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Federal Register / Vol. 86, No. 162 / Wednesday, August 25, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES

through June 17, 2021, nearly 31% of complex orders executed on the Exchanges trading floor had a ratio greater than three-to-one. For example, a complex order consisting of one leg to buy 30 VIX calls and another leg to sell 30 VIX putsboth in the same series combined with a third leg to purchase 100 VIX calls in a separate series that have a delta of 30 30% or .30 creates a delta neutral position, and there is no reason such a transaction should not receive the complex order benefits.
However, market participants who submit such orders are disadvantaged compared to strategies with smaller ratios due to the restrictiveness of the current pricing increment. The Exchange sees no reason to restrict complex orders with a ratio of four-toone, for example, in a class with a minimum increment of $0.05 from being expressed in, or having their legs execute in, $0.01 increments while legs of complex orders with a ratio of threeto-one in the same class may be expressed in, and have their legs execute in, $0.01 increments.12 The Exchange believes it is appropriate to expand the availability of the smaller pricing increment to complex orders with larger ratios so that all market participants may have the same flexibility with respect to the pricing of their multi-legged investment strategies, regardless of ratio. In the same way the Commission held that the procedures governing the execution of complex orders, such as . . . orders with ratios no greater than three-to-one or less than one-to-three, serve to reduce the risk of incomplete or inadequate executions while increasing efficiency and competitive pricing by requiring price improvement before the order can receive priority over other orders, 13
the Exchange believes expanding penny pricing to all complex orders regardless of ratios will serve to reduce the risk of incomplete or inadequate executions for larger-ratio complex orders while increasing efficiency and competitive pricing by requiring price improvement 12 Currently, simple orders in classes with minimum increments of $0.05 or $0.10 may trade in penny increments in certain circumstances. See, e.g., Rule 5.37a4 pursuant to which the minimum price improvement increment for the Automated Improvement Mechanism AIM must be at least $0.01, which is the current minimum increment as determined by the Exchange for all classes eligible for AIM except for S&P 500 Index SPX options; and Rule 5.33f1B pursuant to which the option legs of a stock-option order may be $0.01 or greater, which the Exchange determines on a class-by-class basis, regardless of the minimum increments otherwise applicable to the option legs; see also Rule 5.39a4.
13 See Approval Order at 68128.

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before the order can receive priority over other orders.
The Exchange understands that the Commission is concerned that the simple order market may be somehow disadvantaged by allowing larger-ratio multi-legged orders to receive the complex order benefit. The chief concern appears to be that if the ratios are too greatly expanded, market participants will, for example, enter multi-legged strategies designed primarily to trade orders in a class in pennies that cannot otherwise execute as simple orders in that class in pennies rather than to effectuate a bona fide trading or hedging strategy.
Additionally, the Commission believes there is a risk that market participants may possibly enter such strategies to trade ahead of orders on the book by a smaller amount.14 The Exchange first notes a significant amount of volume executed on the Exchange is already done in penny increments. From January 3 through June 17, 2021, over half the volume executed on the Exchange as part of a complex order, the majority of which all electronic complex orders and all open outcry complex orders with ratios no greater than three-to-one which represents nearly 70% of open outcry complex orders are able to trade in pennies both the package price and leg prices, except for SPX, for which the package price must be in nickels, but the legs may trade in pennies under current rules. Additionally, during that same time period, approximately 43% of simple volume on the Exchange executed in AIM Auctions, which permit executions in pennies for all classes except SPX. Therefore, the majority of contracts that execute on the Exchange already execute in pennies even though penny increments are available for fewer than 400 classes,15
and the Exchange does not believe permitting all complex orders to trade in pennies will significantly increase the volume that may already execute in pennies on the Exchange.
The Exchange believes it is highly unlikely that market participants will submit non-bona-fide trading strategies with larger ratios just to trade in pennies. First, with respect to a nonbona-fide trading strategy, it is unlikely 14 Although the marketplace may in fact be better served by a structure that does not require multilegged orders to, among other things, yield priority to a simple order which cannot on its own satisfy the terms of a multi-leg order, this proposal does not require the Commission to pass judgment on that issue.
15 See Rule 5.4d which provides that the penny program applies to 363 of the over 2000 classes that currently trade on the Exchange.

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other market participants would rest an order for such a strategy on the complex order book or be willing to execute against such an order given that it is a non-bona-fide strategy, thus reducing the likelihood a market participant would be able to execute such strategy.
Additionally, adding a single leg to a larger order just to obtain penny pricing may further reduce execution opportunities for that order, because it may be less likely that sufficient contracts in the appropriate ratio would be available. The Exchange also believes it is unlikely market participants will attempt to submit large-ratio complex orders solely to use penny pricing to trade ahead of customers on the simple book. From January 2 to June 17, 2021, there was only a customer order on the top of the book across all series listed on the Exchange for 0.328% of that time.
Therefore, there would be minimal amounts of time when a market participant would even have the need to attempt to do this. Additionally, as proposed, unlike complex orders with ratios between one-to-three and three-toone, complex orders with ratios less than one-to-three or greater than threeto-one will have to improve all legs with customers on the book, rather than just improve one leg like complex orders with smaller ratios, and such orders would also have to honor away markets.
Therefore, if a market participant were to attempt to submit a complex order with a large ratio 16 primarily to trade in pennies or ahead of customers, it may need to improve more legs than a smaller ratio order, and would have to honor all away markets, potentially reducing any potential savings the market participant was attempting to achieve. Note also that rather than adding an extra leg to a large order simply to be able to improve the book by $0.01 is unnecessary because such order could already be executed in an AIM Auction in $0.01 increments.
Additionally, these orders would be subject to review by the Exchanges regulatory division, which may determine submission of such orders to be in violation of the Exchanges Rules, including Rule 8.1, which prohibits TPHs from engaging in acts or practices inconsistent with just and equitable principles of trade. For these reasons, the Exchange believes there is a de minimis chance that market participants would submit non-bona-fide trading strategies to trade the legs in pennies or 16 A market participant could already attempt to do this today by submitting a smaller-ratio complex order by adding an inexpensive, out-of-the-money leg to an order. However, the Exchange has not observed this behavior.

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