83 FR 60921 - Self-Regulatory Organizations; Cboe BZX 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 228 (November 27, 2018)

[Federal Register Volume 83, Number 228 (Tuesday, November 27, 2018)]
[Notices]
[Pages 60921-60924]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-25733]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84631; File No. SR-CboeBZX-2018-082]


Self-Regulatory Organizations; Cboe BZX 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 BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') 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 BZX Exchange, Inc. (the ``Exchange'' or ``BZX 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 BZX 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 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 BZX 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 60922]]

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 EDGX Exchange, Inc. (``EDGX or EDGX 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.\5\ 
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.\6\ As noted above, this handling is consistent with the 
definition of a market order.\7\ 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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    \5\ See Rule 21.1(d)(5).
    \6\ See proposed Rule 21.17(e)(2).
    \7\ 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 BZX 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.\8\
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    \8\ 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 BZX 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.\9\
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    \9\ 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,\10\ 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.\11\ Notwithstanding this 
provision, the proposed rule change would allow for the potential 
execution of sell Market Orders in no-bid series

[[Page 60923]]

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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    \10\ See Cboe Options Rule 6.13(b)(vi).
    \11\ 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.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 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).\15\
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    \15\ 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 \16\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 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) \18\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \19\ 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

[[Page 60924]]

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.\20\
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    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ 17 CFR 240.19b-4(f)(6)(iii).
    \20\ 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-CboeBZX-2018-082 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-2018-082. 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-2018-082 and should be submitted 
on or before December 18, 2018.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25733 Filed 11-26-18; 8:45 am]
 BILLING CODE 8011-01-P