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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 October 11, 2024, 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 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 Substance of the Proposed Rule Change
Cboe Exchange, Inc. (the “Exchange” or “Cboe Options”) proposes to amend its Rules regarding the types of complex orders available for flexible exchange options (“FLEX”) trading at the Exchange. 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
The Exchange proposes to adopt rules to govern a new type of complex FLEX Order. Specifically, the Exchange proposes to amend Rules 4.21 (Series of FLEX Options), 5.70 (Availability of Orders), 5.72 (FLEX Trading), and 6.5 (Nullification and Adjustment of Options Transactions Including Obvious Errors).
FLEX Options are customized equity or index option contracts that allow investors to tailor contract terms for exchange-listed equity and index options. The Exchange may make simple FLEX Orders and complex FLEX Orders (see Rule 5.70(b)), including security future-option orders and stock-option orders, available for FLEX trading. Currently, the legs of a complex FLEX Order are limited to FLEX Option series only. An investor wishing to trade a complex strategy containing both FLEX Option series and non-FLEX Option series must execute such strategy using two or more separate orders. The Exchange now proposes to amend its rules to allow for the legs of a complex FLEX Order to include a combination of FLEX Option series and non-FLEX Option series (“FLEX v. Non-FLEX Order”).
The Exchange notes that, with exception of the rules proposed in this rule filing, FLEX v. Non-FLEX Orders will be subject to the same trading rules and procedures that currently govern the trading of other complex FLEX Orders on the Exchange. There are no changes in regards to complex FLEX Orders with FLEX Option legs only as a result of the proposed rule change. To permit the trading of FLEX v. Non-FLEX Orders, the Exchange proposes to amend its rules as follows.
First, the Exchange proposes to amend Rule 5.70 (Availability of Orders) to add FLEX v. Non-FLEX Orders to the types of complex orders available for FLEX trading. Specifically, the Exchange proposes to amend Rule 5.70(b) to state that the legs of a complex FLEX Order may be for FLEX Option series only or a combination of FLEX Option series and non-FLEX Option series (“FLEX v. Non-FLEX Order”). As noted above, FLEX v. Non-FLEX Orders will be considered complex FLEX instruments, which will be subject to the same trading rules and procedures that govern the trading of other FLEX Orders on the Exchange (unless otherwise noted herein). The Exchange also proposes to amend Rule 5.70(b) to remove the requirement that each leg(s) of a complex FLEX Order must be for a FLEX Option series authorized for FLEX trading with the same underlying equity security or index and must have the same exercise style. The proposed change will allow for the trading of the proposed FLEX v. Non-FLEX Orders and will, in general, provide FLEX Traders with more flexibility and opportunities for customization via FLEX trading.
As part of the proposed rule change, the Exchange proposes to amend Rule 5.70(b) to add a cite to the definition of complex order in Rule 1.1; this is not a substantive change, but rather merely adds a cross-reference to the defined term for purposes of clarity. Per Rule 1.1, the term “complex order” means an order involving the concurrent execution of two or more different series in the same underlying security or index (the “legs” or “components” of the complex order), for the same account, occurring at or near the same time and for the purpose of executing a particular investment strategy with no more than the applicable number of legs (which number the Exchange determines on a class-by-class basis).
Under the proposed rule change, complex FLEX Orders could include both listed instruments as well as FLEX instruments (if at least one leg is for a FLEX Option series), with an optional stock leg. Per the definition of complex order, the legs of all complex FLEX Orders (including FLEX v. Non-FLEX options) must have the same underlying security or index. See Rule 1.1 (definition of complex order).
The Exchange also proposes to add Rule 5.70(d), which states that, in classes determined by the Exchange, a nonconforming FLEX v. Non-FLEX Order is not eligible for electronic processing, in which case the nonconforming FLEX v. Non-FLEX Order may only be submitted for manual handling and open outcry trading. For reference, a “nonconforming complex order” is defined as a complex order with a ratio on the options legs less than one-to-three (.333) or greater than three-to-one (3.00). The proposed language is the same as language currently included in the definition of “complex order” in Rule 5.33(a), the intent of which is to permit the Exchange to determine in which classes nonconforming complex orders (including stock-option orders) may be submitted for electronic processing on the Exchange pursuant to Rule 5.33.
See Rule 1.1.
The Exchange also proposes to add Rule 5.70(e), which states that the non-FLEX Option leg(s) of a FLEX v. Non-FLEX Order may not Leg into the Simple Book, to provide for more efficient execution and processing of FLEX v. Non-FLEX Orders. The series that would comprise a FLEX v. Non-FLEX Order are parts of different classes and thus are subject to different trading setting and parameters pursuant to the Rules. Currently, electronic trading is not possible “across” classes given these different settings. Non-FLEX classes also have separate market data inputs, as the System must read market data for each class in connection with potential executions in non-FLEX classes. If the System receives a FLEX v. Non-FLEX Order, it would need to trade the Non-FLEX leg against the appropriate leg in the book; however, there is no book with resting simple FLEX orders against which the FLEX leg could execute. If this were to occur, execution opportunities for FLEX v. Non-FLEX Orders may be prevented. As discussed below, the Non-FLEX legs of FLEX v. Non-FLEX Orders will protect Priority Customer orders in the simple book for the Non-FLEX classes.
This proposed change is consistent with current Rules that do not permit legging of complex orders consisting of legs in different groups of series in a class, as the System handles groups of series as different classes. See Rule 5.33(g)(6).
The Exchange proposes to amend Rule 5.72 (FLEX Trading) to distinguish criteria for a complex order with only FLEX Option legs and to add criteria for FLEX and non-FLEX Option legs of a FLEX v. Non-FLEX Order. First, the Exchange proposes to amend Rule 5.72(b)(2) to specify that each FLEX Option leg of the FLEX Option complex strategy must include all terms for a FLEX Option series set forth in Rule 4.21 (including that a non-FLEX Option series with identical terms is not listed for trading), subject to the order entry requirements set forth in Rule 5.7.
Additionally, the Exchange proposes changes to distinguish the criteria for a complex order with only FLEX Option leg(s) from that proposed for FLEX v. Non-FLEX Orders, noting that there are no changes to the criteria to those FLEX Orders containing only FLEX Option leg(s) as a result of the proposed rule change. The Exchange proposes to amend Rule 5.72(b)(2)(A) to specifically reference the pricing requirements for complex FLEX Orders with FLEX Option legs only. As proposed Rule 5.72(b)(2)(A)(i) contains the requirements for a complex FLEX Order with only FLEX Option legs submitted into the System for an electronic FLEX Auction pursuant to Rule 5.72(c) or Rules 5.73 or 5.74, which must include a bid or offer price for each leg, which leg prices must add together to equal the net price. Proposed Rule 5.72(b)(2)(A)(ii) sets forth the requirements for a complex FLEX Order with only FLEX Option legs submitted into the System prior to representation in an open outcry FLEX Auction pursuant to Rule 5.72 (d), namely that the order may include a bid or offer price on one or more of the legs (subject to a FLEX Trader's responsibilities pursuant to Rule 5.91 and Chapter 9). The execution leg prices must be entered or modified, as necessary, via PAR following execution of the order, which prices must add together to equal the net execution price.
The Exchange proposes to add Rule 5.72(b)(2)(B) containing certain requirements for a FLEX v. Non-FLEX Order. Under the proposed rule, a FLEX v. Non-FLEX Order submitted in the System for an electronic FLEX Auction pursuant to Rule 5.72(c) must include a bid or offer price for each FLEX Option leg but no bid or offer price for each non-FLEX Option leg, and a net price. By allowing the System the ability to adjust the price of the legs, FLEX Traders may achieve their desired net price for the order, while ensuring the non-FLEX Option legs fit within pricing requirements of the non-FLEX markets. A FLEX v. Non-FLEX Order submitted into the System prior to representation in an open outcry FLEX Auction pursuant to Rule 5.72(d) below [sic] may include a bid or offer price for any FLEX Option leg but no bid or offer price for each non-FLEX Option leg, and a net price. By allowing flexibility in open outcry trading, FLEX Traders may achieve their desired net price for the order.
To achieve the desired net execution price for a FLEX v. Non-FLEX Order (1) the execution leg price of each non-FLEX Option leg may not be worse than the NBBO, worse than the BBO, or equal to the BBO if there is a Priority Customer order(s) on the Simple Book; and (2) the execution leg price of each FLEX Option leg(s) may be adjusted so that the prices of the FLEX Option legs combined with the prices of the non-FLEX Option legs add together to equal the net price. If a non-FLEX Option leg of a FLEX v. Non-FLEX Order cannot execute at a price permissible that meets the requirements set forth in proposed Rule 5.72(b)(2)(B)(i), the entire FLEX v. Non-FLEX Order will be cancelled.
See Rule 1.1. The term “NBBO” means the national best bid or offer the Exchange calculates based on market information it receives from OPRA.
See Rule 1.1. The term “BBO” means the best bid or offer disseminated on the Exchange.
The below examples are designed to illustrate the pricing of a FLEX v. Non-FLEX Order. Assume for each example a FLEX Trader wishes to execute a complex FLEX Order with two legs (one FLEX Option leg and one non-FLEX Option leg).
Example 1: Listed (i.e., non-FLEX) legs are adjusted to their NBBO first, FLEX Option leg is then adjusted residually to meet net execution price.
| Instrument ID | Legs | Symbol | Side | Ratio | Expiration | Strike | Type |
|---|---|---|---|---|---|---|---|
| CI0001 | Leg 1 | XYZ | Buy | 1 | December | 10 | Call. |
| Leg 2 | 1XYZ | Sell | 1 | November | 10.01 | Call. |
| Instrument ID | Legs | Symbol | Side | Ratio | Expiration | Strike | Type |
|---|---|---|---|---|---|---|---|
| CI0001 | Leg 1 | XYZ | Buy | 1 | December | 10 | Call. |
| Leg 2 | 1XYZ | Sell | 1 | November | 10.01 | Call. |