Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Market Makers Trading in Non-Appointed Options Classes, 66775-66778 [2018-28001]
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Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Notices
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Elizabeth Reed,
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[FR Doc. 2018–27937 Filed 12–26–18; 8:45 am]
BILLING CODE 7710–12–P
[Release No. 34–84860; File No. SR–GEMX–
2018–42]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to Market
Makers Trading in Non-Appointed
Options Classes
December 19, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
12, 2018, Nasdaq GEMX, LLC (‘‘GEMX’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
POSTAL SERVICE
ACTION:
SUPPLEMENTARY INFORMATION:
Jkt 247001
The Exchange proposes to amend
Rule 805(b) relating to Market Makers 3
trading in non-appointed options
classes.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqgemx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 ‘‘Market Makers’’ refers to ‘‘Competitive Market
Makers’’ and ‘‘Primary Market Makers’’ collectively.
See Rule 100(a)(33).
2 17
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66775
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this rule change is to
amend Rule 805(b) relating to Market
Makers trading in non-appointed
options classes.
Rule 805(b) presently governs the
submission of orders by Market Makers
in non-appointed options classes.
Subparagraphs (b)(2) and (b)(3) place
limitations on the overall percentage of
executions that can occur in the nonappointed options classes. Specifically,
subparagraph (b)(2) limits a Competitive
Market Maker’s (‘‘CMM’’) total number
of contracts executed in non-appointed
options classes to 25% of the CMM’s
total number of contracts executed in its
appointed options classes and with
respect to which it was quoting
pursuant to Rule 804(e)(1), and
subparagraph (b)(3) limits a Primary
Market Maker’s (‘‘PMM’’) total number
of contracts executed in non-appointed
options classes to 10% of the PMM’s
total number of contracts executed in its
appointed classes.
The Exchange now proposes in
subparagraph (b)(3) to increase the
overall percentage of executions that
can occur in a PMM’s non-appointed
options classes from 10% to 25% to
align with the CMM allowance as well
as other options exchanges, including
its affiliated options market, BX
Options.4 The Exchange adopted the
4 BX Options Market Makers (including Lead
Market Makers) can execute no more than 25% of
their total volume outside of their registered options
classes. See BX Options Rules, Chapter VII, Section
6(e). In addition, CBOE Rule 8.7, Interpretations
and Policies .03 provides that 75% of a MarketMaker’s total contract volume must be in classes to
which the Market-Maker is appointed. Accordingly,
only 25% of a CBOE Market-Maker’s contract
volume can be in non-appointed classes. CBOE
Rule 8.7 applies equally to Lead Market-Makers and
Designated Primary Market-Makers in the same
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Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Notices
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10% volume limitation for PMMs as
part of its application to be registered as
a national securities exchange, and
initially restricted PMMs in this manner
because as a nascent exchange, it sought
to promote PMM activity in their
appointed options classes in order to
encourage liquidity on the Exchange.
Since then, there has been a
proliferation of options classes added to
the Exchange for trading, and the
Exchange therefore believes that the
10% limitation is restrictive in light of
the current environment. The Exchange
does not believe that its proposal will
adversely impact the quality of the
Exchange’s market or lead to a material
decrease in liquidity. As noted above,
other options exchanges are operating
today with similar or more generous
allowances for its market makers
without sacrificing market quality, and
the Exchange believes that its proposed
increase will likewise not result in a
decrease of market quality.5
Furthermore, Market Makers and in
particular, PMMs, will continue to be
subject to the highest standard
applicable on the Exchange to provide
liquidity. For instance as set forth in
Rule 804(e)(2), PMMs are held to the
highest quoting standards on the
Exchange. Specifically, PMMs are
required to provide two-sided
quotations in 90% of the cumulative
number of seconds for which that
PMM’s appointed options class is open
for trading.6 Furthermore, PMMs are
required to quote in certain options
series of their appointed classes that are
excluded from the quoting requirements
of CMMs (i.e., Quarterly Options Series,
Adjusted Options Series, and long-term
options). In addition, the Exchange can
announce a higher percentage than the
current 90% quoting requirement if
doing so would be in the interest of a
fair and orderly market.7 PMMs are also
required to enter quotes in their
appointed options classes and
participate in the Opening Process.8
Accordingly, the Exchange believes that
the foregoing obligations will continue
to ensure that PMMs will provide
liquidity in their appointed options
classes notwithstanding the proposed
manner as Market-Makers. The Exchange also notes
that NYSE Arca Options does not impose a strict
percentage limitation on its market makers for
transacting in non-appointed classes. See NYSE
Arca Options Rules 6.37–O(d) and 6.37B–O.
5 Id.
6 See Rule 804(e)(2).
7 See Rule 804(e)(2). See also Securities Exchange
Act Release No. 84581 (November 14, 2018), 83 FR
58657 (November 20, 2018) (SR–GEMX–2018–37).
8 See Rule 701(c)(3).
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increase in the trading allowance in
non-appointed classes.
In addition, the Exchange believes
that the proposed increase in the overall
percentage from 10% to 25% will bring
GEMX in line with other options
exchanges, and permit its Market
Makers to effectively compete with
market makers on other options
exchanges. Moreover, applying
requirements that are substantially
similar to other options exchanges will
remove a significant compliance burden
on market makers who provide liquidity
across multiple options exchanges.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,9 in general, and furthers the
objectives of Section 6(b)(5) of the Act,10
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest. In
particular, the Exchange believes that
the proposed rule change promotes just
and equitable principles of trade
because it reduces an outdated
restriction on PMMs, and simplifies the
application of the rule by imposing the
same 25% volume limitation on all
Market Makers. The purpose of limiting
the number of contracts executed in
non-appointed classes to a small
percentage of contracts executed in
appointed classes was to encourage
Market Makers to provide liquidity in
their appointed classes. As discussed
above, the Exchange initially adopted
the 10% volume limitation for PMMs
because as a nascent exchange, it sought
to promote PMM activity in their
appointed options classes in order to
encourage liquidity on the Exchange.
Since then, there has been a
proliferation of options classes added to
the Exchange for trading, and the
Exchange therefore believes that the
10% limitation is restrictive in light of
the current environment. Other options
exchanges are operating today with
similar or more generous allowances for
its market makers without sacrificing
market quality, and the Exchange
therefore believes that the proposed
increase will not result in a decrease of
quality on its own market.11 In addition,
the Exchange believes that the
heightened obligations for PMMs to
participate in the Opening Process and
provide intra-day quotes will continue
9 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
11 See note 4 above.
10 15
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to ensure that PMMs provide liquidity
in their appointed options classes
notwithstanding the proposed increase
in the trading allowance in nonappointed classes.12 As discussed
above, the proposed rule change will
also conform GEMX’s Market Maker
obligations to the requirements of other
options markets, which will promote
the application of consistent compliance
standards for market makers who
provide liquidity across multiple
options exchanges.
Furthermore, such volume limitations
were traditionally put in place and
especially important at ‘‘floor-based’’
exchanges, since market makers were
limited in the number of classes in
which they could physically make
markets, and it was in the floor-based
exchange’s interest that market makers
focus their market making abilities on
their appointed classes.13 Although
limitations on trading in non-appointed
classes may be less important on a fully
electronic exchange since electronic
quoting and trading systems allow
market makers to make markets and
provide liquidity in many more options
classes than on a floor-based exchange,
GEMX still believes focusing its Market
Makers on trading in their appointed
classes is important for providing
liquidity in those classes. In this
respect, the Exchange believes that its
proposal would continue to meet that
objective because the proposed
limitation for PMMs would still require
that a substantial percentage (i.e., 75%)
of a PMM’s transactions be effected in
their appointed classes.
Finally, in determining to revise
requirements for its Market Makers, the
Exchange is mindful of the balance
between the obligations and benefits
provided to Market Makers. While the
proposal will change obligations
currently in place for Market Makers,
the Exchange does not believe that these
changes reduce the overall obligations
applicable to Market Makers. In this
respect, the Exchange still imposes
many obligations on Market Makers to
maintain a fair and orderly market in
their appointed classes, which the
Exchange believes eliminates the risk of
a material decrease in liquidity.14 In
addition, Market Makers are required to
abide by quoting requirements in their
appointed options classes in order to
maintain the status of a Market Maker,
12 See
notes 6—8 above, with accompanying text.
e.g., Securities Exchange Act Release No.
35786 (May 31, 1995), 60 FR 30122 (June 7, 1995)
(SR–Amex–94–51) (order approving proposal by
American Stock Exchange, Inc. relating to the in
person trading volume requirement for registered
options traders).
14 See Rule 803(b)(1)–(4).
13 See
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Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Notices
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and PMMs in particular are held to the
highest quoting standards on the
Exchange.15 As further discussed above,
PMMs are also required to enter quotes
and participate during the Opening
Process, pursuant to Rule 701. Lastly,
the Exchange also notes that for nonappointed options classes of Market
Makers, Rule 803(d) would continue to
prohibit a Market Maker from engaging
in transactions for an account in which
it has an interest that are
disproportionate in relation to, or in
derogation of, the performance of its
obligations as specified in Rule 803(b)
with respect to its appointed options
classes. In particular, Market Makers
would be prohibited from (1)
individually or as a group, intentionally
or unintentionally, dominating the
market in options contracts of a
particular class and (2) effecting
purchases or sales on the Exchange
except in a reasonable and orderly
manner.16 Accordingly, the proposal
supports the quality of the Exchange’s
markets by helping to ensure that
Market Makers and in particular, PMMs,
will continue to be obligated to and
have incentives to provide liquidity in
their appointed classes. Ultimately, the
benefit that the proposed rule change
confers upon PMMs by increasing the
percentage of contracts executed in the
PMM’s non-appointed classes from 10%
to 25% is offset by the PMM’s continued
responsibilities to provide significant
liquidity to the market to the benefit of
market participants.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe that its
proposal will impose an undue burden
on intra-market competition because it
will align the percentage limitations for
both PMMs and CMMs to 25% of their
non-appointed classes, and will treat all
Market Makers uniformly in this
respect. In terms of inter-market
competition, the Exchange operates in a
highly competitive market in which
market participants can send order flow
to competing exchanges if they deem
trading practices at a particular
exchange to be onerous or cumbersome.
The proposal to increase the limitation
on the percentage of contracts executed
in a PMM’s non-appointed classes from
10% to 25% will serve to better align
15 See
notes 6 and 7 above, with accompanying
text.
16 See
Rule 803(d)(1) and (2).
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17:14 Dec 26, 2018
Jkt 247001
the Exchange’s requirements with those
in place at other options exchanges,
which enhances the ability of its Market
Makers to effectively compete with
market makers on other options
exchanges.17
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 18 and
subparagraph (f)(6) of Rule 19b–4
thereunder.19
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 20 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 21
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. GEMX has requested
that the Commission waive the 30-day
operative delay contained in Rule 19b–
4(f)(6)(iii). The Commission believes
that waiver of the 30-day operative
delay is consistent with the protection
of investors and the public interest. The
proposal raises no novel issues. As the
Exchange notes, other options markets
require their market makers to a 25%
restriction for trading in non-appointed
classes. Further, pursuant to the
proposal, PMMs’ obligation to their
appointed classes would remain
unchanged. Accordingly, the
Commission waives the operative delay
and designates the proposed rule change
operative upon filing.22
17 See
note 4 above.
U.S.C. 78s(b)(3)(A)(iii).
19 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
20 17 CFR 240.19b–4(f)(6).
21 17 CFR 240.19b–4(f)(6)(iii).
22 For purposes only of waiving the 30-day
operative delay, the Commission also has
considered the proposed rule’s impact on
18 15
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66777
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
GEMX–2018–42 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–GEMX–2018–42. 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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Notices
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly.
All submissions should refer to File
Number SR–GEMX–2018–42 and
should be submitted on or before
January 17, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Brent J. Fields,
Secretary.
[FR Doc. 2018–28001 Filed 12–26–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84864; File No. SR–MIAX–
2018–38]
Self-Regulatory Organizations: Notice
of Filing and Immediate Effectiveness
of a Proposed Rule Change by Miami
International Securities Exchange, LLC
To Amend Exchange Rule 510,
Minimum Price Variations and
Minimum Trading Increments To
Extend the Penny Pilot Program
December 19, 2018.
khammond on DSK30JT082PROD with NOTICES
Pursuant to the provisions of Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on December 13, 2018, Miami
International Securities Exchange, LLC
(‘‘MIAX Options’’ or the ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend Rule 510, Minimum Price
Variations and Minimum Trading
Increments, Interpretations and Policies
.01 to extend the pilot program for the
quoting and trading of certain options in
pennies.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/ at MIAX Options’ principal
23 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is a participant in an
industry-wide pilot program that
provides for the quoting and trading of
certain option classes in penny
increments (the ‘‘Penny Pilot Program’’
or ‘‘Program’’). The Penny Pilot Program
allows the quoting and trading of certain
option classes in minimum increments
of $0.01 for all series in such option
classes with a price of less than $3.00;
and in minimum increments of $0.05 for
all series in such option classes with a
price of $3.00 or higher. Options
overlying the PowerShares QQQTM
(‘‘QQQ’’), SPDR® S&P 500® ETF
(‘‘SPY’’), and iShares® Russell 2000 ETF
(‘‘IWM’’), however, are quoted and
traded in minimum increments of $0.01
for all series regardless of the price. The
Penny Pilot Program was initiated at the
then existing option exchanges in
January 2007 3 and currently includes
more than 300 of the most active option
classes. The Penny Pilot Program is
currently scheduled to expire on
December 31, 2018.4 The purpose of the
proposed rule change is to extend the
Penny Pilot Program in its current
format through June 30, 2019.
In addition to the extension of the
Penny Pilot Program through June 30,
3 See Securities Exchange Act Release Nos. 55154
(January 23, 2007), 72 FR 4743 (February 1, 2007)
(SR–CBOE–2006–92); 55161 (January 24, 2007), 72
FR 4754 (February 1, 2007) (SR–ISE–2006–62);
54886 (December 6, 2006), 71 FR 74979 (December
13, 2006) (SR–Phlx–2006–74); 54590 (October 12,
2006), 71 FR 61525 (October 18, 2006) (SR–
NYSEArca–2006–73); and 54741 (November 9,
2006), 71 FR 67176 (November 20, 2006) (SR–
Amex–2006–106).
4 See Securities Exchange Act Release No. 83515
(June 25, 2018), 83 FR 30786 (June 29, 2018) (SR–
MIAX–2018–12) (extending the Penny Pilot
Program from June 30, 2018 to December 31, 2018).
PO 00000
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2019, the Exchange proposes to extend
one other date in the Rule. Currently,
Interpretations and Policies .01 states
that the Exchange will replace any
Penny Pilot issues that have been
delisted with the next most actively
traded multiply listed option classes
that are not yet included in the Penny
Pilot Program, and that the replacement
issues will be selected based on trading
activity in the previous six months.
Such option classes will be added to the
Penny Pilot Program on the second
trading day following July 1, 2018.5
Because this date has expired and the
Exchange intends to continue this
practice for the duration of the Penny
Pilot Program, the Exchange is
proposing to amend the Rule to reflect
that such option classes will be added
to the Penny Pilot Program on the
second trading day following January 1,
2019.
The purpose of this provision is to
reflect the new date on which
replacement issues may be added to the
Penny Pilot Program.
2. Statutory Basis
The Exchange believes that its
proposed rule change is consistent with
Section 6(b) of the Act 6 in general, and
furthers the objectives of Section 6(b)(5)
of the Act 7 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
In particular, the proposed rule
change, which extends the Penny Pilot
Program for six months, allows the
Exchange to continue to participate in a
program that has been viewed as
beneficial to traders, investors and
public customers and viewed as
successful by the other options
exchanges participating in it.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
MIAX Options does not believe that
the proposed rule change will impose
any burden on competition that is not
5 The month immediately preceding a
replacement class’s addition to the Pilot Program
(i.e., December) is not used for purposes of the sixmonth analysis. For example, a replacement added
on the second trading day following January 1,
2019, will be identified based on trading activity
from June 1, 2018, through November 30, 2018.
6 15 U.S.C. 78f(b).
7 15 U.S.C. 78f(b)(5).
E:\FR\FM\27DEN1.SGM
27DEN1
]]>Agencies
[Federal Register Volume 83, Number 247 (Thursday, December 27, 2018)]
[Notices]
[Pages 66775-66778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28001]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84860; File No. SR-GEMX-2018-42]
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Relating to Market
Makers Trading in Non-Appointed Options Classes
December 19, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 12, 2018, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 805(b) relating to Market
Makers \3\ trading in non-appointed options classes.
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\3\ ``Market Makers'' refers to ``Competitive Market Makers''
and ``Primary Market Makers'' collectively. See Rule 100(a)(33).
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The text of the proposed rule change is available on the Exchange's
website at https://nasdaqgemx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule change is to amend Rule 805(b) relating to
Market Makers trading in non-appointed options classes.
Rule 805(b) presently governs the submission of orders by Market
Makers in non-appointed options classes. Subparagraphs (b)(2) and
(b)(3) place limitations on the overall percentage of executions that
can occur in the non-appointed options classes. Specifically,
subparagraph (b)(2) limits a Competitive Market Maker's (``CMM'') total
number of contracts executed in non-appointed options classes to 25% of
the CMM's total number of contracts executed in its appointed options
classes and with respect to which it was quoting pursuant to Rule
804(e)(1), and subparagraph (b)(3) limits a Primary Market Maker's
(``PMM'') total number of contracts executed in non-appointed options
classes to 10% of the PMM's total number of contracts executed in its
appointed classes.
The Exchange now proposes in subparagraph (b)(3) to increase the
overall percentage of executions that can occur in a PMM's non-
appointed options classes from 10% to 25% to align with the CMM
allowance as well as other options exchanges, including its affiliated
options market, BX Options.\4\ The Exchange adopted the
[[Page 66776]]
10% volume limitation for PMMs as part of its application to be
registered as a national securities exchange, and initially restricted
PMMs in this manner because as a nascent exchange, it sought to promote
PMM activity in their appointed options classes in order to encourage
liquidity on the Exchange. Since then, there has been a proliferation
of options classes added to the Exchange for trading, and the Exchange
therefore believes that the 10% limitation is restrictive in light of
the current environment. The Exchange does not believe that its
proposal will adversely impact the quality of the Exchange's market or
lead to a material decrease in liquidity. As noted above, other options
exchanges are operating today with similar or more generous allowances
for its market makers without sacrificing market quality, and the
Exchange believes that its proposed increase will likewise not result
in a decrease of market quality.\5\ Furthermore, Market Makers and in
particular, PMMs, will continue to be subject to the highest standard
applicable on the Exchange to provide liquidity. For instance as set
forth in Rule 804(e)(2), PMMs are held to the highest quoting standards
on the Exchange. Specifically, PMMs are required to provide two-sided
quotations in 90% of the cumulative number of seconds for which that
PMM's appointed options class is open for trading.\6\ Furthermore, PMMs
are required to quote in certain options series of their appointed
classes that are excluded from the quoting requirements of CMMs (i.e.,
Quarterly Options Series, Adjusted Options Series, and long-term
options). In addition, the Exchange can announce a higher percentage
than the current 90% quoting requirement if doing so would be in the
interest of a fair and orderly market.\7\ PMMs are also required to
enter quotes in their appointed options classes and participate in the
Opening Process.\8\ Accordingly, the Exchange believes that the
foregoing obligations will continue to ensure that PMMs will provide
liquidity in their appointed options classes notwithstanding the
proposed increase in the trading allowance in non-appointed classes.
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\4\ BX Options Market Makers (including Lead Market Makers) can
execute no more than 25% of their total volume outside of their
registered options classes. See BX Options Rules, Chapter VII,
Section 6(e). In addition, CBOE Rule 8.7, Interpretations and
Policies .03 provides that 75% of a Market-Maker's total contract
volume must be in classes to which the Market-Maker is appointed.
Accordingly, only 25% of a CBOE Market-Maker's contract volume can
be in non-appointed classes. CBOE Rule 8.7 applies equally to Lead
Market-Makers and Designated Primary Market-Makers in the same
manner as Market-Makers. The Exchange also notes that NYSE Arca
Options does not impose a strict percentage limitation on its market
makers for transacting in non-appointed classes. See NYSE Arca
Options Rules 6.37-O(d) and 6.37B-O.
\5\ Id.
\6\ See Rule 804(e)(2).
\7\ See Rule 804(e)(2). See also Securities Exchange Act Release
No. 84581 (November 14, 2018), 83 FR 58657 (November 20, 2018) (SR-
GEMX-2018-37).
\8\ See Rule 701(c)(3).
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In addition, the Exchange believes that the proposed increase in
the overall percentage from 10% to 25% will bring GEMX in line with
other options exchanges, and permit its Market Makers to effectively
compete with market makers on other options exchanges. Moreover,
applying requirements that are substantially similar to other options
exchanges will remove a significant compliance burden on market makers
who provide liquidity across multiple options exchanges.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\10\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. In particular, the Exchange believes that the proposed rule
change promotes just and equitable principles of trade because it
reduces an outdated restriction on PMMs, and simplifies the application
of the rule by imposing the same 25% volume limitation on all Market
Makers. The purpose of limiting the number of contracts executed in
non-appointed classes to a small percentage of contracts executed in
appointed classes was to encourage Market Makers to provide liquidity
in their appointed classes. As discussed above, the Exchange initially
adopted the 10% volume limitation for PMMs because as a nascent
exchange, it sought to promote PMM activity in their appointed options
classes in order to encourage liquidity on the Exchange. Since then,
there has been a proliferation of options classes added to the Exchange
for trading, and the Exchange therefore believes that the 10%
limitation is restrictive in light of the current environment. Other
options exchanges are operating today with similar or more generous
allowances for its market makers without sacrificing market quality,
and the Exchange therefore believes that the proposed increase will not
result in a decrease of quality on its own market.\11\ In addition, the
Exchange believes that the heightened obligations for PMMs to
participate in the Opening Process and provide intra-day quotes will
continue to ensure that PMMs provide liquidity in their appointed
options classes notwithstanding the proposed increase in the trading
allowance in non-appointed classes.\12\ As discussed above, the
proposed rule change will also conform GEMX's Market Maker obligations
to the requirements of other options markets, which will promote the
application of consistent compliance standards for market makers who
provide liquidity across multiple options exchanges.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
\11\ See note 4 above.
\12\ See notes 6--8 above, with accompanying text.
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Furthermore, such volume limitations were traditionally put in
place and especially important at ``floor-based'' exchanges, since
market makers were limited in the number of classes in which they could
physically make markets, and it was in the floor-based exchange's
interest that market makers focus their market making abilities on
their appointed classes.\13\ Although limitations on trading in non-
appointed classes may be less important on a fully electronic exchange
since electronic quoting and trading systems allow market makers to
make markets and provide liquidity in many more options classes than on
a floor-based exchange, GEMX still believes focusing its Market Makers
on trading in their appointed classes is important for providing
liquidity in those classes. In this respect, the Exchange believes that
its proposal would continue to meet that objective because the proposed
limitation for PMMs would still require that a substantial percentage
(i.e., 75%) of a PMM's transactions be effected in their appointed
classes.
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\13\ See e.g., Securities Exchange Act Release No. 35786 (May
31, 1995), 60 FR 30122 (June 7, 1995) (SR-Amex-94-51) (order
approving proposal by American Stock Exchange, Inc. relating to the
in person trading volume requirement for registered options
traders).
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Finally, in determining to revise requirements for its Market
Makers, the Exchange is mindful of the balance between the obligations
and benefits provided to Market Makers. While the proposal will change
obligations currently in place for Market Makers, the Exchange does not
believe that these changes reduce the overall obligations applicable to
Market Makers. In this respect, the Exchange still imposes many
obligations on Market Makers to maintain a fair and orderly market in
their appointed classes, which the Exchange believes eliminates the
risk of a material decrease in liquidity.\14\ In addition, Market
Makers are required to abide by quoting requirements in their appointed
options classes in order to maintain the status of a Market Maker,
[[Page 66777]]
and PMMs in particular are held to the highest quoting standards on the
Exchange.\15\ As further discussed above, PMMs are also required to
enter quotes and participate during the Opening Process, pursuant to
Rule 701. Lastly, the Exchange also notes that for non-appointed
options classes of Market Makers, Rule 803(d) would continue to
prohibit a Market Maker from engaging in transactions for an account in
which it has an interest that are disproportionate in relation to, or
in derogation of, the performance of its obligations as specified in
Rule 803(b) with respect to its appointed options classes. In
particular, Market Makers would be prohibited from (1) individually or
as a group, intentionally or unintentionally, dominating the market in
options contracts of a particular class and (2) effecting purchases or
sales on the Exchange except in a reasonable and orderly manner.\16\
Accordingly, the proposal supports the quality of the Exchange's
markets by helping to ensure that Market Makers and in particular,
PMMs, will continue to be obligated to and have incentives to provide
liquidity in their appointed classes. Ultimately, the benefit that the
proposed rule change confers upon PMMs by increasing the percentage of
contracts executed in the PMM's non-appointed classes from 10% to 25%
is offset by the PMM's continued responsibilities to provide
significant liquidity to the market to the benefit of market
participants.
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\14\ See Rule 803(b)(1)-(4).
\15\ See notes 6 and 7 above, with accompanying text.
\16\ See Rule 803(d)(1) and (2).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
that its proposal will impose an undue burden on intra-market
competition because it will align the percentage limitations for both
PMMs and CMMs to 25% of their non-appointed classes, and will treat all
Market Makers uniformly in this respect. In terms of inter-market
competition, the Exchange operates in a highly competitive market in
which market participants can send order flow to competing exchanges if
they deem trading practices at a particular exchange to be onerous or
cumbersome. The proposal to increase the limitation on the percentage
of contracts executed in a PMM's non-appointed classes from 10% to 25%
will serve to better align the Exchange's requirements with those in
place at other options exchanges, which enhances the ability of its
Market Makers to effectively compete with market makers on other
options exchanges.\17\
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\17\ See note 4 above.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \18\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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\18\ 15 U.S.C. 78s(b)(3)(A)(iii).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \20\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \21\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. GEMX has
requested that the Commission waive the 30-day operative delay
contained in Rule 19b-4(f)(6)(iii). The Commission believes that waiver
of the 30-day operative delay is consistent with the protection of
investors and the public interest. The proposal raises no novel issues.
As the Exchange notes, other options markets require their market
makers to a 25% restriction for trading in non-appointed classes.
Further, pursuant to the proposal, PMMs' obligation to their appointed
classes would remain unchanged. Accordingly, the Commission waives the
operative delay and designates the proposed rule change operative upon
filing.\22\
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\20\ 17 CFR 240.19b-4(f)(6).
\21\ 17 CFR 240.19b-4(f)(6)(iii).
\22\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-GEMX-2018-42 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-GEMX-2018-42. 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
[[Page 66778]]
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly.
All submissions should refer to File Number SR-GEMX-2018-42 and
should be submitted on or before January 17, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-28001 Filed 12-26-18; 8:45 am]
BILLING CODE 8011-01-P
