I. Introduction

On June 12, 2020, Cboe Exchange, Inc. (the “Exchange” or “CBOE”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to adopt Rule 5.24(e)(3) to make available an audio and video communication program to serve as a “virtual trading floor” in one or more option classes during regular trading hours if the physical trading floor is inoperable. The proposed rule change was published for comment in the Federal Register on June 29, 2020.^[3] On July 23, 2020, the Exchange filed Amendment No. 1 to the proposed rule change.^[4] On August 10, 2020, the Commission designated a longer period for Commission action on the proposed rule change, until September 27, 2020.^[5] On August 21, 2020, the Exchange filed Amendment No. 2 to the proposed rule change, which replaced and superseded the proposed rule change, as modified by Amendment No. 1.^[6] On September 21, 2020, the Commission published notice of Amendment No. 2 to the proposed rule change and instituted proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 2.^[7] On November 2, 2020, the Exchange filed Amendment No. 3 to the proposed rule change, which replaced and superseded the proposed rule change, as modified by Amendment No. 2.^[8] The Commission has received one comment letter on the proposal.^[9] The ( printed page 82561) Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 3, from interested persons and is approving the proposed rule change, as modified by Amendment No. 3, on an accelerated basis.

II. Description of the Proposed Rule Change, as Modified by Amendment No. 3

Rule 5.24(e) currently provides that if the Exchange trading floor becomes inoperable, the Exchange will continue to operate in a screen-based only environment using a floorless configuration of the system that is operational while the trading floor facility is inoperable. The Exchange would operate using that configuration only until the Exchange's trading floor facility became operational.^[10] Open outcry on the physical trading floor would not be available in the event the trading floor becomes inoperable.^[11] In the event that the trading floor becomes inoperable, CBOE Rule 5.24(e)(1) provides that trading will be conducted pursuant to all applicable system rules, except that open outcry rules would not be in force, including but not limited to the rules (or applicable portions) in Chapter 5, Section G,^[12] and that all non-trading rules of the Exchange would continue to apply.^[13]

On March 16, 2020, the Exchange suspended open outcry trading to help prevent the spread of COVID-19.^[14] The Exchange operated in an all-electronic configuration until it reopened its trading floor on June 15, 2020, at which time the Exchange returned to operating as a hybrid exchange with electronic and open outcry trading.^[15] However, given the uncertainty related to the ongoing pandemic, which includes the possibility of the Exchange having to close its trading floor again, and given the possibility that the Exchange's trading floor may be inoperable for other reasons in the future, the Exchange now has proposed to adopt Rule 5.24(e)(3) to permit it to make available an audio and video communication program to serve as a “virtual trading floor” in one or more option classes ^[16] if the physical trading floor is inoperable. The Exchange represents that if it were to determine to use the virtual trading floor in a more permanent manner for reasons other than business continuity purposes, the Exchange would submit a separate rule filing to the Commission.^[17]

In the program, the Exchange would create “virtual trading pits,” in each of which the Exchange would determine which options class(es) would be available for trading.^[18] TPHs would access virtual trading pits via “zones.” ^[19] Multiple classes may trade in a single virtual trading pit, available for trading in a single zone.^[20] The Exchange may determine to divide a virtual trading pit for a single class into multiple zones given the number of TPHs generally present in the trading pit for that class on the physical trading floor.^[21] The Exchange will assign each Floor Broker to a zone, and each Market-Maker may determine in which zone it will be present.^[22] In each zone, the Exchange will make visible an electronic blotter containing a running list of unexecuted orders that have been represented by Floor Brokers in that zone.^[23] The Exchange believes that the proposed configuration of the virtual trading pit is a practical replication of the structure of the physical trading floor that will allow market participants to interact in nearly the same manner as they do on the physical trading floor.^[24]

In a virtual trading pit, each TPH authorized to access the virtual trading floor (as described below) that enters the virtual trading pit would be visible to all other TPHs in that virtual trading pit.^[25] Additionally, all TPHs in a virtual trading pit may speak to each other through the proposed communication program.^[26] The Exchange states that this will provide the same communication capabilities TPHs generally have on the physical trading floor so that they may conduct open outcry trading on the virtual trading floor in the same manner as they do on the physical trading floor.^[27]

Proposed Rule 5.24(e)(3) states that if the Exchange makes a virtual trading floor available in a class, the rules in Rule 5.24(e)(1) will not apply to that class.^[28] All rules related to open outcry trading, including those in Chapter 5, Section G,^[29] will apply to open outcry trading on the virtual trading floor in the same manner as they apply to open outcry trading on the physical trading floor, except as the context otherwise requires and as set forth in proposed subparagraph (e)(3).^[30] Proposed subparagraph (e)(3)(A) lists certain terms in the rules related to open outcry trading on the physical trading floor that would be deemed to refer to corresponding terms related to open outcry trading on the virtual trading floor. Specifically:

• References in the rules to the “floor,” “trading floor,” and “Exchange floor” (and any other terms with the same meaning) will be deemed to refer to the “virtual trading floor.” ( printed page 82562)
• References in the rules to “pit,” “trading station,” and “trading post” (and any other terms with the same meaning) will be deemed to refer to a “virtual trading pit.”
• References in the rules to “physical presence” (any other terms with the same meaning) in a pit or on the trading floor will be deemed to refer to “presence” in a virtual trading pit or on the virtual trading floor, respectively.
• The terms “in-crowd market participant” and “ICMP” mean a Market-Maker, a Designated Primary Market-Maker (“DPM”) or Lead Market-Maker (“LMM”) with an allocation in a class, or a Floor Broker or PAR Official representing an order in a virtual pit on the virtual trading floor.
• References to an “on-floor DPM” or “on -floor LMM” will be deemed to refer to a DPM or LMM, respectively, in a virtual pit for its allocated class(es).

In addition, proposed Rule 5.24(e) states that the temporary rules set forth in Rule 5.24(e)(1) will not be applicable to trading in classes in which the Exchange makes a virtual trading floor available when the physical trading floor is inoperable. As noted above, the temporary rules in Rule 5.24(e)(1) are intended to make electronic trading more similar to open outcry trading when open outcry trading is not available by replicating certain features of open outcry trading in an electronic environment. However, the virtual trading floor will permit open outcry trading to continue in a separate environment if the physical trading floor becomes inoperable. Therefore, trading opportunities that are generally only available in open outcry trading will continue to be available on the virtual trading floor, making the temporary rules in Rule 5.24(e)(1) unnecessary when the virtual trading floor is available.

The Exchange represents that access to the virtual trading floor will be substantially similar to access to the physical trading floor.^[31] Proposed Rule 5.24(e)(3)(B) states that admission to the virtual trading floor is limited to TPHs, clerks,^[32] Exchange employees, and any other persons the Exchange authorizes admission to the virtual trading floor.^[33] The Exchange will provide access to the virtual trading floor to TPHs the Exchange has approved to perform a trading floor function (including Floor Brokers and Market-Makers).^[34] Each authorized individual will receive one log-in to the virtual trading floor and may be present in only one virtual trading pit/zone at one time.^[35] The Exchange will not require a minimum number of Market-Makers to be present for the virtual trading floor, which is consistent with the manner of operation on the physical trading floor.^[36]

Proposed Rule 5.24(e)(3)(C) states that TPHs may use any equipment ( e.g., any hardware or software related to a phone, system, or other device, including an instant messaging system, email system, or similar device) to access the virtual trading floor and do not need to register devices they use while on the virtual trading floor.^[37] TPHs must use Exchange-provided equipment to access PAR workstations while transacting on the virtual trading floor.^[38] The Exchange states that the requirements in Rule 5.81(a) would otherwise apply in the same manner to the virtual trading floor as it does to the physical trading floor (to the extent the context requires).^[39]

Proposed Rule 5.24(e)(3)(E) provides that the Exchange may determine to require any Market-Maker or Floor Broker in a virtual trading pit/zone that wants to trade against an order represented for execution to express its bid or offer in a chat available in the virtual trading pit.^[40] Additionally, chats will be visible to all participants in a zone and will not be permitted directly between individual participants.^[41]

Finally, if the virtual trading floor encounters issues that cause it to become unavailable, the Exchange will operate in an all-electronic configuration, pursuant to CBOE Rule 5.24(e), until the communication program is available again.^[42]

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 3, is consistent with the requirements of the Act,^[43] and the rules and regulations thereunder applicable to a national securities exchange.^[44] In particular, the Commission finds that the proposed rule change, as modified by Amendment No. 3, is consistent with Section 6(b)(5) of the Act,^[45] which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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.

As discussed above, CBOE proposes to adopt rules for a virtual trading floor for when the physical trading floor is inoperable. Currently, Rule 5.24(e) provides that, if the physical trading floor becomes inoperable, the Exchange will operate in all-electronic screen-based only environment. The proposed virtual trading floor is designed to facilitate open outcry trading on the Exchange when the physical trading floor is inoperable, which would allow trading on the Exchange to occur more similarly to physical floor trading than the current rules for all-electronic trading. Among other things, the Exchange believes that the proposed enhancement to its business continuity plans through the implementation of a virtual trading floor environment would ameliorate some of the features in open outcry trading that are difficult to replicate in an all-electronic environment, particularly the small segment of trading strategies that benefit from human interactions to negotiate pricing and to facilitate executions of large orders and high-risk and complicated trading strategies.^[46] The Exchange believes that the proposed rule change may facilitate continued trading of these orders if and when the trading floor is inoperable. As a result, the Exchange believes that providing continuous access to open outcry trading when the physical trading floor becomes inoperable will remove impediments to a free and open market and will ultimately benefit investors, particularly those executing high-risk and complex trading strategies.

The Commission finds that the proposed implementation of the virtual trading floor for business continuity purposes is consistent with the Act. The Commission believes that the proposed virtual trading floor will allow the Exchange to provide a trading environment to TPHs that is reasonably designed to facilitate open outcry trading when circumstances prevent physical human interaction. The Commission notes that the Exchange has conducted several town halls with TPHs on the virtual trading floor and made the functionality available for testing so that the Exchange will be ready to implement it if necessary. The Exchange states that it has received positive feedback from TPHs regarding the tool and will continue to make updates as necessary and appropriate in response to member feedback.^[47] As a result, the Commission finds that the virtual trading floor is reasonably designed to allow continuous access to open outcry trading, which will remove impediments to a free and open market and will ultimately benefit investors, particularly those facilitating executions of large orders and complex trading strategies.

Additionally, the design of the virtual trading zones to closely replicate the arrangement of the physical trading floor will facilitate the rollout of the virtual trading floor to TPHs and help remove impediments to a free and open market when the physical trading floor is inoperable. Virtual trading zones will provide flexibility for a Market-Maker to enter and exit zones for particular trading interest, which may make it easier for a Market-Maker to trade with Floor Brokers that are otherwise too far away on the physical trading floor for them to trade (as movement inside a trading pit is practically not possible, and is currently not permitted while the physical trading floor operates in a modified state).

Furthermore, the Commission finds that the design of the virtual trading floor will help prevent fraudulent and manipulative acts and practices, and promote just and equitable principles of trade by requiring that the Rules and regulatory requirements apply in the substantially the same manner as open outcry of the physical trading floor. Specifically, the Exchange represents that all Rules related to open outcry trading, including those in Chapter 5, Section G, will apply to open outcry trading on the virtual trading floor.^[48] In addition, all risk controls and price protection mechanisms in Rule 5.34 that currently apply to open outcry trading will apply in the same manner on the virtual trading floor.^[49] TPHs participating on the virtual trading floor will be subject to the same regulatory requirements on the virtual trading floor as they are on the physical trading floor, including those set forth in Chapters 8 and 9 of the Rules.^[50] Orders on the virtual trading floor will be systematized and represented, and transactions reported, in the same manner as on the physical trading floor.^[51] CBOE's Regulatory Division staff will continue to utilize preexisting floor surveillances to surveil for the activity occurring on the virtual trading floor and will access the virtual trading floor as necessary and appropriate, including records of any chats, participant logs, and any other records related to the virtual trading floor consistent with the Exchange's record retention obligations under the Act.^[52] Finally, Floor Officials will also have access to all zones in the virtual trading floor and will retain the same authority to act in the virtual trading floor as they do on the physical trading floor.^[53]

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 3 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 torule-comments@sec.gov. Please include File Number SR-CBOE-2020-055 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.

V. Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 3

The Commission finds good cause for approving the proposed rule change, as amended by Amendment No. 3, prior to the 30th day after the date of publication of notice in the Federal Register . Amendment No. 3 provided additional detail and clarity on several points.^[54] Specifically, the Exchange revised the proposal to provide additional description on several aspects of the proposal, including operation of the multiple “zones” in the virtual trading floor, interaction of Floor Brokers and Maker Makers in the virtual trading floor, distribution and use of PAR workstations for purposes of participating in the virtual trading floor, market participant outreach and testing of the virtual trading floor, use of chat functionality in the virtual trading floor, regulatory surveillance of the virtual trading floor, and make technical and conforming changes. Amendment No. 3 does not change the substance of the proposed rule change, but merely adds detail and clarification to several items of the proposal. Accordingly, the Commission finds good cause for approving the proposed rule change, as amended, on an accelerated basis, pursuant to Section 19(b)(2) of the Act.^[55]

VI. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[56] that the proposed rule change, as modified by Amendment No. 3 (SR-CBOE-2020-055), be, and hereby is, approved on an accelerated basis.

All submissions should refer to File Number SR-CBOE-2020-055. 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 ( printed page 82564) 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-CBOE-2020-055 and should be submitted by January 8, 2021. Rebuttal comments should be submitted by January 22, 2021.