver of 
the operative delay will provide Users with additional flexibility to 
manage and display their orders and provide additional control over 
their executions on the Exchange as soon as possible. The Exchange 
further states that waiver of the operative delay will allow the 
Exchange to continue to strive towards a complete technology 
integration of the Cboe Affiliated Exchanges, with gradual roll-outs of 
new functionality to ensure the stability of the System. The Exchange 
notes that the proposed rule change is generally intended to codify and 
to add certain system functionality to the Exchange's System in order 
to provide a consistent technology offering for the Cboe Affiliated 
Exchanges. The Exchange further notes that a consistent technology 
offering will simplify the technology implementation changes and 
maintenance by Trading Permit Holders of the Exchange that are also 
participants on Cboe Affiliated Exchanges. The Commission believes that 
waiver of the 30-day operative delay is consistent with the protection 
of investors and the public interest. Therefore, the Commission hereby 
waives the 30-day operative delay and designates the proposed rule 
change as operative on November 29, 2018.\18\
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    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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: (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:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeEDGX-2018-052 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeEDGX-2018-052. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeEDGX-2018-052 and should be 
submitted on or before December 17, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25734 Filed 11-23-18; 8:45 am]
 BILLING CODE 8011-01-P