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Federal Register / Vol. 86, No. 31 / Thursday, February 18, 2021 / Notices
market maker on one side of the transaction.26
With respect to FLEX AIM, the Exchange states that, unlike in simple non-FLEX markets, FLEX market makers have no obligations to provide liquidity to FLEX classes and there is no book into which FLEX market makers may submit quotes to rest. According to the Exchange, therefore, appointed market makers in FLEX markets are on equal footing with all other market participants with respect to FLEX AIM
auctions and permitting FLEX market makers to be solicited as the contra order in a FLEX AIM auction would provide all market participants with the opportunity to provide liquidity to execute against agency orders in FLEX
AIM auctions in the same manner i.e., through solicitation and responses.27
The Exchange also proposes to amend Rules 5.37c5 and 5.73c5 to codify that any user or FLEX Trader, respectively, other than the Initiating TPH or FLEX Trader, respectively, may submit responses to AIM and FLEX AIM
auctions. The Exchange also proposes to specify that the system will reject a response with the same EFID as the initiating order.28 The Exchange represents that if the same user submits a response to an auction in which that same user had an order comprising the initiating order even with a different EFID, the Exchange may take regulatory action against that user for a violation of the proposed rule.29 Further, with respect to any potential misuse of nonpublic information by an SPX market maker regarding an upcoming SPX AIM
auction, the Exchange represents that it has existing rules that prohibit a pattern or practice of submitting orders or quotes for the purpose of disrupting or manipulating AIM auctions and that require trading permit holders to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information.30
III. Discussion and Commission Findings The Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent 26 See
id. at 8.
id. at 9.
28 See Rule 1.1 defining EFID as an Executing Firm ID. The Exchange states that, although the system is only able to reject responses with the same EFID as the initiating order, the rule prohibits all responses from the same user that represents the initiating order, even if orders for the same user have different EFIDs. See Amendment No. 1, supra note 4, at 10.
29 See Amendment No. 1, supra note 4, at 10.
30 See Amendment No. 2, supra note 5, at 5. See also Rules 5.37.02 and 8.10.

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with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.31 In particular, the Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with Section 6b5 of the Act,32 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. The Commission also finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with Section 6b8 of the Act,33 which requires that the rules of a national securities exchange do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
As described above, the Exchange proposes to permit orders for the accounts of market makers with an appointment in SPX to be solicited for the initiating order submitted for execution against an agency order in SPX options into an AIM auctions. In support of its proposal, the Exchange states that brokers seeking liquidity to execute against customer orders on the trading floor regularly solicit appointed SPX market makers for this liquidity, as they are generally the primary source of pricing and liquidity for those options.
Accordingly, the Exchange believes the liquidity provided by SPX market makers is necessary for brokers to initiate AIM auctions and would create potential price improvement opportunities for retail-sized orders in SPX. As summarized in more detail above, the Exchange collected data during the time open outcry trading was temporarily suspended and SPX options traded in AIM auctions while the trading floor was inoperable. The data demonstrates that significant price improvement opportunities for retailsized orders occurred during this time.
Two commenters agreed with Cboe that the proposal would increase liquidity for AIM auctions and thereby would increase execution and price improvement opportunities for retail 31 In approving this proposed rule change, the Commission has considered the proposed rules impact on efficiency, competition, and capital formation. See 15 U.S.C. 78cf.
32 15 U.S.C. 78fb5.
33 15 U.S.C. 78fb8.

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investors.34 One such commenter argued that removing the market maker solicitation prohibition would eliminate an inequity against market makers that unduly curtails liquidity to customer orders.35 Commenters also supported the proposal because it would better align the execution and price improvement opportunities in electronic crossing auctions with those available in open outcry trading, where no similar solicitation prohibition exists.36
After careful consideration, the Commission believes that the proposal is reasonably designed to protect investors and the public interest. The data provided by the Exchange supports the Exchanges conclusion that the proposal could provide additional execution and price improvement opportunities for customer orders in SPX options submitted through the Exchanges AIM auctions. As described above, the Exchange provided data demonstrating market maker participation in SPX AIM auctions during April and May 2020, the temporary period when SPX market makers were permitted to be solicited as contra side to the agency order in AIM
auctions.37 The Commission believes that the Exchanges data shows that SPX
market makers represented a significant amount of SPX AIM volume during this period, both as initiating orders and through auction responses. Accordingly, the Exchanges data supports a finding that permanently permitting initiating orders from SPX market makers is designed to increase the number of AIM
auctions and consequently, provide a larger number of agency orders with the opportunity for price improvement. For example, an AIM agency order for less than 50 contracts is guaranteed price improvement of at least one minimum increment better than the then-current National Best Bid or National Best Offer.38
The Commission further believes that the proposed rule change will not impose any burden on competition that is not necessary or appropriate in 34 See letters to Vanessa Countryman, Secretary, Commission, from Richard J. McDonald, Susquehanna International Group, LLP, dated July 8, 2020, at 2 SIG Letter and Ellen Greene, Managing Director, Equities & Options Market Structure, The Securities Industry and Financial Markets Association, dated July 9, 2020, at 3
SIFMA Letter. The SIG Letter and SIFMA Letter commented on Cboes original proposal, which would have applied the proposed rule change to all classes, not just SPX.
35 See SIG Letter, supra note 34, at 1.
36 See SIFMA Letter, supra note 34, at 3; SIG
Letter, supra note 34, at 2.
37 See supra notes 2325 and accompanying text.
38 See Amendment No. 1, supra note 4, at 8.

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