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

complex orders are typically represented on the basis of a total debit or credit for the order. After a complex order executes at the total debit or credit, the parties to the trade record the contract quantities and prices for each component option of the order. For complex orders executed electronically, the Exchanges system performs this calculation within the pricing and priority parameters set forth in Rule 5.33f. For complex orders executed in open outcry, this task is straightforward and uncomplicated when the total debit or credit for a complex strategy expressed in the minimum increment under Rule 5.4b.7 However, if a complex order is unable to be expressed in increments smaller than the increment for the class such as $0.05, it may be difficult for brokers to obtain the desired prices for their customers orders, because the transaction parties must perform complicated and timeconsuming mathematical calculations to break down a complex order into the required contract quantities and prices to fit within the constraint of executing complex orders at a minimum increment other than $0.01.8 This difficulty is exacerbated when the quantity of such an order is an odd lot quantity such as 106 contracts. The result is that on active trading days, brokers executing these types of orders cannot be as efficient in representing other customer orders that they are holding. This difficulty exists for complex orders with any ratio and with legs in any combination.
The proposed rule change will enable Trading Permit Holders TPHs to execute complex orders more 7 For example, assume the market for the December SPX 4350 calls is 18 bid, 19 asked, and the market for the December SPX 4375 calls is 6.50
bid and 7.50 asked. The fair value of a call comprised of one leg to buy and one leg to sell the same number of contracts of this series is 11.50 the difference between the prices quoted for each option. If an order to buy 100 of the 4350 calls and to sell 100 of the 4375 calls is quoted and executed at a net debit of 11.50 expressed in a multiple of the minimum increment, the parties to the trade can easily determine and record a price for each component option that comprises the complex order. Any combination of purchase and sale prices within the quoted ranges for the component options that yield a net debit or credit of 11.50 could be used e.g., 18.50 for the 4350 calls, and 7 for the 4375 calls.
8 Using the example in the previous footnote, if instead a customer wants to pay 11.48 rather than 11.50 for a complex order, in order to determine prices for the component options that are expressed in a multiple of $0.05 the trader must perform a series of calculations. In this case, the trader might determine that the trade must be split up into a 40contract spread that traded at a net debit of 11.45
and a 60-contract spread that traded at a net debit of 11.50, which together yield a net debit of 11.48
for the entire amount. This is ultimately a better net price for the customer.

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efficiently, including on behalf of customers that wish to execute highly complicated complex orders, by permitting the parties to execute the trades more expeditiously on the trading floor. As noted above, the Exchange also intends to accept complex orders with ratios larger than three-to-one or smaller than one-to-three for electronic execution, which would further improve efficiency of execution of electronic orders, as the System would perform this calculation. The Exchange believes this increased efficiency would increase execution opportunities for complex orders with investment strategies that do not fit within the three-to-one ratio requirement.
Additionally, the proposed rule change may enable TPHs to execute customers complex orders with these larger ratios at better prices, rather than executing at prices that fit within the confines of a larger increment.
While the proposed rule change amends the minimum increment at which all complex orders and their legs may execute, the Exchange does not propose to extend the complex order priority afforded to complex orders with ratios equal to or greater than one-tothree and less than or equal to three-toone to these larger-ratio complex orders.
Electronic execution of complex orders with any ratio will continue to be required at net prices: i That would cause any component of the complex strategy to be executed at a price of zero;
ii worse than the Synthetic Best Bid or Offer SBBO 9 or equal to the SBBO
when there is a priority customer order at the SBBO except all-or-none AON; iii that would cause any component of the complex strategy to be executed at a price worse than the individual component prices on the Simple Book; or iv worse than the price that would be available if the complex order legged into the Simple Book. The proposed rule change amends Rule 5.33f2Av to provide that a complex order may not execute at a net price that would cause any component of the complex strategy to be executed at a price ahead of a Priority Customer Order on the Simple Book without improving the BBO of a at least one component of the complex strategy, if the complex order has a ratio equal to 9 The SBBO means the best bid and offer on the Exchange for a complex strategy calculated using 1 for complex orders, the BBO for each component or the NBBO for a component if the BBO for that component is not available of a complex strategy from the Simple Book; and 2 for stock-option orders, the BBO for each option component or the NBBO for a component if the BBO for that component is not available and the NBBO of the stock component of a complex strategy.

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or greater than one-to-three .333 and less than or equal to three-to-one 3.00, or is an Index Combo order which is consistent with current functionality and thus for all complex orders that may be executed electronically, or b each component the complex strategy with a Priority Customer Order at the BBO, if the complex order has a ratio less than one-to-three .333 or greater than threeto-one 3.00 which is consistent with current open outcry rules, where complex orders with any such ratio may currently be executed.10 As a result, to the extent a complex order with a ratio of four-to-one for example is submitted for electronic execution, the complex order may be executed at a net debit or credit price only if each leg of the order betters the corresponding bid offer of a priority customer orders in the Simple Book. Therefore, the complex order priority rules will continue to protect Priority Customer interest on the Simple Book.
When the Exchange first proposed to restrict penny pricing for complex orders to those with ratios no greater than three-to-one, investors had only begun to use multi-leg strategies. At the time, the Commission held that ratio orders within certain permissible ratios may provide market participants with greater flexibility and precision in effectuating trading and hedging strategies. 11 In the nearly 20 years since, market participants have expanded the use and complexity of multi-leg trading strategies, which represent a critical portion of their overall investment strategies, while the rules regarding the increments of largerratio orders have remained unchanged and no longer reflect the current marketplace. Market participants regularly submit legitimate multi-leg trading and hedging strategies with ratios greater than three-to-one or less than one-to-three. From January 3
10 See
Rule 5.85b.
Securities Exchange Act Release 48858
December 1, 2003, 68 FR 68128 December 5, 2003 SRCBOE2003007 Approval Order. In approving ratio orders which had ratios no less than one-to-three and no greater than three-to-one, the Commission stated that the Commission believes that ratio orders within certain permissible ratios may provide market participants with greater flexibility and precision in effectuating trading and hedging strategies. In addition, the Commission believes that including such ratio orders in the exception to the priority rules provided in CBOE
Rule 6.45e will facilitate the execution of ratio orders. In this regard, the Commission believes that the procedures governing the execution of complex orders, such as ratio orders, 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. Id. Pursuant to SRCBOE2019060, Rule 6.45 was replaced with Rule 5.33.
11 See
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