Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing of Proposed Rule Change in Connection With a System Migration to Nasdaq INET Technology, 25827-25837 [2017-11509]

Download as PDF Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2017–055 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. asabaliauskas on DSKBBXCHB2PROD with NOTICES All submissions should refer to File Number SR–NASDAQ–2017–055. 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 (https://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– NASDAQ–2017–055 and should be submitted on or before June 26, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.53 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–11507 Filed 6–2–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80815; File No. SR–MRX– 2017–02] Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing of Proposed Rule Change in Connection With a System Migration to Nasdaq INET Technology May 30, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 17, 2017, Nasdaq MRX, LLC (‘‘MRX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend various rules in connection with a system migration to Nasdaq INET technology. The text of the proposed rule change is available on the Exchange’s Web site at www.ise.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this rule change is to amend certain rules to reflect the MRX technology migration to a Nasdaq, Inc. (‘‘Nasdaq’’) supported architecture. 1 15 53 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 17:31 Jun 02, 2017 2 17 Jkt 241001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00073 Fmt 4703 Sfmt 4703 25827 INET is the proprietary core technology utilized across Nasdaq’s global markets and utilized on The NASDAQ Options Market LLC (‘‘NOM’’), NASDAQ PHLX LLC (‘‘Phlx’’) and NASDAQ BX, Inc. (‘‘BX’’) (collectively, ‘‘Nasdaq Exchanges’’). The migration of MRX to the Nasdaq INET architecture would result in higher performance, scalability, and more robust architecture. With this system migration, the Exchange intends to adopt certain trading functionality currently utilized at Nasdaq Exchanges. The functionality being adopted is described in this filing. The Exchange is also separately filing 3 a rule change to amend the Exchange’s Opening Process. MRX will replace its current opening process at Rule 701 with Phlx’s Opening Process.4 The Exchange intends to begin implementation of the proposed rule changes in Q3 2017. The migration will be on a symbol by symbol basis, and the Exchange will issue an alert to members in the form of an Options Trader Alert to provide notification of the symbols that will migrate and the relevant dates. Generally With the re-platform, the Exchange will now be built on the Nasdaq INET architecture, which allows certain trading system functionality to be performed in parallel. The Exchange believes that this architecture change will improve the member experience by reducing overall latency compared to the current MRX system because of the manner in which the system is segregated into component parts to handle processing. Trading Halts Cancellation of Quotes The Exchange proposes to amend MRX Rule 702 entitled ‘‘Trading Halts.’’ Specifically, the Exchange proposes to amend Rule 702(a)(2) to note that during a halt, the Exchange will maintain existing orders on the book, but not existing quotes prior to the halt, accept orders and quotes, and process cancels and modifications for quotes and orders, except that existing quotes are cancelled. Today, MRX maintains existing orders and quotes during a trading halt. With respect to cancels and modifications, this behavior will not change. MRX does not have a quote 3 See SR–MRX–2017–01 (not yet published). Phlx Rule 1017. See also Securities Exchange Act Release No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR–Phlx– 2017–79) (notice of Filing of Partial Amendment No. 2 and Order Granting Approval of a Proposed Rule Change, as Modified by Partial Amendment No. 2, to Amend PHLX Rule 1017, Openings in Options). 4 See E:\FR\FM\05JNN1.SGM 05JNN1 25828 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices purge today, so this functionality will be changed with the adoption of this trading rule. The Exchange believes that purging quotes upon a halt will remove uncertainty for market participants. The Exchange proposes to conform the treatment of quotes and orders on MRX to Phlx Rule 1047(f) in conjunction with the replatform of MRX. The Exchange desires to handle halts in a similar manner as Phlx. asabaliauskas on DSKBBXCHB2PROD with NOTICES Limit Up-Limit Down The Exchange also proposes to add new MRX Rule 702(d) to replace rule text currently contained in MRX Rule 703A entitled ‘‘Trading During Limit Up-Limit Down States in Underlying Securities.’’ Proposed MRX Rule 702(d) is similar to language currently in Phlx Rule 1047(d), which provides for Exchange handling due to extraordinary market volatility. Currently MRX Rule 703A(a) and (b) provides modified order handling procedures when a security underlying an options class traded on the Exchange enters a Limit State or Straddle State under the Plan to Address Extraordinary Market Volatility (the ‘‘Plan’’).5 Specifically, during a 5 Unless otherwise specified, capitalized terms used in this rule filing are based on the defined terms of the Plan. As set forth in more detail in the Plan, Price Bands consisting of a Lower Price Band and an Upper Price Band for each NMS Stock are calculated by the Processors (Section V(A) of the Plan). When the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band, the Processors shall disseminate such National Best Bid (Offer) with an appropriate flag identifying it as unexecutable. When the National Best Bid (Offer) is equal to the Upper (Lower) Price Band, the Processors shall distribute such National Best Bid (Offer) with an appropriate flag identifying it as a Limit State Quotation (Section VI(A) of the Plan). All trading centers in NMS stocks must maintain written policies and procedures that are reasonably designed to prevent the display of offers below the Lower Price Band and bids above the Upper Price Band for NMS stocks. Notwithstanding this requirement, the Processor shall display an offer below the Lower Price Band or a bid above the Upper Price Band, but with a flag that it is nonexecutable. Such bids or offers shall not be included in the National Best Bid or National Best Offer calculations (Section VI(A)(3) of the Plan). Trading in an NMS stock immediately enters a Limit State if the National Best Offer (Bid) equals but does not cross the Lower (Upper) Price Band (Section VI(B)(1) of the Plan. Trading for an NMS stock exits a Limit State if, within 15 seconds of entering the Limit State, all Limit State Quotations were executed or canceled in their entirety. If the market does not exit a Limit State within 15 seconds, then the Primary Listing Exchange would declare a five-minute trading pause pursuant to Section VII of the Plan, which would be applicable to all markets trading the security. The primary listing market would declare a Trading Pause in an NMS stock; upon notification by the primary listing market, the Processor would disseminate this information to the public. No trades in that NMS stock could occur during the trading pause, but all bids and offers may be displayed (Section VII(A) of the Plan). In addition, the Plan defines a Straddle State as when the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 Limit State or Straddle State: (1) Incoming Market Orders are automatically rejected, and all unexecuted Market Orders pending in the system are cancelled, and (2) incoming Stop Orders (which become Market Orders if elected) are automatically rejected, and unexecuted Stop Orders pending in the system cannot be elected and will be held until the end of the Limit State or Straddle State. In addition, MRX Rule 703A(c) provides that when the security underlying an option class is in a Limit State or Straddle State, the maximum quotation spread requirements for market maker quotes contained in MRX Rule 803(b)(4) and the continuous quotation requirements contained in MRX Rule 804(e) shall be suspended.6 With the re-platform, the Exchange will adopt opening limitation, Market Order and Stop Order handling consistent with handling today on Phlx.7 Specifically, proposed MRX Rule 702(d) will provide that during a Limit State and Straddle State in the Underlying NMS stock: (i) The Exchange will not open an affected option, (ii) provided the Exchange has opened an affected option for trading, the Exchange shall reject Market Orders, as defined in MRX Rule 715(a), and shall notify Members of the reason for such rejection, and (iii) provided the Exchange has opened an affected option for trading, the Exchange will elect Stop Orders if the condition is met, and, because they become Market Orders, shall cancel them back and notify Members of the reason for such rejection. The language in proposed MRX Rule 703(d)(iv) [sic] concerning the maximum quotation spread requirements for market maker quotes and the continuous quotation requirements suspensions are the same language currently contained in MRX Rule 703A(c). These amendments differ in certain respects from the manner in which MRX stock is not in a Limit State. For example, assume the Lower Price Band for an NMS Stock is $ 9.50 and the Upper Price Band is $ 10.50, such NMS stock would be in a Straddle State if the National Best Bid were below $ 9.50, and therefore unexecutable, and the National Best Offer were above $ 9.50 (including a National Best Offer that could be above $ 10.50). If an NMS stock is in a Straddle State and trading in that stock deviates from normal trading characteristics, the Primary Listing Exchange may declare a trading pause for that NMS stock if such Trading Pause would support the Plan’s goal to address extraordinary market volatility. 6 The time periods associated with Limit States and Straddle States are not considered by the Exchange when evaluating whether a market maker complied with the continuous quotation requirements contained in Rule 804(e). 7 See proposed MRX Rule 702(d)(ii) and (iii). PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 operates today during a Limit State or Straddle State. The current MRX rule does not address the opening. The Exchange proposes to adopt rule text to provide for how the Exchange shall treat the Opening Process.8 The opening in an option will not commence in the event that the underlying NMS stock is open, but has entered into a Limit State or Straddle State. If this occurs, the opening will only commence and complete if the underlying NMS stock stays out of a Limit or Straddle State. Accordingly, proposed MRX Rule 702(d)(i) [sic] will provide that the Exchange will not open an affected option. As a result, if an opening process is occurring, it will cease and then start the opening process from the beginning once the Limit State or Straddle State is no longer occurring. In addition, MRX currently cancels Market Orders pending in the system upon initiation of a Limit or Straddle State. Under the proposal to adopt the Phlx rule and implementation of the Limit Up-Limit Down procedures, Market Orders pending in the system will continue to be processed regardless of the Limit or Straddle State. The Exchange believes this is a reasonable handling of Market Orders in the system since these orders are only pending in the system if they are exposed at the NBBO pursuant to Supplementary Material .02 to Rule 1901. If at the end of the exposure period the affected underlying is in a Limit or Straddle State, the Market Order will be cancelled with no execution occurring. If at the end of the exposure period the underlying is no longer in a Limit or Straddle State, the Market Order will be handled under the normal operation of the rules. Lastly, MRX does not currently elect Stop Orders that are pending in the system during a Limit or Straddle State. Under the proposal, and in-line with the Phlx implementation, Stop Orders that are pending in the system during a Limit or Straddle State will be elected, if conditions for such election are met, however because they become Market Orders will be cancelled back to the Member with a reason for such rejection. While the implementation of Market and Stop Order handling varies from MRX today, both the current and proposed Rule provide for protections from erroneous executions in a highly volatile period.9 The Exchange believes consistency across the six options 8 See note 3 above. Exchange is introducing a Phlx protection, Acceptable Trade Range, into MRX Rules as discussed within this rule change. 9 The E:\FR\FM\05JNN1.SGM 05JNN1 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES markets operated by Nasdaq, Inc. provides clarity for Members as to how their orders, as well as the opening process, will be handled in a Limit or Straddle State. Auction Handling During a Trading Halt The Exchange proposes to amend various rules to add detail to MRX rules to account for the impact of a trading halt on the Exchange’s auction mechanisms. The Exchange proposes to memorialize within MRX Rule 723, entitled ‘‘Price Improvement Mechanism for Crossing Transactions’’ the manner in which a trading halt will impact an order entered into PIM once it is migrated to the INET architecture. Today, if a trading halt is initiated after an order is entered into the Price Improvement Mechanism (‘‘PIM’’) on MRX, such auction is terminated and eligible interest is executed. The Exchange proposes to amend today’s current behavior and instead terminate the auction and not execute eligible interest when a trading halt occurs. In the event of a trading halt, terminating the auction and not executing eligible interest will provide certainty to participants in regard to how their interest will be handled. Memorializing the manner in which the system will handle orders entered into PIM during a trading halt will provide transparency for the benefit of members and investors. The Exchange proposes an amendment to MRX Rule 716, entitled ‘‘Block Trades’’ to memorialize that if a trading halt is initiated after an order is entered into the Block Order Mechanism, Facilitation Mechanism, or Solicited Order Mechanism, such auction will also be automatically terminated without execution. This is the current behavior today on MRX and will not be changing. As discussed above, Phlx Rule 1047(c) provides that in the event the Exchange halts trading, all trading in the affected option shall be halted. This is interpreted to restrict executions after a halt unless there is a specific rule specifying that such trades should take place. The Exchange is proposing to add more specificity into the relevant rules. With respect to Block Order Mechanism, Facilitation Mechanism, or Solicited Order Mechanism, the Exchange notes that the current behavior is consistent with Phlx Rule 1047(c) generally, where all trading in the affected option shall be halted.10 In the event of a trading halt, terminating these auction mechanisms and not executing eligible interest will provide 10 See Phlx Rule 1047(c). VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 certainty to participants in regard to how their interest will be handled. Memorializing the manner in which the system will handle orders during a trading halt will provide transparency for the benefit of members and investors. Market Order Spread Protection The Exchange proposes to amend MRX Rule 711, entitled ‘‘Acceptance of Quotes and Orders’’ to adopt a new mandatory risk protection entitled Market Order Spread Protection. MRX does not have a similar feature today. This mandatory feature is currently offered on NOM to protect Market Orders from being executed in very wide markets.11 Pursuant to proposed MRX Rule 711(c), if the NBBO is wider than a preset threshold at the time a Market Order is received, the order will be rejected. For example, if the Market Order Spread Protection is set to $20.00, and a Market Order to buy is received while the NBBO is $1.00–$50.00, such Market Order will be rejected. The proposed feature would assist with the maintenance of fair and orderly markets by mitigating the risks associated with errors resulting in executions at prices that are away from the Best Bid or Offer and potentially erroneous. Further the proposal protects investors from potentially receiving executions away from the prevailing prices at any given time. The Exchange proposes this feature to avoid a series of improperly priced aggressive orders transacting in the Order Book. Today, the NOM threshold is set at $5. MRX will initially set the threshold to $5. Similar to NOM, the Exchange will notify Members of the threshold with a notice, and, thereafter, Members will be notified of any subsequent changes to the threshold. NOM set the differential at $5 to match the bid/ask differential permitted for quotes on the Exchange.12 MRX has a similar $5 11 See NOM Rules at Chapter VI, Section 6(c). NOM’s current rule states, ‘‘System Orders that are Market Orders will be rejected if the best of the NBBO and the internal market BBO (the ‘‘Reference BBO’’) is wider than a preset threshold at the time the order is received by the System.’’ NOM has two order types, Price-Improving and Post-Only Orders, which result in non-displayed pricing that may cause the internal market BBO to be better than the NBBO. MRX does not have similar non-displayed order types and therefore the reference to the internal market BBO is not necessary. 12 See Chapter VII, Section 6(d)(ii) of NOM Rules which describes the bid/ask differentials. Options on equities (including Exchange-Traded Fund Shares), and on index options must be quoted with a difference not to exceed $5 between the bid and offer regardless of the price of the bid, including before and during the opening. However, respecting in-the-money series where the market for the underlying security is wider than $5, the bid/ask PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 25829 differential.13 Thus, the presence of a quote on the Exchange will ensure the NBBO is at least $5 wide. The Exchange believes the presence of a quote on the Exchange, or a bid/ask differential of the NBBO, which is no more than $5 wide affords Market Orders proper protection against erroneous execution and in the event a bid/ask differential is more than $5, then a Market Order is rejected. The threshold is appropriate because it seeks to capture improperly priced Market Orders and reject them to reduce the risk of, and to potentially prevent, the automatic execution of Market Orders at prices that may be considered erroneous. The Exchange’s proposed threshold is a reasonable measure to ensure prices remain within the reasonable limits. This protection will bolster the normal resilience and market behavior that persistently produces robust reference prices. This feature should create a level of protection that prevents Market Orders from entering the Order Book outside of an acceptable range for the Market Order to execute. Finally, the Market Order Spread Protection will be the same for all options traded on the Exchange, and is applicable to all Members that submit Market Orders. Acceptable Trade Range The Exchange proposes to amend Rule 714, entitled ‘‘Automatic Execution of Orders,’’ at MRX Rule 714(b)(1) to remove the current Price Level Protection rule and adopt Phlx’s Acceptable Trade Range.14 The Exchange is proposing to adopt similar functionality which is currently utilized on Phlx in connection with the replatform of MRX. Today, MRX places a limit on the number of price levels at which an incoming order or quote to sell (buy) will be executed automatically when there are no bids (offers) from other exchanges at any price for the options series. Orders and quotes are executed at each successive price level until the maximum number of price levels is reached, and any balance is either handled by the Primary Market Maker pursuant to Rule 803(c)(1) (in the case of Priority Customer Orders) or canceled (in the case of Professional Orders). The number of price levels, may be between one (1) and ten (10). The Exchange determines the number of price levels from time-to-time on a class-by-class basis. differential may be as wide as the quotation for the underlying security on the primary market. The Exchange may establish differences other than the above for one or more series or classes of options. 13 See MRX Rule 803(b)(4). 14 See Phlx Rule 1080(p). E:\FR\FM\05JNN1.SGM 05JNN1 25830 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices MRX proposes to replace the current Price Level Protection with Phlx’s Acceptable Trade Range.15 The proposed Acceptable Trade Range is a mechanism to prevent the system from experiencing dramatic price swings by creating a level of protection that prevents the market from moving beyond set thresholds. The thresholds consist of a reference price plus (minus) set dollar amounts based on the nature of the option and the premium of the option. The system will calculate an Acceptable Trade Range to limit the range of prices at which an order or quote will be allowed to execute. To bolster the normal resilience and market behavior that persistently produces robust reference prices, MRX is proposing to create a level of protection that prevents the market from moving beyond set thresholds. The Acceptable Trade Range is calculated (upon receipt of a new order or quote) by taking the reference price, plus or minus a value to be determined by the Exchange (i.e., the reference price ¥ (x) for sell orders/ quotes and the reference price + (x) for buy orders).16 Upon receipt of a new order, the reference price is the National Best Bid (‘‘NBB’’) for sell orders/quotes and the National Best Offer (‘‘NBO’’) for buy orders/quotes. If an order or quote reaches the outer limit of the Acceptable Trade Range without being fully executed, then any unexecuted balance will be cancelled. The proposed Acceptable Trade Range would work as follows: Prior to executing orders received by MRX, an Acceptable Trade Range is calculated to determine the range of prices at which orders/quotes may be executed.17 When an order is initially received, the threshold is calculated by adding (for buy orders/ quotes) or subtracting (for sell orders/ quotes) a value,18 as discussed below, to the National Best Offer for buy orders/ quotes or the National Best Bid for sell orders/quotes to determine the range of prices that are valid for execution. A buy (sell) order or quote will be allowed to execute up (down) to and including the maximum (minimum) price within the Acceptable Trade Range. For example, in a thinly traded option: AWAY EXCHANGE QUOTES Exchange Bid size NOM ................................................................................................................. NYSE Arca ....................................................................................................... NYSE MKT ...................................................................................................... BOX ................................................................................................................. Bid price 10 10 10 10 $1.00 1.00 1.00 1.00 Offer price Offer size $1.05 1.05 1.10 1.15 10 10 10 10 MRX PRICE LEVELS Exchange asabaliauskas on DSKBBXCHB2PROD with NOTICES MRX MRX MRX MRX orders orders orders orders Bid size ...................................................................................................... ...................................................................................................... ...................................................................................................... ...................................................................................................... Bid price 10 ........................ ........................ ........................ $1.00 ........................ ........................ ........................ Offer price Offer size $1.05 1.10 1.40 5.00 10 10 10 10 If MRX receives a routable market order to buy 80 contracts, the system will respond as described below: —10 contracts will be executed at $1.05 against MRX —10 contracts will be executed at $1.05 against NOM —10 contracts will be executed at $1.05 against NYSE Arca. —10 contracts will be executed at $1.10 against MRX —10 contracts will be executed at $1.10 against NYSE MKT —10 contracts will be executed at $1.15 against BOX After these executions, there are no other known valid away exchange quotes. The National Best Bid/Offer (‘‘NBBO’’) is therefore comprised of the remaining interest on the MRX book, specifically 10 contracts at $1.40 and 10 contracts at $5.00. In the absence of an Acceptable Trade Range mechanism, the order would execute against the remaining interest at $1.40 and $5.00, resulting in potential harm to investors. MRX will set the parameters of the mechanism at levels that will ensure that it is triggered quite infrequently. Importantly, the Acceptable Trade Range is neutral with respect to away markets, an order may route to other destinations to access liquidity priced within the Acceptable Trade Range provided the order is designated as routable. The options premium will be the dominant factor in determining the Acceptable Trade Range. Generally, options with lower premiums tend to be more liquid and have tighter bid/ask spreads; options with higher premiums have wider spreads and less liquidity. Accordingly, a table consisting of several steps based on the premium of the option will be used to determine how far the market for a given option will be allowed to move. This table or tables would be listed on the Exchange Web site and any periodic updates to the table would be announced via an Options Trader Alert. For example, looking at some SPY May 2013 Call options on May 1st of 2013: Bid/Offer of SPY May 160 Call (at or near-the-money): $1.23 × $1.24 (several hundred contracts on bid and offer) Bid/Offer of SPY May 105 Call (deep inthe-money): $54.10 × $54.26 (11 contracts on each side) The deep in-the-money calls (May 105 calls) have a wider spread ($54.10 ¥ $54.26 = $0.16) compared to a spread of $0.01 for the at-the-money calls (May 15 The Exchange notes that the version of Acceptable Trade Range to be implemented on MRX will not include the posting period functionality available today on Phlx. The proposed rules reflect this change. 16 The Acceptable Trade Range settings are tied to the option premium. 17 The Acceptable Trade Range will not be available for All-Or-None orders. Today, MRX’s Price Level Protection rule is not available for AllOr-None orders. The Exchange has determined that it would be difficult, from a technical standpoint, to apply this feature to those orders because their particular contingency makes it difficult to automate their handling. 18 The value that is to be added to/subtracted from the reference price will be set by MRX and posted on its Web site. VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 E:\FR\FM\05JNN1.SGM 05JNN1 asabaliauskas on DSKBBXCHB2PROD with NOTICES Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices 160 calls). Therefore, it is appropriate to have different thresholds for the two options. For instance, it may make sense to have a $0.05 threshold for the at-themoney strikes (Premium < $2) and a $0.50 threshold for the deep in-themoney strikes (Premium > $10). To consider another example, the May 2013 ORCL put options on May 1st of 2013: Bid/Offer of ORCL 33 May Put (at or near-the-money): $0.33 × $0.34 (100 × 500) Bid/Offer of ORCL 44 May Put (deep inthe-money): $10.40 × $10.55 (50 × 200) Even though ORCL has a much lower share price than SPY, and is a different type of security (it is a common stock of a technology company whereas SPY is an ETF based on the S&P 500 Index), the pattern is the same. The option with the lower premium has a very narrow spread of $0.01 with significant size displayed whereas the higher premium option has a wide spread ($0.15) and less size displayed. The Acceptable Trade Range settings will be tied to the option premium. However, other factors will be considered when determining the exact settings. For example, acceptable ranges may change if market-wide volatility is as high as it was during the financial crisis in 2008 and 2009, or if overall liquidity is low based on historical trends. These different market conditions may present the need to adjust the threshold amounts from time to time to ensure a well-functioning market. Without adjustments, the market may become too constrained or conversely, prone to wide price swings. As stated above, the Exchange would publish the Acceptable Trade Range table or tables on the Exchange Web site. The Exchange does not foresee updating the table(s) often or intraday, although the exchange may determine to do so in extreme circumstances. The Exchange will provide sufficient advanced notice of changes to the Acceptable Trade Range table, generally the prior day, to its membership via an Exchange alert. The Acceptable Trade Range settings would generally be the same across all options traded on MRX, although MRX proposes to maintain flexibility to set them separately based on characteristics of the underlying security. For instance, Google is a stock with a high share price ($824.57 closing price on April 30, 2013). Google options therefore may require special settings due to the risk involved in actively quoting options on such a high-priced stock. Option spreads on Google are wider and the VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 size available at the best bid and offer is smaller. Google could potentially need a wider threshold setting compared to other lower-priced stocks. There are other options that fit into this category (e.g. AAPL) which makes it necessary to have threshold settings that have flexibility based on the underlying security. Additionally, it is generally observed that options subject to the Penny Pilot program quote with tighter spreads than options not subject to the Penny Pilot. MRX will set Acceptable Trade Ranges for three categories of options: (1) Penny Pilot Options trading in one cent increments for options trading at less than $3.00 and increments of five cents for options trading at $3.00 or more, (2) Penny Pilot Options trading in one-cent increments for all prices, and (3) Non-Penny Pilot Options. The Phlx rule contains language that references a posting period.19 Specifically, the Phlx Rule provides if an order/quote reaches the outer limit of the Acceptable Trade Range (the ‘‘Threshold Price’’) without being fully executed, it will be posted at the Threshold Price for a brief period, not to exceed one second (‘‘Posting Period’’), to allow more liquidity to be collected, unless a Quote Exhaust has occurred, in which case the Quote Exhaust process in Phlx Rule 1082(a)(ii)(B)(3) will ensue, triggering a new Reference Price.20 The Exchange will not post interest that exceeds the outer limit of the Acceptable Trade Range, rather the interest will be cancelled. Only if the order limit does not exceed the Acceptable Trade Range will it post on the Exchange, if not otherwise executed. Further, the Phlx rule provides for the re-pricing of that order or quote and calculation of a new Acceptable Trade Range. Consistent with the current treatment of orders and quotes under MRX rules, the Exchange is not adopting the posting period. Unlike Phlx, MRX does not offer a general continuous re-pricing mechanism, and does not consider iterations in its current functionality.21 19 See Phlx Rule 1080(p)(1)(B). Quote Exhaust process occurs when Phlx’s disseminated market at a particular price level includes a quote, and such market is exhausted by an inbound contra-side quote or order, and following such exhaustion, contracts remain to be executed from such quote or order through the initial execution price. 21 With respect to trade-throughs and locked and crossed markets, a Phlx order will not be executed at a price that trades through another market or is displayed at a price that would lock or cross another market. If, at the time of entry, an order that the entering party has elected not to make eligible for routing would cause a locked or crossed market violation or would cause a trade-through violation, it will be re-priced to the current national best offer 20 The PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 25831 MRX would cancel rather than reprice orders which exceed the outer limit of the Acceptable Trade Range. Orders which do not exceed the outer limit of the Acceptable Trade Range will post to the order book and will reside on the order book at such price until they are either executed in full or cancelled by the Member. Additionally, resting orders do not re-price on the order book as they do today on Phlx. For these reasons, the unexecuted balance which exceeds the outer limit of the Acceptable Trade Range will be cancelled, rather than posted to the order book. PMM Order Handling and Opening Obligations Today, PMMs are responsible for handling Priority Customer orders that are not automatically executed pursuant to MRX Rule 714(b)(1), i.e., the Price Level Protection, and to initiate the opening rotation in each series pursuant to MRX Rule 701. This responsibility is described in each of those rules, as well as in MRX Rule 803(c), which provides that: In addition to the obligations contained in this Rule for market makers generally, for options classes to which a market maker is the appointed Primary Market Maker, it shall have the responsibility to: (1) As soon as practical, address Priority Customer Orders that are not automatically executed pursuant to Rule 714(b)(1) in a manner consistent with its obligations under paragraph (b) of this Rule by either (i) executing all or a portion of the order at a price that at least matches the NBBO and that improves upon the Exchange’s best bid (in the case of a sell order) or the Exchange’s best offer (in the case of a buy order); or (ii) releasing all or a portion of the order for execution against bids and offers on the Exchange. (2) Initiate trading in each series pursuant to Rule 701. As described in more detail in the sections above, with the re-platform to Nasdaq technology, the Exchange is adopting Acceptable Trade Range and opening rotation functionality currently offered on NOM and Phlx, which do not contain similar requirements for the PMM. The Exchange therefore proposes to eliminate the PMM order handling and opening obligations in Rule 803(c). The Exchange believes that the elimination of the PMM obligation to initiate the opening rotation in this rule is appropriate because the proposed (for bids) or the current national best bid (for offers) and displayed at one minimum price variance above (for offers) or below (for bids) the national best price. See Phlx Rule 1080(m)(iv)(A). In the instance that the system automatically reprices an order or quote, the system would assign the orders or quote a new timestamp and the order or quote will be reprioritized within the Order Book in accordance with the priority rules in Phlx Rule 1014(g). E:\FR\FM\05JNN1.SGM 05JNN1 25832 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices opening process 22 is initiated by the receipt of an appropriate number of valid width Primary Market Maker or Competitive Market Maker quotes as outlined in proposed MRX Rule 701(c)(i) [sic]. Similarly, the Acceptable Trade Range functionality will continue to provide an important protection to members without imposing any Primary Market Maker obligations. Today, Phlx does not have similar roles for a Specialist on its market. In connection with the replatform, the Exchange will conform its rules with those of Phlx with respect to the manner in which it operates the Opening Process. asabaliauskas on DSKBBXCHB2PROD with NOTICES Back-Up PMM The Exchange also proposes to amend MRX Supplementary Material .03 to Rule 803 to eliminate its Back-Up Primary Market Maker program. Today, any MRX Member that is approved to act in the capacity of a Primary Market Maker may voluntarily act as a ‘‘BackUp Primary Market Maker’’ in options series in which it is quoting as a Competitive Market Maker. A Back-Up Primary Market Maker assumes all of the responsibilities and privileges of a Primary Market Maker under the Exchange’s rules with respect to any series in which the appointed Primary Market Maker fails to have a quote in the system except that a Back-Up Primary Market Maker’s quoting obligations are the same as the quoting obligations for Competitive Market Makers as described in MRX Rule 804(e)(2)(iii) and .02 of Supplementary Material to Rule 804.23 If more than one Competitive Market Maker that has volunteered to be a Back-Up Primary Market Maker is quoting in an options series at the time that a Primary Market Maker ceases quoting, the Competitive Market Maker with the largest offer at the lowest price in the series at that time will be chosen to be the Back-Up Primary Market Maker. In the event of a tie based on price and size, the Competitive Market Maker with time priority will be automatically chosen. The Back-Up Primary Market Maker is automatically restored to Competitive Market Maker status when the appointed Primary Market Maker initiates quoting in the series. The obligations of a Primary Market Maker 22 See note 3 above. Exchange notes that the current rule text for Back-up Primary Market Maker on MRX does not indicate that quoting obligations for Back-up Primary Market Makers are the same as for Competitive Market Makers. This, however, has been the Exchanges practice, and the practice of its affiliated exchanges, including, the Nasdaq ISE, LLC. See Securities Exchange Act Release No. 76936 (January 20, 2016), 81 FR 4347 (January 26, 2016) (SR–ISE–2016–02). 23 The VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 include the initiation of a trading rotation pursuant to MRX Rule 701, quoting and other obligations pursuant to MRX Rules 803 and 804, and financial requirements pursuant to MRX Rule 809. The Exchange is proposing to amend the obligations of a PMM only with regard to the initiation of a trading rotation pursuant to MRX Rule 701. The quoting and financial requirements rules shall remain the same. With the re-platform, a Back-Up Primary Market Maker is no longer necessary since the order handling obligations present on MRX today are not going to be present in the new system. Furthermore, the proposed Opening Process,24 obviates the importance of such a role. The Opening Process describes the entry of quotes by both a Primary Market Maker and a Competitive Market Maker, provided they are Valid Width Quotes.25 The Opening Process further describes alternative methods to open the market if such quotes are not entered at the opening by either of these market makers.26 The reliance on a market maker to initiate the opening process is no longer present within the proposed rule.27 Market Maker Speed Bump The Exchange proposes to amend MRX Rule 804, entitled ‘‘Market Maker Quotations’’ to establish default parameters for certain risk functionality. The Exchange offers a risk protection mechanism for market maker quotes that removes a member’s quotes in an options class if a specified number of curtailment events occur during a set time period (‘‘Market Maker Speed Bump’’). In addition, the Exchange offers a market-wide risk protection that removes a market maker’s quotes across all classes if a number of curtailment events occur (‘‘Market-Wide Speed Bump’’). MRX Rule 804(g) currently requires that market makers set curtailment parameters for both the Market Maker Speed Bump and the Market-Wide Speed Bump. Today, if a market maker does not set these parameters their quotes are rejected by the trading system for each of the speed bumps mentioned herein. With the re-platform, the Exchange has determined to provide default curtailment parameters to assist market makers when they do not enter their own parameters into the system. The default parameters will be determined by the Exchange and announced to members. Rather than rejecting quotes, the default parameters would be instituted. The default parameters are important because market makers at MRX have quoting obligations as specified in MRX Rule 804. When a market maker’s quotes are removed from the system, the time does not count toward the continuous quoting obligations. The Exchange believes that allowing for default settings would cause quotes not to be rejected and would assist market makers in meeting their quoting obligations because they would not have their quotes removed from the market. Today, Phlx indicates default parameters for its detection of loss of communication settings.28 Anti-Internalization The Exchange proposes to amend the MRX Supplementary Material at .03 to Rule 804, entitled ‘‘Market Maker Quotations’’ to adopt an AntiInternalization rule. Today, MRX’s functionality prevents Immediate-orCancel (‘‘IOC’’) 29 orders entered by a market maker from trading with the market maker’s own quote.30 As implemented, if an IOC order entered by a market maker would trade with a quote entered by the same market maker, that order will instead be allocated to other interest at the same price, and the balance cancelled. The Exchange proposes to replace this selftrade protection functionality with AntiInternalization functionality currently offered on Phlx.31 Today, Phlx provides antiinternalization (‘‘AIQ’’) functionality to Specialists and Registered Options Traders (‘‘collectively market makers’’). Quotes and orders entered by Phlx market makers using the same badge 32 are not executed against quotes and orders entered on the opposite side of the market using the same badge. This automatically prevents these quotes and orders from interacting with each other in the system. On Phlx, the system cancels the resting quote or order back to the entering party prior to execution. This functionality does not apply in any 28 Phlx Rule 1019(c). IOC order is a limit order that is to be executed in whole or in part upon receipt. Any portion not so executed is to be treated as cancelled. See Rule 715(b)(3). 30 This functionality is not memorialized in MRX’s rules. 31 Phlx Rule 1080(p)(2). 32 A badge is the same as a market participant identifier (‘‘MPID’’). 29 An 24 See note 3 above. Valid Width Quote is a two-sided electronic quotation submitted by a Market Maker that consists of a bid/ask differential that is compliant with MRX proposed Rule 803(b)(4). See note 3 above. 26 See note 3 above. 27 Id. 25 A PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 E:\FR\FM\05JNN1.SGM 05JNN1 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices auction or with respect to complex transactions. The Exchange proposes to adopt a similar rule that provides that quotes and orders entered by Market Makers using the same member identifier will not be executed against quotes and orders entered on the opposite side of the market by the same market maker using the same member identifier. In such a case, the system will cancel the resting quote or order back to the entering party prior to execution. This functionality shall not apply in any auction. AIQ is difficult to apply during auctions, and there is limited benefit in doing so. There is limited benefit because, generally speaking, auctions do not raise the same policy concerns for wash sales and ERISA 33 due to the semi-random manner in which trades are matched. This functionality does not relieve or otherwise modify the duty of best execution owed to orders received from public customers. Market Makers generally do not display public customer orders in market making quotations, opting instead to enter public customer orders using separate identifiers. In the event that a Market Maker opts to include a public customer order within a market making quotation, the Market Maker must take appropriate steps to ensure that public customer orders that do not execute due to antiinternalization functionality ultimately receive the same execution price (or better) they would have originally obtained if execution of the order was not inhibited by the functionality. This Anti-Internalization functionality can assist Market Makers in reducing trading costs from unwanted executions potentially resulting from the interaction of executable buy and sell trading interest from the same firm when performing the same market making function. asabaliauskas on DSKBBXCHB2PROD with NOTICES Minimum Execution Quantity Orders The Exchange proposes to amend MRX Rule 715, entitled ‘‘Types of Orders’’ at 715(q) to remove minimum quantity orders. Today, the Exchange allows members to enter minimum quantity orders, which is an order type that is available for partial execution, 33 AIQ also is designed to assist market participants in complying with certain rules and regulations of the Employee Retirement Income Security Act (‘‘ERISA’’) that preclude and/or limit managing broker-dealers of such accounts from trading as principal with orders generated for those accounts. It can also assist Market Makers in reducing trading costs from unwanted executions potentially resulting from the interaction of executable buy and sell trading interest from the same firm when performing the same market making function. VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 but each partial execution must be for a specified number of contracts or greater. If the balance of the order after one or more partial executions is less than the minimum, such balance is treated as All-Or-None. Like All-OrNone orders, minimum quantity orders are contingency orders that are not displayed in the Exchange’s best bid or offer. However, the Exchange disseminates to market participants an indication that a minimum quantity order has been entered. The Exchange has found that its members have not adopted this feature and therefore proposes to remove this functionality.34 Furthermore, the Exchange proposes to remove two references to minimum quantity orders in other rules. Specifically, the Exchange proposes to remove references to minimum quantity orders in MRX Supplementary Material .02 to Rule 713, which notes that minimum quantity orders are contingency orders that have no priority on the book, and in MRX Supplementary Material .04 to Rule 717, which explains that non-marketable minimum quantity orders are deemed ‘‘exposed’’ one second following a broadcast notifying the market that such an order to buy or sell a specified number of contracts at a specified with a specified minimum quantity has been received in the options series. Cancel and Replace Orders The Exchange is proposing to amend Supplementary Material .02 to MRX Rule 715 to memorialize the manner in which the system will handle cancel and replace orders in connection with the Exchange’s technology migration to INET. By way of background with respect to cancel and replace orders, a Member has the option of either sending in a cancel order and then separately sending in a new order which serves as a replacement of the original order (two separate messages) or sending a single cancel and replace order in one message (‘‘Cancel and Replace Order’’). Sending in a cancel order and then separately sending in a new order will not retain the priority of the original order on the current MRX system and on the INET system. Today, MRX does not treat all Cancel and Replace Orders as new orders. For example, a Cancel and Replace Order which reduced the size of the original order from 600 to 300 contracts would not be treated as a new order. A new order would be subject to price or other 34 This functionality is not currently being utilized by any member on MRX. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 25833 reasonability checks,35 which this order today on MRX would not be subject to as a result of decreasing the size of the order. This order would continue to retain its time priority in the system. If a Cancel and Replace Order does not pass a price or other reasonability check, the order will cancel, but it will not be replaced with a new order. The Exchange proposes to define a Cancel and Replace Order as a single message for the immediate cancellation of a previously received order and the replacement of that order with a new order. If the previously placed order is already partially filled or in its entirety,36 the replacement order is automatically canceled or reduced by the number of contracts that were executed. Additionally, the replacement order will retain the priority of the cancelled order, if the order posts to the Order Book,37 provided the price is not amended, size is not increased,38 or in the case of Reserve Orders, size is not changed.39 However, if the replacement portion of a Cancel and Replace Order does not satisfy the system’s price or other reasonability checks the existing order will be cancelled and not replaced.40 The Exchange represents that conducting price or other reasonability checks for all Cancel and Replace Orders will validate orders against current market conditions prior to proceeding with the request to modify the order. The Exchange further believes that memorializing Cancel and Replace Order handling will add transparency to the Exchange’s rules and reduce the potential for investor confusion. Other exchanges with a similar order type permit an order to retain priority if only 35 Price or other reasonability checks consider the current market at the time of the Cancel and Replace Order. 36 For example, in both the current MRX system and INET, the original order is automatically canceled or reduced by the number of contracts that were executed depending on the volume of the original order that was filled. 37 During an exposure period a Cancel and Replace Order will retain priority if the order posts to the Order Book, provided price is not changed, size is not increased or, for a Reserve Order, size is not changed. 38 Decrementing the volume will not result in a change in priority, as is the case today with MRX. 39 A Reserve Order is a limit order that contains both a displayed portion and a non-displayed portion. See MRX Rule 715(g). 40 The Exchange notes that if the replacement portion of a Cancel and Replace order does not satisfy the system’s price or other reasonability checks, the existing order shall be cancelled and not replaced. The price reasonability checks include: (i) MRX Rule 710; (ii) MRX Rule 711(c); and (iii) MRX Rule 714(b)(2). The Exchange notes that other than these price reasonability checks, the Exchange may cancel an order because it does not satisfy a format or other requirement specified in the Exchange’s s rules and specifications. E:\FR\FM\05JNN1.SGM 05JNN1 25834 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices the size of the order is decremented.41 Accordingly, the Commission believes it is appropriate for the Exchange to define Cancel and Replace Order in the manner proposed. All-Or-None Orders The Exchange proposes to amend Rule 715(c) to provide that an All-OrNone Order may only be entered into the system with a time-in-force designation of Immediate-Or-Cancel order in connection with the Exchange’s technology migration to INET. An All-Or-None Order is a limit or market order that is to be executed in its entirety or not at all. Today, an All-OrNone Order may be designated as a market or limit order with any time-inforce designation. The Exchange proposes to limit All-Or-None Orders to only be accepted with a time-in-force designation of Immediate-Or-Cancel. An Immediate-Or-Cancel Order is a limit order that is to be executed in whole or in part upon receipt. Any portion not so executed is to be treated as cancelled. The Exchange also proposes to amend Supplementary Material .02 to Rule 713 to make clear that All-Or-None Orders will only be accepted with a time-inforce designation of Immediate-OrCancel and, therefore, would not persist in the Order Book. The Exchange also proposes to amend Supplementary Material .04 to Rule 717 to reserve this section as All-Or-None Orders 42 would not be subject to exposure because they would be cancelled if not executed in their entirety.43 Delay of Implementation The Exchange proposes to delay the implementation of Directed Order 44 functionality on MRX. The Exchange proposes to continue to offer this functionality on the current platform. The Exchange however would propose not to launch the Directed Order functionality on MRX at the same time 41 See Phlx Rule 1080(b)(i)(A). section is also being reserved because the Exchange is eliminating Minimum Quantity Orders. 43 The Exchange notes that Rule 716(e), Solicited Order Mechanism, is not being amended. The proposed rule change does not impact the manner in which the Solicited Order Mechanism operates. 44 MRX currently operates a Directed Order system in which Electronic Access Members (‘‘EAMs’’) can send an order to a DMM for possible price improvement. If a DMM accepts Directed Orders generally, that DMM must accept all Directed Orders from all EAMs. Once such a DMM receives a Directed Order, it either (i) must enter the order into the Exchange’s PIM auction and guarantee its execution at a price better than the MRX best bid or offer (‘‘MRX BBO’’) by at least a penny and equal to or better than the NBBO or (ii) must release the order into the Exchange’s limit order book, in which case there are certain restrictions on the DMM interacting with the order. See MRX Rule 811. asabaliauskas on DSKBBXCHB2PROD with NOTICES 42 This VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 as proposed herein for the proposals to amend other trading functions. The Exchange would instead issue an alert which specifies a different date for this functionality to commence on MRX. This functionality will remain the same on the new platform. The Exchange proposes to amend the rule text in Rule 811 (Directed Orders) to note that this functionality will not be available as of a certain date in the third quarter of 2017 to be announced in a notice. The Exchange will recommence this functionality on MRX within one year from the date of filing of this rule change to be announced in a separate notice. The Exchange intends to begin implementation of the functionality for Directed Orders after Q3 2017. The migration will also be on a symbol by symbol basis, and the Exchange will issue an alert to members in the form of an Options Trader Alert to provide notification of the symbols that will migrate and the relevant dates. The Exchange will introduce Directed Orders on MRX within one year from the date of this filing, otherwise the Exchange will file a rule proposal with the Commission to remove these rules. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,45 in general, and furthers the objectives of Section 6(b)(5) of the Act,46 in particular, in that it is 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 for the reasons stated below. Trading Halts The Exchange’s proposal to amend MRX Rule 702 concerning Trading Halts to specifically note that during a halt the Exchange will maintain existing orders on the book but not existing quotes is consistent with the Act because it provides market participants with clarity as to the manner in which interest will be handled by the system. During a trading halt, the market may move and create risk to market participants with respect to resting interest. The Exchange believes that cancelling existing quotes protects investors and the public interest by removing potentially stale quotes during the halt process. The Exchange’s proposal to amend its rules on order handling during Limit 45 15 46 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00080 Fmt 4703 Sfmt 4703 up-Limit Down states and trading halts is consistent with the Act because it will harmonize the way the Exchange treats orders during a Limit State or Straddle State in the equity market, or a trading halt in the option, with how those orders are handled on other Nasdaq Exchanges. The proposed rule text should provide certainty about how options orders and trades will be handled during periods of extraordinary volatility in the underlying security. Specifically, under the proposal, market participants will be able to continue to trade options overlying securities that are in a Limit State or Straddle State, while addressing specific order types that are subject to added risks during such periods. The Exchange believes that the rejection of options Market Orders (including elected Stop Orders) should help to prevent executions that might occur at prices that have not been reliably formed, which should, in turn, protect, in particular, retail investors from executions of un-priced orders during times of significant volatility. The Exchange believes that harmonizing these rules will provide a better experience to members that trade on multiple markets operated by Nasdaq, Inc. Cancellation of Quotes The Exchange’s proposal to amend MRX Rule 702 concerning Trading Halts to specifically note that during a halt the Exchange will maintain existing orders on the book but not existing quotes is consistent with the Act because it provides market participants with clarity as to the manner in which interest will be handled by the system. During a trading halt, the market may move and create risk to market participants with respect to resting interest. The Exchange believes that cancelling existing quotes protects investors and the public interest by removing potentially stale quotes during the halt process. Limit Up-Limit Down The Exchange’s proposal to add new MRX Rule 702(d) to replace rule text currently contained in MRX Rule 703A entitled ‘‘Trading During Limit UpLimit Down States in Underlying Securities’’ is consistent with the Act because the proposed rules provide for protections from erroneous executions in a highly volatile period. The proposed rule text in MRX Rule 702(d) is similar to language currently in Phlx Rule 1047(d), which provides for Exchange handling due to extraordinary market volatility. As noted within this proposal, the Exchange will adopt opening limitation, Market Order and E:\FR\FM\05JNN1.SGM 05JNN1 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES Stop Order handling consistent with handling today on Phlx. The Exchange proposes to adopt rule text to provide for how the Exchange shall treat the opening rotation.47 If an opening process is occurring, it will cease and then start the opening process from the beginning once the Limit State or Straddle State is no longer occurring. The Exchange believes that this treatment at the opening will protect investors and the public interest by halting trading to prevent unintended executions. Also, with this proposal, Market Orders pending in the system will continue to be processed regardless of the Limit or Straddle State. The Exchange believes that this treatment of Market Orders is consistent with the Act because these Market Orders are only pending in the system if they are exposed at the NBBO pursuant to Supplementary Material .02 to Rule 1901. If at the end of the exposure period the affected underlying is in a Limit or Straddle State, the Market Order will be cancelled with no trade occurring. If at the end of the exposure period, the affected underlying is no longer in a Limit or Straddle State, the Market Order will be handled pursuant to the normal operation of the rules. Lastly, MRX does not currently elect Stop Orders that are pending in the system during a Limit or Straddle State. Under the proposal, and in-line with the Phlx implementation, Stop Orders that are pending in the system during a Limit or Straddle State will be elected, if conditions for such election are met, and, because they become Market Orders, will be cancelled back to the Member with a reason for such rejection. The Exchange believes that this is consistent with the Act because it affords the appropriate protections to an elected Stop Order once it becomes a Market Order after election. The Exchange believes that this approach provides the market participant with the intended result. Auction Handling During a Trading Halt The Exchange’s proposal to amend various rules to add detail to MRX rules to account for the impact of a trading halt on the Exchange’s auction mechanisms is consistent with the Act for the reasons which follow. The Exchange’s proposal to amend today’s current behavior and instead terminate the PIM auction and not execute eligible interest when a trading halt occurs is consistent with the Act because during a trading halt, the market may move and create risk to market participants with respect to resting interest. The Exchange 47 See note 3 above. VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 believes that terminating the PIM auction protects investors and the public interest by providing certainty to participants in regard to how their interest will be handled. Memorializing the manner in which the system will handle orders entered into PIM during a trading halt will provide transparency for the benefit of members and investors. The Exchange’s proposal to amend MRX Rule 716, entitled ‘‘Block Trades’’ to memorialize that if a trading halt is initiated after an order is entered into the Block Order Mechanism, Facilitation Mechanism, or Solicited Order Mechanism, such auction will also be automatically terminated without execution is consistent with the Act because in the event of a trading halt, terminating these auction mechanisms and not executing eligible interest will provide certainty to participants in regard to how their interest will be handled. Memorializing the manner in which the system will handle orders during a trading halt will provide transparency for the benefit of members and investors. Market Order Spread Protection The Exchange’s proposal to amend MRX Rule 711 to adopt a mandatory risk protection entitled Market Order Spread Protection is consistent with the Act because it provides a protection for Market Orders that may encourage price continuity, which should, in turn, protect investors and the public interest by reducing executions occurring at dislocated prices. Further, the Exchange believes that this rule proposal will mitigate risks to market participants. Acceptable Trade Range The Exchange’s proposal to amend MRX Rule 714 to remove the current Price Level Protection rule and adopt Phlx’s Acceptable Trade Range is consistent with the Act and will 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 by making the Exchange’s market more efficient, to the benefit of the investing public. Further, it should prevent the system from experiencing dramatic price swings by creating a level of protection that prevents the market from moving beyond set thresholds. The proposed rule change will reduce the negative impacts of sudden, unanticipated volatility in individual options, and serve to preserve an orderly market in a transparent and uniform manner, enhance the price-discovery process, increase overall market confidence, and PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 25835 promote fair and orderly markets and the protection of investors. Specifically, the Exchange believes that the NBBO is a fair representation of then-available prices and accordingly the proposal helps to avoid executions at prices that are significantly worse than the NBBO. With respect to the posting information, which is described in the Phlx rule, but not contained in the proposed MRX rule, the Exchange believes that it is consistent with the Act to cancel unexecuted interest which is priced through an Acceptable Trade Range. Today, the Exchange does not have an iterative process wherein the Exchange will attempt to execute unexecuted balances for a period of time while that interest is automatically repriced on the order book. Phlx has this type of functionality for Acceptable Trade Range, while the Exchange does not re-price interest on the order book. The Exchange transparently describes the cancellation of the interest within its rules. PMM Order Handling and Opening Obligations The Exchange’s proposal to eliminate the PMMs order handling and opening obligations is consistent with the Act because PMMs will no longer have these obligations due to the introduction of Acceptable Trade Range and opening rotation functionality that is offered today on NOM and Phlx. Because the PMM will no longer have these obligations, the Exchange believes that it is appropriate to remove these rules. Back-Up PMM The Exchange’s proposal to remove certain responsibilities of Primary Market Makers with respect to Back-Up Primary Market Maker assignments is consistent with the Act because the Exchange believes this function is not necessary. Today, in addition to market making obligations, the Primary Market Maker has certain order handling and other obligations as prescribed by Exchange Rules. Specifically, the obligations of a Primary Market Maker include the initiation of a trading rotation pursuant to MRX Rule 701, quoting and other obligations pursuant to MRX Rules 803 and 804, and financial requirements pursuant to MRX Rule 809. The Exchange is proposing to amend the obligations of a PMM only with regard to the initiation of a trading rotation pursuant to MRX Rule 701. The quoting and financial requirements rules shall remain the same. With the replatform, a Back-Up Primary Market Maker is no longer necessary since the order handling obligations present on MRX today are not going to be present E:\FR\FM\05JNN1.SGM 05JNN1 25836 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices in the new system. Furthermore, the proposed Opening Process,48 obviates the importance of such a role. The Opening Process further describes alternative methods to open the market if such quotes are not entered at the opening by either of these market makers.49 The reliance on a market maker to initiate the opening process is no longer present within the proposed rule.50 In addition, the Exchange does not believe there is an interest among market participants for the back-up assignment. Default Settings for Market Maker Risk Protections The Exchange’s proposal to amend MRX Rule 804(g) to introduce default curtailment settings for the Market Maker Speed Bump and Market-Wide Speed Bump is consistent with the Act as it will allow market makers to use Exchange set default values for these risk protections. Today, these market makers would have their quotes rejected if they fail to enter the required curtailment parameters. The default settings provide an alternative for market makers that have not entered their curtailment settings. Default settings will be announced to members who will have the opportunity to avoid the defaults by entering their own curtailment settings as required under the rule. asabaliauskas on DSKBBXCHB2PROD with NOTICES Anti-Internalization The Exchange’s proposal to amend the MRX Supplementary Material at .03 to Rule 804 to add Anti-Internalization is consistent with the Act because it is designed to assist market makers in reducing trading costs from unwanted executions potentially resulting from the interaction of executable buy and sell trading interest from the same firm when performing the same market making function. Further, it is consistent with the Act to not apply this functionality in any auction because AIQ is difficult to apply during auctions, and there is limited benefit in doing so. There is limited benefit because, generally speaking, auctions do not raise the same policy concerns for wash sales and ERISA 51 due to the semi-random manner in which trades are matched. Minimum Quantity Orders The Exchange believes that removing minimum quantity orders would 48 See note 3 above. 49 Id. remove impediments to and perfect the mechanism of a free and open market and a national market system by simplifying functionality available on the Exchange and reducing complexity of its order types. Delay of Implementation The Exchange believes that delaying the implementation of the Directed Order functionality on MRX is consistent with the Act because the Exchange desires to rollout this functionality at a later date to allow additional time to rebuild this technology on the new platform. The Exchange is staging the replatform to provide maximum benefit to its Members while also ensuring a successful rollout. This delay will provide the Exchange additional time to implement this functionality, which is not being amended. Members have been given adequate notice of the implementation dates. The Exchange will continue to provide notifications to Members to ensure clarity about the delay of implementation of this functionality. The Exchange will note the applicable dates within the rule text. Cancel and Replace Orders With respect to Cancel and Replace Orders, the Exchange believes that it is consistent with the Act to treat such orders as new orders which will be subject to price or other reasonability checks. The Exchange believes that conducting price or other reasonability checks for all Cancel and Replace Orders will protect investors and the public interest by validating the order against the current market conditions prior to proceeding with the request to modify the order. The manner in which MRX treats priority with respect to Cancel and Replace Orders is not changing. The MRX system currently assigns a new priority to the order when the price is changed, size is increased or the size of a reserve order is changed. Hence, the priority of the original order would continue to not be retained in the same manner with respect to the original order. The Exchange believes that allowing Cancel and Replace Orders, where the size is reduced, to retain the priority of the original order is consistent with the manner in which the Exchange treats partially executed orders, which similarly apply the priority of the executed portion of the order to the remaining portion of the order. Other exchanges today permit an order to retain priority if only the size was decremented.52 The Exchange believes that permitting size to 50 Id. 51 See note 34 above. VerDate Sep<11>2014 17:31 Jun 02, 2017 52 See Jkt 241001 PO 00000 NASDAQ PHLX, LLC Rule 1080(b)(i)(A). Frm 00082 Fmt 4703 Sfmt 4703 decrement and allowing the order to retain priority is consistent with the Act because the reduced change in size does not impact the terms of the order materially. The reduced size of the order would have priority on the Order Book with the original order. The Exchange believes that it is consistent with the Act to treat Reserve Orders differently than other order types by giving these orders a new priority if size is amended in any way, including a decrement in size, with a Cancel and Replace Order because unlike other order types, Reserve Orders have both a displayed an [sic] non-displayed portion. The Exchange believes that any change to the original order of a Reserve Order should be treated as a new order because the size of a Reserve Order is specifically defined as part of that order type. A Member must specify the displayed and total volume, a portion of which is non-displayed, when a Reserve Order is entered into the system. Treating this order type as a new order if size is amended is consistent with the Act because the terms of the original order of a Reserve Order would modify the total size of the order, including potentially displayed and non-displayed portions which the Exchange believes should result in a new order as it changes a material portion of the order. The Exchange believes that memorializing the Cancel and Replace Order handling will add transparency and specificity to the Rules thereby protecting investors and the public interest by reducing the potential for investor confusion. All-Or-None Orders The Exchange believes that the proposal with respect to All-Or-None Orders is appropriate and reasonable, because the time-in-force designation of Immediate-Or-Cancel will offer Members certainty with respect to their order handling. With this proposal, an All-Or-None Order will either execute immediately or be cancelled back to the Member. All-Or-None Orders are contingency orders that have no priority on the Order Book. These orders would receive an execution after all other trading interest at the same price has been exhausted. This proposal would remove uncertainty with respect to the manner in which these orders would be handled in the Order Book by cancelling back an All-Or-None Order if it cannot be immediately executed in its entirety. Today, the NASDAQ Options Market, LLC (‘‘NOM’’) only permits All-Or-None Orders to be submitted with a time-in- E:\FR\FM\05JNN1.SGM 05JNN1 Federal Register / Vol. 82, No. 106 / Monday, June 5, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES force designation of Immediate-OrCancel.53 The Exchange notes that Members are aware of the Exchange’s efforts to replatform to the INET technology. Members have been involved in testing the system and providing feedback to the Exchange throughout this migration process. Members were provided notice of this proposed change to the system. The Exchange intends to make clear the implementation of this functionality within its Rulebook. Members a competitive alternative on MRX for submitting orders for execution. Delaying the implementation of the Directed Order functionality will allow additional time to rebuild this technology on the new platform and provide maximum benefit to Members for a successful rollout. No Member will be able to utilize the Directed Order functionality with the delay. Members have been given adequate notice of the implementation dates. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. As explained above, the Exchange is re-platforming it’s trading system onto the Nasdaq INET architecture, and is making certain other changes to its trading functionality in connection with this migration. A majority of the functionality that is being added with the proposed rule change already exists on one or more Nasdaq Exchanges. As a result, the Exchange does not believe that the proposed rule change will impact the intense competition that exists in the options market. In fact, the Exchange believes that adopting this functionality on MRX will allow the Exchange to more effectively compete for order flow with other options markets. The Exchange does not believe conducting price or other reasonability checks for all Cancel and Replace Orders imposes an undue burden on competition because all Cancel and Replace Orders will uniformly be subject to this additional protection based on the current market conditions. Permitting all market participants to reduce their exposure without penalty does not impose an undue burden [sic] competition, rather it promotes competition by allowing participants the ability to change their orders in a changing market, provided the order was not already filled. The Exchange believes that not permitting Reserve Orders to retain priority if size is amended does not create an undue burden on competition because all Members will be treated in a uniform manner with respect to Cancel and Replace Order handling. The Exchange does not believe that the proposed rule change to All-or-None Orders will impact the intense competition that exists in the options market because the All-Or-None Order type, as proposed, will continue to offer C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. 53 See NOM Rules, Chapter VI, Section 1(g)(2). VerDate Sep<11>2014 17:31 Jun 02, 2017 Jkt 241001 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–MRX–2017–02 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–MRX–2017–02. 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 PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 25837 post all comments on the Commission’s Internet Web site (https://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–MRX– 2017–02 and should be submitted on or before June 26, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.54 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–11509 Filed 6–2–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80809; File No. SR– BatsBYX–2017–11] Self-Regulatory Organizations; Bats BYX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees for Use on Bats BYX Exchange, Inc. May 30, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 16, 2017, Bats BYX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Bats’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as 54 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\05JNN1.SGM 05JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)]
[Notices]
[Pages 25827-25837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11509]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80815; File No. SR-MRX-2017-02]

Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
of Proposed Rule Change in Connection With a System Migration to Nasdaq
INET Technology

May 30, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 17, 2017, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II below, which Items have been
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to amend various rules in connection with a
system migration to Nasdaq INET technology.
The text of the proposed rule change is available on the Exchange's
Web site at www.ise.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
The purpose of this rule change is to amend certain rules to
reflect the MRX technology migration to a Nasdaq, Inc. (``Nasdaq'')
supported architecture. INET is the proprietary core technology
utilized across Nasdaq's global markets and utilized on The NASDAQ
Options Market LLC (``NOM''), NASDAQ PHLX LLC (``Phlx'') and NASDAQ BX,
Inc. (``BX'') (collectively, ``Nasdaq Exchanges''). The migration of
MRX to the Nasdaq INET architecture would result in higher performance,
scalability, and more robust architecture. With this system migration,
the Exchange intends to adopt certain trading functionality currently
utilized at Nasdaq Exchanges. The functionality being adopted is
described in this filing.
The Exchange is also separately filing \3\ a rule change to amend
the Exchange's Opening Process. MRX will replace its current opening
process at Rule 701 with Phlx's Opening Process.\4\
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\3\ See SR-MRX-2017-01 (not yet published).
\4\ See Phlx Rule 1017. See also Securities Exchange Act Release
No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR-
Phlx-2017-79) (notice of Filing of Partial Amendment No. 2 and Order
Granting Approval of a Proposed Rule Change, as Modified by Partial
Amendment No. 2, to Amend PHLX Rule 1017, Openings in Options).
---------------------------------------------------------------------------

The Exchange intends to begin implementation of the proposed rule
changes in Q3 2017. The migration will be on a symbol by symbol basis,
and the Exchange will issue an alert to members in the form of an
Options Trader Alert to provide notification of the symbols that will
migrate and the relevant dates.
Generally
With the re-platform, the Exchange will now be built on the Nasdaq
INET architecture, which allows certain trading system functionality to
be performed in parallel. The Exchange believes that this architecture
change will improve the member experience by reducing overall latency
compared to the current MRX system because of the manner in which the
system is segregated into component parts to handle processing.
Trading Halts
Cancellation of Quotes
The Exchange proposes to amend MRX Rule 702 entitled ``Trading
Halts.'' Specifically, the Exchange proposes to amend Rule 702(a)(2) to
note that during a halt, the Exchange will maintain existing orders on
the book, but not existing quotes prior to the halt, accept orders and
quotes, and process cancels and modifications for quotes and orders,
except that existing quotes are cancelled. Today, MRX maintains
existing orders and quotes during a trading halt. With respect to
cancels and modifications, this behavior will not change. MRX does not
have a quote

[[Page 25828]]

purge today, so this functionality will be changed with the adoption of
this trading rule. The Exchange believes that purging quotes upon a
halt will remove uncertainty for market participants.
The Exchange proposes to conform the treatment of quotes and orders
on MRX to Phlx Rule 1047(f) in conjunction with the replatform of MRX.
The Exchange desires to handle halts in a similar manner as Phlx.
Limit Up-Limit Down
The Exchange also proposes to add new MRX Rule 702(d) to replace
rule text currently contained in MRX Rule 703A entitled ``Trading
During Limit Up-Limit Down States in Underlying Securities.'' Proposed
MRX Rule 702(d) is similar to language currently in Phlx Rule 1047(d),
which provides for Exchange handling due to extraordinary market
volatility. Currently MRX Rule 703A(a) and (b) provides modified order
handling procedures when a security underlying an options class traded
on the Exchange enters a Limit State or Straddle State under the Plan
to Address Extraordinary Market Volatility (the ``Plan'').\5\
Specifically, during a Limit State or Straddle State: (1) Incoming
Market Orders are automatically rejected, and all unexecuted Market
Orders pending in the system are cancelled, and (2) incoming Stop
Orders (which become Market Orders if elected) are automatically
rejected, and unexecuted Stop Orders pending in the system cannot be
elected and will be held until the end of the Limit State or Straddle
State. In addition, MRX Rule 703A(c) provides that when the security
underlying an option class is in a Limit State or Straddle State, the
maximum quotation spread requirements for market maker quotes contained
in MRX Rule 803(b)(4) and the continuous quotation requirements
contained in MRX Rule 804(e) shall be suspended.\6\
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\5\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan. As set forth
in more detail in the Plan, Price Bands consisting of a Lower Price
Band and an Upper Price Band for each NMS Stock are calculated by
the Processors (Section V(A) of the Plan). When the National Best
Bid (Offer) is below (above) the Lower (Upper) Price Band, the
Processors shall disseminate such National Best Bid (Offer) with an
appropriate flag identifying it as unexecutable. When the National
Best Bid (Offer) is equal to the Upper (Lower) Price Band, the
Processors shall distribute such National Best Bid (Offer) with an
appropriate flag identifying it as a Limit State Quotation (Section
VI(A) of the Plan). All trading centers in NMS stocks must maintain
written policies and procedures that are reasonably designed to
prevent the display of offers below the Lower Price Band and bids
above the Upper Price Band for NMS stocks. Notwithstanding this
requirement, the Processor shall display an offer below the Lower
Price Band or a bid above the Upper Price Band, but with a flag that
it is non-executable. Such bids or offers shall not be included in
the National Best Bid or National Best Offer calculations (Section
VI(A)(3) of the Plan). Trading in an NMS stock immediately enters a
Limit State if the National Best Offer (Bid) equals but does not
cross the Lower (Upper) Price Band (Section VI(B)(1) of the Plan.
Trading for an NMS stock exits a Limit State if, within 15 seconds
of entering the Limit State, all Limit State Quotations were
executed or canceled in their entirety. If the market does not exit
a Limit State within 15 seconds, then the Primary Listing Exchange
would declare a five-minute trading pause pursuant to Section VII of
the Plan, which would be applicable to all markets trading the
security. The primary listing market would declare a Trading Pause
in an NMS stock; upon notification by the primary listing market,
the Processor would disseminate this information to the public. No
trades in that NMS stock could occur during the trading pause, but
all bids and offers may be displayed (Section VII(A) of the Plan).
In addition, the Plan defines a Straddle State as when the National
Best Bid (Offer) is below (above) the Lower (Upper) Price Band and
the NMS stock is not in a Limit State. For example, assume the Lower
Price Band for an NMS Stock is $ 9.50 and the Upper Price Band is $
10.50, such NMS stock would be in a Straddle State if the National
Best Bid were below $ 9.50, and therefore unexecutable, and the
National Best Offer were above $ 9.50 (including a National Best
Offer that could be above $ 10.50). If an NMS stock is in a Straddle
State and trading in that stock deviates from normal trading
characteristics, the Primary Listing Exchange may declare a trading
pause for that NMS stock if such Trading Pause would support the
Plan's goal to address extraordinary market volatility.
\6\ The time periods associated with Limit States and Straddle
States are not considered by the Exchange when evaluating whether a
market maker complied with the continuous quotation requirements
contained in Rule 804(e).
---------------------------------------------------------------------------

With the re-platform, the Exchange will adopt opening limitation,
Market Order and Stop Order handling consistent with handling today on
Phlx.\7\ Specifically, proposed MRX Rule 702(d) will provide that
during a Limit State and Straddle State in the Underlying NMS stock:
(i) The Exchange will not open an affected option, (ii) provided the
Exchange has opened an affected option for trading, the Exchange shall
reject Market Orders, as defined in MRX Rule 715(a), and shall notify
Members of the reason for such rejection, and (iii) provided the
Exchange has opened an affected option for trading, the Exchange will
elect Stop Orders if the condition is met, and, because they become
Market Orders, shall cancel them back and notify Members of the reason
for such rejection. The language in proposed MRX Rule 703(d)(iv) [sic]
concerning the maximum quotation spread requirements for market maker
quotes and the continuous quotation requirements suspensions are the
same language currently contained in MRX Rule 703A(c).
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\7\ See proposed MRX Rule 702(d)(ii) and (iii).
---------------------------------------------------------------------------

These amendments differ in certain respects from the manner in
which MRX operates today during a Limit State or Straddle State. The
current MRX rule does not address the opening. The Exchange proposes to
adopt rule text to provide for how the Exchange shall treat the Opening
Process.\8\ The opening in an option will not commence in the event
that the underlying NMS stock is open, but has entered into a Limit
State or Straddle State. If this occurs, the opening will only commence
and complete if the underlying NMS stock stays out of a Limit or
Straddle State. Accordingly, proposed MRX Rule 702(d)(i) [sic] will
provide that the Exchange will not open an affected option. As a
result, if an opening process is occurring, it will cease and then
start the opening process from the beginning once the Limit State or
Straddle State is no longer occurring.
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\8\ See note 3 above.
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In addition, MRX currently cancels Market Orders pending in the
system upon initiation of a Limit or Straddle State. Under the proposal
to adopt the Phlx rule and implementation of the Limit Up-Limit Down
procedures, Market Orders pending in the system will continue to be
processed regardless of the Limit or Straddle State. The Exchange
believes this is a reasonable handling of Market Orders in the system
since these orders are only pending in the system if they are exposed
at the NBBO pursuant to Supplementary Material .02 to Rule 1901. If at
the end of the exposure period the affected underlying is in a Limit or
Straddle State, the Market Order will be cancelled with no execution
occurring. If at the end of the exposure period the underlying is no
longer in a Limit or Straddle State, the Market Order will be handled
under the normal operation of the rules.
Lastly, MRX does not currently elect Stop Orders that are pending
in the system during a Limit or Straddle State. Under the proposal, and
in-line with the Phlx implementation, Stop Orders that are pending in
the system during a Limit or Straddle State will be elected, if
conditions for such election are met, however because they become
Market Orders will be cancelled back to the Member with a reason for
such rejection.
While the implementation of Market and Stop Order handling varies
from MRX today, both the current and proposed Rule provide for
protections from erroneous executions in a highly volatile period.\9\
The Exchange believes consistency across the six options

[[Page 25829]]

markets operated by Nasdaq, Inc. provides clarity for Members as to how
their orders, as well as the opening process, will be handled in a
Limit or Straddle State.
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\9\ The Exchange is introducing a Phlx protection, Acceptable
Trade Range, into MRX Rules as discussed within this rule change.
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Auction Handling During a Trading Halt
The Exchange proposes to amend various rules to add detail to MRX
rules to account for the impact of a trading halt on the Exchange's
auction mechanisms. The Exchange proposes to memorialize within MRX
Rule 723, entitled ``Price Improvement Mechanism for Crossing
Transactions'' the manner in which a trading halt will impact an order
entered into PIM once it is migrated to the INET architecture.
Today, if a trading halt is initiated after an order is entered
into the Price Improvement Mechanism (``PIM'') on MRX, such auction is
terminated and eligible interest is executed. The Exchange proposes to
amend today's current behavior and instead terminate the auction and
not execute eligible interest when a trading halt occurs. In the event
of a trading halt, terminating the auction and not executing eligible
interest will provide certainty to participants in regard to how their
interest will be handled. Memorializing the manner in which the system
will handle orders entered into PIM during a trading halt will provide
transparency for the benefit of members and investors.
The Exchange proposes an amendment to MRX Rule 716, entitled
``Block Trades'' to memorialize that if a trading halt is initiated
after an order is entered into the Block Order Mechanism, Facilitation
Mechanism, or Solicited Order Mechanism, such auction will also be
automatically terminated without execution. This is the current
behavior today on MRX and will not be changing.
As discussed above, Phlx Rule 1047(c) provides that in the event
the Exchange halts trading, all trading in the affected option shall be
halted. This is interpreted to restrict executions after a halt unless
there is a specific rule specifying that such trades should take place.
The Exchange is proposing to add more specificity into the relevant
rules. With respect to Block Order Mechanism, Facilitation Mechanism,
or Solicited Order Mechanism, the Exchange notes that the current
behavior is consistent with Phlx Rule 1047(c) generally, where all
trading in the affected option shall be halted.\10\ In the event of a
trading halt, terminating these auction mechanisms and not executing
eligible interest will provide certainty to participants in regard to
how their interest will be handled. Memorializing the manner in which
the system will handle orders during a trading halt will provide
transparency for the benefit of members and investors.
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\10\ See Phlx Rule 1047(c).
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Market Order Spread Protection
The Exchange proposes to amend MRX Rule 711, entitled ``Acceptance
of Quotes and Orders'' to adopt a new mandatory risk protection
entitled Market Order Spread Protection. MRX does not have a similar
feature today. This mandatory feature is currently offered on NOM to
protect Market Orders from being executed in very wide markets.\11\
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\11\ See NOM Rules at Chapter VI, Section 6(c). NOM's current
rule states, ``System Orders that are Market Orders will be rejected
if the best of the NBBO and the internal market BBO (the ``Reference
BBO'') is wider than a preset threshold at the time the order is
received by the System.'' NOM has two order types, Price-Improving
and Post-Only Orders, which result in non-displayed pricing that may
cause the internal market BBO to be better than the NBBO. MRX does
not have similar non-displayed order types and therefore the
reference to the internal market BBO is not necessary.
---------------------------------------------------------------------------

Pursuant to proposed MRX Rule 711(c), if the NBBO is wider than a
preset threshold at the time a Market Order is received, the order will
be rejected. For example, if the Market Order Spread Protection is set
to $20.00, and a Market Order to buy is received while the NBBO is
$1.00-$50.00, such Market Order will be rejected. The proposed feature
would assist with the maintenance of fair and orderly markets by
mitigating the risks associated with errors resulting in executions at
prices that are away from the Best Bid or Offer and potentially
erroneous. Further the proposal protects investors from potentially
receiving executions away from the prevailing prices at any given time.
The Exchange proposes this feature to avoid a series of improperly
priced aggressive orders transacting in the Order Book.
Today, the NOM threshold is set at $5. MRX will initially set the
threshold to $5. Similar to NOM, the Exchange will notify Members of
the threshold with a notice, and, thereafter, Members will be notified
of any subsequent changes to the threshold. NOM set the differential at
$5 to match the bid/ask differential permitted for quotes on the
Exchange.\12\ MRX has a similar $5 differential.\13\ Thus, the presence
of a quote on the Exchange will ensure the NBBO is at least $5 wide.
The Exchange believes the presence of a quote on the Exchange, or a
bid/ask differential of the NBBO, which is no more than $5 wide affords
Market Orders proper protection against erroneous execution and in the
event a bid/ask differential is more than $5, then a Market Order is
rejected. The threshold is appropriate because it seeks to capture
improperly priced Market Orders and reject them to reduce the risk of,
and to potentially prevent, the automatic execution of Market Orders at
prices that may be considered erroneous. The Exchange's proposed
threshold is a reasonable measure to ensure prices remain within the
reasonable limits. This protection will bolster the normal resilience
and market behavior that persistently produces robust reference prices.
This feature should create a level of protection that prevents Market
Orders from entering the Order Book outside of an acceptable range for
the Market Order to execute.
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\12\ See Chapter VII, Section 6(d)(ii) of NOM Rules which
describes the bid/ask differentials. Options on equities (including
Exchange-Traded Fund Shares), and on index options must be quoted
with a difference not to exceed $5 between the bid and offer
regardless of the price of the bid, including before and during the
opening. However, respecting in-the-money series where the market
for the underlying security is wider than $5, the bid/ask
differential may be as wide as the quotation for the underlying
security on the primary market. The Exchange may establish
differences other than the above for one or more series or classes
of options.
\13\ See MRX Rule 803(b)(4).
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Finally, the Market Order Spread Protection will be the same for
all options traded on the Exchange, and is applicable to all Members
that submit Market Orders.
Acceptable Trade Range
The Exchange proposes to amend Rule 714, entitled ``Automatic
Execution of Orders,'' at MRX Rule 714(b)(1) to remove the current
Price Level Protection rule and adopt Phlx's Acceptable Trade
Range.\14\ The Exchange is proposing to adopt similar functionality
which is currently utilized on Phlx in connection with the replatform
of MRX. Today, MRX places a limit on the number of price levels at
which an incoming order or quote to sell (buy) will be executed
automatically when there are no bids (offers) from other exchanges at
any price for the options series. Orders and quotes are executed at
each successive price level until the maximum number of price levels is
reached, and any balance is either handled by the Primary Market Maker
pursuant to Rule 803(c)(1) (in the case of Priority Customer Orders) or
canceled (in the case of Professional Orders). The number of price
levels, may be between one (1) and ten (10). The Exchange determines
the number of price levels from time-to-time on a class-by-class basis.
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\14\ See Phlx Rule 1080(p).

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[[Page 25830]]

MRX proposes to replace the current Price Level Protection with
Phlx's Acceptable Trade Range.\15\ The proposed Acceptable Trade Range
is a mechanism to prevent the system from experiencing dramatic price
swings by creating a level of protection that prevents the market from
moving beyond set thresholds. The thresholds consist of a reference
price plus (minus) set dollar amounts based on the nature of the option
and the premium of the option.
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\15\ The Exchange notes that the version of Acceptable Trade
Range to be implemented on MRX will not include the posting period
functionality available today on Phlx. The proposed rules reflect
this change.
---------------------------------------------------------------------------

The system will calculate an Acceptable Trade Range to limit the
range of prices at which an order or quote will be allowed to execute.
To bolster the normal resilience and market behavior that persistently
produces robust reference prices, MRX is proposing to create a level of
protection that prevents the market from moving beyond set thresholds.
The Acceptable Trade Range is calculated (upon receipt of a new order
or quote) by taking the reference price, plus or minus a value to be
determined by the Exchange (i.e., the reference price - (x) for sell
orders/quotes and the reference price + (x) for buy orders).\16\ Upon
receipt of a new order, the reference price is the National Best Bid
(``NBB'') for sell orders/quotes and the National Best Offer (``NBO'')
for buy orders/quotes. If an order or quote reaches the outer limit of
the Acceptable Trade Range without being fully executed, then any
unexecuted balance will be cancelled. The proposed Acceptable Trade
Range would work as follows: Prior to executing orders received by MRX,
an Acceptable Trade Range is calculated to determine the range of
prices at which orders/quotes may be executed.\17\ When an order is
initially received, the threshold is calculated by adding (for buy
orders/quotes) or subtracting (for sell orders/quotes) a value,\18\ as
discussed below, to the National Best Offer for buy orders/quotes or
the National Best Bid for sell orders/quotes to determine the range of
prices that are valid for execution. A buy (sell) order or quote will
be allowed to execute up (down) to and including the maximum (minimum)
price within the Acceptable Trade Range.
---------------------------------------------------------------------------

\16\ The Acceptable Trade Range settings are tied to the option
premium.
\17\ The Acceptable Trade Range will not be available for All-
Or-None orders. Today, MRX's Price Level Protection rule is not
available for All-Or-None orders. The Exchange has determined that
it would be difficult, from a technical standpoint, to apply this
feature to those orders because their particular contingency makes
it difficult to automate their handling.
\18\ The value that is to be added to/subtracted from the
reference price will be set by MRX and posted on its Web site.
---------------------------------------------------------------------------

For example, in a thinly traded option:

Away Exchange Quotes
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Offer price Offer size
----------------------------------------------------------------------------------------------------------------
NOM............................................. 10 $1.00 $1.05 10
NYSE Arca....................................... 10 1.00 1.05 10
NYSE MKT........................................ 10 1.00 1.10 10
BOX............................................. 10 1.00 1.15 10
----------------------------------------------------------------------------------------------------------------

MRX Price Levels
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Offer price Offer size
----------------------------------------------------------------------------------------------------------------
MRX orders...................................... 10 $1.00 $1.05 10
MRX orders...................................... .............. .............. 1.10 10
MRX orders...................................... .............. .............. 1.40 10
MRX orders...................................... .............. .............. 5.00 10
----------------------------------------------------------------------------------------------------------------

If MRX receives a routable market order to buy 80 contracts, the
system will respond as described below:

--10 contracts will be executed at $1.05 against MRX
--10 contracts will be executed at $1.05 against NOM
--10 contracts will be executed at $1.05 against NYSE Arca.
--10 contracts will be executed at $1.10 against MRX
--10 contracts will be executed at $1.10 against NYSE MKT
--10 contracts will be executed at $1.15 against BOX

After these executions, there are no other known valid away
exchange quotes. The National Best Bid/Offer (``NBBO'') is therefore
comprised of the remaining interest on the MRX book, specifically 10
contracts at $1.40 and 10 contracts at $5.00. In the absence of an
Acceptable Trade Range mechanism, the order would execute against the
remaining interest at $1.40 and $5.00, resulting in potential harm to
investors.
MRX will set the parameters of the mechanism at levels that will
ensure that it is triggered quite infrequently. Importantly, the
Acceptable Trade Range is neutral with respect to away markets, an
order may route to other destinations to access liquidity priced within
the Acceptable Trade Range provided the order is designated as
routable.
The options premium will be the dominant factor in determining the
Acceptable Trade Range. Generally, options with lower premiums tend to
be more liquid and have tighter bid/ask spreads; options with higher
premiums have wider spreads and less liquidity. Accordingly, a table
consisting of several steps based on the premium of the option will be
used to determine how far the market for a given option will be allowed
to move. This table or tables would be listed on the Exchange Web site
and any periodic updates to the table would be announced via an Options
Trader Alert.
For example, looking at some SPY May 2013 Call options on May 1st
of 2013:

Bid/Offer of SPY May 160 Call (at or near-the-money): $1.23 x $1.24
(several hundred contracts on bid and offer)
Bid/Offer of SPY May 105 Call (deep in-the-money): $54.10 x $54.26 (11
contracts on each side)

The deep in-the-money calls (May 105 calls) have a wider spread
($54.10 - $54.26 = $0.16) compared to a spread of $0.01 for the at-the-
money calls (May

[[Page 25831]]

160 calls). Therefore, it is appropriate to have different thresholds
for the two options. For instance, it may make sense to have a $0.05
threshold for the at-the-money strikes (Premium < $2) and a $0.50
threshold for the deep in-the-money strikes (Premium > $10).
To consider another example, the May 2013 ORCL put options on May
1st of 2013:

Bid/Offer of ORCL 33 May Put (at or near-the-money): $0.33 x $0.34 (100
x 500)
Bid/Offer of ORCL 44 May Put (deep in-the-money): $10.40 x $10.55 (50 x
200)

Even though ORCL has a much lower share price than SPY, and is a
different type of security (it is a common stock of a technology
company whereas SPY is an ETF based on the S&P 500 Index), the pattern
is the same. The option with the lower premium has a very narrow spread
of $0.01 with significant size displayed whereas the higher premium
option has a wide spread ($0.15) and less size displayed.
The Acceptable Trade Range settings will be tied to the option
premium. However, other factors will be considered when determining the
exact settings. For example, acceptable ranges may change if market-
wide volatility is as high as it was during the financial crisis in
2008 and 2009, or if overall liquidity is low based on historical
trends. These different market conditions may present the need to
adjust the threshold amounts from time to time to ensure a well-
functioning market. Without adjustments, the market may become too
constrained or conversely, prone to wide price swings. As stated above,
the Exchange would publish the Acceptable Trade Range table or tables
on the Exchange Web site. The Exchange does not foresee updating the
table(s) often or intraday, although the exchange may determine to do
so in extreme circumstances. The Exchange will provide sufficient
advanced notice of changes to the Acceptable Trade Range table,
generally the prior day, to its membership via an Exchange alert.
The Acceptable Trade Range settings would generally be the same
across all options traded on MRX, although MRX proposes to maintain
flexibility to set them separately based on characteristics of the
underlying security. For instance, Google is a stock with a high share
price ($824.57 closing price on April 30, 2013). Google options
therefore may require special settings due to the risk involved in
actively quoting options on such a high-priced stock. Option spreads on
Google are wider and the size available at the best bid and offer is
smaller. Google could potentially need a wider threshold setting
compared to other lower-priced stocks. There are other options that fit
into this category (e.g. AAPL) which makes it necessary to have
threshold settings that have flexibility based on the underlying
security. Additionally, it is generally observed that options subject
to the Penny Pilot program quote with tighter spreads than options not
subject to the Penny Pilot. MRX will set Acceptable Trade Ranges for
three categories of options: (1) Penny Pilot Options trading in one
cent increments for options trading at less than $3.00 and increments
of five cents for options trading at $3.00 or more, (2) Penny Pilot
Options trading in one-cent increments for all prices, and (3) Non-
Penny Pilot Options.
The Phlx rule contains language that references a posting
period.\19\ Specifically, the Phlx Rule provides if an order/quote
reaches the outer limit of the Acceptable Trade Range (the ``Threshold
Price'') without being fully executed, it will be posted at the
Threshold Price for a brief period, not to exceed one second (``Posting
Period''), to allow more liquidity to be collected, unless a Quote
Exhaust has occurred, in which case the Quote Exhaust process in Phlx
Rule 1082(a)(ii)(B)(3) will ensue, triggering a new Reference
Price.\20\ The Exchange will not post interest that exceeds the outer
limit of the Acceptable Trade Range, rather the interest will be
cancelled. Only if the order limit does not exceed the Acceptable Trade
Range will it post on the Exchange, if not otherwise executed. Further,
the Phlx rule provides for the re-pricing of that order or quote and
calculation of a new Acceptable Trade Range. Consistent with the
current treatment of orders and quotes under MRX rules, the Exchange is
not adopting the posting period. Unlike Phlx, MRX does not offer a
general continuous re-pricing mechanism, and does not consider
iterations in its current functionality.\21\ MRX would cancel rather
than reprice orders which exceed the outer limit of the Acceptable
Trade Range. Orders which do not exceed the outer limit of the
Acceptable Trade Range will post to the order book and will reside on
the order book at such price until they are either executed in full or
cancelled by the Member. Additionally, resting orders do not re-price
on the order book as they do today on Phlx. For these reasons, the
unexecuted balance which exceeds the outer limit of the Acceptable
Trade Range will be cancelled, rather than posted to the order book.
---------------------------------------------------------------------------

\19\ See Phlx Rule 1080(p)(1)(B).
\20\ The Quote Exhaust process occurs when Phlx's disseminated
market at a particular price level includes a quote, and such market
is exhausted by an inbound contra-side quote or order, and following
such exhaustion, contracts remain to be executed from such quote or
order through the initial execution price.
\21\ With respect to trade-throughs and locked and crossed
markets, a Phlx order will not be executed at a price that trades
through another market or is displayed at a price that would lock or
cross another market. If, at the time of entry, an order that the
entering party has elected not to make eligible for routing would
cause a locked or crossed market violation or would cause a trade-
through violation, it will be re-priced to the current national best
offer (for bids) or the current national best bid (for offers) and
displayed at one minimum price variance above (for offers) or below
(for bids) the national best price. See Phlx Rule 1080(m)(iv)(A). In
the instance that the system automatically reprices an order or
quote, the system would assign the orders or quote a new timestamp
and the order or quote will be reprioritized within the Order Book
in accordance with the priority rules in Phlx Rule 1014(g).
---------------------------------------------------------------------------

PMM Order Handling and Opening Obligations
Today, PMMs are responsible for handling Priority Customer orders
that are not automatically executed pursuant to MRX Rule 714(b)(1),
i.e., the Price Level Protection, and to initiate the opening rotation
in each series pursuant to MRX Rule 701. This responsibility is
described in each of those rules, as well as in MRX Rule 803(c), which
provides that:

In addition to the obligations contained in this Rule for market
makers generally, for options classes to which a market maker is the
appointed Primary Market Maker, it shall have the responsibility to:
(1) As soon as practical, address Priority Customer Orders that are
not automatically executed pursuant to Rule 714(b)(1) in a manner
consistent with its obligations under paragraph (b) of this Rule by
either (i) executing all or a portion of the order at a price that
at least matches the NBBO and that improves upon the Exchange's best
bid (in the case of a sell order) or the Exchange's best offer (in
the case of a buy order); or (ii) releasing all or a portion of the
order for execution against bids and offers on the Exchange. (2)
Initiate trading in each series pursuant to Rule 701.

As described in more detail in the sections above, with the re-
platform to Nasdaq technology, the Exchange is adopting Acceptable
Trade Range and opening rotation functionality currently offered on NOM
and Phlx, which do not contain similar requirements for the PMM. The
Exchange therefore proposes to eliminate the PMM order handling and
opening obligations in Rule 803(c).
The Exchange believes that the elimination of the PMM obligation to
initiate the opening rotation in this rule is appropriate because the
proposed

[[Page 25832]]

opening process \22\ is initiated by the receipt of an appropriate
number of valid width Primary Market Maker or Competitive Market Maker
quotes as outlined in proposed MRX Rule 701(c)(i) [sic]. Similarly, the
Acceptable Trade Range functionality will continue to provide an
important protection to members without imposing any Primary Market
Maker obligations. Today, Phlx does not have similar roles for a
Specialist on its market. In connection with the replatform, the
Exchange will conform its rules with those of Phlx with respect to the
manner in which it operates the Opening Process.
---------------------------------------------------------------------------

\22\ See note 3 above.
---------------------------------------------------------------------------

Back-Up PMM
The Exchange also proposes to amend MRX Supplementary Material .03
to Rule 803 to eliminate its Back-Up Primary Market Maker program.
Today, any MRX Member that is approved to act in the capacity of a
Primary Market Maker may voluntarily act as a ``Back-Up Primary Market
Maker'' in options series in which it is quoting as a Competitive
Market Maker. A Back-Up Primary Market Maker assumes all of the
responsibilities and privileges of a Primary Market Maker under the
Exchange's rules with respect to any series in which the appointed
Primary Market Maker fails to have a quote in the system except that a
Back-Up Primary Market Maker's quoting obligations are the same as the
quoting obligations for Competitive Market Makers as described in MRX
Rule 804(e)(2)(iii) and .02 of Supplementary Material to Rule 804.\23\
If more than one Competitive Market Maker that has volunteered to be a
Back-Up Primary Market Maker is quoting in an options series at the
time that a Primary Market Maker ceases quoting, the Competitive Market
Maker with the largest offer at the lowest price in the series at that
time will be chosen to be the Back-Up Primary Market Maker. In the
event of a tie based on price and size, the Competitive Market Maker
with time priority will be automatically chosen. The Back-Up Primary
Market Maker is automatically restored to Competitive Market Maker
status when the appointed Primary Market Maker initiates quoting in the
series. The obligations of a Primary Market Maker include the
initiation of a trading rotation pursuant to MRX Rule 701, quoting and
other obligations pursuant to MRX Rules 803 and 804, and financial
requirements pursuant to MRX Rule 809. The Exchange is proposing to
amend the obligations of a PMM only with regard to the initiation of a
trading rotation pursuant to MRX Rule 701. The quoting and financial
requirements rules shall remain the same.
---------------------------------------------------------------------------

\23\ The Exchange notes that the current rule text for Back-up
Primary Market Maker on MRX does not indicate that quoting
obligations for Back-up Primary Market Makers are the same as for
Competitive Market Makers. This, however, has been the Exchanges
practice, and the practice of its affiliated exchanges, including,
the Nasdaq ISE, LLC. See Securities Exchange Act Release No. 76936
(January 20, 2016), 81 FR 4347 (January 26, 2016) (SR-ISE-2016-02).
---------------------------------------------------------------------------

With the re-platform, a Back-Up Primary Market Maker is no longer
necessary since the order handling obligations present on MRX today are
not going to be present in the new system. Furthermore, the proposed
Opening Process,\24\ obviates the importance of such a role. The
Opening Process describes the entry of quotes by both a Primary Market
Maker and a Competitive Market Maker, provided they are Valid Width
Quotes.\25\ The Opening Process further describes alternative methods
to open the market if such quotes are not entered at the opening by
either of these market makers.\26\ The reliance on a market maker to
initiate the opening process is no longer present within the proposed
rule.\27\
---------------------------------------------------------------------------

\24\ See note 3 above.
\25\ A Valid Width Quote is a two-sided electronic quotation
submitted by a Market Maker that consists of a bid/ask differential
that is compliant with MRX proposed Rule 803(b)(4). See note 3
above.
\26\ See note 3 above.
\27\ Id.
---------------------------------------------------------------------------

Market Maker Speed Bump
The Exchange proposes to amend MRX Rule 804, entitled ``Market
Maker Quotations'' to establish default parameters for certain risk
functionality. The Exchange offers a risk protection mechanism for
market maker quotes that removes a member's quotes in an options class
if a specified number of curtailment events occur during a set time
period (``Market Maker Speed Bump''). In addition, the Exchange offers
a market-wide risk protection that removes a market maker's quotes
across all classes if a number of curtailment events occur (``Market-
Wide Speed Bump''). MRX Rule 804(g) currently requires that market
makers set curtailment parameters for both the Market Maker Speed Bump
and the Market-Wide Speed Bump. Today, if a market maker does not set
these parameters their quotes are rejected by the trading system for
each of the speed bumps mentioned herein.
With the re-platform, the Exchange has determined to provide
default curtailment parameters to assist market makers when they do not
enter their own parameters into the system. The default parameters will
be determined by the Exchange and announced to members. Rather than
rejecting quotes, the default parameters would be instituted. The
default parameters are important because market makers at MRX have
quoting obligations as specified in MRX Rule 804. When a market maker's
quotes are removed from the system, the time does not count toward the
continuous quoting obligations. The Exchange believes that allowing for
default settings would cause quotes not to be rejected and would assist
market makers in meeting their quoting obligations because they would
not have their quotes removed from the market. Today, Phlx indicates
default parameters for its detection of loss of communication
settings.\28\
---------------------------------------------------------------------------

\28\ Phlx Rule 1019(c).
---------------------------------------------------------------------------

Anti-Internalization
The Exchange proposes to amend the MRX Supplementary Material at
.03 to Rule 804, entitled ``Market Maker Quotations'' to adopt an Anti-
Internalization rule. Today, MRX's functionality prevents Immediate-or-
Cancel (``IOC'') \29\ orders entered by a market maker from trading
with the market maker's own quote.\30\ As implemented, if an IOC order
entered by a market maker would trade with a quote entered by the same
market maker, that order will instead be allocated to other interest at
the same price, and the balance cancelled. The Exchange proposes to
replace this self-trade protection functionality with Anti-
Internalization functionality currently offered on Phlx.\31\
---------------------------------------------------------------------------

\29\ An IOC order is a limit order that is to be executed in
whole or in part upon receipt. Any portion not so executed is to be
treated as cancelled. See Rule 715(b)(3).
\30\ This functionality is not memorialized in MRX's rules.
\31\ Phlx Rule 1080(p)(2).
---------------------------------------------------------------------------

Today, Phlx provides anti-internalization (``AIQ'') functionality
to Specialists and Registered Options Traders (``collectively market
makers''). Quotes and orders entered by Phlx market makers using the
same badge \32\ are not executed against quotes and orders entered on
the opposite side of the market using the same badge. This
automatically prevents these quotes and orders from interacting with
each other in the system. On Phlx, the system cancels the resting quote
or order back to the entering party prior to execution. This
functionality does not apply in any

[[Page 25833]]

auction or with respect to complex transactions.
---------------------------------------------------------------------------

\32\ A badge is the same as a market participant identifier
(``MPID'').
---------------------------------------------------------------------------

The Exchange proposes to adopt a similar rule that provides that
quotes and orders entered by Market Makers using the same member
identifier will not be executed against quotes and orders entered on
the opposite side of the market by the same market maker using the same
member identifier. In such a case, the system will cancel the resting
quote or order back to the entering party prior to execution. This
functionality shall not apply in any auction. AIQ is difficult to apply
during auctions, and there is limited benefit in doing so. There is
limited benefit because, generally speaking, auctions do not raise the
same policy concerns for wash sales and ERISA \33\ due to the semi-
random manner in which trades are matched.
---------------------------------------------------------------------------

\33\ AIQ also is designed to assist market participants in
complying with certain rules and regulations of the Employee
Retirement Income Security Act (``ERISA'') that preclude and/or
limit managing broker-dealers of such accounts from trading as
principal with orders generated for those accounts. It can also
assist Market Makers in reducing trading costs from unwanted
executions potentially resulting from the interaction of executable
buy and sell trading interest from the same firm when performing the
same market making function.
---------------------------------------------------------------------------

This functionality does not relieve or otherwise modify the duty of
best execution owed to orders received from public customers. Market
Makers generally do not display public customer orders in market making
quotations, opting instead to enter public customer orders using
separate identifiers. In the event that a Market Maker opts to include
a public customer order within a market making quotation, the Market
Maker must take appropriate steps to ensure that public customer orders
that do not execute due to anti-internalization functionality
ultimately receive the same execution price (or better) they would have
originally obtained if execution of the order was not inhibited by the
functionality.
This Anti-Internalization functionality can assist Market Makers in
reducing trading costs from unwanted executions potentially resulting
from the interaction of executable buy and sell trading interest from
the same firm when performing the same market making function.
Minimum Execution Quantity Orders
The Exchange proposes to amend MRX Rule 715, entitled ``Types of
Orders'' at 715(q) to remove minimum quantity orders. Today, the
Exchange allows members to enter minimum quantity orders, which is an
order type that is available for partial execution, but each partial
execution must be for a specified number of contracts or greater. If
the balance of the order after one or more partial executions is less
than the minimum, such balance is treated as All-Or-None. Like All-Or-
None orders, minimum quantity orders are contingency orders that are
not displayed in the Exchange's best bid or offer. However, the
Exchange disseminates to market participants an indication that a
minimum quantity order has been entered. The Exchange has found that
its members have not adopted this feature and therefore proposes to
remove this functionality.\34\ Furthermore, the Exchange proposes to
remove two references to minimum quantity orders in other rules.
Specifically, the Exchange proposes to remove references to minimum
quantity orders in MRX Supplementary Material .02 to Rule 713, which
notes that minimum quantity orders are contingency orders that have no
priority on the book, and in MRX Supplementary Material .04 to Rule
717, which explains that non-marketable minimum quantity orders are
deemed ``exposed'' one second following a broadcast notifying the
market that such an order to buy or sell a specified number of
contracts at a specified with a specified minimum quantity has been
received in the options series.
---------------------------------------------------------------------------

\34\ This functionality is not currently being utilized by any
member on MRX.
---------------------------------------------------------------------------

Cancel and Replace Orders
The Exchange is proposing to amend Supplementary Material .02 to
MRX Rule 715 to memorialize the manner in which the system will handle
cancel and replace orders in connection with the Exchange's technology
migration to INET.
By way of background with respect to cancel and replace orders, a
Member has the option of either sending in a cancel order and then
separately sending in a new order which serves as a replacement of the
original order (two separate messages) or sending a single cancel and
replace order in one message (``Cancel and Replace Order''). Sending in
a cancel order and then separately sending in a new order will not
retain the priority of the original order on the current MRX system and
on the INET system.
Today, MRX does not treat all Cancel and Replace Orders as new
orders. For example, a Cancel and Replace Order which reduced the size
of the original order from 600 to 300 contracts would not be treated as
a new order. A new order would be subject to price or other
reasonability checks,\35\ which this order today on MRX would not be
subject to as a result of decreasing the size of the order. This order
would continue to retain its time priority in the system. If a Cancel
and Replace Order does not pass a price or other reasonability check,
the order will cancel, but it will not be replaced with a new order.
---------------------------------------------------------------------------

\35\ Price or other reasonability checks consider the current
market at the time of the Cancel and Replace Order.
---------------------------------------------------------------------------

The Exchange proposes to define a Cancel and Replace Order as a
single message for the immediate cancellation of a previously received
order and the replacement of that order with a new order. If the
previously placed order is already partially filled or in its
entirety,\36\ the replacement order is automatically canceled or
reduced by the number of contracts that were executed. Additionally,
the replacement order will retain the priority of the cancelled order,
if the order posts to the Order Book,\37\ provided the price is not
amended, size is not increased,\38\ or in the case of Reserve Orders,
size is not changed.\39\ However, if the replacement portion of a
Cancel and Replace Order does not satisfy the system's price or other
reasonability checks the existing order will be cancelled and not
replaced.\40\
---------------------------------------------------------------------------

\36\ For example, in both the current MRX system and INET, the
original order is automatically canceled or reduced by the number of
contracts that were executed depending on the volume of the original
order that was filled.
\37\ During an exposure period a Cancel and Replace Order will
retain priority if the order posts to the Order Book, provided price
is not changed, size is not increased or, for a Reserve Order, size
is not changed.
\38\ Decrementing the volume will not result in a change in
priority, as is the case today with MRX.
\39\ A Reserve Order is a limit order that contains both a
displayed portion and a non-displayed portion. See MRX Rule 715(g).
\40\ The Exchange notes that if the replacement portion of a
Cancel and Replace order does not satisfy the system's price or
other reasonability checks, the existing order shall be cancelled
and not replaced. The price reasonability checks include: (i) MRX
Rule 710; (ii) MRX Rule 711(c); and (iii) MRX Rule 714(b)(2). The
Exchange notes that other than these price reasonability checks, the
Exchange may cancel an order because it does not satisfy a format or
other requirement specified in the Exchange's s rules and
specifications.
---------------------------------------------------------------------------

The Exchange represents that conducting price or other
reasonability checks for all Cancel and Replace Orders will validate
orders against current market conditions prior to proceeding with the
request to modify the order. The Exchange further believes that
memorializing Cancel and Replace Order handling will add transparency
to the Exchange's rules and reduce the potential for investor
confusion. Other exchanges with a similar order type permit an order to
retain priority if only

[[Page 25834]]

the size of the order is decremented.\41\ Accordingly, the Commission
believes it is appropriate for the Exchange to define Cancel and
Replace Order in the manner proposed.
---------------------------------------------------------------------------

\41\ See Phlx Rule 1080(b)(i)(A).
---------------------------------------------------------------------------

All-Or-None Orders
The Exchange proposes to amend Rule 715(c) to provide that an All-
Or-None Order may only be entered into the system with a time-in-force
designation of Immediate-Or-Cancel order in connection with the
Exchange's technology migration to INET.
An All-Or-None Order is a limit or market order that is to be
executed in its entirety or not at all. Today, an All-Or-None Order may
be designated as a market or limit order with any time-in-force
designation. The Exchange proposes to limit All-Or-None Orders to only
be accepted with a time-in-force designation of Immediate-Or-Cancel. An
Immediate-Or-Cancel Order is a limit order that is to be executed in
whole or in part upon receipt. Any portion not so executed is to be
treated as cancelled.
The Exchange also proposes to amend Supplementary Material .02 to
Rule 713 to make clear that All-Or-None Orders will only be accepted
with a time-in-force designation of Immediate-Or-Cancel and, therefore,
would not persist in the Order Book. The Exchange also proposes to
amend Supplementary Material .04 to Rule 717 to reserve this section as
All-Or-None Orders \42\ would not be subject to exposure because they
would be cancelled if not executed in their entirety.\43\
---------------------------------------------------------------------------

\42\ This section is also being reserved because the Exchange is
eliminating Minimum Quantity Orders.
\43\ The Exchange notes that Rule 716(e), Solicited Order
Mechanism, is not being amended. The proposed rule change does not
impact the manner in which the Solicited Order Mechanism operates.
---------------------------------------------------------------------------

Delay of Implementation
The Exchange proposes to delay the implementation of Directed Order
\44\ functionality on MRX. The Exchange proposes to continue to offer
this functionality on the current platform. The Exchange however would
propose not to launch the Directed Order functionality on MRX at the
same time as proposed herein for the proposals to amend other trading
functions. The Exchange would instead issue an alert which specifies a
different date for this functionality to commence on MRX. This
functionality will remain the same on the new platform.
---------------------------------------------------------------------------

\44\ MRX currently operates a Directed Order system in which
Electronic Access Members (``EAMs'') can send an order to a DMM for
possible price improvement. If a DMM accepts Directed Orders
generally, that DMM must accept all Directed Orders from all EAMs.
Once such a DMM receives a Directed Order, it either (i) must enter
the order into the Exchange's PIM auction and guarantee its
execution at a price better than the MRX best bid or offer (``MRX
BBO'') by at least a penny and equal to or better than the NBBO or
(ii) must release the order into the Exchange's limit order book, in
which case there are certain restrictions on the DMM interacting
with the order. See MRX Rule 811.
---------------------------------------------------------------------------

The Exchange proposes to amend the rule text in Rule 811 (Directed
Orders) to note that this functionality will not be available as of a
certain date in the third quarter of 2017 to be announced in a notice.
The Exchange will recommence this functionality on MRX within one year
from the date of filing of this rule change to be announced in a
separate notice.
The Exchange intends to begin implementation of the functionality
for Directed Orders after Q3 2017. The migration will also be on a
symbol by symbol basis, and the Exchange will issue an alert to members
in the form of an Options Trader Alert to provide notification of the
symbols that will migrate and the relevant dates. The Exchange will
introduce Directed Orders on MRX within one year from the date of this
filing, otherwise the Exchange will file a rule proposal with the
Commission to remove these rules.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\45\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\46\ in particular, in that it is 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 for the reasons stated below.
---------------------------------------------------------------------------

\45\ 15 U.S.C. 78f(b).
\46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Trading Halts
The Exchange's proposal to amend MRX Rule 702 concerning Trading
Halts to specifically note that during a halt the Exchange will
maintain existing orders on the book but not existing quotes is
consistent with the Act because it provides market participants with
clarity as to the manner in which interest will be handled by the
system. During a trading halt, the market may move and create risk to
market participants with respect to resting interest. The Exchange
believes that cancelling existing quotes protects investors and the
public interest by removing potentially stale quotes during the halt
process.
The Exchange's proposal to amend its rules on order handling during
Limit up-Limit Down states and trading halts is consistent with the Act
because it will harmonize the way the Exchange treats orders during a
Limit State or Straddle State in the equity market, or a trading halt
in the option, with how those orders are handled on other Nasdaq
Exchanges. The proposed rule text should provide certainty about how
options orders and trades will be handled during periods of
extraordinary volatility in the underlying security. Specifically,
under the proposal, market participants will be able to continue to
trade options overlying securities that are in a Limit State or
Straddle State, while addressing specific order types that are subject
to added risks during such periods. The Exchange believes that the
rejection of options Market Orders (including elected Stop Orders)
should help to prevent executions that might occur at prices that have
not been reliably formed, which should, in turn, protect, in
particular, retail investors from executions of un-priced orders during
times of significant volatility. The Exchange believes that harmonizing
these rules will provide a better experience to members that trade on
multiple markets operated by Nasdaq, Inc.
Cancellation of Quotes
The Exchange's proposal to amend MRX Rule 702 concerning Trading
Halts to specifically note that during a halt the Exchange will
maintain existing orders on the book but not existing quotes is
consistent with the Act because it provides market participants with
clarity as to the manner in which interest will be handled by the
system. During a trading halt, the market may move and create risk to
market participants with respect to resting interest. The Exchange
believes that cancelling existing quotes protects investors and the
public interest by removing potentially stale quotes during the halt
process.
Limit Up-Limit Down
The Exchange's proposal to add new MRX Rule 702(d) to replace rule
text currently contained in MRX Rule 703A entitled ``Trading During
Limit Up-Limit Down States in Underlying Securities'' is consistent
with the Act because the proposed rules provide for protections from
erroneous executions in a highly volatile period. The proposed rule
text in MRX Rule 702(d) is similar to language currently in Phlx Rule
1047(d), which provides for Exchange handling due to extraordinary
market volatility. As noted within this proposal, the Exchange will
adopt opening limitation, Market Order and

[[Page 25835]]

Stop Order handling consistent with handling today on Phlx. The
Exchange proposes to adopt rule text to provide for how the Exchange
shall treat the opening rotation.\47\ If an opening process is
occurring, it will cease and then start the opening process from the
beginning once the Limit State or Straddle State is no longer
occurring. The Exchange believes that this treatment at the opening
will protect investors and the public interest by halting trading to
prevent unintended executions. Also, with this proposal, Market Orders
pending in the system will continue to be processed regardless of the
Limit or Straddle State. The Exchange believes that this treatment of
Market Orders is consistent with the Act because these Market Orders
are only pending in the system if they are exposed at the NBBO pursuant
to Supplementary Material .02 to Rule 1901. If at the end of the
exposure period the affected underlying is in a Limit or Straddle
State, the Market Order will be cancelled with no trade occurring. If
at the end of the exposure period, the affected underlying is no longer
in a Limit or Straddle State, the Market Order will be handled pursuant
to the normal operation of the rules.
---------------------------------------------------------------------------

\47\ See note 3 above.
---------------------------------------------------------------------------

Lastly, MRX does not currently elect Stop Orders that are pending
in the system during a Limit or Straddle State. Under the proposal, and
in-line with the Phlx implementation, Stop Orders that are pending in
the system during a Limit or Straddle State will be elected, if
conditions for such election are met, and, because they become Market
Orders, will be cancelled back to the Member with a reason for such
rejection. The Exchange believes that this is consistent with the Act
because it affords the appropriate protections to an elected Stop Order
once it becomes a Market Order after election. The Exchange believes
that this approach provides the market participant with the intended
result.
Auction Handling During a Trading Halt
The Exchange's proposal to amend various rules to add detail to MRX
rules to account for the impact of a trading halt on the Exchange's
auction mechanisms is consistent with the Act for the reasons which
follow. The Exchange's proposal to amend today's current behavior and
instead terminate the PIM auction and not execute eligible interest
when a trading halt occurs is consistent with the Act because during a
trading halt, the market may move and create risk to market
participants with respect to resting interest. The Exchange believes
that terminating the PIM auction protects investors and the public
interest by providing certainty to participants in regard to how their
interest will be handled. Memorializing the manner in which the system
will handle orders entered into PIM during a trading halt will provide
transparency for the benefit of members and investors.
The Exchange's proposal to amend MRX Rule 716, entitled ``Block
Trades'' to memorialize that if a trading halt is initiated after an
order is entered into the Block Order Mechanism, Facilitation
Mechanism, or Solicited Order Mechanism, such auction will also be
automatically terminated without execution is consistent with the Act
because in the event of a trading halt, terminating these auction
mechanisms and not executing eligible interest will provide certainty
to participants in regard to how their interest will be handled.
Memorializing the manner in which the system will handle orders during
a trading halt will provide transparency for the benefit of members and
investors.
Market Order Spread Protection
The Exchange's proposal to amend MRX Rule 711 to adopt a mandatory
risk protection entitled Market Order Spread Protection is consistent
with the Act because it provides a protection for Market Orders that
may encourage price continuity, which should, in turn, protect
investors and the public interest by reducing executions occurring at
dislocated prices. Further, the Exchange believes that this rule
proposal will mitigate risks to market participants.
Acceptable Trade Range
The Exchange's proposal to amend MRX Rule 714 to remove the current
Price Level Protection rule and adopt Phlx's Acceptable Trade Range is
consistent with the Act and will 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 by making the
Exchange's market more efficient, to the benefit of the investing
public. Further, it should prevent the system from experiencing
dramatic price swings by creating a level of protection that prevents
the market from moving beyond set thresholds. The proposed rule change
will reduce the negative impacts of sudden, unanticipated volatility in
individual options, and serve to preserve an orderly market in a
transparent and uniform manner, enhance the price-discovery process,
increase overall market confidence, and promote fair and orderly
markets and the protection of investors. Specifically, the Exchange
believes that the NBBO is a fair representation of then-available
prices and accordingly the proposal helps to avoid executions at prices
that are significantly worse than the NBBO.
With respect to the posting information, which is described in the
Phlx rule, but not contained in the proposed MRX rule, the Exchange
believes that it is consistent with the Act to cancel unexecuted
interest which is priced through an Acceptable Trade Range. Today, the
Exchange does not have an iterative process wherein the Exchange will
attempt to execute unexecuted balances for a period of time while that
interest is automatically re-priced on the order book. Phlx has this
type of functionality for Acceptable Trade Range, while the Exchange
does not re-price interest on the order book. The Exchange
transparently describes the cancellation of the interest within its
rules.
PMM Order Handling and Opening Obligations
The Exchange's proposal to eliminate the PMMs order handling and
opening obligations is consistent with the Act because PMMs will no
longer have these obligations due to the introduction of Acceptable
Trade Range and opening rotation functionality that is offered today on
NOM and Phlx. Because the PMM will no longer have these obligations,
the Exchange believes that it is appropriate to remove these rules.
Back-Up PMM
The Exchange's proposal to remove certain responsibilities of
Primary Market Makers with respect to Back-Up Primary Market Maker
assignments is consistent with the Act because the Exchange believes
this function is not necessary. Today, in addition to market making
obligations, the Primary Market Maker has certain order handling and
other obligations as prescribed by Exchange Rules. Specifically, the
obligations of a Primary Market Maker include the initiation of a
trading rotation pursuant to MRX Rule 701, quoting and other
obligations pursuant to MRX Rules 803 and 804, and financial
requirements pursuant to MRX Rule 809. The Exchange is proposing to
amend the obligations of a PMM only with regard to the initiation of a
trading rotation pursuant to MRX Rule 701. The quoting and financial
requirements rules shall remain the same. With the re-platform, a Back-
Up Primary Market Maker is no longer necessary since the order handling
obligations present on MRX today are not going to be present

[[Page 25836]]

in the new system. Furthermore, the proposed Opening Process,\48\
obviates the importance of such a role. The Opening Process further
describes alternative methods to open the market if such quotes are not
entered at the opening by either of these market makers.\49\ The
reliance on a market maker to initiate the opening process is no longer
present within the proposed rule.\50\
---------------------------------------------------------------------------

\48\ See note 3 above.
\49\ Id.
\50\ Id.
---------------------------------------------------------------------------

In addition, the Exchange does not believe there is an interest
among market participants for the back-up assignment.
Default Settings for Market Maker Risk Protections
The Exchange's proposal to amend MRX Rule 804(g) to introduce
default curtailment settings for the Market Maker Speed Bump and
Market-Wide Speed Bump is consistent with the Act as it will allow
market makers to use Exchange set default values for these risk
protections. Today, these market makers would have their quotes
rejected if they fail to enter the required curtailment parameters. The
default settings provide an alternative for market makers that have not
entered their curtailment settings. Default settings will be announced
to members who will have the opportunity to avoid the defaults by
entering their own curtailment settings as required under the rule.
Anti-Internalization
The Exchange's proposal to amend the MRX Supplementary Material at
.03 to Rule 804 to add Anti-Internalization is consistent with the Act
because it is designed to assist market makers in reducing trading
costs from unwanted executions potentially resulting from the
interaction of executable buy and sell trading interest from the same
firm when performing the same market making function.
Further, it is consistent with the Act to not apply this
functionality in any auction because AIQ is difficult to apply during
auctions, and there is limited benefit in doing so. There is limited
benefit because, generally speaking, auctions do not raise the same
policy concerns for wash sales and ERISA \51\ due to the semi-random
manner in which trades are matched.
---------------------------------------------------------------------------

\51\ See note 34 above.
---------------------------------------------------------------------------

Minimum Quantity Orders
The Exchange believes that removing minimum quantity orders would
remove impediments to and perfect the mechanism of a free and open
market and a national market system by simplifying functionality
available on the Exchange and reducing complexity of its order types.
Delay of Implementation
The Exchange believes that delaying the implementation of the
Directed Order functionality on MRX is consistent with the Act because
the Exchange desires to rollout this functionality at a later date to
allow additional time to rebuild this technology on the new platform.
The Exchange is staging the replatform to provide maximum benefit to
its Members while also ensuring a successful rollout. This delay will
provide the Exchange additional time to implement this functionality,
which is not being amended. Members have been given adequate notice of
the implementation dates. The Exchange will continue to provide
notifications to Members to ensure clarity about the delay of
implementation of this functionality. The Exchange will note the
applicable dates within the rule text.
Cancel and Replace Orders
With respect to Cancel and Replace Orders, the Exchange believes
that it is consistent with the Act to treat such orders as new orders
which will be subject to price or other reasonability checks. The
Exchange believes that conducting price or other reasonability checks
for all Cancel and Replace Orders will protect investors and the public
interest by validating the order against the current market conditions
prior to proceeding with the request to modify the order. The manner in
which MRX treats priority with respect to Cancel and Replace Orders is
not changing. The MRX system currently assigns a new priority to the
order when the price is changed, size is increased or the size of a
reserve order is changed. Hence, the priority of the original order
would continue to not be retained in the same manner with respect to
the original order. The Exchange believes that allowing Cancel and
Replace Orders, where the size is reduced, to retain the priority of
the original order is consistent with the manner in which the Exchange
treats partially executed orders, which similarly apply the priority of
the executed portion of the order to the remaining portion of the
order. Other exchanges today permit an order to retain priority if only
the size was decremented.\52\ The Exchange believes that permitting
size to decrement and allowing the order to retain priority is
consistent with the Act because the reduced change in size does not
impact the terms of the order materially. The reduced size of the order
would have priority on the Order Book with the original order.
---------------------------------------------------------------------------

\52\ See NASDAQ PHLX, LLC Rule 1080(b)(i)(A).
---------------------------------------------------------------------------

The Exchange believes that it is consistent with the Act to treat
Reserve Orders differently than other order types by giving these
orders a new priority if size is amended in any way, including a
decrement in size, with a Cancel and Replace Order because unlike other
order types, Reserve Orders have both a displayed an [sic] non-
displayed portion. The Exchange believes that any change to the
original order of a Reserve Order should be treated as a new order
because the size of a Reserve Order is specifically defined as part of
that order type. A Member must specify the displayed and total volume,
a portion of which is non-displayed, when a Reserve Order is entered
into the system. Treating this order type as a new order if size is
amended is consistent with the Act because the terms of the original
order of a Reserve Order would modify the total size of the order,
including potentially displayed and non-displayed portions which the
Exchange believes should result in a new order as it changes a material
portion of the order.
The Exchange believes that memorializing the Cancel and Replace
Order handling will add transparency and specificity to the Rules
thereby protecting investors and the public interest by reducing the
potential for investor confusion.
All-Or-None Orders
The Exchange believes that the proposal with respect to All-Or-None
Orders is appropriate and reasonable, because the time-in-force
designation of Immediate-Or-Cancel will offer Members certainty with
respect to their order handling. With this proposal, an All-Or-None
Order will either execute immediately or be cancelled back to the
Member. All-Or-None Orders are contingency orders that have no priority
on the Order Book. These orders would receive an execution after all
other trading interest at the same price has been exhausted. This
proposal would remove uncertainty with respect to the manner in which
these orders would be handled in the Order Book by cancelling back an
All-Or-None Order if it cannot be immediately executed in its entirety.
Today, the NASDAQ Options Market, LLC (``NOM'') only permits All-Or-
None Orders to be submitted with a time-in-

[[Page 25837]]

force designation of Immediate-Or-Cancel.\53\
---------------------------------------------------------------------------

\53\ See NOM Rules, Chapter VI, Section 1(g)(2).
---------------------------------------------------------------------------

The Exchange notes that Members are aware of the Exchange's efforts
to replatform to the INET technology. Members have been involved in
testing the system and providing feedback to the Exchange throughout
this migration process. Members were provided notice of this proposed
change to the system. The Exchange intends to make clear the
implementation of this functionality within its Rulebook.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. As explained above, the
Exchange is re-platforming it's trading system onto the Nasdaq INET
architecture, and is making certain other changes to its trading
functionality in connection with this migration. A majority of the
functionality that is being added with the proposed rule change already
exists on one or more Nasdaq Exchanges. As a result, the Exchange does
not believe that the proposed rule change will impact the intense
competition that exists in the options market. In fact, the Exchange
believes that adopting this functionality on MRX will allow the
Exchange to more effectively compete for order flow with other options
markets.
The Exchange does not believe conducting price or other
reasonability checks for all Cancel and Replace Orders imposes an undue
burden on competition because all Cancel and Replace Orders will
uniformly be subject to this additional protection based on the current
market conditions. Permitting all market participants to reduce their
exposure without penalty does not impose an undue burden [sic]
competition, rather it promotes competition by allowing participants
the ability to change their orders in a changing market, provided the
order was not already filled. The Exchange believes that not permitting
Reserve Orders to retain priority if size is amended does not create an
undue burden on competition because all Members will be treated in a
uniform manner with respect to Cancel and Replace Order handling.
The Exchange does not believe that the proposed rule change to All-
or-None Orders will impact the intense competition that exists in the
options market because the All-Or-None Order type, as proposed, will
continue to offer Members a competitive alternative on MRX for
submitting orders for execution.
Delaying the implementation of the Directed Order functionality
will allow additional time to rebuild this technology on the new
platform and provide maximum benefit to Members for a successful
rollout. No Member will be able to utilize the Directed Order
functionality with the delay. Members have been given adequate notice
of the implementation dates.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-MRX-2017-02 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-MRX-2017-02. 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 (https://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-MRX-2017-02 and should be
submitted on or before June 26, 2017.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
---------------------------------------------------------------------------

\54\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11509 Filed 6-2-17; 8:45 am]
BILLING CODE 8011-01-P

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