SEC invites comments on Cboe’s proposal to add Qualified Contingent Cross with Stock Order functionality

Maria Nikolova

Via the new order functionality, Trading Permit Holders will have the option to electronically submit the stock component of QCC orders to the Exchange.

The United States Securities and Exchange Commission (SEC) has published a notice inviting comments on a proposed rule change by Cboe Exchange, Inc. that seeks to add Qualified Contingent Cross (QCC) with Stock Order functionality.

A QCC order is an initiating order to buy (sell) at least 1,000 standard option contracts or 10,000 mini-option contracts that is identified as being part of a qualified contingent trade coupled with a contra-side order or orders totaling an equal number of contracts.

The Exchange wants to introduce a “QCC with Stock Order”, which is defined as a qualified contingent cross order, entered with a stock component to be electronically communicated by the Exchange to a designated broker-dealer for execution on behalf of the submitting Trading Permit Holder (TPH).

While Cboe does not specify how the TPH should go about executing the stock component of the trade, this process is often manual and is therefore a compliance risk for TPHs if they do not execute the stock component within a reasonable time period of execution of the options component. Threfore, the Exchange is proposing to offer QCC with Stock Order functionality, pursuant to which the Exchange will automatically communicate the stock component of a QCT to a designated broker-dealer for execution in connection with the execution of a QCC order on the Exchange.

QCC with Stock Orders will be available to all TPHs on a voluntary basis. This is indeed an optional piece of functionality. A TPH that does not wish to use QCC with Stock Order functionality can continue to execute a QCT by entering a QCC order on the Exchange and separately executing the stock component of the QCT another venue, as it may do today.

The Exchange believes the proposed rule change is set to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, as well as to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitation transactions in securities.

The new functionality is anticipated to lessen TPHs’ compliance burden as it allows for the automatic submission of the stock component of a QCT in connection with the execution of the options component(s) as a QCC order on the Exchange. QCC with Stock Order functionality also provides benefits to the Exchange by establishing an audit trail for the execution of the stock component of a QCT within a reasonable period of time after the execution of the QCC order.

The proposed rule change further reduces TPHs’ compliance risk by providing that the Exchange will, in addition to cancelling the stock component if the option component cannot execute, nullify any option component execution when the stock component does not execute without a request from the TPH. Nullification of the option trade is consistent with the requirement that a TPH must execute the stock component of a QCT within a reasonable period of time after executing the option component on the Exchange as a QCC order.

The proposed rule change simply eliminates the requirement that one party to the transaction request nullification of the option component trade before the Exchange nullifies the option trade, because such nullification is consistent with the definitions of QCC orders and QCT. The change merely automates a process that TPHs can manually do today.

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