C2 proposes to allow Post Only order instruction on complex orders that route to its electronic book

The Securities and Exchange Commission (SEC) has opened a consultation into a proposal by Cboe C2 Exchange, Inc. to amend the Exchange’s rulebook to allow the Post Only order instruction on complex orders that route to its electronic book.

The new proposal is published after C2 recently adopted the Post Only order instruction on simple orders that route to its electronic book.

“Post Only” order is an order the System ranks and executes, subjects to the Price Adjust process, or cancels or rejects, except the order may not remove liquidity from the Simple Book or route away to another Exchange. Put otherwise, if a Post Only order is entered into C2’s automated trading system, it will not execute against an order resting in the Simple Book or route to another exchange. The purpose of the Post Only order is to add liquidity to the Simple Book.

As C2 has a maker-taker fee structure, pursuant to which an execution taking liquidity from the Simple Book is subject to a taker fee, the Post Only order instruction provides Trading Permit Holders (TPHs) with the flexibility to avoid incurring a taker fee if the TPH’s intent is to submit an order to add liquidity to the Simple Book.

C2 does not currently offer Post Only complex orders. Like in the Simple Book, execution of a complex order taking liquidity from the COB is subject to a taker fee and execution of an order adding liquidity is subject to a maker rebate. Unlike in the Simple Book, however, a TPH that intends to submit a complex order to add liquidity to the COB is not given the same flexibility to avoid incurring a taker fee. Accordingly, C2 is proposing to add Post Only to the permissible types of complex orders submitted to the Exchange.

Under the proposed rule, upon receipt of a Post Only complex order with any Time-in-Force, the System does not initiate a complex order auction (COA), and if a User marks the Post Only complex order to initiate a COA, the System cancels the order. Not permitting a Post Only complex order to COA is consistent with the purposes of a Post Only order, which is to add liquidity to the COB.

By adding the Post Only order instruction for complex orders, TPHs are set to be given the ability to exercise more control over the circumstances in which their complex orders are executed and be encouraged to add liquidity in the complex order market. Any additional liquidity will subsequently benefit all participants who trade complex orders on the Exchange.

According to C2, the Post Only order instruction on complex orders aims to encourage market participants to add liquidity in the complex order market, which will benefit investors. By giving market participants the flexibility to manage their execution costs and the circumstances in which their complex orders are executed, the Exchange believes the proposed rule change would remove impediments to perfect the mechanism of a free and open market and a national market system and protect investors. The Exchange also believes that the proposed rule change will contribute to the protection of investors and the public interest by assuring compliance with rules related to locked and crossed markets.

Furthermore, the Exchange notes that Post Only functionality is not new or unique functionality and is already available in a similar capacity. While the Post Only complex order type is not currently available in the market, C2 and other exchanges have implemented the Post Only simple order type, which functions in the same manner as the proposed Post Only complex order type.

The purpose of a Post Only complex order is the same as the purpose of a Post Only simple order, given C2’s maker-taker fee structure with respect to executions of complex orders.