SEC Hits Pause on Cboe's New Disruptive Trading Rule

In a somewhat unusual step, the Securities and Exchange Commission (SEC) paused the effort by the Chicago Board Options Exchange (Cboe) to self-certify a new Rule 8.23 governing disruptive trading practices (Proposed Rule).[1] Cboe attempted to self-certify the Proposed Rule in January 2026 using a process that allows a self-regulatory organization (SRO) like Cboe to adopt certain types of generally uncontroversial rules without submitting them for public comment.

Although the Proposed Rule imposed a wide range of substantive obligations on market participants that had never been subject to notice and comment or rulemaking, Cboe claimed that the rule merely “codif[ied] that disruptive order and quote entry and trading activity are prohibited” and that the “descriptions of disruptive quoting and trading activity articulated in proposed Rule 8.23 are consistent with the activities that have been previously identified and described” to market participants in prior guidance.[2] However, much of that prior guidance was also implemented through regulatory circulars or self-certified rules and were not subject to notice and comment.[3]

This type of regulatory bootstrapping would have allowed Cboe to adopt new substantive rules without ever receiving public comment. Perhaps unsurprisingly, market participants pushed back, arguing that the rule should go through public comment because it sets forth “more than 30 separate items,”[4] constitutes “a substantive modification to Cboe’s existing investor protection rules,”[5] and contains “patently vague language.”[6] By halting implementation of the Proposed Rule and opening it to public notice and comment, the SEC has created an opportunity for market participants to gain greater clarity about the potential scope and application of the Proposed Rule and to be heard regarding their view on the proposed standards. 

Cboe’s Proposed Disruptive Trading Practices Rule

The Proposed Rule is an effort to codify a prohibition on various practices the Cboe proposes to label “disruptive,” requiring traders to “submit all orders and quotes at any time for the purpose of executing bona fide transactions or in good faith for legitimate purposes” and setting forth a list of 11 enumerated purposes that Cboe considers non-bona fide or illegitimate.[7] In the past, Cboe (and other exchanges) have relied on vague “just and equitable principles of trade” authority to sanction behavior they found inappropriate. In principle, the Proposed Rule could give market participants clarity about trade behaviors that Cboe finds inappropriate. In practice, however, the meaning of many of the provisions of the Proposed Rule remains vague. 

Intent: The Proposed Rule closely tracks disruptive trading rules adopted by futures exchanges, including the standard set forth in Rule 575 of the Chicago Mercantile Exchange (CME), Rule 4.02(l) of the ICE Futures U.S. Exchange (IFUS) and Rule 620 of Cboe Futures Exchange (CFE), which respectfully regulate disruptive trading practices on CME, IFUS and CFE futures exchanges (collectively, the Futures Disruptive Trading Rules).[8] The Futures Disruptive Trading Rules and the Proposed Rule all consistently state that certain conduct may be violative only if done intentionally, such as (i) entering orders with the intent to cancel the order before execution or to modify the order to avoid execution; (ii) entering or causing to be entered an actionable or non-actionable message with the intent to mislead, and (iii) entering messages with the intent to overload or delay the exchange’s systems, while other conduct may be violative if done intentionally or recklessly, such as (i) intentionally or recklessly submitting messages that have the potential to disrupt the exchange or other market participants or (ii) entering messages with the intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.[9] 

While the Futures Disruptive Trading Rules and the Proposed Rule apply the same intent standards for similar conduct, they differ in how they indicate the exchanges may prove intent: 

• Futures Disruptive Trading Rules: “Proof of intent is not limited to instances in which a market participant admits its state of mind. Where the conduct was such that it more likely than not was intended to produce a prohibited disruptive consequence, intent may be found. Claims of ignorance, or lack of knowledge, are not acceptable defenses to intentional or reckless conduct. Recklessness has been commonly defined as conduct that ‘departs so far from the standards of ordinary care that it is very difficult to believe the actor was not aware of what he or she was doing.’ See Drexel Burnham Lambert, Inc. v. CFTC, 850 F.2d 742, 748 (D.C. Cir. 1988).”[10]
• Proposed Rule: “Proof of intent is not limited to instances in which a market participant admits the market participant’s state of mind. If conduct more likely than not was intended to produce a prohibited disruptive consequence or was reckless, intent may be found. Claims of ignorance, or lack of knowledge, are not acceptable defenses to intentional or reckless conduct. The Exchange generally will find requisite intent if the purpose of the market participant’s conduct was, for example, to induce another market participant to engage in market activity.”[11] 

The Proposed Rule’s addition of the three words “or was reckless” in the definition of proof of intent, and subsequent removal of a separate recklessness standard, could allow Cboe to bring charges under the Proposed Rule for conduct such as an intentionally canceling an order before execution or entering messages with an intent to mislead, based only on a showing of recklessness instead of a higher intent standard. [12]

Spoofing: The Proposed Rule requires that all orders must be bona fide, that all messages must be “entered in good faith for legitimate purposes,” prohibits entering “an order with the intent, at the time of order entry, to cancel the order before execution or to modify the order to avoid execution,” and prohibits entering messages with the intent to mislead other market participants.[13] As noted above, this language closely tracks the anti-spoofing provisions of the Futures Disruptive Trading Rules, potentially creating a pathway for Cboe to bring spoofing charges without having to rely on the fraud provisions of the securities law. 

Regulators and plaintiffs have historically brought claims of conduct similar to spoofing in the securities markets under SEC Rule 10b-5, which requires a showing that the trader intentionally misrepresented a material fact.[14] That requirement, and potentially others, is a different, and higher, standard than the standard under the Futures Disruptive Trading Rules, which arguably have a broader reach because they do not require a showing of materiality. The Proposed Rule suggests that, at least at Cboe, market participants will now be held to the same standard as firms trading in the futures markets in this regard, and not the more traditional SEC Rule 10b-5 standard. 

The Proposed Rule also includes potential exceptions for certain common scenarios that might otherwise fall within a literal interpretation of “spoofing.” These include (i) cancelling orders entered accidentally or in response to market changes; (ii) making two-sided markets with unequal quantities; and (iii) entering orders or quotes at various price levels throughout the order book to gain queue priority and subsequently canceling those orders or quotes in response to market changes.[15]

Quote Stuffing/Systems Disruptions: The Proposed Rule also prohibits market participants from engaging in various practices that could disrupt the systems of the exchange or other participants, including:

• Entering or causing to be entered an actionable or nonactionable message(s) with intent to overload or delay the systems of the Exchange or other market participants, including dividing an order or quote into multiple messages;
• Intentionally or recklessly submitting or causing to be submitted an actionable or nonactionable message(s) that has the potential to disrupt the systems of the Exchange or other market participants;
• Entering or causing to be entered an actionable or nonactionable message(s) with intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions;
• Engaging in a pattern and practice of submitting nonactionable messages for the purpose of seeking to reduce latency;
• Submitting intentionally incomplete, corrupted or malformed data; and
• Engaging in a pattern and practice of preventing any message from reaching an Exchange gateway application and being successfully processed.[16]

This language tracks prior Cboe regulatory circulars (which did not go through the notice and comment process) that described similar behaviors which Cboe asserted would be considered inconsistent with “just and equitable principles of trade.”[17]

Signaling: The Proposed Rule also prohibits “entering orders or quotes to signal the arrival of an order or otherwise to coordinate order flow with another market participant.” This language tracks a September 26, 2022 regulatory circular entitled “Prearranged Trading and Signaling of Imminent Orders” and was not subject to the notice and comment process.[18] Although that regulatory circular attempted to ground its pronouncement in what it described as a traditional prohibition against prearranged trading, at the time it was published the term “signaling” was new, undefined and unconnected to any prior guidance related to prearranged trading. 

IOC Orders: The Proposed Rule prohibits “entering or using [immediate or cancelled (IOC)] orders or quotes for purposes other than to remove resting interest in the Book or the excessive use of IOC orders or quotes,” codifying language that appeared in regulatory circulars issued on April 24, 2025 and May 7, 2024 (which did not go through the notice and comment process).[19] The scope of this prohibition also remains unclear. In particular, Cboe asserted in a prior regulatory circular that “submission of IOC quotes and/or IOC orders that are anticipatory in nature (e.g., sent in anticipation that an order may be booked) would not be consistent” with the purpose of removing resting interest in the order book. Cboe has never explained precisely what it means for an IOC to be “anticipatory in nature,” leaving open a range of scenarios (such as where a market participant submits an IOC order to interact with an order it believes in good faith is in flight) where the applicability of the rule is unclear.

Catch-all: Finally, the Proposed Rule includes a catch-all provision prohibiting any trades that are not bona fide or entered in good faith for legitimate purposes, and indicates that the Proposed Rule’s examples of non-bona fide transactions or illegitimate purposes are not an exhaustive list. Although such catch-all language is not uncommon, the open-ended nature of the Proposed Rule significantly undercuts the degree of notice that it provides. 

SEC Rule Suspension 

The SEC’s decision to suspend the Proposed Rule may suggest a degree of skepticism regarding the extent to which Cboe has relied on informal regulatory guidance rather than notice-and-comment rulemaking in recent years. Cboe filed the Proposed Rule under SEC Rule 19b-4(f), which permits a rule proposed by an SRO to be effective 30 days after filing if the rule does not significantly affect the protection of investors or the public interest and does not impose any significant burden on competition.[20] Cboe argued that the rule “merely codifie[d]” and added “detail regarding what constitutes” prohibited activity that had been “previously identified and described” to market participants.[21] As noted, however, much of the guidance Cboe seeks to codify was never originally submitted for public comment, leaving a multitude of unanswered questions about the scope of the Proposed Rule. Other exchanges have noted the inconsistency of Cboe’s rulemaking practices from their own, which increases the risk of inconsistent rules across the options exchanges.[22] Federal guidance may provide a greater degree of clarity and uniformity, consistent with the SEC’s new emphasis on regulatory predictability.

Next Steps

The SEC is accepting initial comments on the Proposed Rule until April 15, and rebuttal comments until April 29. Market participants should carefully consider the potential impact of the Rule and whether to submit comments to the proposed rule for the SEC’s consideration. 

For more information on Cboe’s Proposed Rule, please contact one of the authors of this article or your primary Katten attorney.