The Securities and Exchange Commission approved a rule change proposed by Cboe Exchange, Inc., on March 19, 2026, allowing orders for the accounts of Market-Makers with an appointment in the applicable class to be solicited as contra-side orders in specific electronic auctions. This development, detailed in the Federal Register on March 24, 2026, modifies existing restrictions under Cboe Rules 5.37, 5.39, 5.73, and 5.74. It expands participation in the Automated Improvement Mechanism (AIM), Solicitation Auction Mechanism (SAM), and their flexible exchange options (FLEX) counterparts. The change applies to all classes, building on a prior exception for S&P 500 Index options. By permitting broader solicitation of Market-Makers for initiating orders, the rule seeks to increase auction liquidity, potentially leading to more price improvement opportunities for agency orders. This approval follows Cboe's filing on December 9, 2025, and a public comment period that yielded no responses, underscoring a targeted effort to refine electronic trading processes amid evolving market dynamics.
Background on Cboe's Auction Mechanisms
Cboe's AIM and SAM auctions facilitate price improvement for agency orders beyond the National Best Bid or Offer (NBBO). In AIM, a Trading Permit Holder submits an agency order along with a contra-side initiating order, which guarantees execution at no worse than the auction start price. Market participants then respond during the auction, and the initiating order may receive an allocation of up to 50 percent if competing interest exists at the same price, as outlined in Cboe Rule 5.37(e). SAM operates similarly but targets larger orders, with the initiating order potentially receiving the entire agency order or none, per Rule 5.39(e). FLEX AIM and FLEX SAM extend these to flexible exchange options, under Rules 5.73 and 5.74.
Previously, rules prohibited soliciting Market-Makers with appointments in the class for contra-side orders in most simple auctions, except for SPX options in AIM and FLEX AIM. This restriction aimed to prevent potential conflicts or information misuse. The approved change eliminates this barrier across all classes, allowing such Market-Makers to provide the initiating order. As noted in the Federal Register notice, this aligns with a 2021 SEC approval for SPX exceptions, where similar expansions did not disrupt market integrity.
Key Players and Filing Process
Cboe Exchange, Inc., a self-regulatory organization, initiated the proposal under Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4. The SEC, as the oversight body, reviewed the filing, publishing it for comment on December 22, 2025, in Release No. 104437. No comments were received, and on February 5, 2026, the Commission extended the review period to March 22, 2026, via Release No. 104768. Approval came in Release No. 34-105049, emphasizing consistency with Act Sections 6(b)(5) and 6(b)(8), which promote fair markets and prevent undue burdens on competition.
Market-Makers, defined under Cboe rules as liquidity providers with class appointments, are central to the change. Trading Permit Holders, who act as agents for agency orders, gain flexibility to solicit these entities. The notice highlights data from January to June 2025, showing a significant portion of smaller customer orders (20 contracts or fewer) executing against Market-Makers, suggesting untapped liquidity potential.
Legal Precedents and Regulatory Consistency
This rule builds on precedents like the 2021 approval for SPX auctions in Release No. 91116, which permitted Market-Maker solicitation without adverse effects. It aligns with broader SEC efforts to enhance electronic trading efficiency, as seen in approvals for similar mechanisms on other exchanges. The Commission found the proposal consistent with preventing fraudulent practices and protecting investors, per Section 6(b)(5). It also avoids unnecessary competition burdens under Section 6(b)(8).
Cboe Rule 8.10, prohibiting misuse of material nonpublic information, remains a key safeguard. The notice states that these protections address potential leakage concerns, ensuring solicited Market-Makers do not gain unfair advantages. Perspectives differ: proponents view it as a liquidity booster, while skeptics might worry about reduced responder competition if Market-Makers dominate contra roles. However, the rule's open response eligibility for all participants mitigates this, potentially attracting more non-Market-Maker interest over time.
Potential Implications
In the short term, the change could increase auction initiations by tapping into Market-Maker liquidity, especially for smaller orders. The notice indicates 24 Trading Permit Holders with multi-list class appointments and 18 with VIX appointments, representing substantial liquidity. This may lead to more competitive starting prices and efficient executions for large block orders.
Long-term effects include enhanced market competition among brokers, as those unable to provide initiating capital can now solicit Market-Makers directly. It may reduce reliance on affiliates for contra participation, streamlining operations. However, if Market-Makers frequently serve as both contra and responders, it could alter auction dynamics, though existing rules limit allocations to maintain fairness.
Different viewpoints emerge: investor advocates may welcome potential price improvements, while some market participants could see it as favoring established liquidity providers. Regulators emphasize surveillance to ensure compliance, balancing innovation with integrity.
The approval of Cboe's rule change marks a step toward more inclusive electronic auctions, potentially fostering greater liquidity and execution efficiency. Key takeaways include expanded Market-Maker roles and reinforced safeguards. Ongoing monitoring will be essential to assess impacts on competition and investor protection, with possible future adjustments based on market feedback or additional SEC reviews.
