Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3 Thereto, To Establish Rules Governing the Trading of Options on the EDGX Options Market, 48600-48610 [2015-19878]

Download as PDF 48600 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEMKT–2015–55, and should be submitted on or before September 3, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.35 Jill M. Peterson, Assistant Secretary. [FR Doc. 2015–19872 Filed 8–12–15; 08:45 am] BILLING CODE P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–75650; File No. SR–EDGX– 2015–18] Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3 Thereto, To Establish Rules Governing the Trading of Options on the EDGX Options Market tkelley on DSK3SPTVN1PROD with NOTICES August 7, 2015. I. Introduction On April 30, 2015, EDGX Exchange, Inc. (‘‘EDGX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt rules to govern the trading of options on the Exchange (referred to herein as ‘‘EDGX Options Exchange’’ or ‘‘EDGX Options’’). The proposed rule change was published for comment in the Federal Register on May 19, 2015.3 On June 25, 2015, pursuant to Section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or 35 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 74949 (May 13, 2015), 80 FR 28745 (‘‘Notice’’). 4 15 U.S.C. 78s(b)(2). 1 15 VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 institute proceedings to determine whether to disapprove the proposed rule change.5 On August 3, 2015, EDGX filed Amendment No. 1 to the proposed rule change.6 On August 6, 2015, EDGX filed Amendment No. 2 to the proposed rule change.7 On August 7, 2015, the Exchange filed Amendment No. 3 to the proposed rule change.8 The Commission received three comment letters on the proposal.9 On August 7, 2015, the Exchange responded to the comment letters.10 The Commission is publishing this notice to solicit comment on Amendment Nos. 1 and 2 to the proposed rule change and is approving the proposed rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, on an accelerated basis. II. Comment Summary The Commission received three comments letters regarding the proposal and the Exchange’s Response thereto.11 5 See Securities Exchange Act Release No. 75297, 80 FR 37672 (July 1, 2015). 6 Amendment No. 1 deleted proposed EDGX Options Rule 21.8(f)(2), which would have granted participation entitlements to Directed Market Makers trading against small size orders defined as five or fewer contracts. In addition, Amendment No. 1 provided more detailed information regarding participation entitlements for Directed Market Makers. Among other things, the Exchange represented that the proposed rules provide the necessary protections against coordinated action between a Directed Market Maker and order entry firms and that EDGX Options will proactively conduct surveillance for, and enforce against, such violations. 7 In Amendment No. 2, the Exchange represented that it is a participant in the Plan for the Selection and Reservation of Securities Symbols. Amendment No. 2 also clarified that the Penny Pilot Program (discussed below) is scheduled to expire on June 30, 2016 and the Exchange would be permitted to replace any penny pilot issues that have been delisted with the next most actively traded multiply listed options classes that are not yet included in the penny pilot, based on trading activity in the previous six months. The replacement issues may be added to the penny pilot on the second trading day following July 1, 2015 and January 1, 2016. 8 Amendment No. 3 made technical changes to Amendments Nos. 1 and 2. Because Amendment No. 3 is technical in nature, the Commission is not required to publish it for public comment. 9 See letters to Brent J. Fields, Secretary, Commission, from Suzanne H. Shatto, dated July 7, 2015 (‘‘Shatto Letter’’); from Michael J. Simon, Secretary and General Counsel, International Securities Exchange, LLC (‘‘ISE’’), dated July 28, 2015 (‘‘ISE Letter’’); and from Mark D. Wilson, Director of Technical Risk Management & Exchange Relations and Brent E. Hippert, President and Chief Compliance Officer, Hardcastle Trading USA, LLC, dated August 3, 2015 (‘‘Hardcastle Letter’’). 10 See letter to Brent J. Fields, Secretary, Commission, from Anders Franzon, VP, Associate General Counsel, EDGX, dated August 7, 2015 (‘‘Response’’). 11 See supra notes 9 and 10. The ISE Letter focused exclusively on the proposed five lot entitlement for Directed Market Makers and did not address any other aspect of the proposed EDGX Options rules. The Exchange subsequently deleted this provision from the proposed rule change and therefore the Commission has not addressed the ISE Letter in this order. PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 One commenter opposed the proposal because ‘‘we do not need additional options exchanges.’’ 12 The commenter stated that additional options exchanges would lead to fragmentation causing ‘‘a thinner order book at all options exchange[s] and allows fast intermediaries to take advantage of retail orders.’’ 13 Another commenter stated that it opposes any priority model for an options exchange other than price-time priority.14 The commenter believed that ‘‘pure price-time priority is the best and fairest model for a healthy and robust market.’’ 15 The commenter further noted that price-time priority ‘‘is the best and fairest model because it rewards firms who are the first people willing to trade at a better price.’’ 16 The commenter states that exchanges with pro-rata allocation models adopt rules which allow directed orders and preferences without justification. According to the commenter, ‘‘[p]ro-rata allocation rewards firms that simply quote large size, for no particularly clear benefit to the market.’’ 17 In response to the commenters’ concerns, EDGX notes that both the ISE Letter and the Hardcastle Letter ‘‘raised concerns with proposed paragraph (f)(2) of proposed [EDGX Options] Rule 21.8, which would have provided a small size order . . . allocation to Directed Market Makers . . . .’’ 18 The Exchange further notes that it eliminated that subparagraph from the proposed rule change in Amendment No. 1.19 The Response also states that the ‘‘additional points raised in the Hardcastle Letter and the Shatto Letter are either not responsive to the issues raised in Proposal or are aimed at existing elements of U.S. market structure that have been previously approved by the Commission and are available on other exchanges and in the marketplace generally.’’ 20 Consequently, EDGX does not believe these comments are ‘‘germane to the proposal.’’ 21 III. Discussion and Commission Findings After careful review of the proposal, as modified by Amendment Nos. 1, 2, 12 See Shatto Letter, supra note 9. id. 14 See Hardcastle Letter, supra note 9, at 1. 15 Id. 16 See Hardcastle Letter, supra note 9, at 3. 17 See Hardcastle Letter, supra note 9, at 3. The Hardcastle Letter was received after the expiration of the comment period and raises broader market structure policy concerns that are outside of the scope of the present proposal. 18 See Response, supra note 10, at 2. 19 See id. 20 See id. 21 See id. 13 See E:\FR\FM\13AUN1.SGM 13AUN1 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices and 3 thereto, and consideration of the comment letters and the Exchange’s Response thereto, the Commission finds that the proposed rule change, as modified by Amendment Nos. 1, 2, and 3, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.22 Specifically, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,23 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 foster cooperation and coordination with persons engaged in regulating, clearing, settling, and processing information with respect to, and facilitating transactions in securities; 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. Section 6(b)(5) also requires that the rules of an exchange not be designed to permit unfair discrimination among customers, issuers, brokers, or dealers. Further, the Commission finds that the proposal is consistent with Sections 6(b)(1) of the Act,24 which requires, among other things, that a national securities exchange be so organized and have the capacity to carry out the purposes of the Act, and to comply and enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulation thereunder, and the rules of the exchange. This discussion does not review every detail of the proposal, but focuses on the most significant rules and policy issues considered in review of the proposal. tkelley on DSK3SPTVN1PROD with NOTICES A. EDGX Options Members EDGX Options will operate an electronic trading system for trading options (‘‘System’’) that will provide for the electronic display and execution of orders.25 EDGX Options will have only one category of members, known as ‘‘Options Members.’’ 26 Only Options 22 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 23 15 U.S.C. 78f(b)(5). 24 15 U.S.C. 78f(b)(1). 25 The proposed rules of EDGX Options are based on, and virtually identical to, the rules of the Exchange’s affiliate, BATS Exchange, Inc. (‘‘BZX Options’’), with the exception of the proposed priority model and certain other limited differences. See Notice, supra note 3, at 28745. 26 The term ‘‘Options Member’’ means a firm, or organization that is registered with the Exchange VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 Members will be permitted to transact business on the System.27 There will be two types of Options Members: (1) Options Order Entry Firms (‘‘OEFs’’) and (2) Options Market Makers. An Options Member must be a member of the Exchange and another registered options exchange that is not registered solely under Section 6(g) of the Act 28 or the Financial Industry Regulatory Authority (‘‘FINRA’’).29 Further, an OEF may only transact business with public customers if such Options Member also is a member of another registered national securities exchange or association with which the Exchange has entered into an agreement under Rule 17d-2 under the Act pursuant to which such other exchange or association shall be the designated options examining authority for the OEF.30 In addition, Options Members that transact business with Public Customers must at all times be a member of FINRA.31 Among other things, each Options Member must be registered as a brokerdealer and have as the principal purpose of being an Options Member the conduct of a securities business, which shall be deemed to exist if and so long as: (1) The Options Member has qualified and acts in respect of its business on EDGX Options as either an OEF or an Options Market Maker or both; and (2) all transactions effected by the Options Member are in compliance with Section 11(a) of the Act 32 and the rules and regulation adopted thereunder.33 Options Members may trade options for their own proprietary accounts or, if authorized to do so under pursuant to Chapter XVII of EDGX Options proposed rules for purposes of participating in options trading on EDGX Options as an Order Entry Firm or Options Market Maker. See proposed EDGX Options Rules, Chapter XVI, Rule 16.1(a)(38). All Exchange members will be eligible to participate in EDGX Options provided that the Exchange specifically authorizes them to trade in the System and they become Options Members. A prospective Options Member must be an existing member or become a Member of the Exchange, pursuant to Chapter II (Members of the Exchange), and continue to abide by the requirements of the Chapter II Exchange Rules with respect to participation in EDGX Options. See proposed EDGX Options Rules, Chapter XVII, Rule 17.1(b)(3). 27 See proposed EDGX Options Rules, Chapter XVII, Rule 17.1(a). 28 15 U.S.C. 78f(g). 29 See proposed EDGX Options Rules, Chapter XVII, Rule 17.2(f). 30 See proposed EDGX Options Rules, Chapter XXVI, Rule 26.1. 31 See proposed EDGX Options Rules, Chapter XVII, Rule 17.2(f). 32 15 U.S.C. 78k(a). 33 See proposed EDGX Options Rules, Chapter XVII, Rule 17.2(e). PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 48601 applicable law, may conduct business on behalf of customers.34 OEFs are Options Members representing customer orders as agent on EDGX Options or non-market maker participants conducting proprietary trading as principal.35 Options Market Makers are Options Members registered with the Exchange as Options Market Makers and registered to make markets in individual series of options.36 Options Market Makers will be eligible to participate as Directed Market Makers, Primary Market Makers and Market Makers.37 A Market Maker that engages in specified Other Business Activities, or that is affiliated with a broker-dealer that engages in Other Business Activities, including functioning as an OEF, must have an Information Barrier between the market making activities and the Other Business Activities.38 To become an Options Market Maker, an Options Member is required to register by filing a written application with the Exchange, which will consider an applicant’s market making ability and such other factors as it deems appropriate in determining whether to approve an applicant’s registration as a Market Maker.39 An unlimited number of Market Makers may be registered in each class unless the number of Market Makers registered to make a market in a particular option class should be limited whenever, in the Exchange’s judgment, quotation system capacity in an option class or classes is not sufficient to support additional Market Makers in such class or classes.40 The Exchange will not restrict access in any particular option class until such time as the Exchange has submitted objective standards for restricting access to the Commission for its review and approval.41 In addition, the Exchange may appoint one Primary Market Maker per option class.42 Market Makers may select from among any option issues traded on the Exchange to request appointment as a Primary Market 34 See proposed EDGX Options Rules, Chapter XVII, Rule 17.1(a). 35 See proposed EDGX Options Rules, Chapter XVI, Rule 16.1(a)(36). 36 See proposed EDGX Options Rules, Chapter XXII, Rule 22.2. All Market Makers are designated as specialists on EDGX Options for all purposes under the Exchange Act or Rules thereunder. 37 See Notice, supra note 3, at 28746. 38 See proposed EDGX Options Rules, Chapter XXII, Rule 22.10(a). 39 See proposed EDGX Options Rules, Chapter XXII, Rule 22.2(a). 40 See proposed EDGX Options Rules, Chapter XXII, Rule 22.2(c). 41 See id. 42 See id. E:\FR\FM\13AUN1.SGM 13AUN1 48602 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Maker, subject to the approval of the Exchange. In considering the approval of the appointment of a Primary Market Maker in each security, the Exchange will consider: The Market Maker’s preference; the financial resources available to the Market Maker; the Market Maker’s experience, expertise and past performance in making markets, including the Market Maker’s performance in other securities; the Market Maker’s operational capability; and the maintenance and enhancement of competition among Market Makers in each security in which they are registered, including pursuant to the performance standards set forth in proposed Rule 22.2(i).43 Options Market Makers are required to electronically engage in a course of dealings to enhance liquidity available on EDGX Options and to assist in the maintenance of fair and orderly markets.44 Among other things, an Options Market Maker must: (1) On a daily basis maintain a two-sided market on a continuous basis in at least 75% of the individual options series in which it is registered; (2) engage, to a reasonable degree under the existing circumstances, in dealings for their own accounts when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of (or demand for) a particular option contract, or a temporary distortion of the price relationships between option contracts of the same class; (3) compete with other Market Makers in all series in which the Market Maker is registered to trade; and (4) maintain minimum net capital in accordance with Commission and the Exchange rules.45 Substantial or continued failure by an Options Market Maker to meet any of its obligations and duties would subject the Options Market Maker to disciplinary action, suspension, or revocation of the Options Market Maker’s registration in one or more options series.46 43 See proposed EDGX Options Rules, Chapter XXII, Rule 22.2(d). The Exchange will periodically conduct an evaluation of Primary Market Makers to determine whether they have fulfilled performance standards relating to, among other things, quality of markets, competition among Market Makers, observance of ethical standards, and administrative factors. The Exchange may consider any relevant information including, but not limited to, the results of a Market Maker evaluation, trading data, a Market Maker’s regulatory history and such other factors and data as may be pertinent in the circumstances. See proposed EDGX Options Rules, Chapter XXII, Rule 22.2(i). 44 See proposed EDGX Options Rules, Chapter XXII, Rule 22.5. 45 See, e.g., proposed EDGX Options Rules, Chapter XXII, Rule 22.5(a). 46 See proposed EDGX Options Rules, Chapter XXII, Rule 22.5(c). VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 The Commission finds that the Options Market Maker qualification requirements are consistent with the Act and notes that they are similar to those of other options exchanges.47 The Commission also finds that the Options Market Maker participation requirements are consistent with the Act. Market makers receive certain benefits for carrying out their responsibilities. For example, a brokerdealer or other lender may extend ‘‘good faith’’ credit to a member of a national securities exchange or registered brokerdealer to finance its activities as a market maker or specialist.48 In addition, market makers are exempted from the prohibition in Section 11(a) of the Act. The Commission believes that a market maker must have sufficient affirmative obligations, including the obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis, to justify this favorable treatment. The Commission believes that EDGX Options Market Maker participation requirements impose sufficient affirmative obligations on Options Market Makers and, accordingly, that these EDGX Options requirements are consistent with the Act.49 B. EDGX Options Trading System The Exchange’s options trading system will leverage the Exchange’s current technology, including its customer connectivity, messaging protocols, quotation and execution engine, order router, data feeds, and network infrastructure. As a result, the EDGX Options Exchange will closely resemble the Exchange’s affiliate, BZX Options, with the exception of the proposed priority model and certain other limited differences.50 As noted above, EDGX Options will maintain a pro rata allocation model with execution priority dependent on the capacity of an order (e.g., Customer or non-Customer) as well as status as a Primary Market Maker or Directed Market Maker, as applicable.51 The 47 See, e.g., Rules of NOM, Chapter VII, Sections 4, 5, and 6; and BATS Rules 22.4, 22.5 and 22.6. 48 See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 240.15c3–1(a)(6) (capital requirements for market makers). 49 The Commission notes that the participation requirements are similar to those of other options exchanges. See, e.g., NOM Rules, Chapter VII, Sections 5 and 6; and BATS Rules 22.5 and 22.6. 50 See Notice, supra note 3, at 28745. 51 See id. at 28747. The System includes: (1) An order execution service that enables Users to automatically execute transactions in System Securities; and provides Users with sufficient monitoring and updating capability to participate in an automated execution environment; (2) a trade reporting service that submits ‘‘locked-in’’ trades for clearing to a registered clearing agency for clearance PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 System will include a proprietary data feed, Multicast PITCH, which will display depth of book quotations and execution information based on orders received by EDGX Options using the minimum price variation applicable to that security.52 Options Members will be able to enter the following types of orders into the System: Limit Orders; 53 Minimum Quantity Orders; 54 Market Orders; 55 Price Improving Orders; 56 Book Only and settlement; transmits last-sale reports of transactions automatically to the Options Price Reporting Authority for dissemination to the public and industry, and provides participants with monitoring and risk management capabilities to facilitate participation in a ‘‘locked-in’’ trading environment; and (3) a data feed(s) that can be used to display with or without attribution to Options Members’ MPIDs Displayed Orders on both the bid and offer side of the market for price levels then within EDGX Options using the minimum price variation applicable to that security. See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(a). See Notice, supra note 3, for a more complete description of EDGX Options operation and rules. The Commission notes that the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information (‘‘OPRA Plan’’) requires each party to the Plan to collect and promptly transmit to the OPRA all last sale reports relating to its market. See OPRA Plan, Article V, Section 5.2(a). 52 See proposed EDGX Options Rules, Chapter XXI, Rule 21.15. 53 Limit Orders are orders to buy or sell an option at a specified price or better. A limit order is marketable when, for a limit order to buy, at the time it is entered into the System, the order is priced at the current inside offer or higher, or for a limit order to sell, at the time it is entered into the System, the order is priced at the inside bid or lower. See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(d)(2). 54 Minimum Quantity Orders are orders that require that a specified minimum quantity of contracts be obtained, or the order is cancelled. Minimum Quantity Orders will only execute against multiple, aggregated orders if such execution would occur simultaneously. The Exchange will only honor a specified minimum quantity on a Book Only Order entered with a timein-force designation of Immediate or Cancel and will disregard a minimum quantity on any other order. See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(d)(3). 55 Market Orders are orders to buy or sell at the best price available at the time of execution. Market Orders to buy or sell an option traded on EDGX Options will be rejected if they are received when the underlying security is subject to a ‘‘Limit State’’ or ‘‘Straddle State’’ as defined in the Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act (the ‘‘Limit Up-Limit Down Plan’’). Any portion of a Market Order that would execute at a price more than $0.50 or 5 percent worse than the NBBO at the time the order initially reaches EDGX Options, whichever is greater, will be cancelled. See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(d)(5). 56 Price Improving Orders are orders to buy or sell an option at a specified price at an increment smaller than the minimum price variation in the security. Price Improving Orders may be entered in increments as small as (1) one cent. Price Improving Orders shall be displayed at the minimum price variation in that security and shall be rounded up for sell orders and rounded down for buy orders. Unless a User has entered instructions not to do so, Price Improving Orders will be subject to the E:\FR\FM\13AUN1.SGM 13AUN1 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES Orders; 57 Post Only Orders; 58 and Intermarket Sweep Orders; 59 with characteristics and functionality similar to what is currently approved for use on BZX Options.60 Orders entered into the System will be designated for display (price and size) on either an attributable or non-attributable basis in the order display service of the System.61 Options Members will be permitted to enter multiple orders at single or multiple price levels.62 All trading interest on the System will be automatically executable. The System shall execute trading interest within the System in price priority, meaning it will execute all trading interest at the best price level within the System before executing trading interest at the next best price. After considering display-price sliding process as set forth in proposed EDGX Options Rule 21.1(h). See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(d)(6). 57 Book Only Orders are orders that are to be ranked and executed on the Exchange pursuant to Rule 21.8 (Order Display and Book Processing) or cancelled, as appropriate, without routing away to another options exchange. A Book Only Order will be subject to the display-price sliding process unless a User has entered instructions not to use the display-price sliding process as set forth in proposed EDGX Options Rule 21.1(h). See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(d)(7). 58 Post Only Orders are orders that are to be ranked and executed on the Exchange pursuant to Rule 21.8 (Order Display and Book Processing) or cancelled, as appropriate, without routing away to another options exchange except that the order will not remove liquidity from the EDGX Options Book. A Post Only Order cannot be designated with instructions to use the display-price sliding process described in proposed EDGX Options Rule 21.1(h), and any such order will be rejected. A Post Only Order that is not subject to the Price Adjust process that would lock or cross a Protected Quotation of another options exchange or the Exchange will be cancelled. See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(d)(8). The Exchange notes that Post Only Orders on BZX Options are permitted to remove liquidity under certain circumstances and can be designated for the display-price sliding process under BZX Options Rules. The Exchange has not proposed to adopt these features. See Notice, supra note 3, at 28748. 59 Intermarket Sweep Orders (‘‘ISOs’’) means a limit order for an options series that: (1) When routed to an eligible exchange, the order is identified as an ISO; and (2) simultaneously with the routing of the order, one or more additional ISOs, as necessary, are routed to execute against the full displayed size of any Protected Bid, in the case of a limit order to sell, or any Protected Offer, in the case of a limit order to buy, for the options series with a price that is superior to the limit price of the ISO, which such additional orders also marked as ISOs. See proposed EDGX Options Rules, Chapter XXVII, Rule 27.1(a)(9). See also proposed EDGX Options Rules, Chapter XXI, Rule 21.1(d)(10). 60 See proposed EDGX Options Rules, Chapter XXI, Rule 21.1. Options Members entering orders into the System may designate such orders to remain in force and available for display and/or potential execution for varying periods of time. Unless cancelled earlier, once these time periods expire, the order (or the unexecuted portion thereof) is returned to the entering party. 61 See Notice, supra note 3, at 28749. 62 See proposed EDGX Options Rules, Chapter XXI, Rule 21.6(a). VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 price priority, all orders will be matched according to pro-rata priority. In addition, Customer, Primary Market Maker and/or Directed Market Maker priority overlays are also available at the Exchange’s discretion on a class-byclass basis.63 For example, (i) the Customer Overlay provides Customers with priority over all non-Customer interest at the same price; (ii) the Directed Market Maker overlay (which may only be in effect if the Customer Overlay is also in effect) provides the Directed Market Maker with priority over other Market Makers for a certain percentage of contracts allocated at the same price (60% or 40% depending upon the number of other Market Makers at the NBBO); and (iii) the Primary Market Maker overlay (which may only be in effect if the Customer Overlay is also in effect) provides Primary Market Makers with priority over other Market Makers for a certain percentage of contracts allocated at the same price (60% or 40% depending upon the number of other Market Makers at the NBBO) and for small size orders.64 After executions resulting from the priority overlays, orders and quotes within the System for the accounts of non-Customers, including Professional Customers, have next priority.65 If there is more than one highest bid or more than one lowest offer in the Consolidated Book for the account of a non-Customer, then such bids or offers will be afforded priority on a ‘‘size pro rata’’ basis.66 Any price improvement resulting from an execution in the System will accrue to the party taking liquidity.67 The Exchange notes that a Directed Market Maker will have to be quoting at or improving the NBBO at the time the order is received to capitalize on the participation entitlement and will only receive a participation entitlement at one such price point. The Directed Market Maker must be publicly quoting at that price when the order is received. In this regard, the proposal prohibits an order flow provider from notifying a Directed Market Maker regarding its intention to submit a Directed Order so that such Directed Market Maker could change its quotation immediately prior to submission of the directed order. The Exchange believes the proposed rules provide the necessary protections 63 See proposed EDGX Options Rules, Chapter XXI, Rule 21.8(d). 64 See Amendment 1, supra note 6, at 1. 65 See proposed EDGX Options Rules, Chapter XXI, Rule 21.8. 66 Id. 67 See proposed EDGX Options Rules, Chapter XXI, Rule 21.8(i). PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 48603 against coordinated action as between a Directed Market Maker and an order entry firm.68 Furthermore, the Exchange has represented that it will proactively conduct surveillance for, and enforce against, such violations.69 Any incoming order designated with a Match Trade Prevention (‘‘MTP’’) modifier will be prevented from executing against a resting opposite side order also designated with an MTP modifier and originating from the same market participant identifier (‘‘MPID’’), Exchange Member identifier, trading group identifier, or Exchange Sponsored Participant identifier.70 In such a case, the MTP modifier on the incoming order controls the interaction between two orders marked with MTP modifiers.71 The Commission believes that EDGX Options’ proposed execution priority rules and order types are consistent with the Act, and in particular, with the requirements in Section 6(b)(5) of the Act, which requires an exchange’s rules be, among other things, designed 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, and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Commission notes that a Directed Market Maker on EDGX Options will have to be quoting at, or better than, the NBBO at the time a Directed Order is received in order to obtain the guarantee. The Commission believes that it is critical that a Directed Market Maker must not be permitted to step up and match the NBBO after it receives a directed order in order to receive the participation entitlement. In this regard, the Exchange’s proposal prohibits notifying a Directed Market Maker of an intention to submit a Directed Order so that such Directed Market Maker could change its quotation to match the NBBO immediately prior to submission of the Directed Order, and then fade its quote. 68 See proposed EDGX Rule 22.10, Limitation on Dealings. The proposed rule would prohibit an order flow provider from notifying a Directed Market Maker of its intention to submit a Directed Order so that the Directed Market Maker could change its quotation to match the national best bid or offer (‘‘NBBO’’) immediately prior to the submission of the Directed Order. 69 See letter to Ted Venuti, Senior Special Counsel, Commission, from Anders Franzon, VP, Associate General Counsel, EDGX, dated August 7, 2015 (‘‘Surveillance Letter’’). 70 See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(g). 71 See id. An exception exists for orders marked with the MTP Decrement and Cancel (‘‘MDC’’) modifier. See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(g)(3). E:\FR\FM\13AUN1.SGM 13AUN1 tkelley on DSK3SPTVN1PROD with NOTICES 48604 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices EDGX submitted a letter to the Commission representing that it will provide the necessary protections against that type of conduct, and will proactively conduct surveillance for, and enforce against, such violations.72 The Commission further finds that EDGX Options’ proposed trading rules are consistent with the requirements of the Options Order Protection and Locked/Crossed Market Plan (‘‘Linkage Plan’’). Specifically, subject to the exceptions contained in proposed EDGX Options Rules, Chapter XXVII, the System will ensure that an order is not executed at a price that trades through another options exchange.73 In this regard, the Commission notes that EDGX Options is required under Rule 608(c) of Regulation NMS to comply with and enforce compliance by its members with the Linkage Plan, including the requirement to avoid trading through better prices available on other markets.74 As noted below, EDGX Options will be a participant in the Linkage Plan. To meet their regulatory responsibilities under the Linkage Plan, including the requirement to avoid trading through better-priced protected quotations available on other markets, other options exchanges that are Linkage Plan participants must have sufficient notice of new protected quotations, as well as all necessary information (such as final technical specifications). Therefore, the Commission believes that it would be a reasonable policy and procedure under the Linkage Plan for options exchanges to begin treating EDGX Options’ best bid and best offer as a protected quotation within 60 days after the date of this order. Proposed EDGX Options Rules, Chapter XXII, Rule 22.12, prohibits Options Members from executing, as principal, orders they represent as agent unless the agency order is first exposed on EDGX Options for at least one second or the Options Members has been bidding or offering on EDGX Options for at least one second prior to receiving an agency order that is executable against such bid or offer. The Commission believes that in the electronic environment of EDGX Options, a one second exposure period could facilitate the prompt execution of orders while continuing to provide Options Members with an opportunity to compete for exposed bids and offers. In addition, the EDGX Options System 72 See Surveillance Letter, supra note 69. proposed EDGX Options Rules, Chapter XXVII, Rule 27.2. 74 See 17 CFR 242.608(c). See also EDGX Options Rules, Chapter XXVII, Rule 27.2(a). 73 See VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 is based upon technology and functionality currently approved for use in the Exchange’s equities trading system and the Exchange’s affiliate, BZX Options and this order exposure requirement is comparable to that which currently applies on other registered options exchanges.75 Accordingly, the Commission believes this proposed rule of EDGX Options is consistent with the Act. C. Opening and Halt Cross The System will determine a single price at which a particular option series will be opened (the ‘‘Opening Price’’) as calculated by the System within 30 seconds of the first transaction on the primary listing market after 9:30 a.m. Eastern Time in the securities underlying the options as reported on the first print disseminated pursuant to an effective national market system plan (‘‘First Listing Market Transaction’) or immediately after a halt in an option series due to the primary listing market for the applicable underlying security declaring a regulatory trading halt, suspension, or pause with respect to such security (‘‘Regulatory Halt’’) has been lifted.76 Specifically, EDGX Options will accept market and limit orders and quotes for inclusion in the opening process (the ‘‘Opening Process’’) beginning at 8:00 a.m. Eastern Time or immediately upon trading being halted in an option series due Regulatory Halt) and will continue to accept market and limit orders and quotes until such time as the Opening Process is initiated in that option series (the ‘‘Order Entry Period’’), other than index options.77 Orders may be entered and cancelled throughout the Order Entry Period. After establishing an Opening Price,78 orders and quotes in the System that are priced equal to or more aggressively than the Opening Price will be matched based on the Exchange’s proposed priority rules.79 After the matching concludes, orders will be handled in 75 See, e.g., Rules of NOM, Chapter VII, Section 12. In addition, the proposed rules governing priority on the System are consistent with other options exchanges that have similar market models, including Amex and MIAX. See, e.g., Amex Rule 964NY and MIAX Rule 514. 76 See proposed EDGX Options Rules, Chapter XXI, Rule 21.7. 77 The Exchange will not accept IOC or FOK orders for queuing prior to the completion of the Opening Process. The Exchange will convert all ISOs entered for queuing prior to the completion of the Opening Process into non-ISOs. 78 An Opening Price must be a Valid Price as defined in proposed EDGX Options Chapter XXI, Rule 21.7(a)(2). 79 See proposed EDGX Options Rules, Chapter XXI, Rule 21.7(a)(3). See also proposed EDGX Options Rules, Chapter XXI, Rule 21.8. PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 time sequence, beginning with the order with the oldest time stamp and may, in whole or in part, be placed on the EDGX Options Book, cancelled, executed, or routed.80 Other than the differences with respect to the market model described above, the Opening Process or re-opening after a Regulatory Halt are nearly identical to those that exist on the Exchange’s affiliate, BZX Options. The Commission believes that the proposed EDGX Options Rules regarding the opening of trading on EDGX Options are reasonably designed to provide for an orderly opening and are consistent with the Act. The Commission further believes that the procedure for re-opening trading in an option following the conclusion of a trading halt in the underlying security is reasonably designed to provide for an orderly re-opening of trading in the option and is consistent with the Act. D. Routing EDGX Options Members may designate orders to be routed to another options exchange when trading interest is not available on EDGX Options or to execute only on the Exchange. The Exchange proposed that its routing functionality will be limited to only routing System securities, which are options listed for trading on EDGX Options.81 The Exchange has proposed to offer a variety of routing options: Parallel D,82 Parallel 2D,83 Destination Specific 84 and Directed ISO,85 which may be combined with all available order types and time-in-force designations, with the exception of 80 See proposed EDGX Options Rules, Chapter XXI, Rule 21.7(a)(3). See also proposed EDGX Options Rules, Chapter XXI, Rule 21.9. 81 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a). 82 Parallel D is a routing option under which an order checks the System for available contracts and then is sent to destinations on the System routing table. The System may route to multiple destinations at a single price level simultaneously through Parallel D routing. See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a)(2)(A). 83 Parallel 2D is a routing option under which an order checks the System for available contracts and then is sent to destinations on the System routing table. The System may route to multiple destinations and at multiple price levels simultaneously through Parallel 2D routing. See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a)(2)(B). 84 Destination Specific is a routing option under which an order checks the System for available contracts and then is sent to a specified away options exchange. See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a)(2)(C). 85 Directed ISO is a routing option under which an ISO entered by a User bypasses the System and is sent by the System to another options exchange specified by the User. It is the entering Member’s responsibility, not the Exchange’s responsibility, to comply with the requirements relating to Intermarket Sweep Orders. See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a)(2)(D). E:\FR\FM\13AUN1.SGM 13AUN1 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES order types and time-in-force designations whose terms are inconsistent with the terms of a particular routing option.86 The Exchange also proposes to offer two optional Re-Route instructions: Aggressive Re-Route 87 and Super Aggressive Re-Route,88 either of which can be assigned to routable orders. An order that is designated as routable will be routed to other options exchanges to be executed when EDGX Options is not at the NBBO consistent with the Options Order Protection and Locked/ Crossed Market Plan.89 Orders routed to other options exchanges do not retain time priority with respect to orders in the System, and the System will continue to execute orders while routed orders are away at another exchange.90 If a routed order is returned, in whole or in part, that order (or its remainder) will receive a new time stamp reflecting the time of its return to the System.91 Options members whose orders are routed away will be obligated to honor trades executed on other options exchanges to the same extent they would be obligated to honor a trade executed on EDGX Options.92 The Exchange will route options orders via BATS Trading, Inc. (‘‘BATS Trading’’), which serves as the Outbound Router of the Exchange, as defined in Rule 2.11.93 The function of the Outbound Router will be to route orders in options listed and open for trading on EDGX Options to other exchanges pursuant to EDGX Options rules solely on behalf of EDGX Options.94 The Outbound Router will be subject to regulation as a facility of the Exchange, including the requirement to 86 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a)(2). These routing options are identical to the routing options offered on BZX. See Notice, supra note 3, at 28750. 87 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a)(3)(A). To the extent the unfilled balance of a routable order has been posted to the EDGX Options Book, should the order subsequently be crossed by another accessible options exchange, the System shall route the order to the crossing options exchange if the User has selected the Aggressive Re-Route instruction. 88 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a)(3)(B). To the extent the unfilled balance of a routable order has been posted to the EDGX Options Book, should the order subsequently be locked or crossed by another accessible options exchange, the System shall route the order to the locking or crossing options exchange if the User has selected the Super Aggressive Re-Route instruction. 89 See Notice, supra note 3, at 28750. 90 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(b). 91 See id. 92 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(c). 93 See Notice, supra note 3, at 28750. 94 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(d). VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 file proposed rule changes under Section 19 of the Act.95 Pursuant to Rule 2.11, BATS Trading is required to be a member of an SRO unaffiliated with EDGX that is its designated examining authority, and BATS Trading is required to establish and maintain procedures and internal controls reasonably designed to restrict the flow of confidential and proprietary information between EDGX and its facilities, including BATS Trading, and any other entity.96 In addition, the books, records, premises, officers, directors, agents, and employees of BATS Trading, as a facility of EDGX, are deemed to be those of the Exchange for purposes of and subject to oversight pursuant to the Act.97 In the event the Exchange is not able to provide order routing services through its affiliated broker-dealer, the Exchange will route orders to other options exchanges in conjunction with one or more routing brokers that are not affiliated with the Exchange (‘‘Routing Services’’).98 The Exchange will determine the logic that provides when, how, and where orders are routed away to other options exchanges.99 The routing broker will receive routing instructions from the Exchange to route orders to other options exchanges and report the executions back to the Exchange.100 The routing broker cannot change the terms of an order or the routing instructions, nor does the routing broker have any discretion about where to route an order.101 The Exchange would enter into an agreement with each routing broker used by the Exchange that would, among other things, restrict the use of any confidential and proprietary information that the routing broker receives to legitimate business purposes necessary for the routing of the order at the direction of the Exchange.102 Further, the Exchange would establish and maintain procedures and internal controls reasonably designed to adequately restrict the flow of confidential and proprietary information between (1) the Exchange and the routing broker, and any other entity, including any affiliate of the 95 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(d). 96 See EDGX Rules, Chapter II, Rule 2.11(a)(5). 97 See EDGX Rules, Chapter II, Rule 2.11(b). 98 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e). 99 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e)(5). 100 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e)(6). 101 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e)(6). 102 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e)(1). PO 00000 Frm 00130 Fmt 4703 Sfmt 4703 48605 routing broker, and (2) if the routing broker or any of its affiliates engage in any other business activities, other than providing routing services to the Exchange, between the segment of the routing broker or affiliate that provides the other business activities and the segment of the routing broker that provides the routing services.103 The Exchange may not use a routing broker for which the Exchange or any affiliate of the Exchange is the designated examining authority.104 In addition, the Exchange will provide its Routing Services in compliance with the provisions of the Act and the rules thereunder, including but not limited to, the requirements in Section 6(b)(4) and (5) of the Act that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.105 Any bid or offer entered on the Exchange routed to another options exchange through a routing broker that results in an execution shall be binding on the Options Member that entered such bid or offer.106 Use of BATS Trading or the Routing Services to route orders to other market centers is optional.107 Parties that do not desire to use BATS Trading for routing or other Routing Services provided by the Exchange must designate orders as not available for routing.108 In light of these protections, for both the use of BATS Trading or an unaffiliated router, the Commission believes that the EDGX Options rules and procedures regarding the use of BATS Trading or an unaffiliated router to route order to away exchanges are consistent with the Act. E. Minimum Quoting and Trading Increments The Exchange is proposing to apply the following minimum quoting increments: (1) If the option price is less than $3.00, five (5) cents; and (2) if the option price is $3.00 or higher, ten (10) cents.109 In addition, the Exchange 103 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e)(2). 104 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e)(3). 105 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e)(4). 106 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e)(7). 107 See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(d). 108 See id. 109 See proposed EDGX Options Rules, Chapter XXI, Rule 21.5(a). E:\FR\FM\13AUN1.SGM 13AUN1 48606 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES proposes to participate in a pilot program, until June 30, 2016, to allow quoting in certain options in smaller increments (‘‘Pilot Program’’).110 The Exchange will include in the Pilot Program all classes that are included by other options exchanges in substantially similar pilot programs. If an options class is included in the Pilot Program, the Exchange will allow quoting in one (1) cent increments any option priced less than $3.00 or options on QQQQs, IWM, and SPY.111 Options priced at $3.00 or higher that are in the Pilot Program will be quoted in five (5) cent increments.112 In addition, the Exchange is proposing that the minimum trading increment for options contracts traded on EDGX Options would be one (1) cent for all series.113 The Exchange is also proposing to offer trading in Mini Options, and the minimum trading increment for Mini Options will be the same as the minimum trading increment permitted for standard options on the same underlying security.114 The Commission believes that the Exchange’s proposed minimum quoting and trading increments, including its proposal to commence quoting pursuant to the Pilot Program, which are consistent with the rules of the other options exchanges,115 are consistent with the Act. As the Commission noted in approving the latest expansion of the Pilot Program, allowing market participants to quote in smaller increments in Pilot options has been shown to reduce spreads, thereby lowering costs to investors.116 In addition, permitting options to be quoted in smaller increments pursuant to the Pilot Program provides the opportunity for reduced spreads for a significant amount of trading volume.117 Further, although the Commission anticipates that the Exchange’s proposal will contribute to further increases in quotation message traffic, the Commission believes that the Exchange’s proposal is sufficiently 110 See proposed EDGX Options Rules, Chapter XXI, Rule 21.5, Interpretations and Policies .01. See also Amendment No. 2, supra note 7. 111 See proposed EDGX Options Rules, Chapter XXI, Rule 21.5(a). 112 See id. 113 See EDGX Options Rules, Chapter XXI, Rule 21.5(b). 114 See EDGX Options Rules, Chapter XXI, Rule 21.5(c). 115 See, e.g., Rules of NOM, Chapter VI, Section 5. 116 See Securities Exchange Act Release No. 60711 (September 23, 2009), 74 FR 49419, 49424 (September 28, 2009) (SR–NYSEArca–2009–44) (partially approving a proposed rule change to expand the Pilot Program). 117 See id. VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 limited such that it is unlikely on its own to increase quotation message traffic beyond the capacity of market participants’ systems. F. Securities Traded on EDGX Options The Exchange proposes to adopt initial and continued listing standards for equity and index options traded on EDGX Options that are substantially similar to the listing standards adopted by other options exchanges.118 The Commission believes that the Exchange’s proposed initial and continued listing standards are consistent with the Act, including Section 6(b)(5), in that they are designed to protect investors and the public interest and to promote just and equitable principles of trade. EDGX’s operation of the EDGX Options Exchange is conditioned on EDGX becoming a Plan Sponsor in the Plan for the Purpose of Developing and Implementing Procedures designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the Act (‘‘OLPP’’). The Exchange has represented that it will join the OLPP.119 In addition, EDGX has represented that it will become an exchange member in the Options Clearing Corporation (‘‘OCC’’).120 G. Participation in National Market System Plans The Exchange represented that it will operate as a participant in various national market system plans for options trading established under Section 11A of the Act.121 Specifically, the Exchange represented that EDGX Options Exchange will become a member of the Options Order Protection and Locked/Crossed Market Plan, the Options Price Reporting Authority (‘‘OPRA’’), and the Options Regulatory Surveillance Authority (‘‘ORSA’’). EDGX further represented that it is currently a participant in the Plan for the Selection and Reservation of Securities Symbols, and the OLPP.122 H. Regulation According to the Exchange, the Exchange will regulate EDGX Options using the Exchange’s existing regulatory structure. The Exchange’s Chief Regulatory Officer will have general supervision of the regulatory operations of EDGX Options, including 118 See Notice, supra note 3, at 28751. See, e.g., Rules of BZX Options, Chapters XIX and XXIX. 119 See Notice, supra note 3, at 28753. 120 See Notice, supra note 3, at 28747. 121 See Notice, supra note 3, at 28753. 122 See id. See also Amendment No. 2, supra note 7. PO 00000 Frm 00131 Fmt 4703 Sfmt 4703 responsibility for overseeing the surveillance, examination, and enforcement functions and for administering all regulatory services agreements applicable to EDGX Options.123 Similarly, the Exchange’s existing Regulatory Oversight Committee (‘‘ROC’’) will be responsible for overseeing the adequacy and effectiveness of the Exchange’s regulatory and SRO responsibilities, including those applicable to EDGX Options.124 As members of the Exchange, the Exchange’s existing rules governing members will apply to Options Members and their associated persons. The Exchange’s By-laws provide that it has disciplinary jurisdiction over its members, including Options Participants, so that it can enforce its members’ compliance with its rules and the federal securities laws.125 The Exchange’s rules also permit it to sanction members, including Options Members, for violations of its rules and of the federal securities laws by, among other things, expelling or suspending members, limiting members’ activities, functions, or operations, fining or censuring members, or suspending or barring a person from being associated with a member.126 The Exchange’s rules also provide for the imposition of fines for minor rule violations in lieu of commencing disciplinary proceedings.127 Moreover, the Exchange will: (1) Join the existing options industry agreements pursuant to Section 17(d) of the Act; (2) amend, as necessary, the Exchange’s existing Regulatory Services Agreement (‘‘RSA’’) with FINRA to cover many aspects of the regulation and discipline of the Exchange’s Options Members that participate in options trading on EDGX Options; (3) perform options listing regulation, as well as authorize Options Members to trade on EDGX Options; and (4) perform automated surveillance of trading on EDGX Options for the purpose of maintaining a fair and orderly market at all times.128 123 See Notice, supra note 3, at 28754. id. Pursuant to a regulatory services agreement, FINRA would perform certain regulatory functions on behalf of the Exchange. See infra note 133 and accompanying text. 125 See, e.g., Fourth Amended and Restated Bylaws of EDGX Exchange, Inc., Article X, Section 2. 126 See, e.g., EDGX Rules, Chapter II, Rule 2.2. 127 See proposed EDGX Options Rules, Chapter XXV, Rule 25.3 and infra notes 145–148 and accompanying text. See also EDGX Options Rules, Chapter VIII, Rule 8.15. 128 See Notice, supra note 3, at 28753–54. EDGX Options will be monitored to identify unusual trading patterns and determine whether particular trading activity requires further regulatory investigation by FINRA. See id. at 28754. 124 See E:\FR\FM\13AUN1.SGM 13AUN1 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices In addition, the Exchange will oversee the process for determining and implementing trading halts, identifying and responding to unusual market conditions, and administering the Exchange’s process for identifying and remediating ‘‘obvious errors’’ by and among its Options Members.129 The proposed EDGX Options rules (Chapter XX) regarding halts, unusual market conditions, extraordinary market volatility, obvious errors, and audit trail are identical to the rules of BZX Options.130 The Commission finds that the Exchange’s proposed rules and regulatory structure with respect to EDGX Options are consistent with the requirements of the Act, and in particular with Section 6(b)(1) of the Act, which requires an exchange to be so organized and have the capacity to be able to carry out the purposes of the Act and to comply, and to enforce compliance by its members and persons associated with its members, with the Act and the rules and regulations thereunder, and the rules of the Exchange,131 and with Section 6(b)(6) and 6(b)(7) of the Act,132 which require an Exchange to provide fair procedures for the disciplining of members and persons associated with members. tkelley on DSK3SPTVN1PROD with NOTICES 1. Regulatory Services Agreement Currently, the Exchange and FINRA are parties to an existing RSA, pursuant to which FINRA personnel operate as agents for the Exchange in performing certain functions. The Exchange represented that it intends to amend the existing RSA in order to capture certain aspects of regulation specifically applicable to EDGX Options and the regulation and discipline of Options Members.133 The Exchange further represents that it will supervise FINRA and continue to bear ultimate regulatory responsibility for functions performed on the Exchange’s behalf under the RSA.134 Further, the Exchange will retain ultimate legal responsibility for the regulation of its Options Members and its market. The Commission believes that it is consistent with the Act to allow the Exchange to contract with FINRA to perform functions relating to the regulation and discipline of members and the regulation of EDGX Options.135 129 See Notice, supra note 3, at 28754. e.g., Rules of BZX, Chapter XX, see also Rules of NOM, Chapter V, and BOX, Chapter V. 131 15 U.S.C. 78f(b)(1). 132 15 U.S.C. 78f(b)(6) and (b)(7). 133 See Notice, supra note 3 at 28754. 134 See id. 135 See, e.g., Regulation of Exchanges and Alternative Trading Systems, Securities Exchange 130 See, VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 These functions are fundamental elements to a regulatory program and constitute core self-regulatory functions. The Commission believes that FINRA has the expertise and experience to perform these functions on behalf of the Exchange.136 As noted, unless relieved by the Commission of its responsibility,137 the Exchange bears the responsibility for self-regulatory conduct and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on the Exchange’s behalf. In performing these functions, however, FINRA may nonetheless bear liability for causing or aiding and abetting the failure of the Exchange to perform its regulatory functions.138 Accordingly, although FINRA will not act on its own behalf under its SRO responsibilities in carrying out these regulatory services for the Exchange relating to the operation of EDGX Options, FINRA also may have secondary liability if, for example, the Commission finds the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws by the Exchange.139 2. 17d–2 Agreements Rule 17d–2 under the Act permits SROs to file with the Commission plans under which the SROs allocate among each other the responsibility to receive regulatory reports from, and examine and enforce compliance with specified Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998). See also, e.g., Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August 6, 2004) (SR–Amex–2004–32) (approving rule that allowed Amex to contract with another SRO for regulatory services) (‘‘Amex Regulatory Services Approval Order’’); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR–NASDAQ–2007–004) (‘‘NOM Approval Order’’); 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10–131) (‘‘Nasdaq Exchange Registration Order’’); and 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) (SR– BATS–2009–031) (‘‘BATS Options Approval Order’’). 136 See Amex Regulatory Services Approval Order; NOM Approval Order; Nasdaq Exchange Registration Order, and BATS Options Approval Order, id. The Commission notes that the RSA is not before the Commission and, therefore, the Commission is not acting on it. 137 See Section 17(d)(1) of the Act and Rule 17d– 2 thereunder (15 U.S.C. 78q(d)(1) and 17 CFR 240.17d–2). 138 For example, if failings by FINRA have the effect of leaving the Exchange in violation of any aspect of the Exchange’s self-regulatory obligations, the Exchange would bear direct liability for the violation, while FINRA may bear liability for causing or aiding and abetting the violation. See Nasdaq Exchange Registration Order, supra note 135. See also Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No. 10–127) (approving the International Securities Exchange LLC’s application for registration as a national securities exchange). 139 See id. PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 48607 provisions of the Act and rules thereunder and SRO rules by, firms that are members of more than one SRO (‘‘common members’’). If such a plan is declared effective by the Commission, an SRO that is a party to the plan is relieved of regulatory responsibility as to any common member for whom responsibility is allocated under the plan to another SRO.140 Pursuant to Rule 17d–2 under the Act, all of the options exchanges, FINRA, and the New York Stock Exchange LLC (‘‘NYSE’’) have entered into the Options Sales Practices Agreement, a Rule 17d– 2 Agreement, which allocates to certain SROs (‘‘examining SROs’’) regulatory responsibility for common members with respect to certain options-related sales practice matters.141 Under this Agreement, the examining SROs would examine firms that are common members of the Exchange and the particular examining SRO for compliance with certain provisions of the Act, certain of the rules and regulations adopted thereunder, certain examining SRO rules, and certain Exchange Rules. The Exchange’s rules contemplate participation in this Agreement by requiring that any Options Member also be a member of at least one of the examining SROs.142 Moreover, pursuant to Rule 17d–2 under the Act, all of the options exchanges and FINRA have entered into the Options Related Market Surveillance Agreement, which allocates regulatory responsibility for certain options-related market surveillance matters among the participants.143 Under this agreement, the examining SRO would assume regulatory responsibility with respect to firms that are common members of the Exchange and the particular examining SRO for compliance with applicable common rules for certain accounts. As a condition to operation, the Exchange must be a party to each of these 17d– 2 Agreements, which will cover EDGX members that are Options Members. 140 Rule 17d–2 provides that any two or more SROs may file with the Commission a plan for allocating among such SROs the responsibility to receive regulatory reports from persons who are members or participants of more than one of such SROs to examine such persons for compliance, or to enforce compliance by such persons, with specified provisions of the Act, the rules and regulations thereunder, and the rules of such SROs, or to carry out other specified regulatory functions with respect to such persons. See 17 CFR 240.17d– 2. 141 See Securities Exchange Act Release No. 57987 (June 18, 2008), 73 FR 36156 (June 25, 2008) (File No. S7–966). 142 See proposed EDGX Options Rule, Chapter XVII, Rule 17.2(f). 143 See Securities Exchange Act Release No. 58765 (October 9, 2008), 73 FR 62344 (October 20, 2008) (File No. 4–551). E:\FR\FM\13AUN1.SGM 13AUN1 48608 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices EDGX represented that it will join the existing options industry agreements pursuant to Section 17d of the Act.144 3. Minor Rule Violation Plan The Commission approved the EDGX Exchange’s Minor Rule Violation Plan (‘‘MRVP’’) in 2010.145 The Exchange’s MRVP specifies those uncontested minor rule violations with sanctions not exceeding $2,500 that would not be subject to the provisions of Rule 19d– 1(c)(1) under the Act 146 requiring that an SRO promptly file notice with the Commission of any final disciplinary action taken with respect to any person or organization.147 The Exchange’s MRVP includes the policies and procedures included in Exchange Rule 8.15 (Imposition of Fines for Minor Violation(s) of Rules) and in Rule 8.15, Interpretation and Policy .01. The Exchange proposes to amend its MRVP and Rule 8.15, Interpretation and Policy .01 to include proposed Rule 25.3 (Penalty for Minor Rule Violations).148 The Commission believes that this change is consistent with the Act because it clarifies that the proposed rules listed in Rule 25.3 of the proposed EDGX Options Rules will be included in EDGX’s MRVP. The Commission notes that the rules included in proposed Rule 25.3 are similar to rules included in the MRVPs of other options exchanges.149 The Commission finds that the EDGX MRVP, as amended to include the rules listed in proposed EDGX Options Rule 25.3, is consistent with Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act, which require, in part, that an exchange have the capacity 144 See Notice, supra note 3 at 28753. Securities Exchange Act Release No. 62036 (May 5, 2010), 75 FR 26822 (May 12, 2010) (File No. 4–594) (‘‘MRVP Order’’). 146 17 CFR 240.19d–1(c)(1). 147 The Commission adopted amendments to paragraph (c) of Rule 19d–1 to allow SROs to submit for Commission approval plans for the abbreviated reporting of minor disciplinary infractions. See Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8, 1984) (File No. S7–983A). Any disciplinary action taken by an SRO against any person for violation of a rule of the SRO which has been designated as a minor rule violation pursuant to such a plan filed with and declared effective by the Commission would not be considered ‘‘final’’ for purposes of Section 19(d)(1) of the Act if the sanction imposed consists of a fine not exceeding $ 2,500 and the sanctioned person has not sought an adjudication, including a hearing, or otherwise exhausted his administrative remedies. 148 In the MRVP Order, the Commission noted that the Exchange proposed that any amendments to Rule 8.15.01 made pursuant to a rule filing submitted under Rule 19b-4 of the Act would automatically be deemed a request by the Exchange for Commission approval of a modification to its MRVP. See MRVP Order, supra note 145, at note 5. 149 See, e.g., Rules of NOM, Chapter X, Section 7. tkelley on DSK3SPTVN1PROD with NOTICES 145 See VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 to enforce compliance with, and provide appropriate discipline for, violations of the rules of the Commission and of the exchange.150 In addition, because EDGX Rule 8.15 will offer procedural rights to a person sanctioned for a violation listed in proposed EDGX Options Rule 25.3, the Commission believes that the Exchange’s rules provide a fair procedure for the disciplining of members and associated persons, consistent with Section 6(b)(7) of the Act.151 The Commission also finds that the proposal to include the provisions in proposed EDGX Options Rule 25.3 in EDGX’s MRVP is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act, as required by Rule 19d–1(c)(2) under the Act,152 because it should strengthen the Exchange’s ability to carry out its oversight and enforcement responsibilities as an SRO in cases where full disciplinary proceedings are unsuitable in view of the minor nature of the particular violation. In approving the proposed change to the Exchange’s MRVP, the Commission in no way minimizes the importance of compliance with the Exchange’s rules and all other rules subject to the imposition of fines under the Exchange’s MRVP. The Commission believes that the violation of any SRO rules, as well as Commission rules, is a serious matter. However, the Exchange’s MRVP provides a reasonable means of addressing rule violations that do not rise to the level of requiring formal disciplinary proceedings, while providing greater flexibility in handling certain violations. The Commission expects that the Exchange will continue to conduct surveillance with due diligence and make a determination based on its findings, on a case-by-case basis, whether a fine of more or less than the recommended amount is appropriate for a violation under the Exchange’s MRVP or whether a violation requires a formal disciplinary action. I. Section 11(a) of the Act Section 11(a)(1) of the Act 153 prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises discretion (collectively, 150 15 U.S.C. 78f(b)(1), 78f(b)(5), and 78f(b)(6). U.S.C. 78f(b)(7). 152 17 CFR 240.19d–1(c)(2). 153 15 U.S.C. 78k(a)(1). 151 15 PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 ‘‘covered accounts’’) unless an exception applies. Rule 11a2–2(T) under the Act,154 known as the ‘‘effect versus execute’’ rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2– 2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute transactions on the exchange. To comply with Rule 11a2–2(T)’s conditions, a member: (i) Must transmit the order from off the exchange floor; (ii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; 155 (iii) may not be affiliated with the executing member; and (iv) with respect to an account over which the member has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule. In a letter to the Commission, the Exchange requests that the Commission concur with the Exchange’s conclusion that Options Members that enter orders into the System satisfy the requirements of Rule 11a2–2(T).156 For the reasons set forth below, the Commission believes that Options Members entering orders into the System would satisfy the conditions of the Rule. The Rule’s first condition is that orders for covered accounts be transmitted from off the exchange floor. The System will receive orders electronically through remote terminals or computer-to-computer interfaces. In the context of other automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange’s floor by electronic means.157 Because the System receives orders electronically through remote terminals or computer-tocomputer interfaces, the Commission 154 17 CFR 240.11a2–2(T). member may, however, participate in clearing and settling the transaction. 156 See Letter to Brent J. Fields, Secretary, Commission, from Anders Franzon, VP, Associate General Counsel, EDGX, dated August 3, 2015 (‘‘EDGX 11(a) Letter’’). 157 See, e.g., NOM Approval Order, supra note 135; Securities Exchange Act Release Nos. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10–131) (approving Nasdaq Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (SR–PCX–00–25) (approving Archipelago Exchange); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR–NYSE–90–52 and SR–NYSE–90–53) (approving NYSE’s Off-Hours Trading Facility); and 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (‘‘1979 Release’’). 155 The E:\FR\FM\13AUN1.SGM 13AUN1 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices believes that the System satisfies the offfloor transmission requirement. Second, the Rule requires that the member not participate in the execution of its order once it has been transmitted to the member performing the execution. The Exchange represented that at no time following the submission of an order is an Options Members able to acquire control or influence over the result or timing of an order’s execution.158 According to the Exchange, the execution of a member’s order is determined solely by what other orders, bids, or offers are present in the System at the time the Options Member submits the order and on the priority of those orders, bids, and offers.159 Accordingly, the Commission believes that an Options Member does not participate in the execution of an order submitted to the System. Third, Rule 11a2–2(T) requires that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that this requirement is satisfied when automated exchange facilities are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange.160 EDGX represented that the design of the System ensures that no Options Member has any special or unique trading advantage in the handling of its orders after transmitting its orders to the Exchange.161 Based on the Exchange’s representation, the Commission believes 158 See EDGX 11(a) Letter, supra note 156, at 6. id. The member may cancel or modify the order, or modify the instruction for executing the order, but only from off the floor. The Commission has stated that the non-participation requirement is satisfied under such circumstances, so long as such modifications or cancellations are also transmitted from off the floor. See Securities Exchange Act Release No. 14713 (April 27, 1978), 43 FR 18557 (May 1, 1978) (‘‘1978 Release’’) (stating that the ‘‘non-participation requirement does not prevent initiating members from canceling or modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor’’). 160 In considering the operation of automated execution systems operated by an exchange, the Commission has noted that while there is not an independent executing exchange member, the execution of an order is automatic once it has been transmitted into the system. Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2–2(T). See 1979 Release, supra note 157. 161 See EDGX 11(a) Letter, supra note 156, at 6. that the System satisfies this requirement. Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2–2(T)(a)(2)(iv).162 EDGX Options Members trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule’s exemption.163 IV. Exemption From Section 19(b) of the Act With Regard to CBOE, NYSE, and FINRA Rules Incorporated by Reference The Exchange proposes to incorporate by reference as EDGX Options Rules certain rules of the CBOE, NYSE, and FINRA.164 Thus, for certain EDGX Options rules, Exchange members will comply with an EDGX Options rule by complying with the CBOE, NYSE, or FINRA rule referenced. In connection with its proposal to incorporate CBOE, NYSE, and FINRA rules by reference, the Exchange requested, pursuant to Rule 240.0–12 under the Act,165 an exemption under Section 36 of the Act from the rule filing requirements of Section 19(b) of the Act for changes to those EDGX Options rules that are effected solely by virtue of a change to tkelley on DSK3SPTVN1PROD with NOTICES 159 See VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 162 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, Rule 11a2–2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated persons thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2–2(T)(d). See also 1978 Release, supra note 159 (stating ‘‘[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after deciding that such arrangements are suitable to their interests’’). 163 See EDGX 11(a) Letter, supra note 156, at 6. 164 Specifically, the Exchange proposes to incorporate by reference: (1) CBOE rules governing position and exercise limits for equity and index options, which are referenced in proposed EDGX Options Rules 18.7, 18.9, 29.5, and 29.7; (2) the margin rules of the CBOE or the NYSE, which are referenced in proposed EDGX Options Rule 28.3; and (3) FINRA’s rules governing communications with the public, which are referenced in proposed EDGX Options Rule 26.16. 165 17 CFR 240.0–12. PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 48609 a cross-referenced CBOE, NYSE, or FINRA rule.166 The Exchange proposes to incorporate by reference categories of rules (rather than individual rules within a category) that are not trading rules. The Exchange agrees to provide written notice to Options Member prior to the launch of EDGX Options of the specific CBOE, NYSE, and FINRA rules that it will incorporate by reference.167 In addition, the Exchange will notify Options Members whenever CBOE, NYSE, or FINRA proposes a change to a cross-referenced CBOE, NYSE, or FINRA rule.168 Using its authority under Section 36 of the Act, the Commission previously exempted certain SROs from the requirement to file proposed rule changes under Section 19(b) of the Act.169 Each such exempt SRO agreed to be governed by the incorporated rules, as amended from time to time, but is not required to file a separate proposed rule change with the Commission each time the SRO whose rules are incorporated by reference seeks to modify its rules. In addition, each SRO incorporated by reference only regulatory rules (e.g., margin, suitability, arbitration), not trading rules, and incorporated by reference whole categories of rules (i.e., did not ‘‘cherry-pick’’ certain individual rules within a category). Each exempt SRO had reasonable procedures in place to provide written notice to its members each time a change is proposed to the incorporated rules of another SRO in order to provide its members with notice of a proposed rule change that affects their interests, so that they would have an opportunity to comment on it. The Commission is granting the Exchange’s request for exemption, pursuant to Section 36 of the Act, from the rule filing requirements of Section 19(b) of the Act with respect to the rules that the Exchange proposes to incorporate by reference into EDGX 166 See Letter to Brent J. Fields, Secretary, Commission, from Anders Franzon, VP, Associate General Counsel, EDGX, dated August 3, 2015 (‘‘Exemption Request Letter’’). 167 See id. 168 The Exchange will provide such notice through a posting on the same Web site location where the Exchange will post its own rule filings pursuant to Rule 19b–4(l) under Act, within the time frame required by that rule. The Web site posting will include a link to the location on the CBOE, NYSE, or FINRA Web site where the proposed rule change is posted. See id. 169 See Securities Exchange Act Release No. 49260 (February 17, 2004), 69 FR 8500 (February 24, 2004). See also Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 14521, 14539– 40 (March 18, 2008) (order approving SR– NASDAQ–2007–004 and SR–NASDAQ–2007–080) and 53128 (January 13, 2006), 71 FR 3550, 3565– 66 (January 23, 2006) (File No. 10–131) (approving The NASDAQ Stock Market LLC’s exchange application). E:\FR\FM\13AUN1.SGM 13AUN1 48610 Federal Register / Vol. 80, No. 156 / Thursday, August 13, 2015 / Notices Options Rules. The Commission believes that this exemption is appropriate in the public interest and consistent with the protection of investors because it will promote more efficient use of Commission and SRO resources by avoiding duplicative rule filings based on simultaneous changes to identical rule text sought by more than one SRO. Consequently, the Commission grants the Exchange’s exemption request for EDGX Options. This exemption is conditioned upon the Exchange providing written notice to Options Members whenever the CBOE, NYSE, or FINRA proposes to change a rule that EDGX Options has incorporated by reference.170 V. Solicitation of Comments on Amendment Nos. 1 and 2 Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment Nos. 1 and 2 to the proposed rule change are consistent with the Act. Comments may be submitted by any of the following methods: tkelley on DSK3SPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR–EDGX–2015–18 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–EDGX–2015–18. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the 170 As discussed above, the Exchange has represented that it will notify Options Members whenever the CBOE, NYSE, or FINRA proposes a change to a cross-referenced CBOE, NYSE, or FINRA rule. See supra note 168 and accompanying text. VerDate Sep<11>2014 16:56 Aug 12, 2015 Jkt 235001 provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–EDGX– 2015–18 and should be submitted on or before September 3, 2015. VI. Accelerated Approval of Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3 The Commission finds good cause to approve the proposed rule change, as modified by Amendment Nos. 1, 2, and 3 171 thereto, prior to the 30th day after the date of publication of notice of Amendment Nos. 1 and 2 in the Federal Register. As discussed above, Amendment No. 1 revised the proposed rule change by deleting proposed EDGX Options Rule 21.8(f)(2), which would have granted participation entitlements to Directed Market Makers trading against small size orders defined as five or fewer contracts in addition to providing more detailed information regarding participation entitlements for Directed Market Makers. The Commission believes that the revisions in Amendment No. 1 are being made in response to concerns raised by commenters regarding internalization in the options market. As discussed above, Amendment No. 2 revised the proposed rule change by representing that the Exchange is a participant in the Plan for the Selection and Reservation of Securities Symbols and clarified that the Penny Pilot is scheduled to expire on June 30, 2016. The Commission believes Amendment Nos. 1 and 2 are consistent with the purpose of the proposed rule change and are consistent with the protection of investors and the public interest. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act,172 to approve the proposed rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, on an accelerated basis. VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,173 that the proposed rule change (SR–EDGX–2015– 18), as modified by Amendment Nos. 1, 2, and 3 thereto, be, and hereby is, approved on an accelerated basis. Although the Commission’s approval of the proposed rule change is final, and the proposed rules are therefore effective, it is further ordered that the operation of EDGX Options is conditioned on the satisfaction of the requirements below: A. Participation in National Market System Plans Relating to Options Trading. EDGX must join: (1) The OPRA Plan; (2) the OLPP; (3) the Linkage Plan; and (4) the Plan of the Options Regulatory Surveillance Authority. B. RSA and Rule 17d–2 Agreements. EDGX must ensure that all necessary changes are made to its Regulatory Services Agreement with FINRA and must be a party to the multi-party Rule 17d–2 agreements concerning options sales practice regulation and market surveillance.174 C. Participation in the Options Clearing Corporation. EDGX must join the Options Clearing Corporation. D. Participation in the Intermarket Surveillance Group. EDGX must be a member of the Intermarket Surveillance Group. It is further ordered, pursuant to Section 36 of the Act,175 that EDGX shall be exempted from the rule filing requirements of Section 19(b) of the Act with respect to the CBOE, FINRA, and NYSE rules that EDGX proposes to incorporate by reference, subject to the conditions specified in this Order. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.176 Jill M. Peterson, Assistant Secretary. [FR Doc. 2015–19878 Filed 8–12–15; 8:45 am] BILLING CODE 8011–01–P 173 15 171 As noted above, because Amendment No. 3 is technical in nature, the Commission is not required to publish it for public comment. See supra note 8. 172 15 U.S.C. 78s(b)(2). PO 00000 Frm 00135 Fmt 4703 Sfmt 9990 U.S.C. 78s(b)(2). supra notes 141 and 143 and accompanying text. See also 17 CFR 240.17d–2. 175 15 U.S.C. 78mm. 176 17 CFR 200.30(a)(12). 174 See E:\FR\FM\13AUN1.SGM 13AUN1

Agencies

[Federal Register Volume 80, Number 156 (Thursday, August 13, 2015)]
[Notices]
[Pages 48600-48610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19878]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75650; File No. SR-EDGX-2015-18]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, 
and 3 Thereto, To Establish Rules Governing the Trading of Options on 
the EDGX Options Market

August 7, 2015.

I. Introduction

    On April 30, 2015, EDGX Exchange, Inc. (``EDGX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (the ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt rules to govern the trading of options on the Exchange (referred 
to herein as ``EDGX Options Exchange'' or ``EDGX Options''). The 
proposed rule change was published for comment in the Federal Register 
on May 19, 2015.\3\ On June 25, 2015, pursuant to Section 19(b)(2) of 
the Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On August 3, 2015, EDGX filed Amendment No. 1 
to the proposed rule change.\6\ On August 6, 2015, EDGX filed Amendment 
No. 2 to the proposed rule change.\7\ On August 7, 2015, the Exchange 
filed Amendment No. 3 to the proposed rule change.\8\ The Commission 
received three comment letters on the proposal.\9\ On August 7, 2015, 
the Exchange responded to the comment letters.\10\ The Commission is 
publishing this notice to solicit comment on Amendment Nos. 1 and 2 to 
the proposed rule change and is approving the proposed rule change, as 
modified by Amendment Nos. 1, 2, and 3 thereto, on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 74949 (May 13, 
2015), 80 FR 28745 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 75297, 80 FR 37672 
(July 1, 2015).
    \6\ Amendment No. 1 deleted proposed EDGX Options Rule 
21.8(f)(2), which would have granted participation entitlements to 
Directed Market Makers trading against small size orders defined as 
five or fewer contracts. In addition, Amendment No. 1 provided more 
detailed information regarding participation entitlements for 
Directed Market Makers. Among other things, the Exchange represented 
that the proposed rules provide the necessary protections against 
coordinated action between a Directed Market Maker and order entry 
firms and that EDGX Options will proactively conduct surveillance 
for, and enforce against, such violations.
    \7\ In Amendment No. 2, the Exchange represented that it is a 
participant in the Plan for the Selection and Reservation of 
Securities Symbols. Amendment No. 2 also clarified that the Penny 
Pilot Program (discussed below) is scheduled to expire on June 30, 
2016 and the Exchange would be permitted to replace any penny pilot 
issues that have been delisted with the next most actively traded 
multiply listed options classes that are not yet included in the 
penny pilot, based on trading activity in the previous six months. 
The replacement issues may be added to the penny pilot on the second 
trading day following July 1, 2015 and January 1, 2016.
    \8\ Amendment No. 3 made technical changes to Amendments Nos. 1 
and 2. Because Amendment No. 3 is technical in nature, the 
Commission is not required to publish it for public comment.
    \9\ See letters to Brent J. Fields, Secretary, Commission, from 
Suzanne H. Shatto, dated July 7, 2015 (``Shatto Letter''); from 
Michael J. Simon, Secretary and General Counsel, International 
Securities Exchange, LLC (``ISE''), dated July 28, 2015 (``ISE 
Letter''); and from Mark D. Wilson, Director of Technical Risk 
Management & Exchange Relations and Brent E. Hippert, President and 
Chief Compliance Officer, Hardcastle Trading USA, LLC, dated August 
3, 2015 (``Hardcastle Letter'').
    \10\ See letter to Brent J. Fields, Secretary, Commission, from 
Anders Franzon, VP, Associate General Counsel, EDGX, dated August 7, 
2015 (``Response'').
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II. Comment Summary

    The Commission received three comments letters regarding the 
proposal and the Exchange's Response thereto.\11\ One commenter opposed 
the proposal because ``we do not need additional options exchanges.'' 
\12\ The commenter stated that additional options exchanges would lead 
to fragmentation causing ``a thinner order book at all options 
exchange[s] and allows fast intermediaries to take advantage of retail 
orders.'' \13\
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    \11\ See supra notes 9 and 10. The ISE Letter focused 
exclusively on the proposed five lot entitlement for Directed Market 
Makers and did not address any other aspect of the proposed EDGX 
Options rules. The Exchange subsequently deleted this provision from 
the proposed rule change and therefore the Commission has not 
addressed the ISE Letter in this order.
    \12\ See Shatto Letter, supra note 9.
    \13\ See id.
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    Another commenter stated that it opposes any priority model for an 
options exchange other than price-time priority.\14\ The commenter 
believed that ``pure price-time priority is the best and fairest model 
for a healthy and robust market.'' \15\ The commenter further noted 
that price-time priority ``is the best and fairest model because it 
rewards firms who are the first people willing to trade at a better 
price.'' \16\ The commenter states that exchanges with pro-rata 
allocation models adopt rules which allow directed orders and 
preferences without justification. According to the commenter, ``[p]ro-
rata allocation rewards firms that simply quote large size, for no 
particularly clear benefit to the market.'' \17\
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    \14\ See Hardcastle Letter, supra note 9, at 1.
    \15\ Id.
    \16\ See Hardcastle Letter, supra note 9, at 3.
    \17\ See Hardcastle Letter, supra note 9, at 3. The Hardcastle 
Letter was received after the expiration of the comment period and 
raises broader market structure policy concerns that are outside of 
the scope of the present proposal.
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    In response to the commenters' concerns, EDGX notes that both the 
ISE Letter and the Hardcastle Letter ``raised concerns with proposed 
paragraph (f)(2) of proposed [EDGX Options] Rule 21.8, which would have 
provided a small size order . . . allocation to Directed Market Makers 
. . . .'' \18\ The Exchange further notes that it eliminated that 
subparagraph from the proposed rule change in Amendment No. 1.\19\ The 
Response also states that the ``additional points raised in the 
Hardcastle Letter and the Shatto Letter are either not responsive to 
the issues raised in Proposal or are aimed at existing elements of U.S. 
market structure that have been previously approved by the Commission 
and are available on other exchanges and in the marketplace 
generally.'' \20\ Consequently, EDGX does not believe these comments 
are ``germane to the proposal.'' \21\
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    \18\ See Response, supra note 10, at 2.
    \19\ See id.
    \20\ See id.
    \21\ See id.
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III. Discussion and Commission Findings

    After careful review of the proposal, as modified by Amendment Nos. 
1, 2,

[[Page 48601]]

and 3 thereto, and consideration of the comment letters and the 
Exchange's Response thereto, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 1, 2, and 3, is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\22\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\23\ 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 foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, and processing 
information with respect to, and facilitating transactions in 
securities; 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. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers. Further, 
the Commission finds that the proposal is consistent with Sections 
6(b)(1) of the Act,\24\ which requires, among other things, that a 
national securities exchange be so organized and have the capacity to 
carry out the purposes of the Act, and to comply and enforce compliance 
by its members and persons associated with its members, with the 
provisions of the Act, the rules and regulation thereunder, and the 
rules of the exchange.
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    \22\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78f(b)(1).
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    This discussion does not review every detail of the proposal, but 
focuses on the most significant rules and policy issues considered in 
review of the proposal.

A. EDGX Options Members

    EDGX Options will operate an electronic trading system for trading 
options (``System'') that will provide for the electronic display and 
execution of orders.\25\ EDGX Options will have only one category of 
members, known as ``Options Members.'' \26\ Only Options Members will 
be permitted to transact business on the System.\27\ There will be two 
types of Options Members: (1) Options Order Entry Firms (``OEFs'') and 
(2) Options Market Makers. An Options Member must be a member of the 
Exchange and another registered options exchange that is not registered 
solely under Section 6(g) of the Act \28\ or the Financial Industry 
Regulatory Authority (``FINRA'').\29\ Further, an OEF may only transact 
business with public customers if such Options Member also is a member 
of another registered national securities exchange or association with 
which the Exchange has entered into an agreement under Rule 17d-2 under 
the Act pursuant to which such other exchange or association shall be 
the designated options examining authority for the OEF.\30\ In 
addition, Options Members that transact business with Public Customers 
must at all times be a member of FINRA.\31\
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    \25\ The proposed rules of EDGX Options are based on, and 
virtually identical to, the rules of the Exchange's affiliate, BATS 
Exchange, Inc. (``BZX Options''), with the exception of the proposed 
priority model and certain other limited differences. See Notice, 
supra note 3, at 28745.
    \26\ The term ``Options Member'' means a firm, or organization 
that is registered with the Exchange pursuant to Chapter XVII of 
EDGX Options proposed rules for purposes of participating in options 
trading on EDGX Options as an Order Entry Firm or Options Market 
Maker. See proposed EDGX Options Rules, Chapter XVI, Rule 
16.1(a)(38). All Exchange members will be eligible to participate in 
EDGX Options provided that the Exchange specifically authorizes them 
to trade in the System and they become Options Members. A 
prospective Options Member must be an existing member or become a 
Member of the Exchange, pursuant to Chapter II (Members of the 
Exchange), and continue to abide by the requirements of the Chapter 
II Exchange Rules with respect to participation in EDGX Options. See 
proposed EDGX Options Rules, Chapter XVII, Rule 17.1(b)(3).
    \27\ See proposed EDGX Options Rules, Chapter XVII, Rule 
17.1(a).
    \28\ 15 U.S.C. 78f(g).
    \29\ See proposed EDGX Options Rules, Chapter XVII, Rule 
17.2(f).
    \30\ See proposed EDGX Options Rules, Chapter XXVI, Rule 26.1.
    \31\ See proposed EDGX Options Rules, Chapter XVII, Rule 
17.2(f).
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    Among other things, each Options Member must be registered as a 
broker-dealer and have as the principal purpose of being an Options 
Member the conduct of a securities business, which shall be deemed to 
exist if and so long as: (1) The Options Member has qualified and acts 
in respect of its business on EDGX Options as either an OEF or an 
Options Market Maker or both; and (2) all transactions effected by the 
Options Member are in compliance with Section 11(a) of the Act \32\ and 
the rules and regulation adopted thereunder.\33\ Options Members may 
trade options for their own proprietary accounts or, if authorized to 
do so under applicable law, may conduct business on behalf of 
customers.\34\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78k(a).
    \33\ See proposed EDGX Options Rules, Chapter XVII, Rule 
17.2(e).
    \34\ See proposed EDGX Options Rules, Chapter XVII, Rule 
17.1(a).
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    OEFs are Options Members representing customer orders as agent on 
EDGX Options or non-market maker participants conducting proprietary 
trading as principal.\35\ Options Market Makers are Options Members 
registered with the Exchange as Options Market Makers and registered to 
make markets in individual series of options.\36\ Options Market Makers 
will be eligible to participate as Directed Market Makers, Primary 
Market Makers and Market Makers.\37\ A Market Maker that engages in 
specified Other Business Activities, or that is affiliated with a 
broker-dealer that engages in Other Business Activities, including 
functioning as an OEF, must have an Information Barrier between the 
market making activities and the Other Business Activities.\38\ To 
become an Options Market Maker, an Options Member is required to 
register by filing a written application with the Exchange, which will 
consider an applicant's market making ability and such other factors as 
it deems appropriate in determining whether to approve an applicant's 
registration as a Market Maker.\39\ An unlimited number of Market 
Makers may be registered in each class unless the number of Market 
Makers registered to make a market in a particular option class should 
be limited whenever, in the Exchange's judgment, quotation system 
capacity in an option class or classes is not sufficient to support 
additional Market Makers in such class or classes.\40\ The Exchange 
will not restrict access in any particular option class until such time 
as the Exchange has submitted objective standards for restricting 
access to the Commission for its review and approval.\41\
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    \35\ See proposed EDGX Options Rules, Chapter XVI, Rule 
16.1(a)(36).
    \36\ See proposed EDGX Options Rules, Chapter XXII, Rule 22.2. 
All Market Makers are designated as specialists on EDGX Options for 
all purposes under the Exchange Act or Rules thereunder.
    \37\ See Notice, supra note 3, at 28746.
    \38\ See proposed EDGX Options Rules, Chapter XXII, Rule 
22.10(a).
    \39\ See proposed EDGX Options Rules, Chapter XXII, Rule 
22.2(a).
    \40\ See proposed EDGX Options Rules, Chapter XXII, Rule 
22.2(c).
    \41\ See id.
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    In addition, the Exchange may appoint one Primary Market Maker per 
option class.\42\ Market Makers may select from among any option issues 
traded on the Exchange to request appointment as a Primary Market

[[Page 48602]]

Maker, subject to the approval of the Exchange. In considering the 
approval of the appointment of a Primary Market Maker in each security, 
the Exchange will consider: The Market Maker's preference; the 
financial resources available to the Market Maker; the Market Maker's 
experience, expertise and past performance in making markets, including 
the Market Maker's performance in other securities; the Market Maker's 
operational capability; and the maintenance and enhancement of 
competition among Market Makers in each security in which they are 
registered, including pursuant to the performance standards set forth 
in proposed Rule 22.2(i).\43\ Options Market Makers are required to 
electronically engage in a course of dealings to enhance liquidity 
available on EDGX Options and to assist in the maintenance of fair and 
orderly markets.\44\ Among other things, an Options Market Maker must: 
(1) On a daily basis maintain a two-sided market on a continuous basis 
in at least 75% of the individual options series in which it is 
registered; (2) engage, to a reasonable degree under the existing 
circumstances, in dealings for their own accounts when there exists, or 
it is reasonably anticipated that there will exist, a lack of price 
continuity, a temporary disparity between the supply of (or demand for) 
a particular option contract, or a temporary distortion of the price 
relationships between option contracts of the same class; (3) compete 
with other Market Makers in all series in which the Market Maker is 
registered to trade; and (4) maintain minimum net capital in accordance 
with Commission and the Exchange rules.\45\ Substantial or continued 
failure by an Options Market Maker to meet any of its obligations and 
duties would subject the Options Market Maker to disciplinary action, 
suspension, or revocation of the Options Market Maker's registration in 
one or more options series.\46\
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    \42\ See id.
    \43\ See proposed EDGX Options Rules, Chapter XXII, Rule 
22.2(d). The Exchange will periodically conduct an evaluation of 
Primary Market Makers to determine whether they have fulfilled 
performance standards relating to, among other things, quality of 
markets, competition among Market Makers, observance of ethical 
standards, and administrative factors. The Exchange may consider any 
relevant information including, but not limited to, the results of a 
Market Maker evaluation, trading data, a Market Maker's regulatory 
history and such other factors and data as may be pertinent in the 
circumstances. See proposed EDGX Options Rules, Chapter XXII, Rule 
22.2(i).
    \44\ See proposed EDGX Options Rules, Chapter XXII, Rule 22.5.
    \45\ See, e.g., proposed EDGX Options Rules, Chapter XXII, Rule 
22.5(a).
    \46\ See proposed EDGX Options Rules, Chapter XXII, Rule 
22.5(c).
---------------------------------------------------------------------------

    The Commission finds that the Options Market Maker qualification 
requirements are consistent with the Act and notes that they are 
similar to those of other options exchanges.\47\ The Commission also 
finds that the Options Market Maker participation requirements are 
consistent with the Act. Market makers receive certain benefits for 
carrying out their responsibilities. For example, a broker-dealer or 
other lender may extend ``good faith'' credit to a member of a national 
securities exchange or registered broker-dealer to finance its 
activities as a market maker or specialist.\48\ In addition, market 
makers are exempted from the prohibition in Section 11(a) of the Act. 
The Commission believes that a market maker must have sufficient 
affirmative obligations, including the obligation to hold itself out as 
willing to buy and sell options for its own account on a regular or 
continuous basis, to justify this favorable treatment. The Commission 
believes that EDGX Options Market Maker participation requirements 
impose sufficient affirmative obligations on Options Market Makers and, 
accordingly, that these EDGX Options requirements are consistent with 
the Act.\49\
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    \47\ See, e.g., Rules of NOM, Chapter VII, Sections 4, 5, and 6; 
and BATS Rules 22.4, 22.5 and 22.6.
    \48\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 
240.15c3-1(a)(6) (capital requirements for market makers).
    \49\ The Commission notes that the participation requirements 
are similar to those of other options exchanges. See, e.g., NOM 
Rules, Chapter VII, Sections 5 and 6; and BATS Rules 22.5 and 22.6.
---------------------------------------------------------------------------

B. EDGX Options Trading System

    The Exchange's options trading system will leverage the Exchange's 
current technology, including its customer connectivity, messaging 
protocols, quotation and execution engine, order router, data feeds, 
and network infrastructure. As a result, the EDGX Options Exchange will 
closely resemble the Exchange's affiliate, BZX Options, with the 
exception of the proposed priority model and certain other limited 
differences.\50\ As noted above, EDGX Options will maintain a pro rata 
allocation model with execution priority dependent on the capacity of 
an order (e.g., Customer or non-Customer) as well as status as a 
Primary Market Maker or Directed Market Maker, as applicable.\51\ The 
System will include a proprietary data feed, Multicast PITCH, which 
will display depth of book quotations and execution information based 
on orders received by EDGX Options using the minimum price variation 
applicable to that security.\52\
---------------------------------------------------------------------------

    \50\ See Notice, supra note 3, at 28745.
    \51\ See id. at 28747. The System includes: (1) An order 
execution service that enables Users to automatically execute 
transactions in System Securities; and provides Users with 
sufficient monitoring and updating capability to participate in an 
automated execution environment; (2) a trade reporting service that 
submits ``locked-in'' trades for clearing to a registered clearing 
agency for clearance and settlement; transmits last-sale reports of 
transactions automatically to the Options Price Reporting Authority 
for dissemination to the public and industry, and provides 
participants with monitoring and risk management capabilities to 
facilitate participation in a ``locked-in'' trading environment; and 
(3) a data feed(s) that can be used to display with or without 
attribution to Options Members' MPIDs Displayed Orders on both the 
bid and offer side of the market for price levels then within EDGX 
Options using the minimum price variation applicable to that 
security. See proposed EDGX Options Rules, Chapter XXI, Rule 
21.1(a). See Notice, supra note 3, for a more complete description 
of EDGX Options operation and rules. The Commission notes that the 
Plan for Reporting of Consolidated Options Last Sale Reports and 
Quotation Information (``OPRA Plan'') requires each party to the 
Plan to collect and promptly transmit to the OPRA all last sale 
reports relating to its market. See OPRA Plan, Article V, Section 
5.2(a).
    \52\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.15.
---------------------------------------------------------------------------

    Options Members will be able to enter the following types of orders 
into the System: Limit Orders; \53\ Minimum Quantity Orders; \54\ 
Market Orders; \55\ Price Improving Orders; \56\ Book Only

[[Page 48603]]

Orders; \57\ Post Only Orders; \58\ and Intermarket Sweep Orders; \59\ 
with characteristics and functionality similar to what is currently 
approved for use on BZX Options.\60\ Orders entered into the System 
will be designated for display (price and size) on either an 
attributable or non-attributable basis in the order display service of 
the System.\61\ Options Members will be permitted to enter multiple 
orders at single or multiple price levels.\62\
---------------------------------------------------------------------------

    \53\ Limit Orders are orders to buy or sell an option at a 
specified price or better. A limit order is marketable when, for a 
limit order to buy, at the time it is entered into the System, the 
order is priced at the current inside offer or higher, or for a 
limit order to sell, at the time it is entered into the System, the 
order is priced at the inside bid or lower. See proposed EDGX 
Options Rules, Chapter XXI, Rule 21.1(d)(2).
    \54\ Minimum Quantity Orders are orders that require that a 
specified minimum quantity of contracts be obtained, or the order is 
cancelled. Minimum Quantity Orders will only execute against 
multiple, aggregated orders if such execution would occur 
simultaneously. The Exchange will only honor a specified minimum 
quantity on a Book Only Order entered with a time-in-force 
designation of Immediate or Cancel and will disregard a minimum 
quantity on any other order. See proposed EDGX Options Rules, 
Chapter XXI, Rule 21.1(d)(3).
    \55\ Market Orders are orders to buy or sell at the best price 
available at the time of execution. Market Orders to buy or sell an 
option traded on EDGX Options will be rejected if they are received 
when the underlying security is subject to a ``Limit State'' or 
``Straddle State'' as defined in the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS under the 
Act (the ``Limit Up-Limit Down Plan''). Any portion of a Market 
Order that would execute at a price more than $0.50 or 5 percent 
worse than the NBBO at the time the order initially reaches EDGX 
Options, whichever is greater, will be cancelled. See proposed EDGX 
Options Rules, Chapter XXI, Rule 21.1(d)(5).
    \56\ Price Improving Orders are orders to buy or sell an option 
at a specified price at an increment smaller than the minimum price 
variation in the security. Price Improving Orders may be entered in 
increments as small as (1) one cent. Price Improving Orders shall be 
displayed at the minimum price variation in that security and shall 
be rounded up for sell orders and rounded down for buy orders. 
Unless a User has entered instructions not to do so, Price Improving 
Orders will be subject to the display-price sliding process as set 
forth in proposed EDGX Options Rule 21.1(h). See proposed EDGX 
Options Rules, Chapter XXI, Rule 21.1(d)(6).
    \57\ Book Only Orders are orders that are to be ranked and 
executed on the Exchange pursuant to Rule 21.8 (Order Display and 
Book Processing) or cancelled, as appropriate, without routing away 
to another options exchange. A Book Only Order will be subject to 
the display-price sliding process unless a User has entered 
instructions not to use the display-price sliding process as set 
forth in proposed EDGX Options Rule 21.1(h). See proposed EDGX 
Options Rules, Chapter XXI, Rule 21.1(d)(7).
    \58\ Post Only Orders are orders that are to be ranked and 
executed on the Exchange pursuant to Rule 21.8 (Order Display and 
Book Processing) or cancelled, as appropriate, without routing away 
to another options exchange except that the order will not remove 
liquidity from the EDGX Options Book. A Post Only Order cannot be 
designated with instructions to use the display-price sliding 
process described in proposed EDGX Options Rule 21.1(h), and any 
such order will be rejected. A Post Only Order that is not subject 
to the Price Adjust process that would lock or cross a Protected 
Quotation of another options exchange or the Exchange will be 
cancelled. See proposed EDGX Options Rules, Chapter XXI, Rule 
21.1(d)(8). The Exchange notes that Post Only Orders on BZX Options 
are permitted to remove liquidity under certain circumstances and 
can be designated for the display-price sliding process under BZX 
Options Rules. The Exchange has not proposed to adopt these 
features. See Notice, supra note 3, at 28748.
    \59\ Intermarket Sweep Orders (``ISOs'') means a limit order for 
an options series that: (1) When routed to an eligible exchange, the 
order is identified as an ISO; and (2) simultaneously with the 
routing of the order, one or more additional ISOs, as necessary, are 
routed to execute against the full displayed size of any Protected 
Bid, in the case of a limit order to sell, or any Protected Offer, 
in the case of a limit order to buy, for the options series with a 
price that is superior to the limit price of the ISO, which such 
additional orders also marked as ISOs. See proposed EDGX Options 
Rules, Chapter XXVII, Rule 27.1(a)(9). See also proposed EDGX 
Options Rules, Chapter XXI, Rule 21.1(d)(10).
    \60\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.1. 
Options Members entering orders into the System may designate such 
orders to remain in force and available for display and/or potential 
execution for varying periods of time. Unless cancelled earlier, 
once these time periods expire, the order (or the unexecuted portion 
thereof) is returned to the entering party.
    \61\ See Notice, supra note 3, at 28749.
    \62\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.6(a).
---------------------------------------------------------------------------

    All trading interest on the System will be automatically 
executable. The System shall execute trading interest within the System 
in price priority, meaning it will execute all trading interest at the 
best price level within the System before executing trading interest at 
the next best price. After considering price priority, all orders will 
be matched according to pro-rata priority. In addition, Customer, 
Primary Market Maker and/or Directed Market Maker priority overlays are 
also available at the Exchange's discretion on a class-by-class 
basis.\63\ For example, (i) the Customer Overlay provides Customers 
with priority over all non-Customer interest at the same price; (ii) 
the Directed Market Maker overlay (which may only be in effect if the 
Customer Overlay is also in effect) provides the Directed Market Maker 
with priority over other Market Makers for a certain percentage of 
contracts allocated at the same price (60% or 40% depending upon the 
number of other Market Makers at the NBBO); and (iii) the Primary 
Market Maker overlay (which may only be in effect if the Customer 
Overlay is also in effect) provides Primary Market Makers with priority 
over other Market Makers for a certain percentage of contracts 
allocated at the same price (60% or 40% depending upon the number of 
other Market Makers at the NBBO) and for small size orders.\64\
---------------------------------------------------------------------------

    \63\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.8(d).
    \64\ See Amendment 1, supra note 6, at 1.
---------------------------------------------------------------------------

    After executions resulting from the priority overlays, orders and 
quotes within the System for the accounts of non-Customers, including 
Professional Customers, have next priority.\65\ If there is more than 
one highest bid or more than one lowest offer in the Consolidated Book 
for the account of a non-Customer, then such bids or offers will be 
afforded priority on a ``size pro rata'' basis.\66\ Any price 
improvement resulting from an execution in the System will accrue to 
the party taking liquidity.\67\
---------------------------------------------------------------------------

    \65\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.8.
    \66\ Id.
    \67\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.8(i).
---------------------------------------------------------------------------

    The Exchange notes that a Directed Market Maker will have to be 
quoting at or improving the NBBO at the time the order is received to 
capitalize on the participation entitlement and will only receive a 
participation entitlement at one such price point. The Directed Market 
Maker must be publicly quoting at that price when the order is 
received. In this regard, the proposal prohibits an order flow provider 
from notifying a Directed Market Maker regarding its intention to 
submit a Directed Order so that such Directed Market Maker could change 
its quotation immediately prior to submission of the directed order. 
The Exchange believes the proposed rules provide the necessary 
protections against coordinated action as between a Directed Market 
Maker and an order entry firm.\68\ Furthermore, the Exchange has 
represented that it will proactively conduct surveillance for, and 
enforce against, such violations.\69\
---------------------------------------------------------------------------

    \68\ See proposed EDGX Rule 22.10, Limitation on Dealings. The 
proposed rule would prohibit an order flow provider from notifying a 
Directed Market Maker of its intention to submit a Directed Order so 
that the Directed Market Maker could change its quotation to match 
the national best bid or offer (``NBBO'') immediately prior to the 
submission of the Directed Order.
    \69\ See letter to Ted Venuti, Senior Special Counsel, 
Commission, from Anders Franzon, VP, Associate General Counsel, 
EDGX, dated August 7, 2015 (``Surveillance Letter'').
---------------------------------------------------------------------------

    Any incoming order designated with a Match Trade Prevention 
(``MTP'') modifier will be prevented from executing against a resting 
opposite side order also designated with an MTP modifier and 
originating from the same market participant identifier (``MPID''), 
Exchange Member identifier, trading group identifier, or Exchange 
Sponsored Participant identifier.\70\ In such a case, the MTP modifier 
on the incoming order controls the interaction between two orders 
marked with MTP modifiers.\71\
---------------------------------------------------------------------------

    \70\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.1(g).
    \71\ See id. An exception exists for orders marked with the MTP 
Decrement and Cancel (``MDC'') modifier. See proposed EDGX Options 
Rules, Chapter XXI, Rule 21.1(g)(3).
---------------------------------------------------------------------------

    The Commission believes that EDGX Options' proposed execution 
priority rules and order types are consistent with the Act, and in 
particular, with the requirements in Section 6(b)(5) of the Act, which 
requires an exchange's rules be, among other things, designed 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, and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
    The Commission notes that a Directed Market Maker on EDGX Options 
will have to be quoting at, or better than, the NBBO at the time a 
Directed Order is received in order to obtain the guarantee. The 
Commission believes that it is critical that a Directed Market Maker 
must not be permitted to step up and match the NBBO after it receives a 
directed order in order to receive the participation entitlement. In 
this regard, the Exchange's proposal prohibits notifying a Directed 
Market Maker of an intention to submit a Directed Order so that such 
Directed Market Maker could change its quotation to match the NBBO 
immediately prior to submission of the Directed Order, and then fade 
its quote.

[[Page 48604]]

EDGX submitted a letter to the Commission representing that it will 
provide the necessary protections against that type of conduct, and 
will proactively conduct surveillance for, and enforce against, such 
violations.\72\
---------------------------------------------------------------------------

    \72\ See Surveillance Letter, supra note 69.
---------------------------------------------------------------------------

    The Commission further finds that EDGX Options' proposed trading 
rules are consistent with the requirements of the Options Order 
Protection and Locked/Crossed Market Plan (``Linkage Plan''). 
Specifically, subject to the exceptions contained in proposed EDGX 
Options Rules, Chapter XXVII, the System will ensure that an order is 
not executed at a price that trades through another options 
exchange.\73\ In this regard, the Commission notes that EDGX Options is 
required under Rule 608(c) of Regulation NMS to comply with and enforce 
compliance by its members with the Linkage Plan, including the 
requirement to avoid trading through better prices available on other 
markets.\74\ As noted below, EDGX Options will be a participant in the 
Linkage Plan. To meet their regulatory responsibilities under the 
Linkage Plan, including the requirement to avoid trading through 
better-priced protected quotations available on other markets, other 
options exchanges that are Linkage Plan participants must have 
sufficient notice of new protected quotations, as well as all necessary 
information (such as final technical specifications). Therefore, the 
Commission believes that it would be a reasonable policy and procedure 
under the Linkage Plan for options exchanges to begin treating EDGX 
Options' best bid and best offer as a protected quotation within 60 
days after the date of this order.
---------------------------------------------------------------------------

    \73\ See proposed EDGX Options Rules, Chapter XXVII, Rule 27.2.
    \74\ See 17 CFR 242.608(c). See also EDGX Options Rules, Chapter 
XXVII, Rule 27.2(a).
---------------------------------------------------------------------------

    Proposed EDGX Options Rules, Chapter XXII, Rule 22.12, prohibits 
Options Members from executing, as principal, orders they represent as 
agent unless the agency order is first exposed on EDGX Options for at 
least one second or the Options Members has been bidding or offering on 
EDGX Options for at least one second prior to receiving an agency order 
that is executable against such bid or offer.
    The Commission believes that in the electronic environment of EDGX 
Options, a one second exposure period could facilitate the prompt 
execution of orders while continuing to provide Options Members with an 
opportunity to compete for exposed bids and offers. In addition, the 
EDGX Options System is based upon technology and functionality 
currently approved for use in the Exchange's equities trading system 
and the Exchange's affiliate, BZX Options and this order exposure 
requirement is comparable to that which currently applies on other 
registered options exchanges.\75\ Accordingly, the Commission believes 
this proposed rule of EDGX Options is consistent with the Act.
---------------------------------------------------------------------------

    \75\ See, e.g., Rules of NOM, Chapter VII, Section 12. In 
addition, the proposed rules governing priority on the System are 
consistent with other options exchanges that have similar market 
models, including Amex and MIAX. See, e.g., Amex Rule 964NY and MIAX 
Rule 514.
---------------------------------------------------------------------------

C. Opening and Halt Cross

    The System will determine a single price at which a particular 
option series will be opened (the ``Opening Price'') as calculated by 
the System within 30 seconds of the first transaction on the primary 
listing market after 9:30 a.m. Eastern Time in the securities 
underlying the options as reported on the first print disseminated 
pursuant to an effective national market system plan (``First Listing 
Market Transaction') or immediately after a halt in an option series 
due to the primary listing market for the applicable underlying 
security declaring a regulatory trading halt, suspension, or pause with 
respect to such security (``Regulatory Halt'') has been lifted.\76\
---------------------------------------------------------------------------

    \76\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.7.
---------------------------------------------------------------------------

    Specifically, EDGX Options will accept market and limit orders and 
quotes for inclusion in the opening process (the ``Opening Process'') 
beginning at 8:00 a.m. Eastern Time or immediately upon trading being 
halted in an option series due Regulatory Halt) and will continue to 
accept market and limit orders and quotes until such time as the 
Opening Process is initiated in that option series (the ``Order Entry 
Period''), other than index options.\77\ Orders may be entered and 
cancelled throughout the Order Entry Period.
---------------------------------------------------------------------------

    \77\ The Exchange will not accept IOC or FOK orders for queuing 
prior to the completion of the Opening Process. The Exchange will 
convert all ISOs entered for queuing prior to the completion of the 
Opening Process into non-ISOs.
---------------------------------------------------------------------------

    After establishing an Opening Price,\78\ orders and quotes in the 
System that are priced equal to or more aggressively than the Opening 
Price will be matched based on the Exchange's proposed priority 
rules.\79\ After the matching concludes, orders will be handled in time 
sequence, beginning with the order with the oldest time stamp and may, 
in whole or in part, be placed on the EDGX Options Book, cancelled, 
executed, or routed.\80\ Other than the differences with respect to the 
market model described above, the Opening Process or re-opening after a 
Regulatory Halt are nearly identical to those that exist on the 
Exchange's affiliate, BZX Options.
---------------------------------------------------------------------------

    \78\ An Opening Price must be a Valid Price as defined in 
proposed EDGX Options Chapter XXI, Rule 21.7(a)(2).
    \79\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.7(a)(3). See also proposed EDGX Options Rules, Chapter XXI, Rule 
21.8.
    \80\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.7(a)(3). See also proposed EDGX Options Rules, Chapter XXI, Rule 
21.9.
---------------------------------------------------------------------------

    The Commission believes that the proposed EDGX Options Rules 
regarding the opening of trading on EDGX Options are reasonably 
designed to provide for an orderly opening and are consistent with the 
Act. The Commission further believes that the procedure for re-opening 
trading in an option following the conclusion of a trading halt in the 
underlying security is reasonably designed to provide for an orderly 
re-opening of trading in the option and is consistent with the Act.

D. Routing

    EDGX Options Members may designate orders to be routed to another 
options exchange when trading interest is not available on EDGX Options 
or to execute only on the Exchange. The Exchange proposed that its 
routing functionality will be limited to only routing System 
securities, which are options listed for trading on EDGX Options.\81\ 
The Exchange has proposed to offer a variety of routing options: 
Parallel D,\82\ Parallel 2D,\83\ Destination Specific \84\ and Directed 
ISO,\85\ which may be combined with all available order types and time-
in-force designations, with the exception of

[[Page 48605]]

order types and time-in-force designations whose terms are inconsistent 
with the terms of a particular routing option.\86\ The Exchange also 
proposes to offer two optional Re-Route instructions: Aggressive Re-
Route \87\ and Super Aggressive Re-Route,\88\ either of which can be 
assigned to routable orders. An order that is designated as routable 
will be routed to other options exchanges to be executed when EDGX 
Options is not at the NBBO consistent with the Options Order Protection 
and Locked/Crossed Market Plan.\89\ Orders routed to other options 
exchanges do not retain time priority with respect to orders in the 
System, and the System will continue to execute orders while routed 
orders are away at another exchange.\90\ If a routed order is returned, 
in whole or in part, that order (or its remainder) will receive a new 
time stamp reflecting the time of its return to the System.\91\ Options 
members whose orders are routed away will be obligated to honor trades 
executed on other options exchanges to the same extent they would be 
obligated to honor a trade executed on EDGX Options.\92\
---------------------------------------------------------------------------

    \81\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(a).
    \82\ Parallel D is a routing option under which an order checks 
the System for available contracts and then is sent to destinations 
on the System routing table. The System may route to multiple 
destinations at a single price level simultaneously through Parallel 
D routing. See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(a)(2)(A).
    \83\ Parallel 2D is a routing option under which an order checks 
the System for available contracts and then is sent to destinations 
on the System routing table. The System may route to multiple 
destinations and at multiple price levels simultaneously through 
Parallel 2D routing. See proposed EDGX Options Rules, Chapter XXI, 
Rule 21.9(a)(2)(B).
    \84\ Destination Specific is a routing option under which an 
order checks the System for available contracts and then is sent to 
a specified away options exchange. See proposed EDGX Options Rules, 
Chapter XXI, Rule 21.9(a)(2)(C).
    \85\ Directed ISO is a routing option under which an ISO entered 
by a User bypasses the System and is sent by the System to another 
options exchange specified by the User. It is the entering Member's 
responsibility, not the Exchange's responsibility, to comply with 
the requirements relating to Intermarket Sweep Orders. See proposed 
EDGX Options Rules, Chapter XXI, Rule 21.9(a)(2)(D).
    \86\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(a)(2). These routing options are identical to the routing 
options offered on BZX. See Notice, supra note 3, at 28750.
    \87\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(a)(3)(A). To the extent the unfilled balance of a routable 
order has been posted to the EDGX Options Book, should the order 
subsequently be crossed by another accessible options exchange, the 
System shall route the order to the crossing options exchange if the 
User has selected the Aggressive Re-Route instruction.
    \88\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(a)(3)(B). To the extent the unfilled balance of a routable 
order has been posted to the EDGX Options Book, should the order 
subsequently be locked or crossed by another accessible options 
exchange, the System shall route the order to the locking or 
crossing options exchange if the User has selected the Super 
Aggressive Re-Route instruction.
    \89\ See Notice, supra note 3, at 28750.
    \90\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(b).
    \91\ See id.
    \92\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(c).
---------------------------------------------------------------------------

    The Exchange will route options orders via BATS Trading, Inc. 
(``BATS Trading''), which serves as the Outbound Router of the 
Exchange, as defined in Rule 2.11.\93\ The function of the Outbound 
Router will be to route orders in options listed and open for trading 
on EDGX Options to other exchanges pursuant to EDGX Options rules 
solely on behalf of EDGX Options.\94\ The Outbound Router will be 
subject to regulation as a facility of the Exchange, including the 
requirement to file proposed rule changes under Section 19 of the 
Act.\95\
---------------------------------------------------------------------------

    \93\ See Notice, supra note 3, at 28750.
    \94\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(d).
    \95\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(d).
---------------------------------------------------------------------------

    Pursuant to Rule 2.11, BATS Trading is required to be a member of 
an SRO unaffiliated with EDGX that is its designated examining 
authority, and BATS Trading is required to establish and maintain 
procedures and internal controls reasonably designed to restrict the 
flow of confidential and proprietary information between EDGX and its 
facilities, including BATS Trading, and any other entity.\96\ In 
addition, the books, records, premises, officers, directors, agents, 
and employees of BATS Trading, as a facility of EDGX, are deemed to be 
those of the Exchange for purposes of and subject to oversight pursuant 
to the Act.\97\
---------------------------------------------------------------------------

    \96\ See EDGX Rules, Chapter II, Rule 2.11(a)(5).
    \97\ See EDGX Rules, Chapter II, Rule 2.11(b).
---------------------------------------------------------------------------

    In the event the Exchange is not able to provide order routing 
services through its affiliated broker-dealer, the Exchange will route 
orders to other options exchanges in conjunction with one or more 
routing brokers that are not affiliated with the Exchange (``Routing 
Services'').\98\ The Exchange will determine the logic that provides 
when, how, and where orders are routed away to other options 
exchanges.\99\ The routing broker will receive routing instructions 
from the Exchange to route orders to other options exchanges and report 
the executions back to the Exchange.\100\ The routing broker cannot 
change the terms of an order or the routing instructions, nor does the 
routing broker have any discretion about where to route an order.\101\ 
The Exchange would enter into an agreement with each routing broker 
used by the Exchange that would, among other things, restrict the use 
of any confidential and proprietary information that the routing broker 
receives to legitimate business purposes necessary for the routing of 
the order at the direction of the Exchange.\102\ Further, the Exchange 
would establish and maintain procedures and internal controls 
reasonably designed to adequately restrict the flow of confidential and 
proprietary information between (1) the Exchange and the routing 
broker, and any other entity, including any affiliate of the routing 
broker, and (2) if the routing broker or any of its affiliates engage 
in any other business activities, other than providing routing services 
to the Exchange, between the segment of the routing broker or affiliate 
that provides the other business activities and the segment of the 
routing broker that provides the routing services.\103\
---------------------------------------------------------------------------

    \98\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.9(e).
    \99\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(e)(5).
    \100\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(e)(6).
    \101\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(e)(6).
    \102\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(e)(1).
    \103\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(e)(2).
---------------------------------------------------------------------------

    The Exchange may not use a routing broker for which the Exchange or 
any affiliate of the Exchange is the designated examining 
authority.\104\ In addition, the Exchange will provide its Routing 
Services in compliance with the provisions of the Act and the rules 
thereunder, including but not limited to, the requirements in Section 
6(b)(4) and (5) of the Act that the rules of a national securities 
exchange provide for the equitable allocation of reasonable dues, fees, 
and other charges among its members and issuers and other persons using 
its facilities, and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.\105\ Any bid or offer 
entered on the Exchange routed to another options exchange through a 
routing broker that results in an execution shall be binding on the 
Options Member that entered such bid or offer.\106\
---------------------------------------------------------------------------

    \104\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(e)(3).
    \105\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(e)(4).
    \106\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(e)(7).
---------------------------------------------------------------------------

    Use of BATS Trading or the Routing Services to route orders to 
other market centers is optional.\107\ Parties that do not desire to 
use BATS Trading for routing or other Routing Services provided by the 
Exchange must designate orders as not available for routing.\108\
---------------------------------------------------------------------------

    \107\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.9(d).
    \108\ See id.
---------------------------------------------------------------------------

    In light of these protections, for both the use of BATS Trading or 
an unaffiliated router, the Commission believes that the EDGX Options 
rules and procedures regarding the use of BATS Trading or an 
unaffiliated router to route order to away exchanges are consistent 
with the Act.

E. Minimum Quoting and Trading Increments

    The Exchange is proposing to apply the following minimum quoting 
increments: (1) If the option price is less than $3.00, five (5) cents; 
and (2) if the option price is $3.00 or higher, ten (10) cents.\109\ In 
addition, the Exchange

[[Page 48606]]

proposes to participate in a pilot program, until June 30, 2016, to 
allow quoting in certain options in smaller increments (``Pilot 
Program'').\110\ The Exchange will include in the Pilot Program all 
classes that are included by other options exchanges in substantially 
similar pilot programs. If an options class is included in the Pilot 
Program, the Exchange will allow quoting in one (1) cent increments any 
option priced less than $3.00 or options on QQQQs, IWM, and SPY.\111\ 
Options priced at $3.00 or higher that are in the Pilot Program will be 
quoted in five (5) cent increments.\112\ In addition, the Exchange is 
proposing that the minimum trading increment for options contracts 
traded on EDGX Options would be one (1) cent for all series.\113\ The 
Exchange is also proposing to offer trading in Mini Options, and the 
minimum trading increment for Mini Options will be the same as the 
minimum trading increment permitted for standard options on the same 
underlying security.\114\
---------------------------------------------------------------------------

    \109\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.5(a).
    \110\ See proposed EDGX Options Rules, Chapter XXI, Rule 21.5, 
Interpretations and Policies .01. See also Amendment No. 2, supra 
note 7.
    \111\ See proposed EDGX Options Rules, Chapter XXI, Rule 
21.5(a).
    \112\ See id.
    \113\ See EDGX Options Rules, Chapter XXI, Rule 21.5(b).
    \114\ See EDGX Options Rules, Chapter XXI, Rule 21.5(c).
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposed minimum 
quoting and trading increments, including its proposal to commence 
quoting pursuant to the Pilot Program, which are consistent with the 
rules of the other options exchanges,\115\ are consistent with the Act. 
As the Commission noted in approving the latest expansion of the Pilot 
Program, allowing market participants to quote in smaller increments in 
Pilot options has been shown to reduce spreads, thereby lowering costs 
to investors.\116\ In addition, permitting options to be quoted in 
smaller increments pursuant to the Pilot Program provides the 
opportunity for reduced spreads for a significant amount of trading 
volume.\117\ Further, although the Commission anticipates that the 
Exchange's proposal will contribute to further increases in quotation 
message traffic, the Commission believes that the Exchange's proposal 
is sufficiently limited such that it is unlikely on its own to increase 
quotation message traffic beyond the capacity of market participants' 
systems.
---------------------------------------------------------------------------

    \115\ See, e.g., Rules of NOM, Chapter VI, Section 5.
    \116\ See Securities Exchange Act Release No. 60711 (September 
23, 2009), 74 FR 49419, 49424 (September 28, 2009) (SR-NYSEArca-
2009-44) (partially approving a proposed rule change to expand the 
Pilot Program).
    \117\ See id.
---------------------------------------------------------------------------

F. Securities Traded on EDGX Options

    The Exchange proposes to adopt initial and continued listing 
standards for equity and index options traded on EDGX Options that are 
substantially similar to the listing standards adopted by other options 
exchanges.\118\ The Commission believes that the Exchange's proposed 
initial and continued listing standards are consistent with the Act, 
including Section 6(b)(5), in that they are designed to protect 
investors and the public interest and to promote just and equitable 
principles of trade. EDGX's operation of the EDGX Options Exchange is 
conditioned on EDGX becoming a Plan Sponsor in the Plan for the Purpose 
of Developing and Implementing Procedures designed to Facilitate the 
Listing and Trading of Standardized Options Submitted Pursuant to 
Section 11A(a)(3)(B) of the Act (``OLPP''). The Exchange has 
represented that it will join the OLPP.\119\ In addition, EDGX has 
represented that it will become an exchange member in the Options 
Clearing Corporation (``OCC'').\120\
---------------------------------------------------------------------------

    \118\ See Notice, supra note 3, at 28751. See, e.g., Rules of 
BZX Options, Chapters XIX and XXIX.
    \119\ See Notice, supra note 3, at 28753.
    \120\ See Notice, supra note 3, at 28747.
---------------------------------------------------------------------------

G. Participation in National Market System Plans

    The Exchange represented that it will operate as a participant in 
various national market system plans for options trading established 
under Section 11A of the Act.\121\ Specifically, the Exchange 
represented that EDGX Options Exchange will become a member of the 
Options Order Protection and Locked/Crossed Market Plan, the Options 
Price Reporting Authority (``OPRA''), and the Options Regulatory 
Surveillance Authority (``ORSA''). EDGX further represented that it is 
currently a participant in the Plan for the Selection and Reservation 
of Securities Symbols, and the OLPP.\122\
---------------------------------------------------------------------------

    \121\ See Notice, supra note 3, at 28753.
    \122\ See id. See also Amendment No. 2, supra note 7.
---------------------------------------------------------------------------

H. Regulation

    According to the Exchange, the Exchange will regulate EDGX Options 
using the Exchange's existing regulatory structure. The Exchange's 
Chief Regulatory Officer will have general supervision of the 
regulatory operations of EDGX Options, including responsibility for 
overseeing the surveillance, examination, and enforcement functions and 
for administering all regulatory services agreements applicable to EDGX 
Options.\123\ Similarly, the Exchange's existing Regulatory Oversight 
Committee (``ROC'') will be responsible for overseeing the adequacy and 
effectiveness of the Exchange's regulatory and SRO responsibilities, 
including those applicable to EDGX Options.\124\
---------------------------------------------------------------------------

    \123\ See Notice, supra note 3, at 28754.
    \124\ See id. Pursuant to a regulatory services agreement, FINRA 
would perform certain regulatory functions on behalf of the 
Exchange. See infra note 133 and accompanying text.
---------------------------------------------------------------------------

    As members of the Exchange, the Exchange's existing rules governing 
members will apply to Options Members and their associated persons. The 
Exchange's By-laws provide that it has disciplinary jurisdiction over 
its members, including Options Participants, so that it can enforce its 
members' compliance with its rules and the federal securities 
laws.\125\ The Exchange's rules also permit it to sanction members, 
including Options Members, for violations of its rules and of the 
federal securities laws by, among other things, expelling or suspending 
members, limiting members' activities, functions, or operations, fining 
or censuring members, or suspending or barring a person from being 
associated with a member.\126\ The Exchange's rules also provide for 
the imposition of fines for minor rule violations in lieu of commencing 
disciplinary proceedings.\127\
---------------------------------------------------------------------------

    \125\ See, e.g., Fourth Amended and Restated By-laws of EDGX 
Exchange, Inc., Article X, Section 2.
    \126\ See, e.g., EDGX Rules, Chapter II, Rule 2.2.
    \127\ See proposed EDGX Options Rules, Chapter XXV, Rule 25.3 
and infra notes 145-148 and accompanying text. See also EDGX Options 
Rules, Chapter VIII, Rule 8.15.
---------------------------------------------------------------------------

    Moreover, the Exchange will: (1) Join the existing options industry 
agreements pursuant to Section 17(d) of the Act; (2) amend, as 
necessary, the Exchange's existing Regulatory Services Agreement 
(``RSA'') with FINRA to cover many aspects of the regulation and 
discipline of the Exchange's Options Members that participate in 
options trading on EDGX Options; (3) perform options listing 
regulation, as well as authorize Options Members to trade on EDGX 
Options; and (4) perform automated surveillance of trading on EDGX 
Options for the purpose of maintaining a fair and orderly market at all 
times.\128\
---------------------------------------------------------------------------

    \128\ See Notice, supra note 3, at 28753-54. EDGX Options will 
be monitored to identify unusual trading patterns and determine 
whether particular trading activity requires further regulatory 
investigation by FINRA. See id. at 28754.

---------------------------------------------------------------------------

[[Page 48607]]

    In addition, the Exchange will oversee the process for determining 
and implementing trading halts, identifying and responding to unusual 
market conditions, and administering the Exchange's process for 
identifying and remediating ``obvious errors'' by and among its Options 
Members.\129\ The proposed EDGX Options rules (Chapter XX) regarding 
halts, unusual market conditions, extraordinary market volatility, 
obvious errors, and audit trail are identical to the rules of BZX 
Options.\130\
---------------------------------------------------------------------------

    \129\ See Notice, supra note 3, at 28754.
    \130\ See, e.g., Rules of BZX, Chapter XX, see also Rules of 
NOM, Chapter V, and BOX, Chapter V.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposed rules and 
regulatory structure with respect to EDGX Options are consistent with 
the requirements of the Act, and in particular with Section 6(b)(1) of 
the Act, which requires an exchange to be so organized and have the 
capacity to be able to carry out the purposes of the Act and to comply, 
and to enforce compliance by its members and persons associated with 
its members, with the Act and the rules and regulations thereunder, and 
the rules of the Exchange,\131\ and with Section 6(b)(6) and 6(b)(7) of 
the Act,\132\ which require an Exchange to provide fair procedures for 
the disciplining of members and persons associated with members.
---------------------------------------------------------------------------

    \131\ 15 U.S.C. 78f(b)(1).
    \132\ 15 U.S.C. 78f(b)(6) and (b)(7).
---------------------------------------------------------------------------

1. Regulatory Services Agreement
    Currently, the Exchange and FINRA are parties to an existing RSA, 
pursuant to which FINRA personnel operate as agents for the Exchange in 
performing certain functions. The Exchange represented that it intends 
to amend the existing RSA in order to capture certain aspects of 
regulation specifically applicable to EDGX Options and the regulation 
and discipline of Options Members.\133\ The Exchange further represents 
that it will supervise FINRA and continue to bear ultimate regulatory 
responsibility for functions performed on the Exchange's behalf under 
the RSA.\134\ Further, the Exchange will retain ultimate legal 
responsibility for the regulation of its Options Members and its 
market.
---------------------------------------------------------------------------

    \133\ See Notice, supra note 3 at 28754.
    \134\ See id.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act to allow 
the Exchange to contract with FINRA to perform functions relating to 
the regulation and discipline of members and the regulation of EDGX 
Options.\135\ These functions are fundamental elements to a regulatory 
program and constitute core self-regulatory functions. The Commission 
believes that FINRA has the expertise and experience to perform these 
functions on behalf of the Exchange.\136\
---------------------------------------------------------------------------

    \135\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998). See also, e.g., Securities 
Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August 
6, 2004) (SR-Amex-2004-32) (approving rule that allowed Amex to 
contract with another SRO for regulatory services) (``Amex 
Regulatory Services Approval Order''); 57478 (March 12, 2008), 73 FR 
14521 (March 18, 2008) (SR-NASDAQ-2007-004) (``NOM Approval 
Order''); 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) 
(File No. 10-131) (``Nasdaq Exchange Registration Order''); and 
61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-
2009-031) (``BATS Options Approval Order'').
    \136\ See Amex Regulatory Services Approval Order; NOM Approval 
Order; Nasdaq Exchange Registration Order, and BATS Options Approval 
Order, id. The Commission notes that the RSA is not before the 
Commission and, therefore, the Commission is not acting on it.
---------------------------------------------------------------------------

    As noted, unless relieved by the Commission of its 
responsibility,\137\ the Exchange bears the responsibility for self-
regulatory conduct and primary liability for self-regulatory failures, 
not the SRO retained to perform regulatory functions on the Exchange's 
behalf. In performing these functions, however, FINRA may nonetheless 
bear liability for causing or aiding and abetting the failure of the 
Exchange to perform its regulatory functions.\138\ Accordingly, 
although FINRA will not act on its own behalf under its SRO 
responsibilities in carrying out these regulatory services for the 
Exchange relating to the operation of EDGX Options, FINRA also may have 
secondary liability if, for example, the Commission finds the 
contracted functions are being performed so inadequately as to cause a 
violation of the federal securities laws by the Exchange.\139\
---------------------------------------------------------------------------

    \137\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder 
(15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2).
    \138\ For example, if failings by FINRA have the effect of 
leaving the Exchange in violation of any aspect of the Exchange's 
self-regulatory obligations, the Exchange would bear direct 
liability for the violation, while FINRA may bear liability for 
causing or aiding and abetting the violation. See Nasdaq Exchange 
Registration Order, supra note 135. See also Securities Exchange Act 
Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) 
(File No. 10-127) (approving the International Securities Exchange 
LLC's application for registration as a national securities 
exchange).
    \139\ See id.
---------------------------------------------------------------------------

2. 17d-2 Agreements
    Rule 17d-2 under the Act permits SROs to file with the Commission 
plans under which the SROs allocate among each other the responsibility 
to receive regulatory reports from, and examine and enforce compliance 
with specified provisions of the Act and rules thereunder and SRO rules 
by, firms that are members of more than one SRO (``common members''). 
If such a plan is declared effective by the Commission, an SRO that is 
a party to the plan is relieved of regulatory responsibility as to any 
common member for whom responsibility is allocated under the plan to 
another SRO.\140\
---------------------------------------------------------------------------

    \140\ Rule 17d-2 provides that any two or more SROs may file 
with the Commission a plan for allocating among such SROs the 
responsibility to receive regulatory reports from persons who are 
members or participants of more than one of such SROs to examine 
such persons for compliance, or to enforce compliance by such 
persons, with specified provisions of the Act, the rules and 
regulations thereunder, and the rules of such SROs, or to carry out 
other specified regulatory functions with respect to such persons. 
See 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    Pursuant to Rule 17d-2 under the Act, all of the options exchanges, 
FINRA, and the New York Stock Exchange LLC (``NYSE'') have entered into 
the Options Sales Practices Agreement, a Rule 17d-2 Agreement, which 
allocates to certain SROs (``examining SROs'') regulatory 
responsibility for common members with respect to certain options-
related sales practice matters.\141\ Under this Agreement, the 
examining SROs would examine firms that are common members of the 
Exchange and the particular examining SRO for compliance with certain 
provisions of the Act, certain of the rules and regulations adopted 
thereunder, certain examining SRO rules, and certain Exchange Rules. 
The Exchange's rules contemplate participation in this Agreement by 
requiring that any Options Member also be a member of at least one of 
the examining SROs.\142\
---------------------------------------------------------------------------

    \141\ See Securities Exchange Act Release No. 57987 (June 18, 
2008), 73 FR 36156 (June 25, 2008) (File No. S7-966).
    \142\ See proposed EDGX Options Rule, Chapter XVII, Rule 
17.2(f).
---------------------------------------------------------------------------

    Moreover, pursuant to Rule 17d-2 under the Act, all of the options 
exchanges and FINRA have entered into the Options Related Market 
Surveillance Agreement, which allocates regulatory responsibility for 
certain options-related market surveillance matters among the 
participants.\143\ Under this agreement, the examining SRO would assume 
regulatory responsibility with respect to firms that are common members 
of the Exchange and the particular examining SRO for compliance with 
applicable common rules for certain accounts. As a condition to 
operation, the Exchange must be a party to each of these 17d-2 
Agreements, which will cover EDGX members that are Options Members.

[[Page 48608]]

EDGX represented that it will join the existing options industry 
agreements pursuant to Section 17d of the Act.\144\
---------------------------------------------------------------------------

    \143\ See Securities Exchange Act Release No. 58765 (October 9, 
2008), 73 FR 62344 (October 20, 2008) (File No. 4-551).
    \144\ See Notice, supra note 3 at 28753.
---------------------------------------------------------------------------

3. Minor Rule Violation Plan
    The Commission approved the EDGX Exchange's Minor Rule Violation 
Plan (``MRVP'') in 2010.\145\ The Exchange's MRVP specifies those 
uncontested minor rule violations with sanctions not exceeding $2,500 
that would not be subject to the provisions of Rule 19d-1(c)(1) under 
the Act \146\ requiring that an SRO promptly file notice with the 
Commission of any final disciplinary action taken with respect to any 
person or organization.\147\ The Exchange's MRVP includes the policies 
and procedures included in Exchange Rule 8.15 (Imposition of Fines for 
Minor Violation(s) of Rules) and in Rule 8.15, Interpretation and 
Policy .01.
---------------------------------------------------------------------------

    \145\ See Securities Exchange Act Release No. 62036 (May 5, 
2010), 75 FR 26822 (May 12, 2010) (File No. 4-594) (``MRVP Order'').
    \146\ 17 CFR 240.19d-1(c)(1).
    \147\ The Commission adopted amendments to paragraph (c) of Rule 
19d-1 to allow SROs to submit for Commission approval plans for the 
abbreviated reporting of minor disciplinary infractions. See 
Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 
23828 (June 8, 1984) (File No. S7-983A). Any disciplinary action 
taken by an SRO against any person for violation of a rule of the 
SRO which has been designated as a minor rule violation pursuant to 
such a plan filed with and declared effective by the Commission 
would not be considered ``final'' for purposes of Section 19(d)(1) 
of the Act if the sanction imposed consists of a fine not exceeding 
$ 2,500 and the sanctioned person has not sought an adjudication, 
including a hearing, or otherwise exhausted his administrative 
remedies.
---------------------------------------------------------------------------

    The Exchange proposes to amend its MRVP and Rule 8.15, 
Interpretation and Policy .01 to include proposed Rule 25.3 (Penalty 
for Minor Rule Violations).\148\ The Commission believes that this 
change is consistent with the Act because it clarifies that the 
proposed rules listed in Rule 25.3 of the proposed EDGX Options Rules 
will be included in EDGX's MRVP.
---------------------------------------------------------------------------

    \148\ In the MRVP Order, the Commission noted that the Exchange 
proposed that any amendments to Rule 8.15.01 made pursuant to a rule 
filing submitted under Rule 19b-4 of the Act would automatically be 
deemed a request by the Exchange for Commission approval of a 
modification to its MRVP. See MRVP Order, supra note 145, at note 5.
---------------------------------------------------------------------------

    The Commission notes that the rules included in proposed Rule 25.3 
are similar to rules included in the MRVPs of other options 
exchanges.\149\ The Commission finds that the EDGX MRVP, as amended to 
include the rules listed in proposed EDGX Options Rule 25.3, is 
consistent with Sections 6(b)(1), 6(b)(5), and 6(b)(6) of the Act, 
which require, in part, that an exchange have the capacity to enforce 
compliance with, and provide appropriate discipline for, violations of 
the rules of the Commission and of the exchange.\150\ In addition, 
because EDGX Rule 8.15 will offer procedural rights to a person 
sanctioned for a violation listed in proposed EDGX Options Rule 25.3, 
the Commission believes that the Exchange's rules provide a fair 
procedure for the disciplining of members and associated persons, 
consistent with Section 6(b)(7) of the Act.\151\
---------------------------------------------------------------------------

    \149\ See, e.g., Rules of NOM, Chapter X, Section 7.
    \150\ 15 U.S.C. 78f(b)(1), 78f(b)(5), and 78f(b)(6).
    \151\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    The Commission also finds that the proposal to include the 
provisions in proposed EDGX Options Rule 25.3 in EDGX's MRVP is 
consistent with the public interest, the protection of investors, or 
otherwise in furtherance of the purposes of the Act, as required by 
Rule 19d-1(c)(2) under the Act,\152\ because it should strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as an SRO in cases where full disciplinary proceedings 
are unsuitable in view of the minor nature of the particular violation.
---------------------------------------------------------------------------

    \152\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------

    In approving the proposed change to the Exchange's MRVP, the 
Commission in no way minimizes the importance of compliance with the 
Exchange's rules and all other rules subject to the imposition of fines 
under the Exchange's MRVP. The Commission believes that the violation 
of any SRO rules, as well as Commission rules, is a serious matter. 
However, the Exchange's MRVP provides a reasonable means of addressing 
rule violations that do not rise to the level of requiring formal 
disciplinary proceedings, while providing greater flexibility in 
handling certain violations. The Commission expects that the Exchange 
will continue to conduct surveillance with due diligence and make a 
determination based on its findings, on a case-by-case basis, whether a 
fine of more or less than the recommended amount is appropriate for a 
violation under the Exchange's MRVP or whether a violation requires a 
formal disciplinary action.

I. Section 11(a) of the Act

    Section 11(a)(1) of the Act \153\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\154\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\155\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member has investment 
discretion, neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule.
---------------------------------------------------------------------------

    \153\ 15 U.S.C. 78k(a)(1).
    \154\ 17 CFR 240.11a2-2(T).
    \155\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    In a letter to the Commission, the Exchange requests that the 
Commission concur with the Exchange's conclusion that Options Members 
that enter orders into the System satisfy the requirements of Rule 
11a2-2(T).\156\ For the reasons set forth below, the Commission 
believes that Options Members entering orders into the System would 
satisfy the conditions of the Rule.
---------------------------------------------------------------------------

    \156\ See Letter to Brent J. Fields, Secretary, Commission, from 
Anders Franzon, VP, Associate General Counsel, EDGX, dated August 3, 
2015 (``EDGX 11(a) Letter'').
---------------------------------------------------------------------------

    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. The System will receive orders 
electronically through remote terminals or computer-to-computer 
interfaces. In the context of other automated trading systems, the 
Commission has found that the off-floor transmission requirement is met 
if a covered account order is transmitted from a remote location 
directly to an exchange's floor by electronic means.\157\ Because the 
System receives orders electronically through remote terminals or 
computer-to-computer interfaces, the Commission

[[Page 48609]]

believes that the System satisfies the off-floor transmission 
requirement.
---------------------------------------------------------------------------

    \157\ See, e.g., NOM Approval Order, supra note 135; Securities 
Exchange Act Release Nos. 53128 (January 13, 2006), 71 FR 3550 
(January 23, 2006) (File No. 10-131) (approving Nasdaq Stock Market 
LLC); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (SR-
PCX-00-25) (approving Archipelago Exchange); 29237 (May 24, 1991), 
56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-53) 
(approving NYSE's Off-Hours Trading Facility); and 15533 (January 
29, 1979), 44 FR 6084 (January 31, 1979) (``1979 Release'').
---------------------------------------------------------------------------

    Second, the Rule requires that the member not participate in the 
execution of its order once it has been transmitted to the member 
performing the execution. The Exchange represented that at no time 
following the submission of an order is an Options Members able to 
acquire control or influence over the result or timing of an order's 
execution.\158\ According to the Exchange, the execution of a member's 
order is determined solely by what other orders, bids, or offers are 
present in the System at the time the Options Member submits the order 
and on the priority of those orders, bids, and offers.\159\ 
Accordingly, the Commission believes that an Options Member does not 
participate in the execution of an order submitted to the System.
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    \158\ See EDGX 11(a) Letter, supra note 156, at 6.
    \159\ See id. The member may cancel or modify the order, or 
modify the instruction for executing the order, but only from off 
the floor. The Commission has stated that the non-participation 
requirement is satisfied under such circumstances, so long as such 
modifications or cancellations are also transmitted from off the 
floor. See Securities Exchange Act Release No. 14713 (April 27, 
1978), 43 FR 18557 (May 1, 1978) (``1978 Release'') (stating that 
the ``non-participation requirement does not prevent initiating 
members from canceling or modifying orders (or the instructions 
pursuant to which the initiating member wishes orders to be 
executed) after the orders have been transmitted to the executing 
member, provided that any such instructions are also transmitted 
from off the floor'').
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities are used, as long as the design of 
these systems ensures that members do not possess any special or unique 
trading advantages in handling their orders after transmitting them to 
the exchange.\160\ EDGX represented that the design of the System 
ensures that no Options Member has any special or unique trading 
advantage in the handling of its orders after transmitting its orders 
to the Exchange.\161\ Based on the Exchange's representation, the 
Commission believes that the System satisfies this requirement.
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    \160\ In considering the operation of automated execution 
systems operated by an exchange, the Commission has noted that while 
there is not an independent executing exchange member, the execution 
of an order is automatic once it has been transmitted into the 
system. Because the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling 
their orders after transmitting them to the exchange, the Commission 
has stated that executions obtained through these systems satisfy 
the independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 157.
    \161\ See EDGX 11(a) Letter, supra note 156, at 6.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T)(a)(2)(iv).\162\ EDGX Options Members trading for covered accounts 
over which they exercise investment discretion must comply with this 
condition in order to rely on the rule's exemption.\163\
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    \162\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 159 (stating ``[t]he contractual and disclosure requirements 
are designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \163\ See EDGX 11(a) Letter, supra note 156, at 6.
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IV. Exemption From Section 19(b) of the Act With Regard to CBOE, NYSE, 
and FINRA Rules Incorporated by Reference

    The Exchange proposes to incorporate by reference as EDGX Options 
Rules certain rules of the CBOE, NYSE, and FINRA.\164\ Thus, for 
certain EDGX Options rules, Exchange members will comply with an EDGX 
Options rule by complying with the CBOE, NYSE, or FINRA rule 
referenced. In connection with its proposal to incorporate CBOE, NYSE, 
and FINRA rules by reference, the Exchange requested, pursuant to Rule 
240.0-12 under the Act,\165\ an exemption under Section 36 of the Act 
from the rule filing requirements of Section 19(b) of the Act for 
changes to those EDGX Options rules that are effected solely by virtue 
of a change to a cross-referenced CBOE, NYSE, or FINRA rule.\166\ The 
Exchange proposes to incorporate by reference categories of rules 
(rather than individual rules within a category) that are not trading 
rules. The Exchange agrees to provide written notice to Options Member 
prior to the launch of EDGX Options of the specific CBOE, NYSE, and 
FINRA rules that it will incorporate by reference.\167\ In addition, 
the Exchange will notify Options Members whenever CBOE, NYSE, or FINRA 
proposes a change to a cross-referenced CBOE, NYSE, or FINRA rule.\168\
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    \164\ Specifically, the Exchange proposes to incorporate by 
reference: (1) CBOE rules governing position and exercise limits for 
equity and index options, which are referenced in proposed EDGX 
Options Rules 18.7, 18.9, 29.5, and 29.7; (2) the margin rules of 
the CBOE or the NYSE, which are referenced in proposed EDGX Options 
Rule 28.3; and (3) FINRA's rules governing communications with the 
public, which are referenced in proposed EDGX Options Rule 26.16.
    \165\ 17 CFR 240.0-12.
    \166\ See Letter to Brent J. Fields, Secretary, Commission, from 
Anders Franzon, VP, Associate General Counsel, EDGX, dated August 3, 
2015 (``Exemption Request Letter'').
    \167\ See id.
    \168\ The Exchange will provide such notice through a posting on 
the same Web site location where the Exchange will post its own rule 
filings pursuant to Rule 19b-4(l) under Act, within the time frame 
required by that rule. The Web site posting will include a link to 
the location on the CBOE, NYSE, or FINRA Web site where the proposed 
rule change is posted. See id.
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    Using its authority under Section 36 of the Act, the Commission 
previously exempted certain SROs from the requirement to file proposed 
rule changes under Section 19(b) of the Act.\169\ Each such exempt SRO 
agreed to be governed by the incorporated rules, as amended from time 
to time, but is not required to file a separate proposed rule change 
with the Commission each time the SRO whose rules are incorporated by 
reference seeks to modify its rules. In addition, each SRO incorporated 
by reference only regulatory rules (e.g., margin, suitability, 
arbitration), not trading rules, and incorporated by reference whole 
categories of rules (i.e., did not ``cherry-pick'' certain individual 
rules within a category). Each exempt SRO had reasonable procedures in 
place to provide written notice to its members each time a change is 
proposed to the incorporated rules of another SRO in order to provide 
its members with notice of a proposed rule change that affects their 
interests, so that they would have an opportunity to comment on it.
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    \169\ See Securities Exchange Act Release No. 49260 (February 
17, 2004), 69 FR 8500 (February 24, 2004). See also Securities 
Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 14521, 
14539-40 (March 18, 2008) (order approving SR-NASDAQ-2007-004 and 
SR-NASDAQ-2007-080) and 53128 (January 13, 2006), 71 FR 3550, 3565-
66 (January 23, 2006) (File No. 10-131) (approving The NASDAQ Stock 
Market LLC's exchange application).
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    The Commission is granting the Exchange's request for exemption, 
pursuant to Section 36 of the Act, from the rule filing requirements of 
Section 19(b) of the Act with respect to the rules that the Exchange 
proposes to incorporate by reference into EDGX

[[Page 48610]]

Options Rules. The Commission believes that this exemption is 
appropriate in the public interest and consistent with the protection 
of investors because it will promote more efficient use of Commission 
and SRO resources by avoiding duplicative rule filings based on 
simultaneous changes to identical rule text sought by more than one 
SRO. Consequently, the Commission grants the Exchange's exemption 
request for EDGX Options. This exemption is conditioned upon the 
Exchange providing written notice to Options Members whenever the CBOE, 
NYSE, or FINRA proposes to change a rule that EDGX Options has 
incorporated by reference.\170\
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    \170\ As discussed above, the Exchange has represented that it 
will notify Options Members whenever the CBOE, NYSE, or FINRA 
proposes a change to a cross-referenced CBOE, NYSE, or FINRA rule. 
See supra note 168 and accompanying text.
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V. Solicitation of Comments on Amendment Nos. 1 and 2

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment Nos. 1 
and 2 to the proposed rule change are consistent with the Act. Comments 
may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-EDGX-2015-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-EDGX-2015-18. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-EDGX-2015-18 and should be 
submitted on or before September 3, 2015.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1, 2, and 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1, 2, and 3 \171\ thereto, prior 
to the 30th day after the date of publication of notice of Amendment 
Nos. 1 and 2 in the Federal Register. As discussed above, Amendment No. 
1 revised the proposed rule change by deleting proposed EDGX Options 
Rule 21.8(f)(2), which would have granted participation entitlements to 
Directed Market Makers trading against small size orders defined as 
five or fewer contracts in addition to providing more detailed 
information regarding participation entitlements for Directed Market 
Makers. The Commission believes that the revisions in Amendment No. 1 
are being made in response to concerns raised by commenters regarding 
internalization in the options market. As discussed above, Amendment 
No. 2 revised the proposed rule change by representing that the 
Exchange is a participant in the Plan for the Selection and Reservation 
of Securities Symbols and clarified that the Penny Pilot is scheduled 
to expire on June 30, 2016. The Commission believes Amendment Nos. 1 
and 2 are consistent with the purpose of the proposed rule change and 
are consistent with the protection of investors and the public 
interest. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\172\ to approve the proposed rule change, 
as modified by Amendment Nos. 1, 2, and 3 thereto, on an accelerated 
basis.
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    \171\ As noted above, because Amendment No. 3 is technical in 
nature, the Commission is not required to publish it for public 
comment. See supra note 8.
    \172\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\173\ that the proposed rule change (SR-EDGX-2015-18), as modified 
by Amendment Nos. 1, 2, and 3 thereto, be, and hereby is, approved on 
an accelerated basis.
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    \173\ 15 U.S.C. 78s(b)(2).
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    Although the Commission's approval of the proposed rule change is 
final, and the proposed rules are therefore effective, it is further 
ordered that the operation of EDGX Options is conditioned on the 
satisfaction of the requirements below:
    A. Participation in National Market System Plans Relating to 
Options Trading. EDGX must join: (1) The OPRA Plan; (2) the OLPP; (3) 
the Linkage Plan; and (4) the Plan of the Options Regulatory 
Surveillance Authority.
    B. RSA and Rule 17d-2 Agreements. EDGX must ensure that all 
necessary changes are made to its Regulatory Services Agreement with 
FINRA and must be a party to the multi-party Rule 17d-2 agreements 
concerning options sales practice regulation and market 
surveillance.\174\
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    \174\ See supra notes 141 and 143 and accompanying text. See 
also 17 CFR 240.17d-2.
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    C. Participation in the Options Clearing Corporation. EDGX must 
join the Options Clearing Corporation.
    D. Participation in the Intermarket Surveillance Group. EDGX must 
be a member of the Intermarket Surveillance Group.
    It is further ordered, pursuant to Section 36 of the Act,\175\ that 
EDGX shall be exempted from the rule filing requirements of Section 
19(b) of the Act with respect to the CBOE, FINRA, and NYSE rules that 
EDGX proposes to incorporate by reference, subject to the conditions 
specified in this Order.
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    \175\ 15 U.S.C. 78mm.
    \176\ 17 CFR 200.30(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\176\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-19878 Filed 8-12-15; 8:45 am]
BILLING CODE 8011-01-P