Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Regarding Price Protections and Risk Controls

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”), and Rule 19b-4 thereunder, notice is hereby given that on September 5, 2019, Cboe Exchange, Inc. (the “Exchange” or “Cboe Options”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule change as described in Items I, II, and III 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 and Rule 19b-4(f)(6) thereunder. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

Cboe Exchange, Inc. (the “Exchange” or “Cboe Options”) proposes to amend the Exchange's Rules regarding price protections and risk controls, and moves those Rules from the currently effective Rulebook (“current Rulebook”) to the shell structure for the Exchange's Rulebook that will become effective upon the migration of the Exchange's trading platform to the same system used by the Cboe Affiliated Exchanges (as defined below) (“shell Rulebook”). The text of the proposed rule change is provided in Exhibit 5.

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 C2 Exchange, Inc. (“C2”), acquired 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 Cboe Options, C2, 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. Cboe Options intends to migrate its trading platform to the same system used by the Cboe Affiliated Exchanges, which the Exchange expects to complete on October 7, 2019. In connection with this technology migration, the Exchange has a shell Rulebook that resides alongside its current Rulebook, which shell Rulebook will contain the Rules that will be in place upon completion of the Cboe Options technology migration.

The Exchange proposes to harmonize its rules in connection with the risk control and price protection functions on the Exchange to that of its affiliated Exchanges. Specifically, the Exchange proposes to consolidate all order and quote price protection mechanisms and risk controls into a single rule, proposed Rule 5.34 (and subsequently delete the relevant price protection mechanism and risk control provisions in current Rules 6.12, 6.13, 6.14, 6.23C, and 6.53C.08 upon migration). Proposed Rule 5.34 is substantively identical to C2 Rule 6.14, as well as substantially the same as corresponding EDGX Options Rules 21.16, 21.17 and 22.11. In line with C2 Rule 6.14, proposed Rule 5.34 categorizes these mechanisms and controls as ones applicable to simple orders (proposed paragraph (a)), complex orders (proposed paragraph (b)), and all (i.e. simple and complex) orders (proposed paragraph (c)). The following table identifies the Exchange's current price protection mechanisms and risk controls, the current Exchange Rule, the proposed Exchange Rule, the corresponding C2 Rule and EDGX rule, where applicable, and any proposed changes, if any. The Exchange notes that much of the proposed functionality is substantially similar to the current price protections and risk controls functionality. The Exchange also proposes to make non-substantive changes by updating cross-references to rules in the shell Rulebook and rules not yet in the shell Rulebook but that in the Exchange intends to move to the shell Rulebook, updating Exchange-specific references for consistency throughout the rules, and, as a result of consolidating and conforming the proposed rule to the rules of affiliated options exchanges, simplifies, clarifies, and updates the rule text to read in plain English, and reformats the paragraph lettering and/or numbering.

The price protection mechanisms and risk controls under proposed Rule 5.34 are applicable to the System's acceptance and execution of orders and quotes pursuant to the Rules, including Rules 5.31 through 5.33, and to and orders routed to the Exchange's Public Automated Routing System (“PAR”) pursuant to Rule 5.82. The Exchange notes that the proposed rule's inclusion of PAR orders is an intended difference made between its proposed rule and C2's rule, as PAR is unique to the Exchange. Upon migration, all orders routed to PAR will also be subject to price protection mechanisms and risk controls. This will provide the same protections for User's PAR routed order as for User's order and quotes sent through and executed by the System. Currently, PAR functions outside of the System, therefore not all risk controls are currently applicable to PAR orders. Upon migration, PAR orders will be entered into the System in the same manner as all other orders, and will route to PAR per User instruction, after going through the System, therefore, the same price protection mechanisms and risk controls will apply.

The proposed rule change also deletes the mechanisms related to execution of quotes that lock or cross the NBBO and quotes inverting the NBBO (current Rule 6.14(b) and (c)). The Exchange's current quote functionality will be replaced with bulk message functionality upon migration; however, orders and bulk messages (the equivalent of current quotes) submitted by Market-Makers will be subject to the same protections, except for those that do not apply to bulk messages (e.g., for market orders in no-bid (offer) series, market order NBBO width and drill-through protections, limit order fat finger checks, and daily risk limits) as described above.

Under the current C2 and EDGX debit/credit price reasonability check (see C2 Rule 6.14(b)(3) and EDGX Rule 21.17(b)(3)), the System only pairs calls (puts) if they have the same expiration date but different exercise prices or the same exercise price but different expiration dates. Under the Exchange's current debit/credit reasonability check, with respect to pairs with different expiration the System pairs of calls (puts) with different expiration dates if the exercise price for the call (put) with the farther expiration date is lower (higher) than the exercise price for the nearer expiration date in addition to those with different expiration dates and the same exercise price. The proposed rule change amends this check to pair orders in the same manner as C2 and EDGX, which is to pair calls (puts) if they have the same expiration date but different exercise prices or the same exercise price but different expiration dates. Additionally, the proposed rule change deletes the exception for complex orders with European-style exercise. This aligns with the corresponding rules of C2 and EDGX and the Exchange no longer believes this exception is necessary and will expand this check to index options with all exercise styles.

The proposed Risk Monitor Mechanism is identical to the current functionality on C2 and substantively the same as the functionality currently available on EDGX. Because there will no longer be separate order and quote functionality on the Exchange following the technology migration, there will no longer be separate mechanisms to monitor entry and execution rates, as there are on the Exchange today. Each User may establish limits for the following parameters in the Exchange's counting program. The System counts each of the following within a class (“class limit”) and across all classes for an EFID (“firm limit”) and/or across all classes for a group of EFIDs (“EFID Group”) (“EFID Group limit”) over a User-established time period (“interval”) on an absolute basis for a trading day (“absolute limits”):

(i) Number of contracts executed (“volume”);

(ii) notional value of executions (“notional”);

(iii) number of executions (“count”);

(iv) number of contracts executed as a percentage of number of contracts outstanding within an Exchange-designated time period or during the trading day, as applicable (“percentage”), which the System determines by calculating the percentage of a User's outstanding contracts that executed on each side of the market during the time period or trading day, as applicable, and then summing the series percentages on each side in the class; and

(v) number of times the limits established by the parameters under the above-listed are reached (“risk trips”).

Also, when the System determines the volume, notional, count, percentage, or risk trips limits have been reached:

(i) a User's class limit within the interval or the absolute limit for the class, the Risk Monitor Mechanism cancels or rejects such User's orders or quotes in all series of the class and cancels or rejects any additional orders or quotes from the User in the class until the counting program resets (as described below).

(ii) a User's firm limit within the interval or the absolute limit for the firm, the Risk Monitor Mechanism cancels or rejects such User's orders or quotes in all classes and cancels or rejects any additional orders or quotes from the User in all classes until the counting program resets (as described below).

(iii) a User's EFID Group limit within the interval or the absolute limit for the EFID Group, the Risk Monitor Mechanism cancels or rejects such User's orders or quotes in all classes and cancels or rejects any additional orders or quotes from any EFID within the EFID Group in all classes until the counting program resets (as described below).

The Risk Monitor Mechanism will also attempt to cancel or reject any orders routed away to other exchanges. The System processes messages in the order in which they are received. Therefore, it will execute any marketable orders or quotes that are executable against a User's order or quote and received by the System prior to the time the Risk Monitor Mechanism is triggered at the price up to the size of the User's order or quote, even if such execution results in executions in excess of the User's parameters. The System will not accept new orders or quotes from a User after a class limit is reached until the User submits an electronic instruction to the System to reset the counting program for the class. The System will not accept new orders or quotes from a User after an EFID limit or EFID Group limit is reached until the User manually notifies the Trade Desk to reset the counting program for the firm, unless the User instructs the Exchange to permit it to reset the counting program by submitting an electronic message to the System. The Exchange may restrict the number of User class and firm resets per second. The System counts executed COA responses as part of the Risk Monitor Mechanism. The System counts individual trades executed as part of a complex order when determining whether the volume, notional, count, or risk trips limit has been reached. The System counts the percentage executed of a complex order when determining whether the percentage limit has been reached. In addition, a User may also engage the Risk Monitor Mechanism to cancel resting bids and offers, as well as order set forth in the kill switch protection provision. The Risk Monitor Mechanism providers Users with similar ability to manage their order and execution risk to the quote risk monitor and rate checks currently available on the Exchange, and merely uses different parameters and modifies the functionality to conform the new System to that of C2 and EDGX upon migration.

With respect to various price protections and risk controls in current Rules 6.12.01, 6.13, and 6.53C.08, the Exchange has the authority to provide intraday relief by widening or inactivating one or more of the parameter settings for the mechanisms in those rules. This authority is included in proposed Interpretation and Policy .01, to provide this flexibility for all price protections and risk controls for which the Exchange sets parameters, providing the Exchange with flexibility it believes appropriate given previous experience with risk controls. This is consistent with corresponding C2 Rule 6.14.01. The Exchange will continue to make and keep records to document all determinations to grant intraday relief, and periodically review these determinations for consistency with the interest of a fair and orderly market.

The proposed rule change makes a non-substantive change in moving the provision regarding the Exchange's ability to share User-designated risk settings in the System with a Clearing Trading Permit Holder that clears Exchange transactions on behalf of the User from the introduction of current Rule 6.14 to proposed Rule 5.34.02. Also, the proposed change makes non-substantive changes in that it updates all provisions to account for “User” as opposed to Trading Permit Holder (“TPH”), which is consistent with the definition under Rule 1.1 the shell Rulebook, and the use of the term throughout the Exchange Rules upon migration.

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. Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 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) requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.

The proposed rule change is generally intended to add or align certain System functionality in connection with price protection mechanisms and risk controls with functionality currently offered by C2 and EDGX in order to provide a consistent technology offering for the Cboe Affiliated Exchanges. A consistent technology offering, in turn, will simplify the technology implementation, changes and maintenance by Users of the Exchange that are also participants on Cboe Affiliated Exchanges. The proposed rule changes would also provide Users with access to functionality that is generally available on markets other than the Cboe Affiliated Exchanges and may result in the efficient execution of such orders and will provide additional flexibility as well as increased functionality to the Exchange's System and its Users. The proposed rule change seeks to provide greater harmonization between the rules of the Cboe Affiliated Exchanges, which would result in greater uniformity and less burdensome and more efficient regulatory compliance. 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. The Exchange also believes that consistent rules will increase the understanding of the Exchange's operations for Trading Permit Holders that are also participants on the Cboe Affiliated Exchanges, thereby contributing to the protection of investors and the public interest. The proposed rule change does not propose to implement new or unique functionality that has not been previously filed with the Commission or is not available on Cboe Affiliated Exchanges. The Exchange notes that the proposed rule text mirrors C2 Rules, save for intended differences that account for PAR (unique to the Exchange), Exchange-specific cross-references and references to certain terms (i.e. User throughout the proposed rule).

Overall, the Exchange believes the additional and enhanced price protection mechanisms and risk controls will protect investors and the public interest and maintain fair and orderly markets by mitigating potential risks associated with market participants entering orders and quotes at unintended prices, and risks associated with orders and quotes trading at prices that are extreme and potentially erroneous, which may likely have resulted from human or operational error. The Exchange notes that the proposed rule change is substantially similar to the current Cboe Options Rules, and, while the Exchange currently offers many similar protections and controls, as described above, the Exchange believes Users will benefit from the additional functionality that will be available following the technology migration.

As indicated in the table above, the proposed price protection and risk control mechanisms no longer establish outer boundaries or limits to the levels at which mechanisms are set (save for the proposed no-bid provision, noted below), but instead, the proposed rule change amends the price protection mechanisms and risk controls to account for Exchange-determined and/or User-determined buffer or default amounts. The Exchange believes this removes impediments to and perfects the mechanism of a free and open market and national market system because it affords the Exchange and Users reasonable and necessary flexibility to establish and modify the default parameters, which, in turn, protects investors and the public interest, and maintains a fair and orderly market. The Exchange notes any Exchange-determined parameters will always be available on the Exchange's website via specification or Notice. The Exchange also believes the proposed rule change to the no-bid provisions, that the System cancels or rejects a market order if there is no-bid and the best offer is less than or equal to $0.50, as well as a market order where there is no-offer, is designed to protect User's as it will provide protection for market orders to prevent execution at potentially erroneous prices when a market order is entered in a series with no bid or offer.

The proposed drill-through protections for complex orders removes impediments to and perfect the mechanism of a free and open market and national market system and facilitates transactions in securities by adding detail to the rules regarding complex order price protections. Particularly, by adding that a COA-eligible order would initiate a COA at the drill-through price because the prices for complex strategy executions may be subject to the drill-through protection and permitting an order that is not currently executable due to Legging restrictions to remain on the COB if the SBBO changes during the set time-period will provide additional execution opportunities, for Users' orders participating in the COA and/or prior to cancellation.

The proposed provision in connection with the Risk Monitor Mechanism will not alter the function of this mechanism for market participants as it provides Users with the ability to manage their order and execution risk to the quote risk monitor and rate checks similar to that which is currently available on the Exchange, and merely uses different parameters and modifies the functionality to conform the new System to that of C2 and EDGX upon migration. The Exchange also notes that this functionality is optional; it is User-enabled and the parameters are User-established.

The proposed rule change also removes functionality, and reference to such functionality, that will not exist upon migration in order to align the Exchange's System with that of its affiliated options exchanges, which will serve to remove impediments to and perfect the mechanism of a free and open market and national market system by providing market participants with rules that accurately reflect functionality post-migration and effectively harmonize Exchange functionality with that of C2 and EDGX. Moreover, the Exchange does not believe that the proposed change that removes functionality that will no longer be available upon migration will impact investors because the proposed change provides substantially similar alternative mechanisms and controls that result in the same protections as current Exchange functionality. The Exchange believes that the proposed rule provides a full suite of price protection mechanisms and risk controls, the same as those currently in effect on its affiliated options exchanges, which will sufficiently mitigate risks associated with market participants entering orders and quotes at unintended prices, and risks associated with orders and quotes trading at prices that are extreme and potentially erroneous, as a likely result of human or operational error. The Exchange also notes that a majority of the proposed price protection mechanisms and risks controls are voluntary and/or User-determined, which benefits market participants by providing Users with additional control and flexibility in connection with their orders.

As stated, the Exchange notes the proposed price protection mechanisms and risk controls provisions do not present any new or unique rules or functionality for market participants as the proposed rule is substantially similar to the Exchange's current rules, identical to C2 Rule 6.14, as well as substantively the same as corresponding EDGX rules and technical specifications, as discussed above. The proposed rule change makes various non-substantive changes throughout the rules by updating cross-references and Exchange-specific terms, and by means of conforming language to C2 Rule 6.14, as well as corresponding EDGX rules, that will protect investors and benefit market participants as these changes simplify or clarify rules, delete duplicative rule provisions, conform paragraph numbering and lettering throughout the rules, and use plain English.

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 reiterates that the proposed rule change is being proposed in the context of the technology integration of the Cboe Affiliated Exchanges. Thus, the Exchange believes this proposed rule change is necessary to permit fair competition among national securities exchanges.

The Exchange does not believe that the proposed rule change will impose any burden on intramarket competition that is not necessary or appropriate in furtherance of the purposes of the Act. Rather, the proposed rule change is designed to benefit Exchange participants in that it will provide a consistent technology offering for Users by the Cboe Affiliated Exchanges. Following the technology migration, the Exchange's System, as described in this proposed rule change, will apply to all Users and order and quotes submitted by Users in the same manner. The Exchange also notes that many of the proposed price protections and risk controls are either User-determined or altogether voluntary.

In addition to this, the Exchange does not believe that the proposed rule change will impose any burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act because the basis for the majority of the proposed rule changes in this filing are the rules of C2 and EDGX, which have previously been filed with the Commission. The Exchange also notes that market participants on other exchanges are welcome to become participants on the Exchange if they determine that this proposed rule change has made Cboe Options a more attractive or favorable venue. As stated, the proposed changes to the rules that accurately reflect functionality that will be in place come October 7, 2019, will not impose any burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act but rather provide clear, consistent rules for market participants surrounding the completion of migration.

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

The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder. 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 will 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 rule-comments@sec.gov. Please include File Number SR-CBOE-2019-057 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-CBOE-2019-057. 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 such 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-2019-057, and should be submitted on or before October 7, 2019.