Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt New Rules Governing the Trading of Complex Orders on the Exchange, 49058-49068 [2017-22886]

Download as PDF 49058 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81891; File No. SR– BatsEDGX–2017–29] Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt New Rules Governing the Trading of Complex Orders on the Exchange October 17, 2017. I. Introduction On June 30, 2017, Bats EDGX Exchange, Inc. (‘‘EDGX’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt rules to govern the trading of complex orders on EDGX. The proposed rule change was published for comment in the Federal Register on July 19, 2017.3 The Commission received no comments regarding the proposal. On August 23, 2017, pursuant to Section 19(b)(2) of the Act,4 the Commission extended the time for Commission action on the proposal until October 17, 2017.5 EDGX filed Amendment No. 1 to the proposal on October 16, 2017.6 The Commission is publishing this notice to 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 81137 (July 13, 2017), 82 FR 33170 (‘‘Notice’’). 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 81468 (August 23, 2017), 82 FR 41079 (August 29, 2017). 6 Amendment No. 1 revises the proposal to: (1) Limit the availability of Complex Only orders to EDGX Market Makers: (2) Limit to 30 seconds or less the configurable time the Exchange would wait in the event the System cannot determine an equilibrium price or a permissible equilibrium price prior to opening a strategy; (3) provide additional justification and rational for giving first priority to Priority Customer Orders on the Simple Book in the allocation of interest at the conclusion of a COA; (4) expand the discussion and justification for the proposed market data feeds; (5) provide additional clarification of the provisions addressing trading halts, Legging, and the and complex order opening process; (6) provide an example relating to the operation of concurrent COAs, and make other minor structural, technical, and clarifying amendments to improve the understandability of the rules. To promote transparency of its proposed amendment, when EDGX filed Amendment No. 1 with the Commission, it also submitted Amendment No. 1 as a comment letter to the file, which the Commission posted on its Web site and placed in the public comment file for SR– BatsEDGX–2017–29. The Exchange also posted a copy of its Amendment No. 1 on its Web site (available at: https://cdn.batstrading.com/resources/ regulation/rule_filings/pending/2017/SRBatsEDGX-2017-29-Amendment-No-1.pdf) when it filed Amendment No. 1 with the Commission. ethrower on DSK3G9T082PROD with NOTICES 2 17 VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 solicit comment on Amendment No. 1 to the proposed rule change from interested persons and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. II. Description of the Proposed Rule Change, as Modified by Amendment No. 1 A. Definitions New EDGX Rule 21.20 establishes the following defined terms that will apply to the trading of complex orders: ABBO,7 BBO,8 Complex Order Auction (‘‘COA’’),9 COA-Eligible Order,10 Complex Order,11 Complex Order Book (‘‘COB’’),12 Complex Strategy,13 NBBO,14 Regular Trading,15 Simple 7 EDGX Rule 21.20(a)(1) defines the term ABBO to mean the best bid(s) or offer(s) disseminated by other Eligible Exchanges (as defined in Rule 27.1(a)(7)) and calculated by the Exchange based on market information received by the Exchange from OPRA. 8 EDGX Rule 21.20(a)(2) defines the term BBO to mean the best bid or offer on the Simple Book on the Exchange. 9 EDGX Rule 21.20(a)(3) defines the Complex Order Auction (‘‘COA’’) as an auction of a complex order as set forth in EDGX Rule 21.20(d). 10 EDGX Rule 21.20(a)(4) defines a COA-eligible order as a complex order designated to be placed into a Complex Order Auction upon receipt that meets the requirements of EDGX Rule 21.20(d)(1). 11 EDGX Rule 21.20(a)(5) defines a complex order as any order involving the concurrent purchase and/or sale of two or more different options in the same underlying security (the ‘‘legs’’ or ‘‘components’’ of the complex order), for the same account, in a ratio that is equal to or greater than one-to-three (.333) and less than or equal to threeto-one (3.00) and for the purposes of executing a particular investment strategy. Only those complex orders in the classes designated by the Exchange and communicated to Members with no more than the applicable number of legs, as determined by the Exchange on a class-by-class basis and communicated to Members, are eligible for processing. The Exchange will communicate such information to Members by making publicly available specifications and/or publishing a Regulatory Circular. See Notice, 82 FR at 33171. 12 EDGX Rule 21.20(a)(6) defines the Complex Order Book (‘‘COB’’) as the Exchange’s electronic book of complex orders. 13 EDGX Rule 21.20(a)(7) defines the term complex strategy to mean a particular combination of components and their ratios to one another. New complex strategies can be created as the result of the receipt of a complex instrument creation request or complex order for a complex strategy that is not currently in the System. The Exchange may limit the number of new complex strategies that may be in the System at a particular time and will communicate any such limitation to Members via specifications and/or Regulatory Circular. EDGX notes that the two methods for creating a new complex strategy will be equally available to all EDGX Members. See Notice, 82 FR at 33171. 14 EDGX Rule 21.20(a)(8) defines the term NBBO to mean the national best bid or offer as calculated by the Exchange based on market information received by the Exchange from OPRA. 15 EDGX Rule 21.20(a)(9) defines the term regular trading to mean the trading of complex orders that occurs during a trading session other than: (i) At the opening or re-opening of the COB for trading PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 Book,16 Synthetic Best Bid or Offer (‘‘SBBO’’),17 and Synthetic National Best Bid or Offer (‘‘SNBBO’’).18 B. Order Types and Times in Force EDGX proposes to amend EDGX Rule 21.1 to add two new Times in Force that are not currently available on EDGX, Good Til Cancelled (‘‘GTC’’) 19 and At the Open (‘‘OPG’’) orders.20 Both GTC and OPG ultimately will be available on both the Simple Book and on the COB.21 EDGX notes that other exchanges offer GTC orders and orders that, like OPG orders, participate only in the exchange’s opening process.22 Complex orders also may be submitted with a Time in Force of GTD, IOC, or DAY.23 EDGX proposes to allow Members to submit limit and market complex orders,24 COA-eligible and Do Not COA Orders,25 and Complex Orders with Match Trade Prevention Modifiers.26 following a halt; or (ii) during the COA process (as described in EDGX Rule 21.20(d)). 16 EDG Rule 21.20(a)(10) defines the Simple Book as the Exchange’s regular electronic book of orders. 17 EDGX Rule 21.20(a)(11) states that the Synthetic Best Bid or Offer (‘‘SBBO’’) is calculated using the best displayed price for each component of a complex strategy from the Simple Book. 18 EDGX Rule 21.20(a)(12) states that the Synthetic National Best Bid or Offer (‘‘SNBBO’’) is calculated using the NBBO for each component of a complex strategy to establish the best net bid and offer for a complex strategy. The NBBO is the national best bid or offer as calculated by the Exchange based on market information received by the Exchange from OPRA. See EDGX Rule 21.20(a)(8). 19 See Notice, 82 FR at 33182. GTC means, for an order so designated, that if after entry into the System, the order is not fully executed, the order (or the unexecuted portion thereof) shall remain available for potential display and/or execution unless cancelled by the entering party, or until the option expires, whichever comes first. See EDGX Rule 21.1(f)(4). 20 OPG means, for an order so designated, an order that shall only participate in the opening process on the Exchange. An OPG order not executed in the opening process will be cancelled. See EDGX Rule 21.1(f)(6). 21 See Notice, 82 FR at 33182, and EDGX Rules 21.1(f)(4) and (f)(6), and 21.20(b). 22 See Notice, 82 FR at 33184–33185 (citing C2 Rules 6.10(e)(2) and 610(c)(7) and ISE Rules 715(o) and 715(r)). 23 See EDGX Rule 21.20(b). 24 See id. 25 Complex orders that are marked as IOC will, by default, not initiate a COA upon arrival, but a Member that submits an order marked IOC may elect to opt-in to initiating a COA and any quantity of the IOC order not executed will be cancelled at the end of the COA. All other Times in Force will by default initiate a COA, but a Member may elect to opt-out of initiating a COA. Orders with instructions to (or which default to) initiate a COA are referred to as COA-eligible orders, subject to the additional eligibility requirements set forth in Rule 21.20, while orders with instructions not to (or which default not to) initiate a COA are referred to as do-not-COA orders. See EDGX Rule 21.20(b)(2). 26 EDGX’s System will support, when trading against other complex orders on the COB, complex orders with the following MTP Modifiers defined in E:\FR\FM\23OCN1.SGM 23OCN1 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices EDGX Market Makers 27 also will be able to submit Complex Only orders.28 EDGX notes that limiting Complex Only orders to EDGX Market Makers is equivalent to approved functionality on MIAX and will encourage use by participants that are most likely to provide liquidity to EDGX on the COB.29 EDGX will communicate to Members via specifications and/or Regulatory Circular when the complex order types, among those listed in EDGX Rule 21.20(b), are available for use on EDGX.30 EDGX expects to launch the COB with all of the proposed order types, except for orders with a Time in Force of GTC.31 C. Trading of Complex Orders EDGX will determine and communicate to Members via specifications and/or Regulatory Circular which complex order origin codes (i.e., non-broker-dealer customers, broker-dealers that are not Market Makers on an options exchange, and/or Market Makers on an options exchange) are eligible for entry onto the COB.32 Complex orders will be subject to all other EDGX rules that pertain to orders submitted to EDGX generally, unless otherwise provided in Rule 21.20.33 ethrower on DSK3G9T082PROD with NOTICES 1. Minimum Increments and Trade Prices Under the proposed rules, bids and offers on complex orders may be expressed in $0.01 increments, and the component(s) of a complex order may Rule 21.1(g): MTP Cancel Newest, MTP Cancel Oldest and MTP Cancel Both. When Legging into the Simple Book, a complex order with any MTP Modifier will be cancelled if it would execute against any leg on the Simple Book that includes an order with an MTP Modifier and the same Unique Identifier as the complex order. See EDGX Rule 21.20(b)(3). 27 A Market Maker is an Options Member that is registered with the Exchange for the purpose of making markets in options contracts traded on the Exchange and that is vested with the rights and responsibilities specified in Chapter XXII of EDGX’s Rules. See EDGX Rule 16.1(a)(37). 28 See Amendment No. 1. Complex Only Orders allow an EDGX Market Maker to designate a complex order with a time in force of DAY or IOC to only check against the COB. Unless designated as Complex Only, and for all other Times in Force and complex order origin codes, a complex order will check against both the COB and the Simple Book. See EDGX Rule 21.20(b)(1) and Amendment No. 1. 29 See Amendment No. 1. EDGX believes that Market Makers may use Complex Only orders as part of their strategy to maintain additional control over their executions, in connection with their attempt to provide and not remove liquidity, or in connection with applicable fees for executions. See id. 30 See Amendment No. 1 and EDGX Rule 21.20(b). 31 See Amendment No. 1. 32 See EDGX Rule 21.20(c). 33 See id. VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 be executed in $0.01 increments, regardless of the minimum increments otherwise applicable to individual components of the complex order.34 If any component of a complex strategy would be executed at a price that is equal to a Priority Customer bid or offer on the Simple Book,35 at least one other component of the complex strategy must trade at a price that is better than the corresponding BBO.36 A complex order will not be executed at a net price that would cause any component of the complex strategy to be executed: (i) At a price of zero; or (ii) ahead of a Priority Customer Order on the Simple Book without improving the BBO of at least one component of the complex strategy.37 2. Execution of Complex Orders a. Opening and Reopening The Opening Process for the COB (‘‘Opening Process’’) will operate at the beginning of each trading session and upon re-opening after a halt.38 Members may submit complex orders to EDGX as set forth in EDGX Rule 21.6(c).39 Any complex orders designated for the Opening Process for the COB will be queued until 9:30 a.m., at which time they will be eligible to be executed in the Opening Process for the COB.40 Any complex orders designated for a reopening following a halt will be queued until the halt has ended, at which time they will be eligible to be executed in the Opening Process for the COB.41 Beginning at 7:30 a.m. and updated every five seconds thereafter, EDGX will disseminate through the data feeds described in EDGX Rule 21.15 indicative prices and order imbalance information associated with the Opening Process for the COB while complex orders are queued prior to 9:30 a.m. or, in the case of a halt, prior to reopening.42 Complex orders do not participate in the Opening Process for the individual option series conducted pursuant to EDGX Rule 21.7.43 The Opening Process will commence when all legs of the complex strategy are open on the Simple Book.44 If there are complex 34 See EDGX Rule 21.20(c)(l). Simple Book is EDGX’s regular electronic book of orders. See EDGX Rule 21.20(a)(10). 36 See EDGX Rule 21.20(c)(l)(B). The BBO is the best bid or offer on the Simple Book on EDGX. See EDGX Rule 21.20(a)(2). 37 See EDGX Rule 21.20(c)(1)(C). 38 See EDGX Rule 21.20(c)(2)(A). 39 See id. and Amendment No. 1. 40 See EDGX Rule 21.20(c)(2)(A). 41 See id. 42 See id. and Amendment No. 1. 43 See EDGX Rule 21.20(c)(2)(A). 44 See id. 35 The PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 49059 orders in a strategy that have been queued but none that can match, the System 45 will open that strategy without a trade and transition such orders to the COB, subject to Legging into the Simple Book, as described in EDGX Rule 21.20(c)(2)(F).46 If there are complex orders that can match, the System will determine the equilibrium price where the most complex orders can trade.47 When an equilibrium price is established at or within the SNBBO,48 EDGX will execute matching complex orders in price/time priority at the equilibrium price (i.e., orders better than the equilibrium price are executed first in price/time priority and thereafter orders at the equilibrium price are executed in time priority).49 Any remaining complex order or the remaining portion thereof will be entered into the COB, subject to the Member’s instructions.50 If, after a configurable time period established by EDGX that may not exceed thirty seconds, the System cannot match orders because it cannot determine an equilibrium price (i.e., all queued orders are Market Orders) or a permissible equilibrium price (i.e., within the SNBBO that also satisfies proposed EDGX Rule 21.20(c)(1)(C)), the System will open the strategy without a trade and transition such orders to the COB.51 45 The ‘‘System’’ is the electronic communications and trading facility designated by EDGX’s Board of Directors through which securities orders of Users are consolidated for ranking, execution and, when applicable, routing away. See EDGX Rule 1.5(cc). 46 See EDGX Rule 21.20(c)(2)(B) and Amendment No. 1. 47 See EDGX Rule 21.20(c)(2)(C). EDGX Rule 21.20(c)(2)(C) further provides that if there are multiple price levels that would result in the same number of strategies executed, the System will choose the price that would result in the smallest remaining imbalance. If there are multiple price levels that would result in the same number of strategies executed and would leave the same ‘‘smallest’’ imbalance, the System will choose the price that is closest to the Volume Based Tie Breaker (‘‘VBTB’’) as the opening price. For purposes of Rule 21.20(c)(2)(C), the VBTB is the midpoint of the SNBBO. If there is no valid VBTB available, the System will use the midpoint of the highest and lowest potential opening prices as the opening price. If the midpoint price would result in an invalid increment, the System will round up to the nearest permissible increment and use that as the opening price. If executing at the equilibrium price would require printing at the same price as a Priority Customer on any leg in the Simple Book, the System will adjust the equilibrium price to a price that is better than the corresponding bid or offer in the marketplace by at least a $0.01 increment. See id. 48 See footnote 18, supra. 49 See EDGX Rule 21.20(c)(2)(D) and Amendment No. 1. 50 See EDGX Rule 21.20(c)(2)(D). 51 See EDGX Rule 21.20(c)(2)(D) and Amendment No. 1. EDGX believes that the proposed configurable time period is important because the E:\FR\FM\23OCN1.SGM Continued 23OCN1 49060 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices All complex orders received by EDGX prior to EDGX opening the strategy, including complex orders received during any delay that EDGX applies pursuant to EDGX Rule 21.20(c)(2)(D), will be eligible to be matched in the Opening Process.52 ethrower on DSK3G9T082PROD with NOTICES b. Pricing Incoming complex orders will not be executed at prices inferior to the SBBO or at a price that is equal to the SBBO when there is a Priority Customer Order 53 at the best SBBO price.54 Complex orders will never be executed at a price that is outside of the individual component prices on the Simple Book, and the net price of a complex order executed against another complex order on the COB will never be inferior to the price that would be available if the complex order legged into the Simple Book.55 Incoming complex orders that cannot be executed because the executions would be priced (i) outside of the SBBO, or (ii) equal to the SBBO due to a Priority Customer Order at the best SBBO price, will be cancelled if such complex orders are not eligible to be placed on the COB.56 Complex orders will be executed without consideration of any prices for the complex strategy that might be available on other exchanges trading the same complex strategy provided, however, that such complex order price may be subject to the Drill-Through Price Protection set opening price protections are relatively restrictive (i.e., based on the SNBBO) and EDGX wants to have the ability to periodically adjust the process to improve its operation. EDGX states that it will adjust the process to include the amount of delay that the Exchange believes will allow sufficient opportunity to have Opening Process executions while also transitioning to regular trading as quickly as possible. The Exchange believes that limiting this time period to thirty seconds or less will ensure that the COB opens promptly and efficiently but that the Exchange also allows enough time for the individual leg markets across all options exchanges, including the Exchange, to open and stabilize. EDGX notes that, although not configurable, in an analogous opening process for its equities market (set forth in EDGX Rule 11.7(d)), when a security cannot be opened through such process based on orders received and market conditions, the Exchange waits fifteen minutes before transitioning such orders to its order book. See Amendment No. 1. 52 See EDGX Rule 21.20(c)(2)(D) and Amendment No. 1. 53 A ‘‘Priority Customer’’ is any person or entity that is not: (A) A broker or dealer in securities; or (B) a Professional, and a ‘‘Priority Customer Order’’ is an order for the account of a Priority Customer. See EDGX Rule 16.1(a)(45). A ‘‘Professional’’ is any person or entity that: (A) Is not a broker or dealer in securities; and (B) places more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s). See EDGX Rule 16.1(a)(46). 54 See EDGX Rule 21.20(c)(2)(E). 55 See id. 56 See id. VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 forth in Interpretation and Policy .04(f) of EDGX Rule 21.20.57 3. Priority A complex order may be executed at a net credit or debit price against another complex order without giving priority to bids or offers established in the marketplace that are no better than the bids or offers comprising such net credit or debit; provided, however, that if any of the bids or offers established in the marketplace consist of a Priority Customer Order, at least one component of the complex strategy must trade at a price that is better than the corresponding BBO by at least a $0.01 increment.58 Complex orders will be automatically executed against bids and offers on the COB in price priority, and bids and offers at the same price on the COB will be executed in time priority.59 Complex orders that leg into the Simple Book will be executed in accordance with EDGX Rule 21.8.60 EDGX notes that a complex order on EDGX would execute first against orders on the Simple Book (except in the limited circumstances described in EDGX Rule 21.20(c)(2)(F)) if any of the bids or offers established in the simple marketplace consist of a Priority Customer Order.61 4. Managed Interest Process EDGX Rule 21.20(c)(4) sets forth the managed interest process that describes how the System handles a complex order that is not immediately executed upon receipt, including how such an order is priced and re-priced on the COB.62 The managed interest process, which is initiated when a complex order that is eligible to be placed on the COB cannot be executed against either the COB or the Simple Book at the complex order’s net price, is intended to ensure that a complex order to be managed does not result in a locked or crossed market on the Exchange.63 Once initiated, the managed interest process for complex orders will be based upon the SBBO.64 57 See Section II.G, infra, for a discussion of the Drill-Through Price Protection feature. 58 See EDGX Rule 21.20(c)(3)(A). EDGX notes that other options exchanges have adopted similar rules. See Notice, 82 FR at 33175, n.34. 59 See EDGX Rule 21.20(c)(3)(B). 60 See id. 61 See Notice, 82 FR at 33184. 62 Complex orders will not be routed outside of EDGX regardless of the prices displayed by away markets. See EDGX Rule 21.20(c)(4). 63 See Notice, 82 FR at 33175. 64 See EDGX Rule 21.20(c)(4). A complex order for which the Drill-Through Price Protection is engaged will be managed to the Drill-Through Price, as described in EDGX Rule 21.20, Interpretations and Policy .04(f). See Notice, 82 FR at 33175, n.36. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 Under the managed interest process, a complex order that is resting on the COB and is either a complex market order, as described in EDGX Rule 21.20(c)(6), or a complex order with a limit price that locks or crosses the current opposite side SBBO when the SBBO is the best price, may be subject to the managed interest process for complex orders.65 If the order is not a COA-eligible order, as defined in EDGX Rule 21.20(a)(4), the System will first determine if the inbound complex order can be matched against other complex orders resting on the COB at a price that is at or inside the SBBO (provided there are no Priority Customer Orders on the Simple Book at that price).66 Second, the System will determine if the inbound complex order can be executed by Legging against individual orders resting on the Simple Book at the SBBO. A complex order subject to the managed interest process will never be executed at a price that is through the individual component prices on the Simple Book.67 The net price of a complex order subject to the managed interest process that is executed against another complex order on the COB will never be inferior to the price that would be available if the complex order legged into the Simple Book.68 When the opposite side SBBO includes a Priority Customer Order, the System will book and display the booked complex order on the COB at a price (the ‘‘book and display price’’) that is $0.01 away from the current opposite side SBBO.69 When the opposite side SBBO does not include a Priority Customer Order and is not available for execution in the ratio of the complex order, or cannot be executed through Legging with the Simple Book, as described in EDGX Rule 21.20(c)(2)(F), the System will place the complex order on the COB and display the booked complex order at a book and display price that will lock the current opposite side SBBO (i.e., because it is a price at which another complex order can trade).70 If the SBBO changes, the complex order’s book and display price will continuously re-price to the new SBBO until: (i) The complex order has been 65 See EDGX Rule 21.20(c)(4)(A). id. 67 See id. 68 See id. 69 See id. For an example of the complex order managed interest process when the SBBO includes Priority Customer Interest, see Notice, 82 FR at 33176. 70 See EDGX Rule 21.20(c)(4)(A) and Notice, 82 FR at 33176. For an example of the complex order managed interest process when the ratio to allow Legging does not exist and there is no Priority Customer Interest at the SBBO, see Notice, 82 FR at 33176. 66 See E:\FR\FM\23OCN1.SGM 23OCN1 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices executed in its entirety; (ii) if not executed, the complex order’s book and display price has reached its limit price or, in the case of a complex market order, the new SBBO, subject to any applicable price protections; (iii) the complex order has been partially executed and the remainder of the order’s book and display price has reached its limit price or, in the case of a complex market order, the new SBBO, subject to any applicable price protections; or (iv) the complex order or any remaining portion of the complex order is cancelled.71 If EDGX receives a new complex order for the complex strategy on the opposite side of the market from the managed complex order that can be executed, the System will immediately execute the remaining contracts from the managed complex order to the extent possible at the complex order’s current book and display price.72 If unexecuted contracts remain from the complex order on the COB, the complex order’s size will be revised and disseminated to reflect the complex order’s remaining contracts at its current managed book and display price.73 5. Evaluation Process EDGX Rule 21.20(c)(5) describes how and when the System determines to execute or otherwise handle complex orders in the System.74 EDGX notes that the System will evaluate complex orders initially once all components of the complex strategy are open, upon receipt as set forth in EDGX Rule 21.20(c)(5)(A), and continually, as set forth in EDGX Rule 21.20(c)(5)(B).75 EDGX Rule 71 See EDGX Rule 21.20(c)(4)(B). id. 73 See id. 74 See Notice, 82 FR at 33176. 75 See id. EDGX Rule 21.20(c)(5)(A) states that new complex orders are evaluated upon receipt to determine if they are COA eligible or (i) eligible for full or partial execution against another complex order resting on the COB; (ii) eligible for full or partial execution through Legging with the Simple Book; (iii) whether all or any remaining portion of such an order should be placed on the COB; (iv) the eligibility of such orders for the managed interest process; (v) whether such orders should be cancelled. EDGX Rule 21.20(c)(5)(B) states that the System will continue to evaluate complex orders on the COB and also will continue to evaluate (i) whether such complex orders are eligible for full or partial execution against a complex order resting on the COB; (ii) whether such complex orders are eligible for full or partial execution through Legging with the Simple Book; (iii) whether any remaining portion of a complex order should be placed on the COB; (iv) whether all or the remaining portion of a complex should be placed on the COB; and (v) whether such complex orders should be cancelled. EDGX Rule 21.20(c)(5)(B) also states that the System will continue to evaluate whether there is a trading halt affecting any component of a complex strategy and, if so, the System will handle complex orders as set forth in EDGX Rule 21.20, Interpretation and Policy .05. ethrower on DSK3G9T082PROD with NOTICES 72 See VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 21.20(c)(5)(C) states that if the System determines that a complex order is COA-eligible, the order will be submitted into the COA process described in EDGX Rule 21.20(d).76 EDGX states that the purpose of the evaluation process for complex orders is to determine (i) their eligibility to initiate, or to participate in, a COA; (ii) their eligibility to participate in the managed interest process; (iii) their eligibility for full or partial execution against a complex order resting on the COB or through the Legging into the Simple Book; (iv) whether the complex order should be cancelled; and (v) whether the complex order or any remaining portion thereof should be placed or remain on the COB.77 EDGX states that the continual and eventtriggered evaluation process ensures that the System is monitoring and assessing the COB for incoming complex orders, and changes in market conditions or events that cause complex orders to re-price and/or execute, and conditions or events that result in the cancellation of complex orders on the COB.78 6. Complex Market Orders EDGX Rule 21.20(c)6) describes the handling of complex market orders. Complex orders may be submitted as market orders and may be designated as COA-eligible.79 Complex market orders designated as COA-eligible may initiate a COA upon arrival.80 Complex market orders not designated as COA-eligible will trade with any contra-side complex orders, or against the individual legs, up to and including the SBBO, and if not fully executed due to applicable price protection may be posted to the COB, subject to the managed interest process and the evaluation process.81 D. Legging EDGX Rule 21.20(c)(2)(F) describes the Legging process through which complex orders, under certain circumstances, are executed against the individual components of a complex strategy on the Simple Book.82 EDGX Rule 21.20(c)(2)(F) provides that complex orders up to a maximum number of legs (determined by the Exchange on a class-by-class basis as either two, three, or four legs and communicated to Members via specifications and/or Regulatory Circular) may be automatically executed against bids and offers on the Simple Book for the individual legs of the complex order (‘‘Legging’’), provided the complex order can be executed in full or in a permissible ratio by such bids and offers.83 Complex orders with two option legs where both legs are buying or both legs are selling and both legs are calls or both legs are puts may only trade against other complex orders on the COB and will not be permitted to leg into the Simple Book.84 Notwithstanding the foregoing, all two leg COA-eligible Customer complex orders will be allowed to leg into the Simple Book without restriction.85 Complex orders with three or four option legs where all legs are buying or all legs are selling may only trade against other complex orders on the COB and will not leg into the Simple Book, regardless of whether the option leg is a call or a put.86 E. COA Process EDGX Rule 21.20(d) describes the COA process. All option classes will be eligible to participate in a COA.87 Upon evaluation, as set forth in EDGX Rule 21.20(c)(5), EDGX may determine to automatically submit a COA-eligible order into a COA.88 1. Eligibility and Initiation A ‘‘COA-eligible order’’ is a complex order that, as determined by the Exchange, is eligible to initiate a COA based upon the Member’s instructions, the order’s marketability (i.e., if the price of such order is equal to or better than the current SBBO, subject to 82 See 76 See EDGX Rule 21.20(c)(5)(C). If the System determines that a complex order is not COAeligible, the complex order may be (i) immediately matched and executed against a complex order resting on the COB; (ii) executed against the individual components of the complex order on the Simple Book through Legging; (iii) placed on the COB and managed pursuant to the managed interest process; or (iv) cancelled by the System if the timein-force of the complex order does not allow it to rest on the COB. See EDGX Rule 21.20(c)(5)(D). 77 See Notice, 82 FR at 33175. 78 See id. 79 See EDGX Rule 21.20(c)(6). 80 See EDGX Rule 21.20(c)(6)(A). 81 See EDGX Rule 21.20(c)(6)(B). See Sections II.C.4 and II.C.5, supra, respectively, for a discussion of the managed interest process and the evaluation process. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 49061 Notice, 82 FR at 33174. EDGX Rule 21.20(c)(2)(F). 84 See id. 85 See id. EDGX notes that Legging against the individual components of a complex order on the Simple Book allows complex orders to access the full liquidity of the Exchange’s Simple Book, thus enhancing the possibility of executions at the best available prices on the Exchange. EDGX believes this is particularly true for Customer complex orders and, thus, does not propose to limit the ability of such orders to leg into the Simple Book (when such orders are two-legged orders). See Amendment No. 1. 86 See EDGX Rule 21.20(c)(2)(F). EDGX notes that its restrictions on Legging are substantially similar to those in ISE Rules 722(b)(3)(ii)(A) and (B). See Amendment No. 1. 87 See EDGX Rule 21.20(d). 88 See id. 83 See E:\FR\FM\23OCN1.SGM 23OCN1 49062 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices applicable restrictions when a Priority Customer Order comprises a portion of the SBBO) as determined by the Exchange, number of components, and complex order origin codes (i.e., nonbroker-dealer customers, broker-dealers that are not market makers on an options exchange, and/or market makers on an options exchange as determined by the Exchange).89 Determinations by the EDGX with respect to COA eligibility will be communicated to Members via specifications and/or Regulatory Circular.90 To initiate a COA, a COA-eligible order must be designated as such (either affirmatively or by default) 91 and must meet the criteria described in proposed EDGX Rule 21.20, Interpretation and Policy .02.92 Dissemination of information related to COA-eligible orders by the submitting Member to third parties will be deemed conduct inconsistent with just and equitable principles of trade, as described in EDGX Rule 3.1.93 ethrower on DSK3G9T082PROD with NOTICES 2. Commencement of a COA Upon receipt of a COA-eligible order, EDGX will send a COA auction message to all subscribers to EDGX’s data feeds that deliver COA Auction messages.94 89 See EDGX Rule 21.20(d)(1). EDGX notes that other options exchanges have limited auction eligibility for complex orders based on order origin code (citing MIAX Rule 518(d)(1), CBOE Rule 6.53C(d)(i), and NYSE American Rule 980NY(e)(1)). See Notice, 82 FR at 33177. 90 See EDGX Rule 21.20(d)(1). 91 Complex orders that are marked as IOC will, by default, not initiate a COA upon arrival, but a Member that submits an order marked IOC may elect to opt-in to initiating a COA and any quantity of the IOC order not executed will be cancelled at the end of the COA. All other Times in Force will by default initiate a COA, but a Member may elect to opt-out of initiating a COA. See EDGX Rule 21.20(b)(2). As noted above, market orders may be designated as COA-eligible. See EDGX Rule 21.20(c)(6). See also Notice, 82 FR at 33172. 92 EDGX Rule 21.20, Interpretation and Policy .02 provides that if a COA-eligible order is priced equal to, or improves, the SBBO and is also priced to improve other complex orders resting at the top of the COB, the complex order will be eligible to initiate a COA, provided that if any of the bids or offers on the Simple Book that comprise the SBBO consists of a Priority Customer Order, the COA will only be initiated if it will trade at a price that is better than the corresponding bid or offer by at least a $0.01 increment. EDGX believes that if a complex order is not priced equal to, or better than, the SBBO or is not priced to improve other complex orders resting at the top of the COB, it would not be reasonable to anticipate that the complex order would generate a meaningful number of COA Responses such that there would be price improvement of the complex order’s limit price. Thus, EDGX believes that these criteria ensure that a COA will be conducted only when there is a reasonable and realistic chance for price improvement through the COA. See Notice, 82 FR at 33185. 93 See EDGX Rule 21.20, Interpretation and Policy .03. 94 See EDGX Rule 21.20(d)(2). EDGX notes that any Member may subscribe to EDGX’s data feeds VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 The COA auction message will identify the COA auction ID, instrument ID (i.e., the complex strategy), origin code, quantity, and side of the market of the COA-eligible order.95 EDGX may also determine to include the price in COA auction messages, and if it does so it will announce that determination in published specifications and/or Regulatory Circular to Members.96 3. COA Responses A Member with any origin code, including a Priority Customer, may submit a response to the COA auction message (a ‘‘COA Response’’) during the Response Time Interval.97 COA Responses may be submitted in $0.01 increments and must specify the price, size, side of the market (i.e., a response to a buy COA as a sell or a response to a sell COA as a buy) and COA auction ID for the COA to which the response is targeted.98 Multiple COA Responses from the same Member may be submitted during the Response Time Interval.99 COA Responses represent non-firm interest that can be modified or withdrawn at any time prior to the end of the Response Time Interval, though any modification to a COA Response other than a decrease of size will result in a new timestamp and a loss of priority.100 COA Responses will not be displayed by the Exchange.101 At the end of the Response Time Interval, COA Responses are firm (i.e., guaranteed at their price and size).102 Any COA Responses not executed in full will expire at the end of the COA.103 Any COA Responses not executable based on the price of the COA will be cancelled immediately.104 4. Processing of COA-Eligible Orders At the end of the Response Time Interval, COA-eligible orders may be that include auction notifications. See Notice, 82 FR at 33814. 95 See EDGX Rule 21.20(d)(2). 96 See id. The price included in the COA auction message will be the limit order price, unless the COA is initiated by a complex market order, in which case such price will be the SBBO, subject to any applicable price protections. See id. 97 See EDGX Rule 21.20(d)(4). The Response Time Interval is the period of time during which responses to the COA may be entered. The Exchange will determine the duration of the Response Time Interval, which shall not exceed 500 milliseconds, and will communicate it to Members via specifications and/or Regulatory Circular. See EDGX Rule 21.20(d)(3). EDGX notes that the Response Time Interval is based on MIAX Rule 518(d)(3). See Notice, 82 FR at 33177, n.45. 98 See EDGX Rule 21.20(d)(4). 99 See id. 100 See id. 101 See id. 102 See id. 103 See id. 104 See id. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 executed in whole or in part against the best priced contra side interest.105 Any unexecuted portion of a COA-eligible order remaining at the end of the Response Time Interval will be placed on the COB and ranked pursuant to EDGX Rule 21.20(c)(3) or cancelled, if IOC.106 The COA will terminate: (i) Upon receipt of a new non-COA-eligible order on the same side as the COA but with a better price, in which case the COA will be processed and the new order will be posted to the COB; (ii) if an order is received that would improve the SBBO on the same side as the COA in progress to a price better than the auction price, in which case the COA will be processed, the new order will be posted to the Simple Book and the SBBO will be updated; or (iii) if a Priority Customer Order is received that would join or improve the SBBO on the same side as the COA in progress to a price equal to or better than the auction price, in which case the COA will be processed, the new order will be posted to the Simple Book and the SBBO will be updated.107 In addition, a COA will terminate immediately without trading if any individual component or underlying security of a complex strategy in the COA process is subject to a halt as described in EDGX Rule 21.20, Interpretation and Policy .05.108 5. COA Pricing and Allocations at the Conclusion of a COA A complex strategy will not be executed at a net price that would cause any component of the complex strategy to be executed: (A) At a price of zero; or (B) ahead of a Priority Customer Order on the Simple Book without improving the BBO on at least one component of the complex strategy by at least $.01.109 Orders executed in a COA will be allocated first in price priority based on their original limit price as follows: (A) Priority Customer Orders resting on the Simple Book; (B) COA Responses and unrelated orders on the COB in time priority; and (C) remaining individual orders in the Simple Book (i.e., non-Priority Customer), which will be allocated pursuant to EDGX Rule 21.8.110 EDGX believes the priority model to provide highest priority to Priority Customer Orders resting on the 105 See EDGX Rule 21.20(d)(5)(A). EDGX Rule 21.20(d)(5)(B). 107 See EDGX Rule 21.20(d)(5)(C). 108 See EDGX Rule 21.20, Interpretation and Policy .05(b). 109 See EDGX Rule 21.20(d)(6). For an example of pricing in a COA, see Notice, 82 FR at 33178. 110 See EDGX Rule 21.20(d)(7). For examples of allocations at the conclusion of a COA, see Notice, 82 FR at 33178–79 and Amendment No. 1. 106 See E:\FR\FM\23OCN1.SGM 23OCN1 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices Simple Book is consistent with the longstanding policies of customer protection found throughout the Act and the rules of options exchanges, and maintains the Exchange’s current practice by affording such priority.111 EDGX notes that the current priority model for the Exchange provides first priority to Priority Customers prior to execution of any orders of other participants (‘‘nonCustomers’’) pursuant to the Customer Overlay set forth in EDGX Rule 21.8(d)(1).112 Thus, orders of nonCustomers on the Simple Book are already afforded last priority as compared to Priority Customers.113 EDGX states that because all listed options are traded on options exchanges, there is significant retail customer participation directly on exchanges.114 In turn, because of such direct retail customer participation, EDGX states that the exchanges have taken steps to afford those retail customers—generally Priority Customers—more favorable treatment in some circumstances.115 EDGX believes this treatment is appropriate to encourage retail participation in the market generally, and in light of the fact that Priority Customers are not necessarily immersed in the day-to-day trading of the markets and may have less understanding of how complex order books operate and interact with leg markets.116 6. Overlapping COAs EDGX Rule 21.20, Interpretation and Policy .02 provides that a COA will be allowed to commence even when a COA for the same strategy is already underway.117 EDGX represents that it 111 See EDGX Rule 21.8 and Amendment No. 1. Amendment No. 1. EDGX states that the Exchange currently applies the Customer Overlay to all options traded on the Exchange. See id. 113 See id. 114 See id. 115 See id. 116 See id. 117 EDGX Rule 21.20, Interpretation and Policy .02 states that to the extent there is more than one COA for a specific complex strategy underway at a time, each COA will conclude sequentially based on the exact time each COA commenced, unless terminated early pursuant to EDGX Rule 21.20(d)(5)(C). At the time each COA concludes, the COA will be allocated pursuant to this Rule and will take into account all COA Responses and unrelated complex orders on the COB at the exact time of conclusion. In the event there are multiple COAs underway that are each terminated early pursuant to EDGX Rule 21.20(d)(5)(C) of this Rule, the COAs will be processed sequentially based on the order in which they commenced. Because a COA Response must specifically identify the COA for which it is targeted, and if not fully executed will be cancelled back at the conclusion of the COA, COA Responses will only be considered in the specified COA. For examples of the processing of overlapping auctions, see Notice, 82 FR at 33178–79 and Amendment No. 1. ethrower on DSK3G9T082PROD with NOTICES 112 See VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 has systems capacity to process multiple overlapping COAs consistent with the proposal, including systems necessary to conduct surveillance of activity occurring in such auctions.118 EDGX states that if it does not permit overlapping COAs, a Member who wishes to submit a COA-eligible order but has its order rejected because another COA is already underway in the complex strategy must either wait for that COA to conclude and re-submit the order to the Exchange (possibly constantly resubmitting the complex order to ensure it is received by the Exchange before another COA commences) or must send the order to another options exchange that accepts complex orders.119 F. Market-Maker Complex Quotes EDGX has not proposed different standards for participation by Market Makers on the COB (i.e., no specific benefits or obligations).120 Market Makers are not required to quote on the COB.121 Complex strategies are not subject to any requirements that are applicable to Market Makers in the simple market for individual options series or classes.122 Volume executed in complex strategies is not taken into consideration when determining whether Market Makers are meeting quoting obligations applicable to Market Makers in the simple market for individual options.123 G. Price and Other Protections The proposal establishes several price and other protections for complex orders. Exchange believes that the complex order price protections will provide market participants with valuable price and order size protections to enable them to better manage their risk exposure when trading complex orders.124 In particular, EDGX believes the price protection mechanisms will mitigate potential risks associated with market participants entering orders at clearly unintended prices and orders trading at prices that are extreme and potentially erroneous, which may likely have resulted from human or operational error.125 EDGX Rule 21.20, Interpretation and Policy .04 provides several price protection standards that are designed to ensure that certain types of complex 118 See Notice, 82 FR at 33177. id., 82 FR at 33186. 120 See id., 82 FR at 33179. 121 See EDGX Rule 21.20, Interpretation and Policy .01. 122 See id. 123 See id. 124 See Notice, 82 FR at 33186. 125 See id. 119 See PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 49063 strategies will not be executed outside of a preset standard minimum and/or maximum price limit.126 Under the Credit-to-Debit parameter in EDGX Rule 21.20, Interpretation and Policy .04(b), market orders that would be executed at a net debit price after receiving a partial execution at a net credit price will be cancelled.127 The Debit/Credit Price Reasonability Check provisions in EDGX Rule 21.20, Interpretation and Policy .04(c) state that, to the extent a price check parameter is applicable, EDGX will not accept a complex order that is a limit order for a debit strategy with a net credit price that exceeds a pre-set buffer, a limit order for a credit strategy with a net debit price that exceeds a pre-set buffer, or a market order for a credit strategy that would be executed at a net debit price that exceeds a pre-set buffer.128 EDGX will determine these pre-set buffer amounts and communicate them to Members via specifications and/or Regulatory Circular.129 The System will reject or cancel back to the Member any limit order or any market order (or any remaining size after partial execution of the order) that does not satisfy the Debit/Credit Price Reasonability check.130 The Debit/Credit Price Reasonability Check applies to auction responses in the same manner as it does to orders.131 The System defines a complex order as a debit or credit as follows: (A) A call butterfly spread 132 for which the 126 See Notice, 82 FR at 33180. EDGX Rule 21.20, Interpretation and Policy .04(b). This functionality is similar to the price protections that are currently operative on other exchanges. See, e.g., CBOE Rule 6.53C, Interpretation and Policy .08(b). 128 The System would not apply this check to an order for when the System cannot define whether the order is a debit or credit. See EDGX Rule 21.20, Interpretation and Policy .04(c)(2). EDGX states that this would primarily occur prior to the opening of trading as orders are being queued because prices may not be available to make such determination. See Notice, 82 FR at 33181, n.54. 129 See EDGX Rule 21.20, Interpretation and Policy .04(c)(1). EDGX notes that ISE Rule 722, Supplementary Material .07(c) also includes variable pre-set values in connection with the analogous price protections included in that rule. See Notice, 82 FR at 33181, n.55. 130 See EDGX Rule 21.20, Interpretation and Policy .04(c)(3). 131 See EDGX Rule 21.20, Interpretation and Policy .04(c)(4). 132 A ‘‘butterfly’’ spread is a three-legged complex order with two legs to buy (sell) the same number of calls (puts) and one leg to sell (buy) twice as many calls (puts), all with the same expiration date but different exercise prices, and the exercise price of the middle leg is between the exercise prices of the other legs. If the exercise price of the middle leg is halfway between the exercise prices of the other legs, it is a ‘‘true’’ butterfly; otherwise, it is 127 See E:\FR\FM\23OCN1.SGM Continued 23OCN1 49064 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES middle leg is to sell (buy) and twice the exercise price of that leg is greater than or equal to the sum of the exercise prices of the buy (sell) legs is a debit (credit); (B) a put butterfly spread for which the middle leg is to sell (buy) and twice the exercise price of that leg is less than or equal to the sum of the exercise prices of the buy (sell) legs is a debit (credit); and (C) an order for which all pairs and loners are debits (credits) is a debit (credit).133 The Buy Strategy Parameters in EDGX Rule 21.20, Interpretation and Policy .04(d) provide that the System will reject a limit order where all the components of the strategy are to buy and the order is priced at zero, any net credit price that exceeds a pre-set buffer, or a net debit price that is less than the number of individual option series legs in the strategy (or applicable ratio) multiplied by the applicable minimum net price increment for the complex order. The Maximum Value Acceptable Price Range parameter in EDGX Rule 21.20, Interpretation and Policy .04(e) provides that the System will reject an order if the order is a vertical, true butterfly or box spread, or a limit order or market order if it would execute at a price that is outside of an acceptable price range.134 The acceptable price a ‘‘skewed’’ butterfly. See EDGX Rule 21.20, Interpretation and Policy .04(a)(2). 133 See EDGX Rule 21.20, Interpretation and Policy .04(c)(2). For purposes of the debit/credit price reasonability checks, a ‘‘pair’’ is a pair of legs in an order for which both legs are calls or both legs are puts, one leg is a buy and one leg is a sell, and both legs have the same expiration date but different exercise prices or, for all options except European-style index options, the same exercise price but different expiration dates. A ‘‘loner’’ is any leg in an order that the System cannot pair with another leg in the order (including legs in orders for European-style index options that have the same exercise price but different expiration dates). The System first pairs legs to the extent possible within each expiration date, pairing one leg with the leg that has the next highest exercise price; the System then, for all options except European-style index options, pairs legs to the extent possible with the same exercise prices across expiration dates, pairing one leg with the leg that has the next nearest expiration date. See EDGX Rule 21.20, Interpretation and Policy .04(c)(2)(C). The rule further provides that a pair of calls is a credit (debit) if the exercise price of the buy (sell) leg is higher than the exercise price of the sell (buy) leg (if the pair has the same expiration date) or if the expiration date of the sell (buy) leg is farther than the expiration date of the buy (sell) leg (if the pair has the same exercise price). A pair of puts is a credit (debit) if the exercise price of the sell (buy) leg is higher than the exercise price of the buy (sell) leg (if the pair has the same expiration date) or if the expiration date of the sell (buy) leg is farther than the expiration date of the buy (sell) leg (if the pair has the same exercise price). A loner to buy is a debit, and a loner to sell is a credit. See id. 134 A ‘‘vertical’’ spread is a two-legged complex order with one leg to buy a number of calls (puts) and one leg to sell the same number of calls (puts) with the same expiration date but different exercise VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 range is set by the minimum and maximum possible value of the spread, subject to an additional buffer amount determined by EDGX and communicated to Members via specifications and/or a Regulatory Circular.135 The maximum possible value of a vertical, true butterfly and box spread is the difference between the exercise prices of (A) the two legs; (B) the middle leg and the legs on either side; and (C) each pair of legs, respectively.136 The minimum possible value of the spread is zero.137 EDGX Rule 21.20, Interpretation and Policy .04(f) establishes EDGX’s DrillThrough Price Protection feature, a price protection mechanism applicable to all complex orders under which a buy (sell) order will not be executed at a price that is higher (lower) than the SNBBO or the SNBBO at the time of order entry plus (minus) a buffer amount (the ‘‘DrillThrough Price’’).138 EDGX will adopt a default buffer amount for the DrillThrough Price Protection and will publish this amount in publicly available specifications and/or a Regulatory Circular.139 A Member may modify the buffer amount applicable to Drill-Through Price Protections to either a larger or smaller amount than the Exchange default.140 If a buy (sell) order would execute or post to the COB at a price higher (lower) than the DrillThrough Price, the System will instead post the order to the COB at the DrillThrough Price, unless the terms of the order instruct otherwise. Any order (or unexecuted portion thereof) will rest in the COB (based on the time at which it enters the book for priority purposes) for a time period in milliseconds that may not exceed three seconds (which the Exchange will determine and communicate to Members via specifications and/or Regulatory Circular) with a price equal to the DrillThrough Price.141 If the order (or prices. See EDGX Rule 21.20, Interpretation and Policy .04(a). A ‘‘box’’ spread is a four-legged complex order with one leg to buy calls and one leg to sell puts with one strike price, and one leg to sell calls and one leg to buy puts with another strike price, all of which have the same expiration date and are for the same number of contracts. See id. See note 132, supra, for the definition of butterfly spread. 135 See EDGX Rule 21.20, Interpretation and Policy .04(e). 136 See EDGX Rule 21.20, Interpretation and Policy .04(e)(1). 137 See EDGX Rule 21.20, Interpretation and Policy .04(e)(2). 138 For an example of the application of the DrillThrough Price Protection, see Notice, 82 FR at 33181–82. 139 See EDGX Rule 21.20, Interpretation and Policy .04(f). 140 See id. 141 See id. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 unexecuted portion thereof) does not execute during that time period, the System will cancel it.142 H. Risk Monitor Mechanism EDGX proposes to add Interpretation and Policy .01 to EDGX Rule 21.16 to provide that complex orders will participate in EDGX’s existing the Risk Monitor Mechanism. The Risk Monitor Mechanism functions by counting a member’s executions, contract volume, and notional value both within a specified time period established by the member and on an absolute basis for the trading day.143 The Risk Monitor Mechanism rejects or cancels orders that exceed member-designated volume, notional, count, or percentage triggers.144 EDGX Rule 21.16, Interpretation and Policy .01 states that, for purposes of counting within a specified time period and for purposes of calculating absolute limits, EDGX will count individual trades executed as part of a complex order when determining whether a volume, notional, or count trigger has been reached. For purposes of counting within a specified time period and for purposes of calculating absolute limits, EDGX will count the percentage executed of a complex order when determining whether the percentage trigger has been reached.145 I. Additional Risk Protection for Complex Orders In addition to the protections described above, EDGX proposes to establish the Fat Finger Price Protection and a complex order size protection.146 These protections will be available for complex orders as determined by the Exchange and communicated to Members via specifications and/or Regulatory Circular.147 Under the Fat Finger Price Protection, EDGX will define a price range outside of which the System will not accept a complex limit order.148 The price range will be a number defined by EDGX and communicated to Members via specifications and/or Regulatory Circular, and a Member may establish a more aggressive or restrictive value than the Exchange default.149 The default 142 See id. EDGX Rule 21.16(a). 144 See Notice, 82 FR at 33183. 145 See EDGX Rule 21.16, Interpretation and Policy .01. 146 See EDGX Rule 21.20, Interpretation and Policy .06(a) and (b). 147 See EDGX Rule 21.20, Interpretation and Policy .06(c). 148 See EDGX Rule 21.20, Interpretation and Policy .06(a). 149 See id. EDGX notes that ISE Rule 722, Supplementary Material .07(d) also provides for 143 See E:\FR\FM\23OCN1.SGM 23OCN1 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices price range for Fat Finger Price Protection will be greater than or equal to a price through the SNBBO for the complex strategy to be determined by the Exchange and communicated to Members via specifications and/or Regulatory Circular.150 A complex limit order to sell will not be accepted at a price that is lower than the SNBBO bid, and a complex limit order to buy will not be accepted at a price that is higher than the SNBBO offer, by more than the Exchange defined or Member established price range.151 A complex limit order that is priced through this range will be rejected.152 Under the complex order size protection, the System will prevent certain complex orders from executing or being placed on the COB if the size of the complex order exceeds the complex order size protection designated by the Member.153 If the maximum size of complex orders is not designated by the Member, the Exchange will set a maximum size of complex orders on behalf of the Member by default.154 Members may designate the complex order size protection on a firm wide basis.155 The default maximum size for complex orders will be determined by the Exchange and communicated to Members via specifications and/or Regulatory Circular.156 ethrower on DSK3G9T082PROD with NOTICES J. Trading Halts EDGX Rule 21.20, Interpretation and Policy .05, describes the Exchange’s handling of complex orders in the context of a trading halt. Under EDGX Rule 21.20, Interpretation and Policy .05(a), if a trading halt exists for the underlying security or a component of a complex strategy, trading in the complex strategy will be suspended and a Member’s complex orders will be cancelled unless the Member has instructed the Exchange not to cancel its orders.157 The COB will remain configurable values in connection with an analogous size protection that ISE offers for its complex order book. See Notice, 82 FR at 33812, n.64. 150 See EDGX Rule 21.20, Interpretation and Policy .06(a). 151 See id. 152 See id. 153 See EDGX Rule 21.20, Interpretation and Policy .06(b). EDGX notes that ISE Rule 722, Supplementary Material .07(e) also applies configurable values in connection with an analogous size protection for its complex order book. See Notice, 82 FR at 33812, n.66. 154 See EDGX Rule 21.20, Interpretation and Policy .06(b). 155 See id. 156 See id. 157 See Amendment No. 1. In Amendment No. 1, EDGX notes that this provision is based on and similar to EDGX Rule 20.3(b), which states that VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 available for Members to enter and manage complex orders.158 Incoming complex orders that could otherwise execute or initiate a COA in the absence of a halt will be placed on the COB.159 Incoming complex orders with a time in force of IOC will be cancelled.160 EDGX Rule 21.20, Interpretation and Policy .05(b) states that if, during a COA, any component(s) and/or the underlying security of a COA-eligible order is halted, the COA will end early without trading and all COA Responses will be cancelled. Remaining complex orders will be placed on the COB if eligible, or cancelled.161 When trading in the halted component(s) and/or underlying security of the complex order resumes, the System will evaluate and re-open the COB pursuant to EDGX Rule 21.20(c)(2)(B)-(D).162 K. Market Data EDGX proposes to amend EDGX Rule 21.15(b) to specify the data feeds that EDGX proposes to adopt in connection with the proposal. EDGX currently offers a Multicast PITCH data feed and an Auction Feed.163 EDGX proposed to adopt a similar, but separate, Multicast PITCH data feed and Auction Feed for the COB.164 Second, EDGX proposes to adopt a new separate Multicast TOP data feed for its Simple Order Book and for the COB.165 Third, EDGX proposes to adopt a separate Auction Feed for the orders are cancelled in the event of a trading halt in the underlying unless the Exchange has been instructed not to cancel such orders. EDGX further notes that its rule is similar to functionality that is currently operative on other exchanges. In particular, EDGX notes that MIAX follows a similar process for trading halts, except that while MIAX reopens through potential complex auctions, EDGX will reopen through its standard Opening Process. See MIAX Rule 518, Interpretation and Policy .05(e)(3). See also PHLX Rule 1098(c)(ii)(C), which states that complex orders will not trade on the PHLX system during a trading halt for any options component of the Complex Order. 158 See EDGX Rule 21.20, Interpretation and Policy .05(a). 159 See id. 160 See id. 161 See EDGX Rule 21.20, Interpretation and Policy .05(b). 162 See EDGX Rule 21.20, Interpretation and Policy .05(c). 163 See EDGX Rules 21.15(b)(1) and (4). The Multicast PITCH data feed is an uncompressed data feed that offers depth of book quotation and execution information based on options orders entered into EDGX’s System. The Auction Feed is an uncompressed data product that provides information regarding the current status of price and size information related to auctions conducted by EDGX. See Notice, 82 FR at 33183. 164 See Notice, 82 FR at 33183. 165 See EDGX Rule 21.15(b)(2). The new Multicast TOP feeds will be uncompressed data feeds that will offer top of book quotations and execution information based on options orders entered into EDGX’s System. See id. EDGX notes that it currently offers a top of book feed for its equities trading platform. See Notice, 82 FR at 33186. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 49065 COB, in addition to its existing Auction Feed for the Simple Book.166 Fourth, EDGX the Exchange proposes to identify Priority Customer Orders and trades as such on messages disseminated by the Exchange through its Multicast TOP data feed, in addition to disseminating that information through it Multicast PITCH and Auction data feeds.167 III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.168 In particular, for the reasons discussed below, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,169 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to 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. This order approves the proposed rule change in its entirety, although only certain more significant aspects of the proposed rules are discussed below. A. Definitions and Order Types The proposal adopts several defined terms related to the trading of complex orders. The Commission notes that EDGX’s definition of complex order 170 is consistent with the definition of complex order adopted by other options exchanges.171 The Commission believes that adding EDGX Rule 21.20(b) to allow complex orders to be entered as limit orders, market orders, GTD orders, IOC orders, DAY orders, GTC orders, OPG orders, Complex Only orders, COAeligible orders, do-not-COA orders, and complex orders with Match Trade 166 See EDGX Rule 21.15(c)(5). The Auction Feed is an uncompressed data product that provides information regarding the current status of price and size information related to auctions conducted by the Exchange. See id. 167 See EDGX Rule 21.15(c)(2). EDGX notes that the proposal also re-numbers the provisions for EDGX’s DROP and Historical Data products, but does not make any changes with respect to those products. See Notice, 82 FR at 33183. 168 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 169 15 U.S.C. 78f(b)(5). 170 See EDGX Rule 21.20(a)(5). 171 See, e.g., ISE Rule 722(a)(1); CBOE Rule 6.53C(a)(1); and MIAX Rule 518(a)(5). E:\FR\FM\23OCN1.SGM 23OCN1 49066 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices Prevention modifiers could provide market participants with greater flexibility and control over the trading of complex orders.172 The Commission notes that EDGX currently permits each of these orders types (other than GTC, OPG, Complex Only orders, COAeligible orders, and do-not-COA orders) for orders on single option series.173 The Commission further notes that Complex Only orders will be available only to EDGX Market Makers, which is consistent with similar functionality available on other options exchanges.174 ethrower on DSK3G9T082PROD with NOTICES B. Trading of Complex Orders and Quotes EDGX states that it has designed its execution and priority rules to allow complex orders to interact with interest in the Simple Book and vice versa in an efficient and orderly manner.175 The Commission notes that EDGX Rule 21.20(c)(3)(A) is designed to protect interest established in the leg market by providing that if any of the bids or offers established in the marketplace consist of a Priority Customer Order, at least one leg of the complex order must trade at a price that is better than the corresponding bid or offer in the marketplace by at least a $0.01 increment. The Commission further notes that other options exchanges have similar provisions requiring one leg to trade at a better price in such a circumstance.176 EDGX proposes that complex orders will never be executed at a price that is outside of the individual component prices on the Simple Book.177 Furthermore, the net price of a complex order executed against another complex order on the COB will never be inferior to the price that would be available if the complex order legged into the Simple Book.178 According to EDGX, these provisions should help prevent a component of a complex order from being executed at a price that compromises the priority already established by a Priority Customer on the Simple Book.179 The Commission 172 As noted above, EDGX also will make GTC and OPG orders available for the Simple Book, which will provide greater flexibility to participants in the markets for orders in single option series. 173 See EDGX Rule 21.1. 174 See MIAX Rule 518(c)(2)(iii) (providing that Legging is not available for, among other things, complex Standard quotes and complex eQuotes); and ISE Rule 722, Supplementary Material .03 (providing that Market Maker quotes will not be automatically executed against bids and offers on ISE for the individual legs of the complex order). 175 See Notice, 82 FR at 33184. 176 See, e.g., ISE Rule 722(b)(2); Phlx Rule 1098(c)(iii); and MIAX Rule 518(c)(3). 177 See Notice, 82 FR at 33173. 178 See id. 179 See id. VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 notes that another options exchange has comparable provisions.180 C. Legging As described more fully above, EDGX proposes to provide for Legging of complex orders into the Simple Book. The Commission believes that Legging could benefit investors by providing additional execution opportunities for both complex orders and interest on the Simple Book. In addition, the Commission believes that Legging could facilitate interaction between the COB and the Simple Book, potentially resulting in a more competitive and efficient market, and better executions for investors. As discussed above, EDGX is proposing to prohibit Legging for: (i) Complex orders with two option legs where both legs are buying or both legs are selling and both legs are calls or both legs are puts, other than COAeligible two-legged Customer complex orders; and (ii) complex orders with three option legs where all legs are buying or all legs are selling regardless of whether the option leg is a call or a put.181 The Commission notes that this prohibition is similar to the rules of other options markets, which the Commission has approved.182 The Commission notes that directional complex orders may continue to trade against other complex orders on the Exchange’s COB, and that market participants may submit the individual legs of a directional complex order separately to the regular market for execution should they so choose. D. Complex Order Auction Process EDGX describes the Complex Order Auction Process in EDGX Rule 21.20(d). EDGX states that the auction process is designed to ensure that complex orders are given every opportunity to be 180 See MIAX Rule 518(c)(2)(ii). EDGX Rule 21.20(c)(2)(F). 182 See, e.g., ISE Rule 722(b)(3)(ii); and MIAX Rule 518(c)(2)(iii). See also Securities Exchange Act Release Nos. 73023 (September 9, 2014) 79 FR 55033 (September 15, 2014) (order approving SR– ISE–2014–10); 79072 (October 7, 2016) 81 FR 71131 (October 14, 2016) (order approving SR–MIAX– 2016–26). As discussed above, EDGX will permit Customer two-leg COA-eligible complex orders to leg into the Simple Book without restriction. See EDGX Rule 21.20(c)(2)(F). EDGX notes that Legging against the individual components of a complex order on the Simple Book allows complex orders to access the full liquidity of the Exchange’s Simple Book, thus enhancing the possibility of executions at the best available prices on the Exchange. EDGX believes this is particularly true for Customer complex orders and, thus, does not propose to limit the ability of such orders to leg into the Simple Book (when such orders are two-legged orders). See Amendment No. 1. See also notes 111–116, supra, and accompanying text, for additional discussion of EDGX’s treatment of Customer complex orders. 181 See PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 executed at the best prices against an increased level of contra-side liquidity.183 In addition, EDGX states that the Complex Order Auction process is designed to work effectively with the COB with a simple priority of allocation that continues to respect the priority of allocations on the Simple Book (via the Exchange’s pro rata allocation methodology).184 The Commission notes that the ability for unrelated marketable orders to join and be executed in a Complex Order Auction may enhance the liquidity in the Complex Order Auction and thus increase opportunities for execution of complex orders on both sides of the market. As noted above, EDGX will permit a COA for a strategy to begin even if another COA for that strategy is already underway.185 The Commission notes that EDGX’s rules regarding the processing of overlapping COAs for a strategy have been made transparent in the proposal and are reasonable, given that the electronic nature of EDGX makes the sequence of auction start times readily discernable.186 In particular, the Commission notes that a COA Response will only be considered for its specified COA. Each COA Response must specifically identify the COA for which it is targeted, and if not fully executed, the COA Response will be cancelled back at the conclusion of the COA.187 E. Opening Process, Managed Interest Process, and Evaluation Process As described above, EDGX Rule 21.20(c)(2)(A)–(D) sets forth EDGX’s opening process for complex orders. The Commission believes that the opening process is designed to provide for the orderly opening of complex orders on EDGX. EDGX Rules 21.20(c)(4) and (5) describe, respectively, the managed interest process and the evaluation process for complex orders. The Commission believes that the managed interest process is designed to protect the priority of Priority Customer interest on the Simple Book and assure that complex orders do not trade through the prices of interest on the Simple Book for the component securities of the complex order. The Commission believes that the evaluation process is designed to facilitate the execution of complex 183 See Notice, 82 FR at 33185. id., 82 FR at 33179. 185 See EDGX Rule 21.20, Interpretation and Policy .02. 186 See id. 187 See id. See also EDGX Rule 21.20(d)(4) (stating that, among other things, a COA Response must include the COA auction ID for the COA to which it is targeted). 184 See E:\FR\FM\23OCN1.SGM 23OCN1 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices orders and other interest on EDGX in accordance with EDGX’s rules. The Commission notes that EDGX’s managed interest and evaluation processes for complex orders are similar to processes adopted by another options exchange.188 F. Market Maker Complex Quotes As described above, EDGX has not proposed different standards for participation by Market Makers on the COB. Market Makers are not required to quote on the COB and there are no continuous quoting requirements respecting complex orders.189 In addition, complex strategies are not subject to any requirements that are applicable to Market Makers in the simple market for the individual options series or classes.190 Finally, volume executed in complex strategies is not taken into consideration when determining whether Market Makers are meeting quoting obligations applicable to Market Makers in the simple market for individual options.191 The Commission notes that other options exchanges have adopted similar rules.192 G. Price Protection and Other Features EDGX’s proposed price and order protection features are intended to provide market participants with price and order size protection to allow them to better manage their risk exposure.193 The credit-to-debit parameters, Debit/ Credit Price Reasonability Checks, Buy Strategy Parameters, Maximum Value Acceptable Price Range, Fat Finger Price Protection, and order size protection are similar to functionalities already available on other options exchanges.194 EDGX’s provisions regarding trading halts could help to protect investors by pausing trading during potentially disruptive conditions.195 Finally, according to EDGX, adding complex orders to the Risk Protection Monitor should allow EDGX members to better manage their risk and encourage them to submit additional liquidity to the Exchange.196 The Commission believes 188 See MIAX Rules (c)(4) and (5). EDGX Rule 21.20, Interpretation and Policy .01. 190 See id. 191 See id. 192 See ISE Rule 722, Supplementary Material .03; and MIAX Rule 518, Interpretation and Policy .02(e). 193 See Notice, 82 FR at 33186. 194 See CBOE Rule 6.53C, Interpretation and Policy .08(b)–(d) and (g); and ISE Rule 722, Supplementary Material .07(d) and (e). 195 See Notice, 82 FR at 33186. 196 See id. The Commission reminds members electing to use the Risk Protection Monitor to be mindful of their obligations to, among other things, ethrower on DSK3G9T082PROD with NOTICES 189 See VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 the proposed new price protection features are designed to promote just and equitable principles of trade to the extent they are able to mitigate potential risks associated with market participants entering orders or executing trades at what EDGX believes are extreme and potentially erroneous prices. H. Market Data As described above, EDGX proposes to make available various data feeds that will provide information regarding complex orders on EDGX. EDGX states that each of the proposed data feeds is based on and similar to an existing data feed offered by EDGX Options and/or the EDGX equities trading platform.197 EDGX notes that the proposed data feeds, which will be free of charge, would be accessed and subscribed to on a voluntary basis by market participants interested in obtaining data regarding activity in the COB.198 If EDGX proposes to adopt fees in connection with any of its data feeds, it will file a separate proposal to include such fees in its Fee Schedule.199 The Commission believes that the proposed data feeds, which will be available free of charge to any subscriber that chooses to receive the data, will provide investors and other market participants with information concerning transactions on EDGX. IV. Solicitation of Comments on Amendment No. 1 Interested persons are invited to submit written data, views, and arguments concerning whether Amendment No. 1 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– BatsEDGX–2017–29 on the subject line. Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BatsEDGX–2017–29. This seek best execution of orders they handle on an agency basis. See Securities Exchange Act Release No. 74496 (March 13, 2015), 80 FR 14421, 14423 (March 19, 2015) (SR–MIAX–2015–03). 197 See Notice, 82 FR at 33186. 198 See Amendment No. 1 and Notice, 82 FR at 33182. 199 See Notice, 82 FR at 33182. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 49067 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 such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– BatsEDGX–2017–29, and should be submitted on or before November 13, 2017. V. Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 The Commission finds good cause to approve the proposed rule change, as modified by Amendment No. 1, prior to the thirtieth day after the date of publication of the notice of Amendment No. 1 in the Federal Register. In Amendment No. 1, EDGX revises its original proposal to make the changes discussed in detail above. Notably, in Amendment No. 1, EDGX revises its proposal to make Complex Only orders available only to EDGX Market Makers, provide additional rationale for its methodology for allocating orders at the conclusion of a COA, and limit to 30 seconds the configurable time period for the System to match orders during the complex order opening process. EDGX also made changes to clarify and add detail to its proposal and the proposed rule text. The Commission believes that Amendment No. 1 does not raise any novel regulatory issues and instead better aligns EDGX’s proposed rules governing the trading of complex orders with the rules of other options exchanges. Amendment No. 1 also E:\FR\FM\23OCN1.SGM 23OCN1 49068 Federal Register / Vol. 82, No. 203 / Monday, October 23, 2017 / Notices provides additional clarity in the rule text and additional analysis of several aspects of the proposal, thus facilitating the Commission’s ability to make the findings set forth above to approve the proposal. Accordingly, the Commission finds good cause for approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,200 that the proposed rule change (SR–BatsEDGX– 2017–29), as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.201 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–22886 Filed 10–20–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81887; File No. SR– NYSEAMER–2017–21] Self-Regulatory Organizations; NYSE American LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 964NY To Adopt Additional Self-Trade Prevention Modifiers October 17, 2017. ethrower on DSK3G9T082PROD with NOTICES Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’),2 and Rule 19b–4 thereunder,3 notice is hereby given that on October 3, 2017, NYSE American LLC (the ‘‘Exchange’’ or ‘‘NYSE American’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. 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 the Substance of the Proposed Rule Change The Exchange proposes to amend Rule 964NY (Display, Priority and Order Allocation—Trading Systems). The proposed rule change is available on the 200 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 201 17 VerDate Sep<11>2014 20:08 Oct 20, 2017 Jkt 244001 Exchange’s Web site at www.nyse.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 self-regulatory organization 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 those 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 parts 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 the filing is to amend Commentary .02 to NYSE American Options Rule 964NY (Display, Priority and Order Allocation—Trading Systems) regarding the Exchange’s SelfTrade Prevention (‘‘STP’’) functionality.4 The Exchange currently offers a basic form of self-trade prevention 5 pursuant to which the Exchange cancels any resting Market Maker quote(s) and order(s) 6 to buy (sell) that are priced equal to or higher (lower) than an incoming Market Maker quote, order or both to sell (buy) entered under the same trading permit identification (‘‘TPID’’).7 4 Self-Trade Prevention is only applicable to electronic trading on the Exchange. 5 See Securities Exchange Act Release No. 66385 (February 13, 2012), 77 FR 9719 (February 17, 2012) (SR–NYSEAmex–2012–03). 6 Self-Trade Prevention currently is applicable to the following order types used by Market Makers: ‘‘PNP Orders’’ and ‘‘PNP–Blind Orders.’’ PNP Orders and PNP–Blind Orders are defined in NYSE American Options Rule 900.3NY, and each is a type of non-routable Limit Order that is only executed on the Exchange. The Exchange notes that Market Makers primarily use these order types, as opposed to other order types offered by the Exchange, because they are similar to quotes (i.e., they are non-routable Limit Orders). See Regulatory Information Bulletin RBO–AMEX–12–04 at https:// www.nyse.com/publicdocs/nyse/markets/americanoptions/rule-interpretations/2012/ NYSEAmex%20RBO-12-04%20Self%20Trade.pdf. 7 The Exchange uses a Market Maker’s TPID to monitor for self-trades. TPIDs are assigned to Market Makers, as well as other ATP Holders, to identify them in the Exchange’s systems. Market Makers on the Exchange are not able to submit orders on an agency basis. Thus, a Market Maker within a firm that conducts both an agency and market making business has a unique TPID that could only be used for that Market Maker’s quotes and orders. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 The Exchange proposes to expand the self-trade functionality by adopting three STP modifiers. The proposed STP modifiers are designed to prevent incoming Market Maker order(s) or quote(s) designated with an STP modifier from executing against an opposite side resting Market Maker order(s) or quote(s) also designated with an STP modifier and entered from the same TPID. As proposed, the STP modifier on the incoming Market Maker order or quote would control the interaction between two orders and/or quotes marked with STP modifiers. The proposed STP modifiers are intended to prevent interaction between the same TPIDs. STP modifiers must be present on both the buy and the sell interest in order to prevent an interaction from occurring and to effect a cancel instruction. The Exchange believes the proposed functionality will allow ATP Holders to better manage order flow and prevent undesirable or unexpected executions with themselves. Given enhancements in technology in today’s trading environment, ATP Holders often have multiple connections into the Exchange. Orders, for example, routed by the same ATP Holder via different connections may, in certain circumstances, trade against each other. The proposed STP modifiers would provide ATP Holders the opportunity to prevent these potentially undesirable interactions occurring under the same TPID on both the buy and sell side of an execution. The three new STP modifiers are discussed more thoroughly below. STP Cancel Newest (‘‘STPN’’) An incoming order or quote marked with the STPN modifier will not execute against opposite side resting interest marked with any STP modifier from the same TPID. The incoming order or quote marked with the STPN modifier will be cancelled back to the originating TPID. The resting order(s) or quote(s) will remain on the Consolidated Book. STPN Example 1: Market Maker 1 is configured for one of the three proposed STP modifiers and submits a quote to sell 100 contracts @ $5.50. A Customer order to sell 5 contracts @ $5.49 is resting on the Consolidated Book. Market Maker 1 enters an order to buy 100 contracts @ $5.60 with an STPN modifier. STPN Result 1: Market Maker 1 buys 5 contracts @ $5.49 because Market Maker 1 has no interest at $5.49. The remaining quantity of Market Maker 1’s order will be cancelled due to Market Maker 1’s quote at $5.50. STPN Example 2: Market Maker 1 is configured for one of the three proposed E:\FR\FM\23OCN1.SGM 23OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 203 (Monday, October 23, 2017)]
[Notices]
[Pages 49058-49068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-22886]



[[Page 49058]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81891; File No. SR-BatsEDGX-2017-29]


Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice 
of Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt New 
Rules Governing the Trading of Complex Orders on the Exchange

October 17, 2017.

I. Introduction

    On June 30, 2017, Bats EDGX Exchange, Inc. (``EDGX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt rules to govern the trading of complex 
orders on EDGX. The proposed rule change was published for comment in 
the Federal Register on July 19, 2017.\3\ The Commission received no 
comments regarding the proposal. On August 23, 2017, pursuant to 
Section 19(b)(2) of the Act,\4\ the Commission extended the time for 
Commission action on the proposal until October 17, 2017.\5\ EDGX filed 
Amendment No. 1 to the proposal on October 16, 2017.\6\ The Commission 
is publishing this notice to solicit comment on Amendment No. 1 to the 
proposed rule change from interested persons and is approving the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 81137 (July 13, 
2017), 82 FR 33170 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 81468 (August 23, 
2017), 82 FR 41079 (August 29, 2017).
    \6\ Amendment No. 1 revises the proposal to: (1) Limit the 
availability of Complex Only orders to EDGX Market Makers: (2) Limit 
to 30 seconds or less the configurable time the Exchange would wait 
in the event the System cannot determine an equilibrium price or a 
permissible equilibrium price prior to opening a strategy; (3) 
provide additional justification and rational for giving first 
priority to Priority Customer Orders on the Simple Book in the 
allocation of interest at the conclusion of a COA; (4) expand the 
discussion and justification for the proposed market data feeds; (5) 
provide additional clarification of the provisions addressing 
trading halts, Legging, and the and complex order opening process; 
(6) provide an example relating to the operation of concurrent COAs, 
and make other minor structural, technical, and clarifying 
amendments to improve the understandability of the rules. To promote 
transparency of its proposed amendment, when EDGX filed Amendment 
No. 1 with the Commission, it also submitted Amendment No. 1 as a 
comment letter to the file, which the Commission posted on its Web 
site and placed in the public comment file for SR-BatsEDGX-2017-29. 
The Exchange also posted a copy of its Amendment No. 1 on its Web 
site (available at: https://cdn.batstrading.com/resources/regulation/rule_filings/pending/2017/SR-BatsEDGX-2017-29-Amendment-No-1.pdf) 
when it filed Amendment No. 1 with the Commission.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

A. Definitions

    New EDGX Rule 21.20 establishes the following defined terms that 
will apply to the trading of complex orders: ABBO,\7\ BBO,\8\ Complex 
Order Auction (``COA''),\9\ COA-Eligible Order,\10\ Complex Order,\11\ 
Complex Order Book (``COB''),\12\ Complex Strategy,\13\ NBBO,\14\ 
Regular Trading,\15\ Simple Book,\16\ Synthetic Best Bid or Offer 
(``SBBO''),\17\ and Synthetic National Best Bid or Offer 
(``SNBBO'').\18\
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    \7\ EDGX Rule 21.20(a)(1) defines the term ABBO to mean the best 
bid(s) or offer(s) disseminated by other Eligible Exchanges (as 
defined in Rule 27.1(a)(7)) and calculated by the Exchange based on 
market information received by the Exchange from OPRA.
    \8\ EDGX Rule 21.20(a)(2) defines the term BBO to mean the best 
bid or offer on the Simple Book on the Exchange.
    \9\ EDGX Rule 21.20(a)(3) defines the Complex Order Auction 
(``COA'') as an auction of a complex order as set forth in EDGX Rule 
21.20(d).
    \10\ EDGX Rule 21.20(a)(4) defines a COA-eligible order as a 
complex order designated to be placed into a Complex Order Auction 
upon receipt that meets the requirements of EDGX Rule 21.20(d)(1).
    \11\ EDGX Rule 21.20(a)(5) defines a complex order as any order 
involving the concurrent purchase and/or sale of two or more 
different options in the same underlying security (the ``legs'' or 
``components'' of the complex order), for the same account, in a 
ratio that is equal to or greater than one-to-three (.333) and less 
than or equal to three-to-one (3.00) and for the purposes of 
executing a particular investment strategy. Only those complex 
orders in the classes designated by the Exchange and communicated to 
Members with no more than the applicable number of legs, as 
determined by the Exchange on a class-by-class basis and 
communicated to Members, are eligible for processing. The Exchange 
will communicate such information to Members by making publicly 
available specifications and/or publishing a Regulatory Circular. 
See Notice, 82 FR at 33171.
    \12\ EDGX Rule 21.20(a)(6) defines the Complex Order Book 
(``COB'') as the Exchange's electronic book of complex orders.
    \13\ EDGX Rule 21.20(a)(7) defines the term complex strategy to 
mean a particular combination of components and their ratios to one 
another. New complex strategies can be created as the result of the 
receipt of a complex instrument creation request or complex order 
for a complex strategy that is not currently in the System. The 
Exchange may limit the number of new complex strategies that may be 
in the System at a particular time and will communicate any such 
limitation to Members via specifications and/or Regulatory Circular. 
EDGX notes that the two methods for creating a new complex strategy 
will be equally available to all EDGX Members. See Notice, 82 FR at 
33171.
    \14\ EDGX Rule 21.20(a)(8) defines the term NBBO to mean the 
national best bid or offer as calculated by the Exchange based on 
market information received by the Exchange from OPRA.
    \15\ EDGX Rule 21.20(a)(9) defines the term regular trading to 
mean the trading of complex orders that occurs during a trading 
session other than: (i) At the opening or re-opening of the COB for 
trading following a halt; or (ii) during the COA process (as 
described in EDGX Rule 21.20(d)).
    \16\ EDG Rule 21.20(a)(10) defines the Simple Book as the 
Exchange's regular electronic book of orders.
    \17\ EDGX Rule 21.20(a)(11) states that the Synthetic Best Bid 
or Offer (``SBBO'') is calculated using the best displayed price for 
each component of a complex strategy from the Simple Book.
    \18\ EDGX Rule 21.20(a)(12) states that the Synthetic National 
Best Bid or Offer (``SNBBO'') is calculated using the NBBO for each 
component of a complex strategy to establish the best net bid and 
offer for a complex strategy. The NBBO is the national best bid or 
offer as calculated by the Exchange based on market information 
received by the Exchange from OPRA. See EDGX Rule 21.20(a)(8).
---------------------------------------------------------------------------

B. Order Types and Times in Force

    EDGX proposes to amend EDGX Rule 21.1 to add two new Times in Force 
that are not currently available on EDGX, Good Til Cancelled (``GTC'') 
\19\ and At the Open (``OPG'') orders.\20\ Both GTC and OPG ultimately 
will be available on both the Simple Book and on the COB.\21\ EDGX 
notes that other exchanges offer GTC orders and orders that, like OPG 
orders, participate only in the exchange's opening process.\22\ Complex 
orders also may be submitted with a Time in Force of GTD, IOC, or 
DAY.\23\
---------------------------------------------------------------------------

    \19\ See Notice, 82 FR at 33182. GTC means, for an order so 
designated, that if after entry into the System, the order is not 
fully executed, the order (or the unexecuted portion thereof) shall 
remain available for potential display and/or execution unless 
cancelled by the entering party, or until the option expires, 
whichever comes first. See EDGX Rule 21.1(f)(4).
    \20\ OPG means, for an order so designated, an order that shall 
only participate in the opening process on the Exchange. An OPG 
order not executed in the opening process will be cancelled. See 
EDGX Rule 21.1(f)(6).
    \21\ See Notice, 82 FR at 33182, and EDGX Rules 21.1(f)(4) and 
(f)(6), and 21.20(b).
    \22\ See Notice, 82 FR at 33184-33185 (citing C2 Rules 
6.10(e)(2) and 610(c)(7) and ISE Rules 715(o) and 715(r)).
    \23\ See EDGX Rule 21.20(b).
---------------------------------------------------------------------------

    EDGX proposes to allow Members to submit limit and market complex 
orders,\24\ COA-eligible and Do Not COA Orders,\25\ and Complex Orders 
with Match Trade Prevention Modifiers.\26\

[[Page 49059]]

EDGX Market Makers \27\ also will be able to submit Complex Only 
orders.\28\ EDGX notes that limiting Complex Only orders to EDGX Market 
Makers is equivalent to approved functionality on MIAX and will 
encourage use by participants that are most likely to provide liquidity 
to EDGX on the COB.\29\
---------------------------------------------------------------------------

    \24\ See id.
    \25\ Complex orders that are marked as IOC will, by default, not 
initiate a COA upon arrival, but a Member that submits an order 
marked IOC may elect to opt-in to initiating a COA and any quantity 
of the IOC order not executed will be cancelled at the end of the 
COA. All other Times in Force will by default initiate a COA, but a 
Member may elect to opt-out of initiating a COA. Orders with 
instructions to (or which default to) initiate a COA are referred to 
as COA-eligible orders, subject to the additional eligibility 
requirements set forth in Rule 21.20, while orders with instructions 
not to (or which default not to) initiate a COA are referred to as 
do-not-COA orders. See EDGX Rule 21.20(b)(2).
    \26\ EDGX's System will support, when trading against other 
complex orders on the COB, complex orders with the following MTP 
Modifiers defined in Rule 21.1(g): MTP Cancel Newest, MTP Cancel 
Oldest and MTP Cancel Both. When Legging into the Simple Book, a 
complex order with any MTP Modifier will be cancelled if it would 
execute against any leg on the Simple Book that includes an order 
with an MTP Modifier and the same Unique Identifier as the complex 
order. See EDGX Rule 21.20(b)(3).
    \27\ A Market Maker is an Options Member that is registered with 
the Exchange for the purpose of making markets in options contracts 
traded on the Exchange and that is vested with the rights and 
responsibilities specified in Chapter XXII of EDGX's Rules. See EDGX 
Rule 16.1(a)(37).
    \28\ See Amendment No. 1. Complex Only Orders allow an EDGX 
Market Maker to designate a complex order with a time in force of 
DAY or IOC to only check against the COB. Unless designated as 
Complex Only, and for all other Times in Force and complex order 
origin codes, a complex order will check against both the COB and 
the Simple Book. See EDGX Rule 21.20(b)(1) and Amendment No. 1.
    \29\ See Amendment No. 1. EDGX believes that Market Makers may 
use Complex Only orders as part of their strategy to maintain 
additional control over their executions, in connection with their 
attempt to provide and not remove liquidity, or in connection with 
applicable fees for executions. See id.
---------------------------------------------------------------------------

    EDGX will communicate to Members via specifications and/or 
Regulatory Circular when the complex order types, among those listed in 
EDGX Rule 21.20(b), are available for use on EDGX.\30\ EDGX expects to 
launch the COB with all of the proposed order types, except for orders 
with a Time in Force of GTC.\31\
---------------------------------------------------------------------------

    \30\ See Amendment No. 1 and EDGX Rule 21.20(b).
    \31\ See Amendment No. 1.
---------------------------------------------------------------------------

C. Trading of Complex Orders

    EDGX will determine and communicate to Members via specifications 
and/or Regulatory Circular which complex order origin codes (i.e., non-
broker-dealer customers, broker-dealers that are not Market Makers on 
an options exchange, and/or Market Makers on an options exchange) are 
eligible for entry onto the COB.\32\ Complex orders will be subject to 
all other EDGX rules that pertain to orders submitted to EDGX 
generally, unless otherwise provided in Rule 21.20.\33\
---------------------------------------------------------------------------

    \32\ See EDGX Rule 21.20(c).
    \33\ See id.
---------------------------------------------------------------------------

1. Minimum Increments and Trade Prices
    Under the proposed rules, bids and offers on complex orders may be 
expressed in $0.01 increments, and the component(s) of a complex order 
may be executed in $0.01 increments, regardless of the minimum 
increments otherwise applicable to individual components of the complex 
order.\34\ If any component of a complex strategy would be executed at 
a price that is equal to a Priority Customer bid or offer on the Simple 
Book,\35\ at least one other component of the complex strategy must 
trade at a price that is better than the corresponding BBO.\36\ A 
complex order will not be executed at a net price that would cause any 
component of the complex strategy to be executed: (i) At a price of 
zero; or (ii) ahead of a Priority Customer Order on the Simple Book 
without improving the BBO of at least one component of the complex 
strategy.\37\
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    \34\ See EDGX Rule 21.20(c)(l).
    \35\ The Simple Book is EDGX's regular electronic book of 
orders. See EDGX Rule 21.20(a)(10).
    \36\ See EDGX Rule 21.20(c)(l)(B). The BBO is the best bid or 
offer on the Simple Book on EDGX. See EDGX Rule 21.20(a)(2).
    \37\ See EDGX Rule 21.20(c)(1)(C).
---------------------------------------------------------------------------

2. Execution of Complex Orders
a. Opening and Reopening
    The Opening Process for the COB (``Opening Process'') will operate 
at the beginning of each trading session and upon re-opening after a 
halt.\38\ Members may submit complex orders to EDGX as set forth in 
EDGX Rule 21.6(c).\39\ Any complex orders designated for the Opening 
Process for the COB will be queued until 9:30 a.m., at which time they 
will be eligible to be executed in the Opening Process for the COB.\40\ 
Any complex orders designated for a re-opening following a halt will be 
queued until the halt has ended, at which time they will be eligible to 
be executed in the Opening Process for the COB.\41\ Beginning at 7:30 
a.m. and updated every five seconds thereafter, EDGX will disseminate 
through the data feeds described in EDGX Rule 21.15 indicative prices 
and order imbalance information associated with the Opening Process for 
the COB while complex orders are queued prior to 9:30 a.m. or, in the 
case of a halt, prior to re-opening.\42\
---------------------------------------------------------------------------

    \38\ See EDGX Rule 21.20(c)(2)(A).
    \39\ See id. and Amendment No. 1.
    \40\ See EDGX Rule 21.20(c)(2)(A).
    \41\ See id.
    \42\ See id. and Amendment No. 1.
---------------------------------------------------------------------------

    Complex orders do not participate in the Opening Process for the 
individual option series conducted pursuant to EDGX Rule 21.7.\43\ The 
Opening Process will commence when all legs of the complex strategy are 
open on the Simple Book.\44\ If there are complex orders in a strategy 
that have been queued but none that can match, the System \45\ will 
open that strategy without a trade and transition such orders to the 
COB, subject to Legging into the Simple Book, as described in EDGX Rule 
21.20(c)(2)(F).\46\
---------------------------------------------------------------------------

    \43\ See EDGX Rule 21.20(c)(2)(A).
    \44\ See id.
    \45\ The ``System'' is the electronic communications and trading 
facility designated by EDGX's Board of Directors through which 
securities orders of Users are consolidated for ranking, execution 
and, when applicable, routing away. See EDGX Rule 1.5(cc).
    \46\ See EDGX Rule 21.20(c)(2)(B) and Amendment No. 1.
---------------------------------------------------------------------------

    If there are complex orders that can match, the System will 
determine the equilibrium price where the most complex orders can 
trade.\47\ When an equilibrium price is established at or within the 
SNBBO,\48\ EDGX will execute matching complex orders in price/time 
priority at the equilibrium price (i.e., orders better than the 
equilibrium price are executed first in price/time priority and 
thereafter orders at the equilibrium price are executed in time 
priority).\49\ Any remaining complex order or the remaining portion 
thereof will be entered into the COB, subject to the Member's 
instructions.\50\ If, after a configurable time period established by 
EDGX that may not exceed thirty seconds, the System cannot match orders 
because it cannot determine an equilibrium price (i.e., all queued 
orders are Market Orders) or a permissible equilibrium price (i.e., 
within the SNBBO that also satisfies proposed EDGX Rule 
21.20(c)(1)(C)), the System will open the strategy without a trade and 
transition such orders to the COB.\51\

[[Page 49060]]

All complex orders received by EDGX prior to EDGX opening the strategy, 
including complex orders received during any delay that EDGX applies 
pursuant to EDGX Rule 21.20(c)(2)(D), will be eligible to be matched in 
the Opening Process.\52\
---------------------------------------------------------------------------

    \47\ See EDGX Rule 21.20(c)(2)(C). EDGX Rule 21.20(c)(2)(C) 
further provides that if there are multiple price levels that would 
result in the same number of strategies executed, the System will 
choose the price that would result in the smallest remaining 
imbalance. If there are multiple price levels that would result in 
the same number of strategies executed and would leave the same 
``smallest'' imbalance, the System will choose the price that is 
closest to the Volume Based Tie Breaker (``VBTB'') as the opening 
price. For purposes of Rule 21.20(c)(2)(C), the VBTB is the midpoint 
of the SNBBO. If there is no valid VBTB available, the System will 
use the midpoint of the highest and lowest potential opening prices 
as the opening price. If the midpoint price would result in an 
invalid increment, the System will round up to the nearest 
permissible increment and use that as the opening price. If 
executing at the equilibrium price would require printing at the 
same price as a Priority Customer on any leg in the Simple Book, the 
System will adjust the equilibrium price to a price that is better 
than the corresponding bid or offer in the marketplace by at least a 
$0.01 increment. See id.
    \48\ See footnote 18, supra.
    \49\ See EDGX Rule 21.20(c)(2)(D) and Amendment No. 1.
    \50\ See EDGX Rule 21.20(c)(2)(D).
    \51\ See EDGX Rule 21.20(c)(2)(D) and Amendment No. 1. EDGX 
believes that the proposed configurable time period is important 
because the opening price protections are relatively restrictive 
(i.e., based on the SNBBO) and EDGX wants to have the ability to 
periodically adjust the process to improve its operation. EDGX 
states that it will adjust the process to include the amount of 
delay that the Exchange believes will allow sufficient opportunity 
to have Opening Process executions while also transitioning to 
regular trading as quickly as possible. The Exchange believes that 
limiting this time period to thirty seconds or less will ensure that 
the COB opens promptly and efficiently but that the Exchange also 
allows enough time for the individual leg markets across all options 
exchanges, including the Exchange, to open and stabilize. EDGX notes 
that, although not configurable, in an analogous opening process for 
its equities market (set forth in EDGX Rule 11.7(d)), when a 
security cannot be opened through such process based on orders 
received and market conditions, the Exchange waits fifteen minutes 
before transitioning such orders to its order book. See Amendment 
No. 1.
    \52\ See EDGX Rule 21.20(c)(2)(D) and Amendment No. 1.
---------------------------------------------------------------------------

b. Pricing
    Incoming complex orders will not be executed at prices inferior to 
the SBBO or at a price that is equal to the SBBO when there is a 
Priority Customer Order \53\ at the best SBBO price.\54\ Complex orders 
will never be executed at a price that is outside of the individual 
component prices on the Simple Book, and the net price of a complex 
order executed against another complex order on the COB will never be 
inferior to the price that would be available if the complex order 
legged into the Simple Book.\55\
---------------------------------------------------------------------------

    \53\ A ``Priority Customer'' is any person or entity that is 
not: (A) A broker or dealer in securities; or (B) a Professional, 
and a ``Priority Customer Order'' is an order for the account of a 
Priority Customer. See EDGX Rule 16.1(a)(45). A ``Professional'' is 
any person or entity that: (A) Is not a broker or dealer in 
securities; and (B) places more than 390 orders in listed options 
per day on average during a calendar month for its own beneficial 
account(s). See EDGX Rule 16.1(a)(46).
    \54\ See EDGX Rule 21.20(c)(2)(E).
    \55\ See id.
---------------------------------------------------------------------------

    Incoming complex orders that cannot be executed because the 
executions would be priced (i) outside of the SBBO, or (ii) equal to 
the SBBO due to a Priority Customer Order at the best SBBO price, will 
be cancelled if such complex orders are not eligible to be placed on 
the COB.\56\ Complex orders will be executed without consideration of 
any prices for the complex strategy that might be available on other 
exchanges trading the same complex strategy provided, however, that 
such complex order price may be subject to the Drill-Through Price 
Protection set forth in Interpretation and Policy .04(f) of EDGX Rule 
21.20.\57\
---------------------------------------------------------------------------

    \56\ See id.
    \57\ See Section II.G, infra, for a discussion of the Drill-
Through Price Protection feature.
---------------------------------------------------------------------------

3. Priority
    A complex order may be executed at a net credit or debit price 
against another complex order without giving priority to bids or offers 
established in the marketplace that are no better than the bids or 
offers comprising such net credit or debit; provided, however, that if 
any of the bids or offers established in the marketplace consist of a 
Priority Customer Order, at least one component of the complex strategy 
must trade at a price that is better than the corresponding BBO by at 
least a $0.01 increment.\58\
---------------------------------------------------------------------------

    \58\ See EDGX Rule 21.20(c)(3)(A). EDGX notes that other options 
exchanges have adopted similar rules. See Notice, 82 FR at 33175, 
n.34.
---------------------------------------------------------------------------

    Complex orders will be automatically executed against bids and 
offers on the COB in price priority, and bids and offers at the same 
price on the COB will be executed in time priority.\59\ Complex orders 
that leg into the Simple Book will be executed in accordance with EDGX 
Rule 21.8.\60\ EDGX notes that a complex order on EDGX would execute 
first against orders on the Simple Book (except in the limited 
circumstances described in EDGX Rule 21.20(c)(2)(F)) if any of the bids 
or offers established in the simple marketplace consist of a Priority 
Customer Order.\61\
---------------------------------------------------------------------------

    \59\ See EDGX Rule 21.20(c)(3)(B).
    \60\ See id.
    \61\ See Notice, 82 FR at 33184.
---------------------------------------------------------------------------

4. Managed Interest Process
    EDGX Rule 21.20(c)(4) sets forth the managed interest process that 
describes how the System handles a complex order that is not 
immediately executed upon receipt, including how such an order is 
priced and re-priced on the COB.\62\ The managed interest process, 
which is initiated when a complex order that is eligible to be placed 
on the COB cannot be executed against either the COB or the Simple Book 
at the complex order's net price, is intended to ensure that a complex 
order to be managed does not result in a locked or crossed market on 
the Exchange.\63\ Once initiated, the managed interest process for 
complex orders will be based upon the SBBO.\64\
---------------------------------------------------------------------------

    \62\ Complex orders will not be routed outside of EDGX 
regardless of the prices displayed by away markets. See EDGX Rule 
21.20(c)(4).
    \63\ See Notice, 82 FR at 33175.
    \64\ See EDGX Rule 21.20(c)(4). A complex order for which the 
Drill-Through Price Protection is engaged will be managed to the 
Drill-Through Price, as described in EDGX Rule 21.20, 
Interpretations and Policy .04(f). See Notice, 82 FR at 33175, n.36.
---------------------------------------------------------------------------

    Under the managed interest process, a complex order that is resting 
on the COB and is either a complex market order, as described in EDGX 
Rule 21.20(c)(6), or a complex order with a limit price that locks or 
crosses the current opposite side SBBO when the SBBO is the best price, 
may be subject to the managed interest process for complex orders.\65\ 
If the order is not a COA-eligible order, as defined in EDGX Rule 
21.20(a)(4), the System will first determine if the inbound complex 
order can be matched against other complex orders resting on the COB at 
a price that is at or inside the SBBO (provided there are no Priority 
Customer Orders on the Simple Book at that price).\66\ Second, the 
System will determine if the inbound complex order can be executed by 
Legging against individual orders resting on the Simple Book at the 
SBBO. A complex order subject to the managed interest process will 
never be executed at a price that is through the individual component 
prices on the Simple Book.\67\ The net price of a complex order subject 
to the managed interest process that is executed against another 
complex order on the COB will never be inferior to the price that would 
be available if the complex order legged into the Simple Book.\68\ When 
the opposite side SBBO includes a Priority Customer Order, the System 
will book and display the booked complex order on the COB at a price 
(the ``book and display price'') that is $0.01 away from the current 
opposite side SBBO.\69\
---------------------------------------------------------------------------

    \65\ See EDGX Rule 21.20(c)(4)(A).
    \66\ See id.
    \67\ See id.
    \68\ See id.
    \69\ See id. For an example of the complex order managed 
interest process when the SBBO includes Priority Customer Interest, 
see Notice, 82 FR at 33176.
---------------------------------------------------------------------------

    When the opposite side SBBO does not include a Priority Customer 
Order and is not available for execution in the ratio of the complex 
order, or cannot be executed through Legging with the Simple Book, as 
described in EDGX Rule 21.20(c)(2)(F), the System will place the 
complex order on the COB and display the booked complex order at a book 
and display price that will lock the current opposite side SBBO (i.e., 
because it is a price at which another complex order can trade).\70\
---------------------------------------------------------------------------

    \70\ See EDGX Rule 21.20(c)(4)(A) and Notice, 82 FR at 33176. 
For an example of the complex order managed interest process when 
the ratio to allow Legging does not exist and there is no Priority 
Customer Interest at the SBBO, see Notice, 82 FR at 33176.
---------------------------------------------------------------------------

    If the SBBO changes, the complex order's book and display price 
will continuously re-price to the new SBBO until: (i) The complex order 
has been

[[Page 49061]]

executed in its entirety; (ii) if not executed, the complex order's 
book and display price has reached its limit price or, in the case of a 
complex market order, the new SBBO, subject to any applicable price 
protections; (iii) the complex order has been partially executed and 
the remainder of the order's book and display price has reached its 
limit price or, in the case of a complex market order, the new SBBO, 
subject to any applicable price protections; or (iv) the complex order 
or any remaining portion of the complex order is cancelled.\71\ If EDGX 
receives a new complex order for the complex strategy on the opposite 
side of the market from the managed complex order that can be executed, 
the System will immediately execute the remaining contracts from the 
managed complex order to the extent possible at the complex order's 
current book and display price.\72\ If unexecuted contracts remain from 
the complex order on the COB, the complex order's size will be revised 
and disseminated to reflect the complex order's remaining contracts at 
its current managed book and display price.\73\
---------------------------------------------------------------------------

    \71\ See EDGX Rule 21.20(c)(4)(B).
    \72\ See id.
    \73\ See id.
---------------------------------------------------------------------------

5. Evaluation Process
    EDGX Rule 21.20(c)(5) describes how and when the System determines 
to execute or otherwise handle complex orders in the System.\74\ EDGX 
notes that the System will evaluate complex orders initially once all 
components of the complex strategy are open, upon receipt as set forth 
in EDGX Rule 21.20(c)(5)(A), and continually, as set forth in EDGX Rule 
21.20(c)(5)(B).\75\ EDGX Rule 21.20(c)(5)(C) states that if the System 
determines that a complex order is COA-eligible, the order will be 
submitted into the COA process described in EDGX Rule 21.20(d).\76\ 
EDGX states that the purpose of the evaluation process for complex 
orders is to determine (i) their eligibility to initiate, or to 
participate in, a COA; (ii) their eligibility to participate in the 
managed interest process; (iii) their eligibility for full or partial 
execution against a complex order resting on the COB or through the 
Legging into the Simple Book; (iv) whether the complex order should be 
cancelled; and (v) whether the complex order or any remaining portion 
thereof should be placed or remain on the COB.\77\ EDGX states that the 
continual and event-triggered evaluation process ensures that the 
System is monitoring and assessing the COB for incoming complex orders, 
and changes in market conditions or events that cause complex orders to 
re-price and/or execute, and conditions or events that result in the 
cancellation of complex orders on the COB.\78\
---------------------------------------------------------------------------

    \74\ See Notice, 82 FR at 33176.
    \75\ See id. EDGX Rule 21.20(c)(5)(A) states that new complex 
orders are evaluated upon receipt to determine if they are COA 
eligible or (i) eligible for full or partial execution against 
another complex order resting on the COB; (ii) eligible for full or 
partial execution through Legging with the Simple Book; (iii) 
whether all or any remaining portion of such an order should be 
placed on the COB; (iv) the eligibility of such orders for the 
managed interest process; (v) whether such orders should be 
cancelled. EDGX Rule 21.20(c)(5)(B) states that the System will 
continue to evaluate complex orders on the COB and also will 
continue to evaluate (i) whether such complex orders are eligible 
for full or partial execution against a complex order resting on the 
COB; (ii) whether such complex orders are eligible for full or 
partial execution through Legging with the Simple Book; (iii) 
whether any remaining portion of a complex order should be placed on 
the COB; (iv) whether all or the remaining portion of a complex 
should be placed on the COB; and (v) whether such complex orders 
should be cancelled. EDGX Rule 21.20(c)(5)(B) also states that the 
System will continue to evaluate whether there is a trading halt 
affecting any component of a complex strategy and, if so, the System 
will handle complex orders as set forth in EDGX Rule 21.20, 
Interpretation and Policy .05.
    \76\ See EDGX Rule 21.20(c)(5)(C). If the System determines that 
a complex order is not COA-eligible, the complex order may be (i) 
immediately matched and executed against a complex order resting on 
the COB; (ii) executed against the individual components of the 
complex order on the Simple Book through Legging; (iii) placed on 
the COB and managed pursuant to the managed interest process; or 
(iv) cancelled by the System if the time-in-force of the complex 
order does not allow it to rest on the COB. See EDGX Rule 
21.20(c)(5)(D).
    \77\ See Notice, 82 FR at 33175.
    \78\ See id.
---------------------------------------------------------------------------

6. Complex Market Orders
    EDGX Rule 21.20(c)6) describes the handling of complex market 
orders. Complex orders may be submitted as market orders and may be 
designated as COA-eligible.\79\ Complex market orders designated as 
COA-eligible may initiate a COA upon arrival.\80\ Complex market orders 
not designated as COA-eligible will trade with any contra-side complex 
orders, or against the individual legs, up to and including the SBBO, 
and if not fully executed due to applicable price protection may be 
posted to the COB, subject to the managed interest process and the 
evaluation process.\81\
---------------------------------------------------------------------------

    \79\ See EDGX Rule 21.20(c)(6).
    \80\ See EDGX Rule 21.20(c)(6)(A).
    \81\ See EDGX Rule 21.20(c)(6)(B). See Sections II.C.4 and 
II.C.5, supra, respectively, for a discussion of the managed 
interest process and the evaluation process.
---------------------------------------------------------------------------

D. Legging

    EDGX Rule 21.20(c)(2)(F) describes the Legging process through 
which complex orders, under certain circumstances, are executed against 
the individual components of a complex strategy on the Simple Book.\82\ 
EDGX Rule 21.20(c)(2)(F) provides that complex orders up to a maximum 
number of legs (determined by the Exchange on a class-by-class basis as 
either two, three, or four legs and communicated to Members via 
specifications and/or Regulatory Circular) may be automatically 
executed against bids and offers on the Simple Book for the individual 
legs of the complex order (``Legging''), provided the complex order can 
be executed in full or in a permissible ratio by such bids and 
offers.\83\ Complex orders with two option legs where both legs are 
buying or both legs are selling and both legs are calls or both legs 
are puts may only trade against other complex orders on the COB and 
will not be permitted to leg into the Simple Book.\84\ Notwithstanding 
the foregoing, all two leg COA-eligible Customer complex orders will be 
allowed to leg into the Simple Book without restriction.\85\ Complex 
orders with three or four option legs where all legs are buying or all 
legs are selling may only trade against other complex orders on the COB 
and will not leg into the Simple Book, regardless of whether the option 
leg is a call or a put.\86\
---------------------------------------------------------------------------

    \82\ See Notice, 82 FR at 33174.
    \83\ See EDGX Rule 21.20(c)(2)(F).
    \84\ See id.
    \85\ See id. EDGX notes that Legging against the individual 
components of a complex order on the Simple Book allows complex 
orders to access the full liquidity of the Exchange's Simple Book, 
thus enhancing the possibility of executions at the best available 
prices on the Exchange. EDGX believes this is particularly true for 
Customer complex orders and, thus, does not propose to limit the 
ability of such orders to leg into the Simple Book (when such orders 
are two-legged orders). See Amendment No. 1.
    \86\ See EDGX Rule 21.20(c)(2)(F). EDGX notes that its 
restrictions on Legging are substantially similar to those in ISE 
Rules 722(b)(3)(ii)(A) and (B). See Amendment No. 1.
---------------------------------------------------------------------------

E. COA Process

    EDGX Rule 21.20(d) describes the COA process. All option classes 
will be eligible to participate in a COA.\87\ Upon evaluation, as set 
forth in EDGX Rule 21.20(c)(5), EDGX may determine to automatically 
submit a COA-eligible order into a COA.\88\
---------------------------------------------------------------------------

    \87\ See EDGX Rule 21.20(d).
    \88\ See id.
---------------------------------------------------------------------------

1. Eligibility and Initiation
    A ``COA-eligible order'' is a complex order that, as determined by 
the Exchange, is eligible to initiate a COA based upon the Member's 
instructions, the order's marketability (i.e., if the price of such 
order is equal to or better than the current SBBO, subject to

[[Page 49062]]

applicable restrictions when a Priority Customer Order comprises a 
portion of the SBBO) as determined by the Exchange, number of 
components, and complex order origin codes (i.e., non-broker-dealer 
customers, broker-dealers that are not market makers on an options 
exchange, and/or market makers on an options exchange as determined by 
the Exchange).\89\ Determinations by the EDGX with respect to COA 
eligibility will be communicated to Members via specifications and/or 
Regulatory Circular.\90\
---------------------------------------------------------------------------

    \89\ See EDGX Rule 21.20(d)(1). EDGX notes that other options 
exchanges have limited auction eligibility for complex orders based 
on order origin code (citing MIAX Rule 518(d)(1), CBOE Rule 
6.53C(d)(i), and NYSE American Rule 980NY(e)(1)). See Notice, 82 FR 
at 33177.
    \90\ See EDGX Rule 21.20(d)(1).
---------------------------------------------------------------------------

    To initiate a COA, a COA-eligible order must be designated as such 
(either affirmatively or by default) \91\ and must meet the criteria 
described in proposed EDGX Rule 21.20, Interpretation and Policy 
.02.\92\ Dissemination of information related to COA-eligible orders by 
the submitting Member to third parties will be deemed conduct 
inconsistent with just and equitable principles of trade, as described 
in EDGX Rule 3.1.\93\
---------------------------------------------------------------------------

    \91\ Complex orders that are marked as IOC will, by default, not 
initiate a COA upon arrival, but a Member that submits an order 
marked IOC may elect to opt-in to initiating a COA and any quantity 
of the IOC order not executed will be cancelled at the end of the 
COA. All other Times in Force will by default initiate a COA, but a 
Member may elect to opt-out of initiating a COA. See EDGX Rule 
21.20(b)(2). As noted above, market orders may be designated as COA-
eligible. See EDGX Rule 21.20(c)(6). See also Notice, 82 FR at 
33172.
    \92\ EDGX Rule 21.20, Interpretation and Policy .02 provides 
that if a COA-eligible order is priced equal to, or improves, the 
SBBO and is also priced to improve other complex orders resting at 
the top of the COB, the complex order will be eligible to initiate a 
COA, provided that if any of the bids or offers on the Simple Book 
that comprise the SBBO consists of a Priority Customer Order, the 
COA will only be initiated if it will trade at a price that is 
better than the corresponding bid or offer by at least a $0.01 
increment. EDGX believes that if a complex order is not priced equal 
to, or better than, the SBBO or is not priced to improve other 
complex orders resting at the top of the COB, it would not be 
reasonable to anticipate that the complex order would generate a 
meaningful number of COA Responses such that there would be price 
improvement of the complex order's limit price. Thus, EDGX believes 
that these criteria ensure that a COA will be conducted only when 
there is a reasonable and realistic chance for price improvement 
through the COA. See Notice, 82 FR at 33185.
    \93\ See EDGX Rule 21.20, Interpretation and Policy .03.
---------------------------------------------------------------------------

2. Commencement of a COA
    Upon receipt of a COA-eligible order, EDGX will send a COA auction 
message to all subscribers to EDGX's data feeds that deliver COA 
Auction messages.\94\ The COA auction message will identify the COA 
auction ID, instrument ID (i.e., the complex strategy), origin code, 
quantity, and side of the market of the COA-eligible order.\95\ EDGX 
may also determine to include the price in COA auction messages, and if 
it does so it will announce that determination in published 
specifications and/or Regulatory Circular to Members.\96\
---------------------------------------------------------------------------

    \94\ See EDGX Rule 21.20(d)(2). EDGX notes that any Member may 
subscribe to EDGX's data feeds that include auction notifications. 
See Notice, 82 FR at 33814.
    \95\ See EDGX Rule 21.20(d)(2).
    \96\ See id. The price included in the COA auction message will 
be the limit order price, unless the COA is initiated by a complex 
market order, in which case such price will be the SBBO, subject to 
any applicable price protections. See id.
---------------------------------------------------------------------------

3. COA Responses
    A Member with any origin code, including a Priority Customer, may 
submit a response to the COA auction message (a ``COA Response'') 
during the Response Time Interval.\97\ COA Responses may be submitted 
in $0.01 increments and must specify the price, size, side of the 
market (i.e., a response to a buy COA as a sell or a response to a sell 
COA as a buy) and COA auction ID for the COA to which the response is 
targeted.\98\ Multiple COA Responses from the same Member may be 
submitted during the Response Time Interval.\99\ COA Responses 
represent non-firm interest that can be modified or withdrawn at any 
time prior to the end of the Response Time Interval, though any 
modification to a COA Response other than a decrease of size will 
result in a new timestamp and a loss of priority.\100\ COA Responses 
will not be displayed by the Exchange.\101\ At the end of the Response 
Time Interval, COA Responses are firm (i.e., guaranteed at their price 
and size).\102\ Any COA Responses not executed in full will expire at 
the end of the COA.\103\ Any COA Responses not executable based on the 
price of the COA will be cancelled immediately.\104\
---------------------------------------------------------------------------

    \97\ See EDGX Rule 21.20(d)(4). The Response Time Interval is 
the period of time during which responses to the COA may be entered. 
The Exchange will determine the duration of the Response Time 
Interval, which shall not exceed 500 milliseconds, and will 
communicate it to Members via specifications and/or Regulatory 
Circular. See EDGX Rule 21.20(d)(3). EDGX notes that the Response 
Time Interval is based on MIAX Rule 518(d)(3). See Notice, 82 FR at 
33177, n.45.
    \98\ See EDGX Rule 21.20(d)(4).
    \99\ See id.
    \100\ See id.
    \101\ See id.
    \102\ See id.
    \103\ See id.
    \104\ See id.
---------------------------------------------------------------------------

4. Processing of COA-Eligible Orders
    At the end of the Response Time Interval, COA-eligible orders may 
be executed in whole or in part against the best priced contra side 
interest.\105\ Any unexecuted portion of a COA-eligible order remaining 
at the end of the Response Time Interval will be placed on the COB and 
ranked pursuant to EDGX Rule 21.20(c)(3) or cancelled, if IOC.\106\
---------------------------------------------------------------------------

    \105\ See EDGX Rule 21.20(d)(5)(A).
    \106\ See EDGX Rule 21.20(d)(5)(B).
---------------------------------------------------------------------------

    The COA will terminate: (i) Upon receipt of a new non-COA-eligible 
order on the same side as the COA but with a better price, in which 
case the COA will be processed and the new order will be posted to the 
COB; (ii) if an order is received that would improve the SBBO on the 
same side as the COA in progress to a price better than the auction 
price, in which case the COA will be processed, the new order will be 
posted to the Simple Book and the SBBO will be updated; or (iii) if a 
Priority Customer Order is received that would join or improve the SBBO 
on the same side as the COA in progress to a price equal to or better 
than the auction price, in which case the COA will be processed, the 
new order will be posted to the Simple Book and the SBBO will be 
updated.\107\ In addition, a COA will terminate immediately without 
trading if any individual component or underlying security of a complex 
strategy in the COA process is subject to a halt as described in EDGX 
Rule 21.20, Interpretation and Policy .05.\108\
---------------------------------------------------------------------------

    \107\ See EDGX Rule 21.20(d)(5)(C).
    \108\ See EDGX Rule 21.20, Interpretation and Policy .05(b).
---------------------------------------------------------------------------

5. COA Pricing and Allocations at the Conclusion of a COA
    A complex strategy will not be executed at a net price that would 
cause any component of the complex strategy to be executed: (A) At a 
price of zero; or (B) ahead of a Priority Customer Order on the Simple 
Book without improving the BBO on at least one component of the complex 
strategy by at least $.01.\109\ Orders executed in a COA will be 
allocated first in price priority based on their original limit price 
as follows: (A) Priority Customer Orders resting on the Simple Book; 
(B) COA Responses and unrelated orders on the COB in time priority; and 
(C) remaining individual orders in the Simple Book (i.e., non-Priority 
Customer), which will be allocated pursuant to EDGX Rule 21.8.\110\ 
EDGX believes the priority model to provide highest priority to 
Priority Customer Orders resting on the

[[Page 49063]]

Simple Book is consistent with the long-standing policies of customer 
protection found throughout the Act and the rules of options exchanges, 
and maintains the Exchange's current practice by affording such 
priority.\111\ EDGX notes that the current priority model for the 
Exchange provides first priority to Priority Customers prior to 
execution of any orders of other participants (``non-Customers'') 
pursuant to the Customer Overlay set forth in EDGX Rule 
21.8(d)(1).\112\ Thus, orders of non-Customers on the Simple Book are 
already afforded last priority as compared to Priority Customers.\113\ 
EDGX states that because all listed options are traded on options 
exchanges, there is significant retail customer participation directly 
on exchanges.\114\ In turn, because of such direct retail customer 
participation, EDGX states that the exchanges have taken steps to 
afford those retail customers--generally Priority Customers--more 
favorable treatment in some circumstances.\115\ EDGX believes this 
treatment is appropriate to encourage retail participation in the 
market generally, and in light of the fact that Priority Customers are 
not necessarily immersed in the day-to-day trading of the markets and 
may have less understanding of how complex order books operate and 
interact with leg markets.\116\
---------------------------------------------------------------------------

    \109\ See EDGX Rule 21.20(d)(6). For an example of pricing in a 
COA, see Notice, 82 FR at 33178.
    \110\ See EDGX Rule 21.20(d)(7). For examples of allocations at 
the conclusion of a COA, see Notice, 82 FR at 33178-79 and Amendment 
No. 1.
    \111\ See EDGX Rule 21.8 and Amendment No. 1.
    \112\ See Amendment No. 1. EDGX states that the Exchange 
currently applies the Customer Overlay to all options traded on the 
Exchange. See id.
    \113\ See id.
    \114\ See id.
    \115\ See id.
    \116\ See id.
---------------------------------------------------------------------------

6. Overlapping COAs
    EDGX Rule 21.20, Interpretation and Policy .02 provides that a COA 
will be allowed to commence even when a COA for the same strategy is 
already underway.\117\ EDGX represents that it has systems capacity to 
process multiple overlapping COAs consistent with the proposal, 
including systems necessary to conduct surveillance of activity 
occurring in such auctions.\118\ EDGX states that if it does not permit 
overlapping COAs, a Member who wishes to submit a COA-eligible order 
but has its order rejected because another COA is already underway in 
the complex strategy must either wait for that COA to conclude and re-
submit the order to the Exchange (possibly constantly resubmitting the 
complex order to ensure it is received by the Exchange before another 
COA commences) or must send the order to another options exchange that 
accepts complex orders.\119\
---------------------------------------------------------------------------

    \117\ EDGX Rule 21.20, Interpretation and Policy .02 states that 
to the extent there is more than one COA for a specific complex 
strategy underway at a time, each COA will conclude sequentially 
based on the exact time each COA commenced, unless terminated early 
pursuant to EDGX Rule 21.20(d)(5)(C). At the time each COA 
concludes, the COA will be allocated pursuant to this Rule and will 
take into account all COA Responses and unrelated complex orders on 
the COB at the exact time of conclusion. In the event there are 
multiple COAs underway that are each terminated early pursuant to 
EDGX Rule 21.20(d)(5)(C) of this Rule, the COAs will be processed 
sequentially based on the order in which they commenced. Because a 
COA Response must specifically identify the COA for which it is 
targeted, and if not fully executed will be cancelled back at the 
conclusion of the COA, COA Responses will only be considered in the 
specified COA. For examples of the processing of overlapping 
auctions, see Notice, 82 FR at 33178-79 and Amendment No. 1.
    \118\ See Notice, 82 FR at 33177.
    \119\ See id., 82 FR at 33186.
---------------------------------------------------------------------------

F. Market-Maker Complex Quotes

    EDGX has not proposed different standards for participation by 
Market Makers on the COB (i.e., no specific benefits or 
obligations).\120\ Market Makers are not required to quote on the 
COB.\121\ Complex strategies are not subject to any requirements that 
are applicable to Market Makers in the simple market for individual 
options series or classes.\122\ Volume executed in complex strategies 
is not taken into consideration when determining whether Market Makers 
are meeting quoting obligations applicable to Market Makers in the 
simple market for individual options.\123\
---------------------------------------------------------------------------

    \120\ See id., 82 FR at 33179.
    \121\ See EDGX Rule 21.20, Interpretation and Policy .01.
    \122\ See id.
    \123\ See id.
---------------------------------------------------------------------------

G. Price and Other Protections

    The proposal establishes several price and other protections for 
complex orders. Exchange believes that the complex order price 
protections will provide market participants with valuable price and 
order size protections to enable them to better manage their risk 
exposure when trading complex orders.\124\ In particular, EDGX believes 
the price protection mechanisms will mitigate potential risks 
associated with market participants entering orders at clearly 
unintended prices and orders trading at prices that are extreme and 
potentially erroneous, which may likely have resulted from human or 
operational error.\125\
---------------------------------------------------------------------------

    \124\ See Notice, 82 FR at 33186.
    \125\ See id.
---------------------------------------------------------------------------

    EDGX Rule 21.20, Interpretation and Policy .04 provides several 
price protection standards that are designed to ensure that certain 
types of complex strategies will not be executed outside of a preset 
standard minimum and/or maximum price limit.\126\
---------------------------------------------------------------------------

    \126\ See Notice, 82 FR at 33180.
---------------------------------------------------------------------------

    Under the Credit-to-Debit parameter in EDGX Rule 21.20, 
Interpretation and Policy .04(b), market orders that would be executed 
at a net debit price after receiving a partial execution at a net 
credit price will be cancelled.\127\ The Debit/Credit Price 
Reasonability Check provisions in EDGX Rule 21.20, Interpretation and 
Policy .04(c) state that, to the extent a price check parameter is 
applicable, EDGX will not accept a complex order that is a limit order 
for a debit strategy with a net credit price that exceeds a pre-set 
buffer, a limit order for a credit strategy with a net debit price that 
exceeds a pre-set buffer, or a market order for a credit strategy that 
would be executed at a net debit price that exceeds a pre-set 
buffer.\128\ EDGX will determine these pre-set buffer amounts and 
communicate them to Members via specifications and/or Regulatory 
Circular.\129\ The System will reject or cancel back to the Member any 
limit order or any market order (or any remaining size after partial 
execution of the order) that does not satisfy the Debit/Credit Price 
Reasonability check.\130\ The Debit/Credit Price Reasonability Check 
applies to auction responses in the same manner as it does to 
orders.\131\
---------------------------------------------------------------------------

    \127\ See EDGX Rule 21.20, Interpretation and Policy .04(b). 
This functionality is similar to the price protections that are 
currently operative on other exchanges. See, e.g., CBOE Rule 6.53C, 
Interpretation and Policy .08(b).
    \128\ The System would not apply this check to an order for when 
the System cannot define whether the order is a debit or credit. See 
EDGX Rule 21.20, Interpretation and Policy .04(c)(2). EDGX states 
that this would primarily occur prior to the opening of trading as 
orders are being queued because prices may not be available to make 
such determination. See Notice, 82 FR at 33181, n.54.
    \129\ See EDGX Rule 21.20, Interpretation and Policy .04(c)(1). 
EDGX notes that ISE Rule 722, Supplementary Material .07(c) also 
includes variable pre-set values in connection with the analogous 
price protections included in that rule. See Notice, 82 FR at 33181, 
n.55.
    \130\ See EDGX Rule 21.20, Interpretation and Policy .04(c)(3).
    \131\ See EDGX Rule 21.20, Interpretation and Policy .04(c)(4).
---------------------------------------------------------------------------

    The System defines a complex order as a debit or credit as follows: 
(A) A call butterfly spread \132\ for which the

[[Page 49064]]

middle leg is to sell (buy) and twice the exercise price of that leg is 
greater than or equal to the sum of the exercise prices of the buy 
(sell) legs is a debit (credit); (B) a put butterfly spread for which 
the middle leg is to sell (buy) and twice the exercise price of that 
leg is less than or equal to the sum of the exercise prices of the buy 
(sell) legs is a debit (credit); and (C) an order for which all pairs 
and loners are debits (credits) is a debit (credit).\133\
---------------------------------------------------------------------------

    \132\ A ``butterfly'' spread is a three-legged complex order 
with two legs to buy (sell) the same number of calls (puts) and one 
leg to sell (buy) twice as many calls (puts), all with the same 
expiration date but different exercise prices, and the exercise 
price of the middle leg is between the exercise prices of the other 
legs. If the exercise price of the middle leg is halfway between the 
exercise prices of the other legs, it is a ``true'' butterfly; 
otherwise, it is a ``skewed'' butterfly. See EDGX Rule 21.20, 
Interpretation and Policy .04(a)(2).
    \133\ See EDGX Rule 21.20, Interpretation and Policy .04(c)(2). 
For purposes of the debit/credit price reasonability checks, a 
``pair'' is a pair of legs in an order for which both legs are calls 
or both legs are puts, one leg is a buy and one leg is a sell, and 
both legs have the same expiration date but different exercise 
prices or, for all options except European-style index options, the 
same exercise price but different expiration dates. A ``loner'' is 
any leg in an order that the System cannot pair with another leg in 
the order (including legs in orders for European-style index options 
that have the same exercise price but different expiration dates). 
The System first pairs legs to the extent possible within each 
expiration date, pairing one leg with the leg that has the next 
highest exercise price; the System then, for all options except 
European-style index options, pairs legs to the extent possible with 
the same exercise prices across expiration dates, pairing one leg 
with the leg that has the next nearest expiration date. See EDGX 
Rule 21.20, Interpretation and Policy .04(c)(2)(C). The rule further 
provides that a pair of calls is a credit (debit) if the exercise 
price of the buy (sell) leg is higher than the exercise price of the 
sell (buy) leg (if the pair has the same expiration date) or if the 
expiration date of the sell (buy) leg is farther than the expiration 
date of the buy (sell) leg (if the pair has the same exercise 
price). A pair of puts is a credit (debit) if the exercise price of 
the sell (buy) leg is higher than the exercise price of the buy 
(sell) leg (if the pair has the same expiration date) or if the 
expiration date of the sell (buy) leg is farther than the expiration 
date of the buy (sell) leg (if the pair has the same exercise 
price). A loner to buy is a debit, and a loner to sell is a credit. 
See id.
---------------------------------------------------------------------------

    The Buy Strategy Parameters in EDGX Rule 21.20, Interpretation and 
Policy .04(d) provide that the System will reject a limit order where 
all the components of the strategy are to buy and the order is priced 
at zero, any net credit price that exceeds a pre-set buffer, or a net 
debit price that is less than the number of individual option series 
legs in the strategy (or applicable ratio) multiplied by the applicable 
minimum net price increment for the complex order.
    The Maximum Value Acceptable Price Range parameter in EDGX Rule 
21.20, Interpretation and Policy .04(e) provides that the System will 
reject an order if the order is a vertical, true butterfly or box 
spread, or a limit order or market order if it would execute at a price 
that is outside of an acceptable price range.\134\ The acceptable price 
range is set by the minimum and maximum possible value of the spread, 
subject to an additional buffer amount determined by EDGX and 
communicated to Members via specifications and/or a Regulatory 
Circular.\135\ The maximum possible value of a vertical, true butterfly 
and box spread is the difference between the exercise prices of (A) the 
two legs; (B) the middle leg and the legs on either side; and (C) each 
pair of legs, respectively.\136\ The minimum possible value of the 
spread is zero.\137\
---------------------------------------------------------------------------

    \134\ A ``vertical'' spread is a two-legged complex order with 
one leg to buy a number of calls (puts) and one leg to sell the same 
number of calls (puts) with the same expiration date but different 
exercise prices. See EDGX Rule 21.20, Interpretation and Policy 
.04(a). A ``box'' spread is a four-legged complex order with one leg 
to buy calls and one leg to sell puts with one strike price, and one 
leg to sell calls and one leg to buy puts with another strike price, 
all of which have the same expiration date and are for the same 
number of contracts. See id. See note 132, supra, for the definition 
of butterfly spread.
    \135\ See EDGX Rule 21.20, Interpretation and Policy .04(e).
    \136\ See EDGX Rule 21.20, Interpretation and Policy .04(e)(1).
    \137\ See EDGX Rule 21.20, Interpretation and Policy .04(e)(2).
---------------------------------------------------------------------------

    EDGX Rule 21.20, Interpretation and Policy .04(f) establishes 
EDGX's Drill-Through Price Protection feature, a price protection 
mechanism applicable to all complex orders under which a buy (sell) 
order will not be executed at a price that is higher (lower) than the 
SNBBO or the SNBBO at the time of order entry plus (minus) a buffer 
amount (the ``Drill-Through Price'').\138\ EDGX will adopt a default 
buffer amount for the Drill-Through Price Protection and will publish 
this amount in publicly available specifications and/or a Regulatory 
Circular.\139\ A Member may modify the buffer amount applicable to 
Drill-Through Price Protections to either a larger or smaller amount 
than the Exchange default.\140\ If a buy (sell) order would execute or 
post to the COB at a price higher (lower) than the Drill-Through Price, 
the System will instead post the order to the COB at the Drill-Through 
Price, unless the terms of the order instruct otherwise. Any order (or 
unexecuted portion thereof) will rest in the COB (based on the time at 
which it enters the book for priority purposes) for a time period in 
milliseconds that may not exceed three seconds (which the Exchange will 
determine and communicate to Members via specifications and/or 
Regulatory Circular) with a price equal to the Drill-Through 
Price.\141\ If the order (or unexecuted portion thereof) does not 
execute during that time period, the System will cancel it.\142\
---------------------------------------------------------------------------

    \138\ For an example of the application of the Drill-Through 
Price Protection, see Notice, 82 FR at 33181-82.
    \139\ See EDGX Rule 21.20, Interpretation and Policy .04(f).
    \140\ See id.
    \141\ See id.
    \142\ See id.
---------------------------------------------------------------------------

H. Risk Monitor Mechanism

    EDGX proposes to add Interpretation and Policy .01 to EDGX Rule 
21.16 to provide that complex orders will participate in EDGX's 
existing the Risk Monitor Mechanism. The Risk Monitor Mechanism 
functions by counting a member's executions, contract volume, and 
notional value both within a specified time period established by the 
member and on an absolute basis for the trading day.\143\ The Risk 
Monitor Mechanism rejects or cancels orders that exceed member-
designated volume, notional, count, or percentage triggers.\144\ EDGX 
Rule 21.16, Interpretation and Policy .01 states that, for purposes of 
counting within a specified time period and for purposes of calculating 
absolute limits, EDGX will count individual trades executed as part of 
a complex order when determining whether a volume, notional, or count 
trigger has been reached. For purposes of counting within a specified 
time period and for purposes of calculating absolute limits, EDGX will 
count the percentage executed of a complex order when determining 
whether the percentage trigger has been reached.\145\
---------------------------------------------------------------------------

    \143\ See EDGX Rule 21.16(a).
    \144\ See Notice, 82 FR at 33183.
    \145\ See EDGX Rule 21.16, Interpretation and Policy .01.
---------------------------------------------------------------------------

I. Additional Risk Protection for Complex Orders

    In addition to the protections described above, EDGX proposes to 
establish the Fat Finger Price Protection and a complex order size 
protection.\146\ These protections will be available for complex orders 
as determined by the Exchange and communicated to Members via 
specifications and/or Regulatory Circular.\147\
---------------------------------------------------------------------------

    \146\ See EDGX Rule 21.20, Interpretation and Policy .06(a) and 
(b).
    \147\ See EDGX Rule 21.20, Interpretation and Policy .06(c).
---------------------------------------------------------------------------

    Under the Fat Finger Price Protection, EDGX will define a price 
range outside of which the System will not accept a complex limit 
order.\148\ The price range will be a number defined by EDGX and 
communicated to Members via specifications and/or Regulatory Circular, 
and a Member may establish a more aggressive or restrictive value than 
the Exchange default.\149\ The default

[[Page 49065]]

price range for Fat Finger Price Protection will be greater than or 
equal to a price through the SNBBO for the complex strategy to be 
determined by the Exchange and communicated to Members via 
specifications and/or Regulatory Circular.\150\ A complex limit order 
to sell will not be accepted at a price that is lower than the SNBBO 
bid, and a complex limit order to buy will not be accepted at a price 
that is higher than the SNBBO offer, by more than the Exchange defined 
or Member established price range.\151\ A complex limit order that is 
priced through this range will be rejected.\152\
---------------------------------------------------------------------------

    \148\ See EDGX Rule 21.20, Interpretation and Policy .06(a).
    \149\ See id. EDGX notes that ISE Rule 722, Supplementary 
Material .07(d) also provides for configurable values in connection 
with an analogous size protection that ISE offers for its complex 
order book. See Notice, 82 FR at 33812, n.64.
    \150\ See EDGX Rule 21.20, Interpretation and Policy .06(a).
    \151\ See id.
    \152\ See id.
---------------------------------------------------------------------------

    Under the complex order size protection, the System will prevent 
certain complex orders from executing or being placed on the COB if the 
size of the complex order exceeds the complex order size protection 
designated by the Member.\153\ If the maximum size of complex orders is 
not designated by the Member, the Exchange will set a maximum size of 
complex orders on behalf of the Member by default.\154\ Members may 
designate the complex order size protection on a firm wide basis.\155\ 
The default maximum size for complex orders will be determined by the 
Exchange and communicated to Members via specifications and/or 
Regulatory Circular.\156\
---------------------------------------------------------------------------

    \153\ See EDGX Rule 21.20, Interpretation and Policy .06(b). 
EDGX notes that ISE Rule 722, Supplementary Material .07(e) also 
applies configurable values in connection with an analogous size 
protection for its complex order book. See Notice, 82 FR at 33812, 
n.66.
    \154\ See EDGX Rule 21.20, Interpretation and Policy .06(b).
    \155\ See id.
    \156\ See id.
---------------------------------------------------------------------------

J. Trading Halts

    EDGX Rule 21.20, Interpretation and Policy .05, describes the 
Exchange's handling of complex orders in the context of a trading halt. 
Under EDGX Rule 21.20, Interpretation and Policy .05(a), if a trading 
halt exists for the underlying security or a component of a complex 
strategy, trading in the complex strategy will be suspended and a 
Member's complex orders will be cancelled unless the Member has 
instructed the Exchange not to cancel its orders.\157\ The COB will 
remain available for Members to enter and manage complex orders.\158\ 
Incoming complex orders that could otherwise execute or initiate a COA 
in the absence of a halt will be placed on the COB.\159\ Incoming 
complex orders with a time in force of IOC will be cancelled.\160\
---------------------------------------------------------------------------

    \157\ See Amendment No. 1. In Amendment No. 1, EDGX notes that 
this provision is based on and similar to EDGX Rule 20.3(b), which 
states that orders are cancelled in the event of a trading halt in 
the underlying unless the Exchange has been instructed not to cancel 
such orders. EDGX further notes that its rule is similar to 
functionality that is currently operative on other exchanges. In 
particular, EDGX notes that MIAX follows a similar process for 
trading halts, except that while MIAX reopens through potential 
complex auctions, EDGX will reopen through its standard Opening 
Process. See MIAX Rule 518, Interpretation and Policy .05(e)(3). See 
also PHLX Rule 1098(c)(ii)(C), which states that complex orders will 
not trade on the PHLX system during a trading halt for any options 
component of the Complex Order.
    \158\ See EDGX Rule 21.20, Interpretation and Policy .05(a).
    \159\ See id.
    \160\ See id.
---------------------------------------------------------------------------

    EDGX Rule 21.20, Interpretation and Policy .05(b) states that if, 
during a COA, any component(s) and/or the underlying security of a COA-
eligible order is halted, the COA will end early without trading and 
all COA Responses will be cancelled. Remaining complex orders will be 
placed on the COB if eligible, or cancelled.\161\ When trading in the 
halted component(s) and/or underlying security of the complex order 
resumes, the System will evaluate and re-open the COB pursuant to EDGX 
Rule 21.20(c)(2)(B)-(D).\162\
---------------------------------------------------------------------------

    \161\ See EDGX Rule 21.20, Interpretation and Policy .05(b).
    \162\ See EDGX Rule 21.20, Interpretation and Policy .05(c).
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K. Market Data

    EDGX proposes to amend EDGX Rule 21.15(b) to specify the data feeds 
that EDGX proposes to adopt in connection with the proposal. EDGX 
currently offers a Multicast PITCH data feed and an Auction Feed.\163\ 
EDGX proposed to adopt a similar, but separate, Multicast PITCH data 
feed and Auction Feed for the COB.\164\ Second, EDGX proposes to adopt 
a new separate Multicast TOP data feed for its Simple Order Book and 
for the COB.\165\ Third, EDGX proposes to adopt a separate Auction Feed 
for the COB, in addition to its existing Auction Feed for the Simple 
Book.\166\ Fourth, EDGX the Exchange proposes to identify Priority 
Customer Orders and trades as such on messages disseminated by the 
Exchange through its Multicast TOP data feed, in addition to 
disseminating that information through it Multicast PITCH and Auction 
data feeds.\167\
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    \163\ See EDGX Rules 21.15(b)(1) and (4). The Multicast PITCH 
data feed is an uncompressed data feed that offers depth of book 
quotation and execution information based on options orders entered 
into EDGX's System. The Auction Feed is an uncompressed data product 
that provides information regarding the current status of price and 
size information related to auctions conducted by EDGX. See Notice, 
82 FR at 33183.
    \164\ See Notice, 82 FR at 33183.
    \165\ See EDGX Rule 21.15(b)(2). The new Multicast TOP feeds 
will be uncompressed data feeds that will offer top of book 
quotations and execution information based on options orders entered 
into EDGX's System. See id. EDGX notes that it currently offers a 
top of book feed for its equities trading platform. See Notice, 82 
FR at 33186.
    \166\ See EDGX Rule 21.15(c)(5). The Auction Feed is an 
uncompressed data product that provides information regarding the 
current status of price and size information related to auctions 
conducted by the Exchange. See id.
    \167\ See EDGX Rule 21.15(c)(2). EDGX notes that the proposal 
also re-numbers the provisions for EDGX's DROP and Historical Data 
products, but does not make any changes with respect to those 
products. See Notice, 82 FR at 33183.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\168\ In particular, for 
the reasons discussed below, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\169\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 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. This order approves the proposed rule change in its 
entirety, although only certain more significant aspects of the 
proposed rules are discussed below.
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    \168\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \169\ 15 U.S.C. 78f(b)(5).
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A. Definitions and Order Types

    The proposal adopts several defined terms related to the trading of 
complex orders. The Commission notes that EDGX's definition of complex 
order \170\ is consistent with the definition of complex order adopted 
by other options exchanges.\171\ The Commission believes that adding 
EDGX Rule 21.20(b) to allow complex orders to be entered as limit 
orders, market orders, GTD orders, IOC orders, DAY orders, GTC orders, 
OPG orders, Complex Only orders, COA-eligible orders, do-not-COA 
orders, and complex orders with Match Trade

[[Page 49066]]

Prevention modifiers could provide market participants with greater 
flexibility and control over the trading of complex orders.\172\ The 
Commission notes that EDGX currently permits each of these orders types 
(other than GTC, OPG, Complex Only orders, COA-eligible orders, and do-
not-COA orders) for orders on single option series.\173\ The Commission 
further notes that Complex Only orders will be available only to EDGX 
Market Makers, which is consistent with similar functionality available 
on other options exchanges.\174\
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    \170\ See EDGX Rule 21.20(a)(5).
    \171\ See, e.g., ISE Rule 722(a)(1); CBOE Rule 6.53C(a)(1); and 
MIAX Rule 518(a)(5).
    \172\ As noted above, EDGX also will make GTC and OPG orders 
available for the Simple Book, which will provide greater 
flexibility to participants in the markets for orders in single 
option series.
    \173\ See EDGX Rule 21.1.
    \174\ See MIAX Rule 518(c)(2)(iii) (providing that Legging is 
not available for, among other things, complex Standard quotes and 
complex eQuotes); and ISE Rule 722, Supplementary Material .03 
(providing that Market Maker quotes will not be automatically 
executed against bids and offers on ISE for the individual legs of 
the complex order).
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B. Trading of Complex Orders and Quotes

    EDGX states that it has designed its execution and priority rules 
to allow complex orders to interact with interest in the Simple Book 
and vice versa in an efficient and orderly manner.\175\ The Commission 
notes that EDGX Rule 21.20(c)(3)(A) is designed to protect interest 
established in the leg market by providing that if any of the bids or 
offers established in the marketplace consist of a Priority Customer 
Order, at least one leg of the complex order must trade at a price that 
is better than the corresponding bid or offer in the marketplace by at 
least a $0.01 increment. The Commission further notes that other 
options exchanges have similar provisions requiring one leg to trade at 
a better price in such a circumstance.\176\
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    \175\ See Notice, 82 FR at 33184.
    \176\ See, e.g., ISE Rule 722(b)(2); Phlx Rule 1098(c)(iii); and 
MIAX Rule 518(c)(3).
---------------------------------------------------------------------------

    EDGX proposes that complex orders will never be executed at a price 
that is outside of the individual component prices on the Simple 
Book.\177\ Furthermore, the net price of a complex order executed 
against another complex order on the COB will never be inferior to the 
price that would be available if the complex order legged into the 
Simple Book.\178\ According to EDGX, these provisions should help 
prevent a component of a complex order from being executed at a price 
that compromises the priority already established by a Priority 
Customer on the Simple Book.\179\ The Commission notes that another 
options exchange has comparable provisions.\180\
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    \177\ See Notice, 82 FR at 33173.
    \178\ See id.
    \179\ See id.
    \180\ See MIAX Rule 518(c)(2)(ii).
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C. Legging

    As described more fully above, EDGX proposes to provide for Legging 
of complex orders into the Simple Book. The Commission believes that 
Legging could benefit investors by providing additional execution 
opportunities for both complex orders and interest on the Simple Book. 
In addition, the Commission believes that Legging could facilitate 
interaction between the COB and the Simple Book, potentially resulting 
in a more competitive and efficient market, and better executions for 
investors.
    As discussed above, EDGX is proposing to prohibit Legging for: (i) 
Complex orders with two option legs where both legs are buying or both 
legs are selling and both legs are calls or both legs are puts, other 
than COA-eligible two-legged Customer complex orders; and (ii) complex 
orders with three option legs where all legs are buying or all legs are 
selling regardless of whether the option leg is a call or a put.\181\ 
The Commission notes that this prohibition is similar to the rules of 
other options markets, which the Commission has approved.\182\ The 
Commission notes that directional complex orders may continue to trade 
against other complex orders on the Exchange's COB, and that market 
participants may submit the individual legs of a directional complex 
order separately to the regular market for execution should they so 
choose.
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    \181\ See EDGX Rule 21.20(c)(2)(F).
    \182\ See, e.g., ISE Rule 722(b)(3)(ii); and MIAX Rule 
518(c)(2)(iii). See also Securities Exchange Act Release Nos. 73023 
(September 9, 2014) 79 FR 55033 (September 15, 2014) (order 
approving SR-ISE-2014-10); 79072 (October 7, 2016) 81 FR 71131 
(October 14, 2016) (order approving SR-MIAX-2016-26). As discussed 
above, EDGX will permit Customer two-leg COA-eligible complex orders 
to leg into the Simple Book without restriction. See EDGX Rule 
21.20(c)(2)(F). EDGX notes that Legging against the individual 
components of a complex order on the Simple Book allows complex 
orders to access the full liquidity of the Exchange's Simple Book, 
thus enhancing the possibility of executions at the best available 
prices on the Exchange. EDGX believes this is particularly true for 
Customer complex orders and, thus, does not propose to limit the 
ability of such orders to leg into the Simple Book (when such orders 
are two-legged orders). See Amendment No. 1. See also notes 111-116, 
supra, and accompanying text, for additional discussion of EDGX's 
treatment of Customer complex orders.
---------------------------------------------------------------------------

D. Complex Order Auction Process

    EDGX describes the Complex Order Auction Process in EDGX Rule 
21.20(d). EDGX states that the auction process is designed to ensure 
that complex orders are given every opportunity to be executed at the 
best prices against an increased level of contra-side liquidity.\183\ 
In addition, EDGX states that the Complex Order Auction process is 
designed to work effectively with the COB with a simple priority of 
allocation that continues to respect the priority of allocations on the 
Simple Book (via the Exchange's pro rata allocation methodology).\184\ 
The Commission notes that the ability for unrelated marketable orders 
to join and be executed in a Complex Order Auction may enhance the 
liquidity in the Complex Order Auction and thus increase opportunities 
for execution of complex orders on both sides of the market.
---------------------------------------------------------------------------

    \183\ See Notice, 82 FR at 33185.
    \184\ See id., 82 FR at 33179.
---------------------------------------------------------------------------

    As noted above, EDGX will permit a COA for a strategy to begin even 
if another COA for that strategy is already underway.\185\ The 
Commission notes that EDGX's rules regarding the processing of 
overlapping COAs for a strategy have been made transparent in the 
proposal and are reasonable, given that the electronic nature of EDGX 
makes the sequence of auction start times readily discernable.\186\ In 
particular, the Commission notes that a COA Response will only be 
considered for its specified COA. Each COA Response must specifically 
identify the COA for which it is targeted, and if not fully executed, 
the COA Response will be cancelled back at the conclusion of the 
COA.\187\
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    \185\ See EDGX Rule 21.20, Interpretation and Policy .02.
    \186\ See id.
    \187\ See id. See also EDGX Rule 21.20(d)(4) (stating that, 
among other things, a COA Response must include the COA auction ID 
for the COA to which it is targeted).
---------------------------------------------------------------------------

E. Opening Process, Managed Interest Process, and Evaluation Process

    As described above, EDGX Rule 21.20(c)(2)(A)-(D) sets forth EDGX's 
opening process for complex orders. The Commission believes that the 
opening process is designed to provide for the orderly opening of 
complex orders on EDGX. EDGX Rules 21.20(c)(4) and (5) describe, 
respectively, the managed interest process and the evaluation process 
for complex orders. The Commission believes that the managed interest 
process is designed to protect the priority of Priority Customer 
interest on the Simple Book and assure that complex orders do not trade 
through the prices of interest on the Simple Book for the component 
securities of the complex order. The Commission believes that the 
evaluation process is designed to facilitate the execution of complex

[[Page 49067]]

orders and other interest on EDGX in accordance with EDGX's rules. The 
Commission notes that EDGX's managed interest and evaluation processes 
for complex orders are similar to processes adopted by another options 
exchange.\188\
---------------------------------------------------------------------------

    \188\ See MIAX Rules (c)(4) and (5).
---------------------------------------------------------------------------

F. Market Maker Complex Quotes

    As described above, EDGX has not proposed different standards for 
participation by Market Makers on the COB. Market Makers are not 
required to quote on the COB and there are no continuous quoting 
requirements respecting complex orders.\189\ In addition, complex 
strategies are not subject to any requirements that are applicable to 
Market Makers in the simple market for the individual options series or 
classes.\190\ Finally, volume executed in complex strategies is not 
taken into consideration when determining whether Market Makers are 
meeting quoting obligations applicable to Market Makers in the simple 
market for individual options.\191\ The Commission notes that other 
options exchanges have adopted similar rules.\192\
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    \189\ See EDGX Rule 21.20, Interpretation and Policy .01.
    \190\ See id.
    \191\ See id.
    \192\ See ISE Rule 722, Supplementary Material .03; and MIAX 
Rule 518, Interpretation and Policy .02(e).
---------------------------------------------------------------------------

G. Price Protection and Other Features

    EDGX's proposed price and order protection features are intended to 
provide market participants with price and order size protection to 
allow them to better manage their risk exposure.\193\ The credit-to-
debit parameters, Debit/Credit Price Reasonability Checks, Buy Strategy 
Parameters, Maximum Value Acceptable Price Range, Fat Finger Price 
Protection, and order size protection are similar to functionalities 
already available on other options exchanges.\194\ EDGX's provisions 
regarding trading halts could help to protect investors by pausing 
trading during potentially disruptive conditions.\195\ Finally, 
according to EDGX, adding complex orders to the Risk Protection Monitor 
should allow EDGX members to better manage their risk and encourage 
them to submit additional liquidity to the Exchange.\196\ The 
Commission believes the proposed new price protection features are 
designed to promote just and equitable principles of trade to the 
extent they are able to mitigate potential risks associated with market 
participants entering orders or executing trades at what EDGX believes 
are extreme and potentially erroneous prices.
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    \193\ See Notice, 82 FR at 33186.
    \194\ See CBOE Rule 6.53C, Interpretation and Policy .08(b)-(d) 
and (g); and ISE Rule 722, Supplementary Material .07(d) and (e).
    \195\ See Notice, 82 FR at 33186.
    \196\ See id. The Commission reminds members electing to use the 
Risk Protection Monitor to be mindful of their obligations to, among 
other things, seek best execution of orders they handle on an agency 
basis. See Securities Exchange Act Release No. 74496 (March 13, 
2015), 80 FR 14421, 14423 (March 19, 2015) (SR-MIAX-2015-03).
---------------------------------------------------------------------------

H. Market Data

    As described above, EDGX proposes to make available various data 
feeds that will provide information regarding complex orders on EDGX. 
EDGX states that each of the proposed data feeds is based on and 
similar to an existing data feed offered by EDGX Options and/or the 
EDGX equities trading platform.\197\ EDGX notes that the proposed data 
feeds, which will be free of charge, would be accessed and subscribed 
to on a voluntary basis by market participants interested in obtaining 
data regarding activity in the COB.\198\ If EDGX proposes to adopt fees 
in connection with any of its data feeds, it will file a separate 
proposal to include such fees in its Fee Schedule.\199\ The Commission 
believes that the proposed data feeds, which will be available free of 
charge to any subscriber that chooses to receive the data, will provide 
investors and other market participants with information concerning 
transactions on EDGX.
---------------------------------------------------------------------------

    \197\ See Notice, 82 FR at 33186.
    \198\ See Amendment No. 1 and Notice, 82 FR at 33182.
    \199\ See Notice, 82 FR at 33182.
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 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 [email protected]. Please include 
File Number SR-BatsEDGX-2017-29 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsEDGX-2017-29. 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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BatsEDGX-2017-29, and should 
be submitted on or before November 13, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of the notice of Amendment No. 1 in the 
Federal Register. In Amendment No. 1, EDGX revises its original 
proposal to make the changes discussed in detail above. Notably, in 
Amendment No. 1, EDGX revises its proposal to make Complex Only orders 
available only to EDGX Market Makers, provide additional rationale for 
its methodology for allocating orders at the conclusion of a COA, and 
limit to 30 seconds the configurable time period for the System to 
match orders during the complex order opening process. EDGX also made 
changes to clarify and add detail to its proposal and the proposed rule 
text. The Commission believes that Amendment No. 1 does not raise any 
novel regulatory issues and instead better aligns EDGX's proposed rules 
governing the trading of complex orders with the rules of other options 
exchanges. Amendment No. 1 also

[[Page 49068]]

provides additional clarity in the rule text and additional analysis of 
several aspects of the proposal, thus facilitating the Commission's 
ability to make the findings set forth above to approve the proposal. 
Accordingly, the Commission finds good cause for approving the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\200\ that the proposed rule change (SR-BatsEDGX-2017-29), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \200\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\201\
---------------------------------------------------------------------------

    \201\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-22886 Filed 10-20-17; 8:45 am]
BILLING CODE 8011-01-P

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