Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 6.40-O To Reduce the Minimum Allowable Parameter for the Transaction- and Volume-Based Settings in the Risk Limitation Mechanism, 43845-43849 [2019-18058]
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Federal Register / Vol. 84, No. 163 / Thursday, August 22, 2019 / Notices
Exchange is proposing a minimum
parameter for two of its risk settings that
would provide the Exchange with
greater flexibility in establishing the
appropriate lower bound of the
transaction and volume-based settings,
which may in turn provide ATP Holders
that utilize this setting with greater
control and flexibility over setting their
risk tolerance and, potentially, more
protection over risk exposure. The
proposal is structured to offer the same
enhancement to all ATP Holders,
regardless of size, and would not
impose a competitive burden on any
participant. The proposal may foster
competition among Market Makers by
providing them with the ability to
enhance and customize their settings in
order to compete for executions and
order flow.
The Exchange does not believe that
the proposed enhancement to the
existing risk limitation mechanism
would impose a burden on competing
options exchanges. Rather, it provides
ATP Holders with the opportunity to
avail themselves of risk settings for
quotes and orders that are consistent
with such tools currently available on
BZX, EDGX, Cboe and PHLX.26
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
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) of the Act 27 and Rule 19b–
4(f)(6) thereunder.28
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 29 normally does not become
operative for 30 days after the date of its
26 See
supra notes 20–25.
U.S.C. 78s(b)(3)(A).
28 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of 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.
29 17 CFR 240.19b–4(f)(6).
27 15
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filing. However, Rule 19b–4(f)(6)(iii) 30
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has
requested that the Commission waive
the 30-day operative delay so that the
proposed rule change may become
operative upon filing. The Exchange
states that such waiver would allow the
Exchange to implement without delay
the proposed functionality and compete
more evenly with other exchanges that
offer similar functionality for quotes and
orders. Therefore, the Commission
believes that waiver of the 30-day
operative delay is consistent with the
protection of investors and the public
interest. Accordingly, the Commission
hereby waives the operative delay and
designates the proposed rule change
operative upon filing.31
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
change 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–
NYSEAMER–2019–31 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–NYSEAMER–2019–31. This
file number should be included on the
30 17
CFR 240.19b–4(f)(6)(iii).
31 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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43845
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
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–NYSEAMER–2019–31 and
should be submitted on or before
September 12, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–18055 Filed 8–21–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86697; File No. SR–
NYSEArca–2019–59]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Rule 6.40–O
To Reduce the Minimum Allowable
Parameter for the Transaction- and
Volume-Based Settings in the Risk
Limitation Mechanism
August 16, 2019.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
32 17
1 15
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CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
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Federal Register / Vol. 84, No. 163 / Thursday, August 22, 2019 / Notices
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on August
7, 2019, NYSE Arca, Inc. (‘‘NYSE Arca’’
or the ‘‘Exchange’’) 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 Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 6.40–O (Risk Limitation
Mechanism) to reduce the minimum
allowable parameter for the transactionand volume-based settings in the Risk
Limitation Mechanism. The proposed
rule change is available on the
Exchange’s website 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Rule 6.40–O (Risk Limitation
Mechanism) to reduce the minimum
allowable parameter for the transactionand volume-based settings in the Risk
Limitation Mechanism. The filing
would align the minimum allowable
parameter for the transaction- and
volume-based settings with the
minimum allowable setting for the
percentage-based setting, which the
Exchange reduced earlier this year.4
2 15
U.S.C. 78a.
CFR 240.19b–4.
4 See Securities Exchange Act Release No. 85494
(April 3, 2019), 84 FR 14166 (April 9, 2019) (SR–
NYSEArca–2019–18) (lowering from 100% to one
percent the minimum allowable parameter for the
3 17
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This proposal would allow the
Exchange to (opt to) set uniform
minimum exposure requirements,
particularly for Market Makers who are
obligated to utilize one of the three risk
settings.5
Risk Limitation Mechanism
Rule 6.40–O sets forth the risklimitation mechanism (the
‘‘Mechanism’’), which is designed to
help Market Makers, as well as OTP
Holder and OTP Firms (collectively,
‘‘OTPs’’), better manage risk related to
quoting and submitting orders,
respectively, during periods of
increased and significant trading
activity.6 The Exchange requires Market
Makers to utilize a risk limitation
mechanism for quotes, which
automatically removes a Market Maker’s
quotes in all series of an options class
when certain parameter settings are
breached.7 The Exchange permits, but
does not require, OTPs (including
Market Makers) to utilize its risk
limitation mechanism for orders, which
automatically cancels such orders when
certain parameter settings are breached.8
Pursuant to Rule 6.40–O, the
Exchange establishes a time period
during which the Mechanism calculates
for quotes and orders, respectively: (1)
The number of trades executed by the
Market Maker or OTP in a particular
options class (‘‘transaction-based’’); (2)
the volume of contracts traded by the
percentage-based risk setting). For consistency with
the proposed textual changes, the Exchange
proposes to modify ‘‘1’’ to ‘‘one’’ in regards to the
minimum allowable percentage-based parameter.
See proposed Commentary .03 to Rule 6.40–O.
5 See infra note 6.
6 Market Makers are included in the definition of
OTPs and therefore, unless the Exchange is
discussing the quoting activity of Market Makers,
the Exchange does not distinguish Market Markers
from OTPs when discussing the risk limitation
mechanisms. See Rule 1.1(nn) (defining OTP
Holder as ‘‘a natural person, in good standing, who
has been issued an OTP, or has been named as a
Nominee’’ that is ‘‘a registered broker or dealer
pursuant to Section 15 of the Securities Exchange
Act of 1934, or a nominee or an associated person
of a registered broker or dealer that has been
approved by the Exchange to conduct business on
the Exchange’s Trading Facilities’’). See also Rule
6.32–O(a) (defining a Market Maker as an
individual ‘‘registered with the Exchange for the
purpose of making transactions as a dealerspecialist on the Floor of the Exchange or for the
purpose of submitting quotes electronically and
making transactions as a dealer-specialist through
the NYSE Arca OX electronic trading system’’).
7 See Rule 6.40–O, Commentary .04(a) (providing
that Market Makers are required to utilize one of the
three risk settings for their quotes); and
Commentary .01 (regarding the cancellation of
quotes once the risk settings have been breached).
8 See Rule 6.40–O, Commentary .04(b) (providing
that OTPs may avail themselves of one of the three
risk limitation mechanisms for certain of their
orders) and Commentary .01 (regarding the
cancellation of orders once the risk settings have
been breached).
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Market Maker or OTP in a particular
options class (‘‘volume-based’’); or (3)
the aggregate percentage of the Market
Maker’s quoted size or OTP’s order
size(s) executed in a particular options
class (‘‘percentage-based’’) (each a ‘‘risk
setting’’; collectively, the ‘‘risk
settings’’).9 If a risk setting is triggered,
the Mechanism will cancel all of the
Market Maker’s quotes or the OTP’s
open orders in that class until the
Market Maker or OTP notifies the
Exchange it will resume submitting
quotes or orders.10 The temporary
suspension of quotes or orders from the
market that results when the risk
settings are triggered is meant to operate
as a safety valve that enables Market
Makers and/or OTPs to re-evaluate their
positions before requesting to re-enter
the market.
Proposed Change to Minimum
Parameter for Transaction- and VolumeBased Risk Settings
Per Commentary .03 to Rule 6.40–O,
the Exchange establishes outside
allowable parameters for each risk
setting and announces by Trader Update
‘‘any applicable minimum, maximum
and/or default settings for the Risk
Limitation Mechanisms’’ that are at or
within these outside parameters. OTPs,
in turn, adjust their own risk settings
within the Exchange-established
parameters, based on risk tolerance,
taking into account such factors as
present and anticipated market
conditions, news in an option, and/or
sudden change in volatility of an option.
Put another way, the rule sets forth the
minimum/maximum for each risk
setting and the Exchange may, but does
not have to, use these settings. However,
the Exchange may instead choose
settings that are higher than the
minimum and lower than the maximum
settings (i.e., if the rule allows a
minimum of 1 and a maximum of 10,
the Exchange could use these
parameters or could instead establish a
minimum of 3 and a maximum of 7).
Once the Exchange determines and
announces the applicable parameters for
each risk setting, the OTP, in turn,
selects a setting within the Exchange
announced parameters that suits their
risk tolerance (i.e., assuming the
Exchange selected a minimum of 3 and
9 See Rule 6.40–O (b)–(d) (setting forth the three
risk limitation mechanisms available). A Market
Maker may activate one Risk Limitation Mechanism
for its quotes (which is required) and a different
Risk Limitation Mechanism for its orders (which is
optional), even if both are activated for the same
class. See also Commentary .08 to Rule 6.40–O.
10 See Commentaries .01 and .02 to Rule 6.40–O
(requiring that a Market Maker or OTP Holder
request that it be re-enabled after a breach of its risk
settings).
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Federal Register / Vol. 84, No. 163 / Thursday, August 22, 2019 / Notices
a maximum of 7, the OTP may select a
setting of 3, 4, 5, 6 or 7).
Earlier this year—in April, the
Exchange reduced from 100% to one
percent the minimum allowable
parameter for the percentage-based risk
setting.11 For consistency and
uniformity, the Exchange now proposes
to likewise adjust the minimum
allowable parameter as established by
Rule for the other two risk settings:
Transaction- and volume-based.
Currently, the transaction-based risk
setting has a minimum allowable
parameter of three (trades) and the
volume-based risk setting has a
minimum allowable parameter of 20
(contracts). The Exchange proposes to
reduce the minimum allowable
parameter for both risk settings to one.12
The following illustrates the potential
impact should the Exchange reduce to
one (1) the minimum allowable
parameter for each of the transactionand volume-based risk settings:
Examples of Impact of Reducing
Transaction-Based Minimum Allowable
Parameter
If a market participant utilizing the
transaction-based risk setting has
interest in three series of the same
underlying (A, B and C), for 10 contracts
each, and the market participant has set
the exposure risk to three, a single
execution of any size in each series (A,
B and C) or a combination of three
executions of any size in any series (A,
B or C) would result in the remaining
interest in the class being canceled. In
this case, because the Mechanism is
counting the number of executions, the
participant can be at risk for any
number of executions from 3 to thirty.
However, if only two executions occur,
no other interest would be canceled. If
there is a subsequent execution within
the applicable time period 13 for any
number of contracts, the remaining
interest in the class would be canceled.
If the same facts as above, but instead
the participant’s exposure risk is set to
1 transaction (as opposed to 3), a single
execution in any series for any number
of contracts, would result in the
remaining interest in the class being
canceled.
11 See
supra note 4.
proposed Commentary .03 to Rule 6.40–O.
The manner in which Rule 6.40–O operates is not
being amended in this rule change.
13 See Commentary .03 to Rule 6.40–O (providing
that the Exchange will specify via Trader Update
‘‘any applicable time period(s) for the Risk
Limitation Mechanisms; provided, however, that
the Exchange will not specify a time period of less
than 100 milliseconds’’).
12 See
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Examples of Impact of Reducing
Volume-Based Minimum Allowable
Parameter
If a market participant utilizing the
volume-based risk setting has interest in
three series of the same underlying (A,
B and C), for 10 contracts each, and the
market participant has set the exposure
risk to 20 contracts, any combination of
executions across the three series that
total twenty or more contracts would
result in the remaining interest in the
class being canceled. In this case,
because the Mechanism is counting the
volume (or number) of contracts
executed, the participant can be at risk
for any number of contracts from 20 to
29 (executions of 10 contracts in series
A and 9 contracts in series B would not
cause cancelation, but a subsequent
execution of any number of contracts in
series C within the applicable time
period 14 would result in the remaining
interest in the class being canceled).
If the same facts as above, but instead
the participant’s exposure risk is set to
1 contract (as opposed to 20), an
execution in any series for any number
of contracts, will result in the remaining
interest in the class being canceled.
*
*
*
*
*
The proposed reduction of the
minimum parameter for each of the
transaction- and volume-based risk
settings was specifically requested by
some OTPs and would inure to their
benefit as it would allow the Exchange
to offer more sensitive risk controls. The
Exchange notes that it is not modifying
the maximum threshold for either of the
transaction or volume-based settings,
which provide OTPs, and Market
Makers in particular, the ability to more
finely calibrate their risk exposure.15
The Exchange believes a modification to
the minimum parameter for these risk
settings would account for increased
market volatility and fragmentation, as
well as the ever-increasing automation,
speed and volume transacted in today’s
electronic trading environment. In this
regard, this proposed change would
provide the Exchange with more
flexibility within which to establish the
lower bound risk parameter for OTPs
that use this risk setting. To the extent
14 See
id.
2016, the Exchange modified both the upper
and lower bound of the transaction-based setting
and only the upper bound of the volume-based (as
well as the upper bound of the percentage-based)
risk setting. See Securities Exchange Act Release
No. 79469 (December 5, 2016), 81 FR 89171
(December 9, 2016) (NYSEArca–2016–155). See also
Securities Exchange Act Release No. 67714 (August
22, 2012), 77 FR 52104 (August 28, 2012)
(NYSEArca–2012–87) (immediate effective filing to
introduce minimum and maximum parameters for
the risk settings).
15 In
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43847
this flexibility is utilized, the Exchange
believes this should afford such OTPs
the ability to better calibrate and
manage risk.16
Implementation
The Exchange will announce by
Trader Update the implementation date
of the proposed rule change.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,17 in general, and furthers the
objectives of Section 6(b)(5) of the Act,18
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 regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest.
OTPs are vulnerable to the risk from
a system or other error or a market event
that may cause them to send a large
number of orders or receive multiple,
automatic executions before they can
adjust their exposure in the market.
Without adequate risk management
tools, such as the available risk settings,
OTPs may opt to reduce the amount of
order flow and liquidity that they
provide to the market, which could
undermine the quality of the markets
available to market participants. The
Exchange believes that the proposed
reduction of the minimum parameter for
each of the transaction- and volumebased risk settings would remove
impediments to and perfect the
mechanism of a free and open market by
providing the Exchange with more
flexibility within which to establish the
appropriate lower bound of these risk
settings, in consideration of market
conditions, which would enable this
risk setting to operate in the manner
intended to the benefit of all market
participants. To the extent this
flexibility is utilized, the Exchange
believes this should afford OTPs that
utilize this risk setting the ability to
better calibrate and manage risk.
16 The Exchange would still announce by Trader
Update the actual minimum setting for the
transaction- and volume-based risk settings, which
may be the same as or greater than the proposed
minimum parameter of one (1) (but no greater than
the maximum allowable transaction- or volumebased setting, as applicable). See Commentary .03
to Rule 6.40–O.
17 15 U.S.C. 78f(b).
18 15 U.S.C. 78f(b)(5).
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Further, this proposed change, which
was specifically requested by some
OTPs, would remove impediments to
and perfect the mechanism of a free and
open market because it would be
available to all OTPs (if the Exchange
chooses to reduce the minimum
parameter—down to one (1)—for one or
both of the transaction- and volumebased risk settings) and may encourage
more OTPs to utilize the transaction- or
volume-based risk settings, specifically,
or the risk settings generally, which
would benefit all market participants.
The Exchange believes this proposal has
the potential to help OTPs better
manage their risk as it would allow for
more precise customization of their risk
settings which would, in turn, help
OTPs avoid trading a number of
contracts that exceeds the OTP’s risk
tolerance level. In particular, this
proposed reduction in the minimum
allowable parameter would mean that
the Exchange has the ability to set a
minimum as low as one (1) for each of
the three risk settings.19
The Exchange notes that other options
exchanges offer risk settings for quotes
and orders, including analogous
transaction- and volume-based settings.
For example, Rule 21.16, Risk Monitor
Mechanism, on both Cboe BZX
Exchange, Inc. (‘‘BZX’’) and Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) states that
each BZX or EDGX Member may (but is
not required to) configure a single
counting program or multiple counting
programs to govern its trading activity
(i.e., on a per port basis).20 Just as with
the Exchange’s risk settings, both BZX
and EDGX offer risk settings based on
the number of contracts (or ‘‘volume’’)
executed and the number of executions
(or ‘‘count’’) within a time period
designated by the BZX/EDGX member
(collectively, the ‘‘risk limits’’).21 These
risk limits are calculated similarly to the
risk setting on the Exchange: For each
series of an option class, the number of
executions or contracts traded
(depending on the applicable risk
setting) are counted and when they
reach the applicable threshold, the risk
protections are activated. Unlike the
Exchange’s rule, which establishes
potential minimum and maximum
19 See
supra note 4.
BZX and EDGX Rule 21.16(a)(i)–(iv)
(providing optional risk control settings). On each
market (BZX and EDGX), risk setting limits have
been reached, the Risk Monitor Mechanism cancels
or rejects such Member’s orders or quotes in all
underlying securities and cancels or rejects any
additional orders or quotes. See BZX and EDGX
Rule 21.16(b)(i)–(iii).
21 See BZX and EDGX Rule 21.16(a)(i), (iii)
(setting forth volume and count risk settings). See
also BZX and EDGX Rule 21.16(a)(iv) (setting forth
percentage-based setting).
20 See
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settings to be determined by the
Exchange, BZX/EDGX Rule 21.16 has no
minimum equivalent, which would
allow the Member (whether orders or
market maker quotes) to set its risk
settings for its trading activity as low as
one contract or one execution. And
unlike the Exchange, BZX/EDGX do not
require its market makers to establish
risk settings for quotes, nor does it
impose a default setting for participants
that do not establish such risk settings.
The proposed change would authorize
the Exchange to set the minimum
parameters for the transaction- and
volume-based to be as low as one trade
or one contract, as applicable, which
would thus allow the Exchange’s rule to
align with the minimum per the
percentage-based risk setting as well as
with the BZX/EDGX rule.22 The
Exchange believes that this proposal is
consistent with the BXZ/EDGX rules
that allow order senders (i.e., including
non-Market Makers) to use a
transactional- or volume-based risk
parameter that may be set as low as one
execution or one contract.
Cboe Exchange Inc. (‘‘Cboe’’) Rule
8.18, Quote Risk Monitor (‘‘QRM’’)
likewise requires risk settings that apply
solely to quotes. For each such option
class in which the Cboe market maker
is engaged in trading, that market maker
must establish ‘‘a maximum number of
contracts for such option class and ‘‘the
maximum number of series for which
either side of the quote is fully traded.23
While Cboe requires a maximum for
each of these risk settings, it does not
require or set a minimum. In addition,
Nasdaq PHLX (‘‘PHLX’’)—like the
Exchange and Cboe—also requires its
market makers to utilize one of its risk
settings (either volume-based or
percentage-based) for quotes.24 PHLX’s
volume-based risk setting operates
similar to the Exchange’s analogous
setting, except that the PHLX market
maker need only establish a maximum
volume threshold that, when reached,
22 The Exchange notes that other options in
exchanges in the Cboe family offer a similar Risk
Monitor Mechanism. See, e.g., Cboe C2 Exchange,
Inc. (‘‘C2’’) Rule 6.14(c)(5)(A)(i)–(v) (setting forth
risk settings, with paragraphs (i) and (iii) setting
forth the volume- and count (or transaction)-based
setting, each of which mirror those offered by BZX
and EDGX). See also Securities Exchange Act
Release No. 84778 (December 10, 2018), 83 FR
64384 (December 14, 2018) (SR–CboeEDGX–2018–
058) (immediately effective EDGX filing to
harmonize risk mechanism to that of its affiliated
exchange, C2 in Rule 21.16).
23 The Exchange notes that the QRM also allows
Cboe market makers to establish ‘‘a maximum
cumulative percentage’’ that the market maker is
willing to trade, where the cumulative percentage
is the sum of the percentages of the original quoted
size of each side of each series that traded, and a
Measurement Interval.’’ See Cboe Rule 8.18.
24 See PHLX Rule 1099(c)(2)(A),(B).
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will trigger PHLX to remove that market
maker’s quotes.25 The Exchange
believes that this proposal is consistent
with the Cboe and PHLX rules that
require market makers on those
exchanges to use a risk parameter that
may be set as low as one contract or one
execution, given that those exchanges
only require that a maximum threshold
be selected.
Finally, the Exchange also believes
that the proposed rule change would
promote just and equitable principles of
trade because Market Makers have the
option to select any one of the three risk
settings for quotes and non-Market
Makers have this same option or may
choose to utilize no risk settings at all.
Thus, this proposal merely provides the
Exchange additional latitude in
establishing the potential minimum for
the transaction- and volume-based risk
settings and may encourage more OTPs
to utilize these or the third (percentagebased) risk setting, which benefits all
market participants.
The Exchange believes the technical
change replacing ‘‘one’’ for ‘‘1’’ with
regard to the minimum allowable
percentage-based parameter change
would promote just and equitable
principles of trade because it would add
internal consistency to Exchange rules.
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 that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange is proposing a minimum
parameter for two of its risk settings that
would provide the Exchange with
greater flexibility in establishing the
appropriate lower bound of the
transaction and volume-based settings,
which may in turn provide OTPs that
utilize this setting with greater control
and flexibility over setting their risk
tolerance and, potentially, more
protection over risk exposure. The
proposal is structured to offer the same
enhancement to all OTPs, regardless of
size, and would not impose a
competitive burden on any participant.
The proposal may foster competition
among Market Makers by providing
them with the ability to enhance and
customize their settings in order to
compete for executions and order flow.
The Exchange does not believe that
the proposed enhancement to the
existing risk limitation mechanism
would impose a burden on competing
options exchanges. Rather, it provides
OTPs with the opportunity to avail
25 See
E:\FR\FM\22AUN1.SGM
PHLX Rule 1099(c)(2)(B).
22AUN1
Federal Register / Vol. 84, No. 163 / Thursday, August 22, 2019 / Notices
themselves of risk settings for quotes
and orders that are consistent with such
tools currently available on BZX, EDGX,
Cboe and PHLX.26
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
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) of the Act 27 and Rule 19b–
4(f)(6) thereunder.28
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 29 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 30
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has
requested that the Commission waive
the 30-day operative delay so that the
proposed rule change may become
operative upon filing. The Exchange
states that such waiver would allow the
Exchange to implement without delay
the proposed functionality and compete
more evenly with other exchanges that
offer similar functionality for quotes and
orders. Therefore, the Commission
believes that waiver of the 30-day
operative delay is consistent with the
protection of investors and the public
interest. Accordingly, the Commission
hereby waives the operative delay and
designates the proposed rule change
operative upon filing.31
26 See
supra notes 20–25.
27 15 U.S.C. 78s(b)(3)(A).
28 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of 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.
29 17 CFR 240.19b–4(f)(6).
30 17 CFR 240.19b–4(f)(6)(iii).
31 For purposes only of waiving the 30-day
operative delay, the Commission also has
considered the proposed rule’s impact on
VerDate Sep<11>2014
16:37 Aug 21, 2019
Jkt 247001
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
change 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–
NYSEArca–2019–59 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–NYSEArca–2019–59. 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
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–NYSEArca–2019–59 and
should be submitted on or before
September 12, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–18058 Filed 8–21–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86695; File No. SR–Phlx–
2019–28]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Exchange
Rules 605 and 1049
August 16, 2019.
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 August 5,
2019, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Exchange Rules 605 and 1049, titled
‘‘Advertisements, Market Letters,
Research Reports and Sales Literature’’
and ‘‘Options Communications.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqphlx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
32 17
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
PO 00000
Frm 00063
Fmt 4703
Sfmt 4703
43849
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 84, Number 163 (Thursday, August 22, 2019)]
[Notices]
[Pages 43845-43849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18058]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86697; File No. SR-NYSEArca-2019-59]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 6.40-
O To Reduce the Minimum Allowable Parameter for the Transaction- and
Volume-Based Settings in the Risk Limitation Mechanism
August 16, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the
[[Page 43846]]
``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that,
on August 7, 2019, NYSE Arca, Inc. (``NYSE Arca'' or the ``Exchange'')
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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 6.40-O (Risk Limitation
Mechanism) to reduce the minimum allowable parameter for the
transaction- and volume-based settings in the Risk Limitation
Mechanism. The proposed rule change is available on the Exchange's
website 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 6.40-O (Risk Limitation
Mechanism) to reduce the minimum allowable parameter for the
transaction- and volume-based settings in the Risk Limitation
Mechanism. The filing would align the minimum allowable parameter for
the transaction- and volume-based settings with the minimum allowable
setting for the percentage-based setting, which the Exchange reduced
earlier this year.\4\ This proposal would allow the Exchange to (opt
to) set uniform minimum exposure requirements, particularly for Market
Makers who are obligated to utilize one of the three risk settings.\5\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 85494 (April 3,
2019), 84 FR 14166 (April 9, 2019) (SR-NYSEArca-2019-18) (lowering
from 100% to one percent the minimum allowable parameter for the
percentage-based risk setting). For consistency with the proposed
textual changes, the Exchange proposes to modify ``1'' to ``one'' in
regards to the minimum allowable percentage-based parameter. See
proposed Commentary .03 to Rule 6.40-O.
\5\ See infra note 6.
---------------------------------------------------------------------------
Risk Limitation Mechanism
Rule 6.40-O sets forth the risk-limitation mechanism (the
``Mechanism''), which is designed to help Market Makers, as well as OTP
Holder and OTP Firms (collectively, ``OTPs''), better manage risk
related to quoting and submitting orders, respectively, during periods
of increased and significant trading activity.\6\ The Exchange requires
Market Makers to utilize a risk limitation mechanism for quotes, which
automatically removes a Market Maker's quotes in all series of an
options class when certain parameter settings are breached.\7\ The
Exchange permits, but does not require, OTPs (including Market Makers)
to utilize its risk limitation mechanism for orders, which
automatically cancels such orders when certain parameter settings are
breached.\8\
---------------------------------------------------------------------------
\6\ Market Makers are included in the definition of OTPs and
therefore, unless the Exchange is discussing the quoting activity of
Market Makers, the Exchange does not distinguish Market Markers from
OTPs when discussing the risk limitation mechanisms. See Rule
1.1(nn) (defining OTP Holder as ``a natural person, in good
standing, who has been issued an OTP, or has been named as a
Nominee'' that is ``a registered broker or dealer pursuant to
Section 15 of the Securities Exchange Act of 1934, or a nominee or
an associated person of a registered broker or dealer that has been
approved by the Exchange to conduct business on the Exchange's
Trading Facilities''). See also Rule 6.32-O(a) (defining a Market
Maker as an individual ``registered with the Exchange for the
purpose of making transactions as a dealer-specialist on the Floor
of the Exchange or for the purpose of submitting quotes
electronically and making transactions as a dealer-specialist
through the NYSE Arca OX electronic trading system'').
\7\ See Rule 6.40-O, Commentary .04(a) (providing that Market
Makers are required to utilize one of the three risk settings for
their quotes); and Commentary .01 (regarding the cancellation of
quotes once the risk settings have been breached).
\8\ See Rule 6.40-O, Commentary .04(b) (providing that OTPs may
avail themselves of one of the three risk limitation mechanisms for
certain of their orders) and Commentary .01 (regarding the
cancellation of orders once the risk settings have been breached).
---------------------------------------------------------------------------
Pursuant to Rule 6.40-O, the Exchange establishes a time period
during which the Mechanism calculates for quotes and orders,
respectively: (1) The number of trades executed by the Market Maker or
OTP in a particular options class (``transaction-based''); (2) the
volume of contracts traded by the Market Maker or OTP in a particular
options class (``volume-based''); or (3) the aggregate percentage of
the Market Maker's quoted size or OTP's order size(s) executed in a
particular options class (``percentage-based'') (each a ``risk
setting''; collectively, the ``risk settings'').\9\ If a risk setting
is triggered, the Mechanism will cancel all of the Market Maker's
quotes or the OTP's open orders in that class until the Market Maker or
OTP notifies the Exchange it will resume submitting quotes or
orders.\10\ The temporary suspension of quotes or orders from the
market that results when the risk settings are triggered is meant to
operate as a safety valve that enables Market Makers and/or OTPs to re-
evaluate their positions before requesting to re-enter the market.
---------------------------------------------------------------------------
\9\ See Rule 6.40-O (b)-(d) (setting forth the three risk
limitation mechanisms available). A Market Maker may activate one
Risk Limitation Mechanism for its quotes (which is required) and a
different Risk Limitation Mechanism for its orders (which is
optional), even if both are activated for the same class. See also
Commentary .08 to Rule 6.40-O.
\10\ See Commentaries .01 and .02 to Rule 6.40-O (requiring that
a Market Maker or OTP Holder request that it be re-enabled after a
breach of its risk settings).
---------------------------------------------------------------------------
Proposed Change to Minimum Parameter for Transaction- and Volume-Based
Risk Settings
Per Commentary .03 to Rule 6.40-O, the Exchange establishes outside
allowable parameters for each risk setting and announces by Trader
Update ``any applicable minimum, maximum and/or default settings for
the Risk Limitation Mechanisms'' that are at or within these outside
parameters. OTPs, in turn, adjust their own risk settings within the
Exchange-established parameters, based on risk tolerance, taking into
account such factors as present and anticipated market conditions, news
in an option, and/or sudden change in volatility of an option. Put
another way, the rule sets forth the minimum/maximum for each risk
setting and the Exchange may, but does not have to, use these settings.
However, the Exchange may instead choose settings that are higher than
the minimum and lower than the maximum settings (i.e., if the rule
allows a minimum of 1 and a maximum of 10, the Exchange could use these
parameters or could instead establish a minimum of 3 and a maximum of
7). Once the Exchange determines and announces the applicable
parameters for each risk setting, the OTP, in turn, selects a setting
within the Exchange announced parameters that suits their risk
tolerance (i.e., assuming the Exchange selected a minimum of 3 and
[[Page 43847]]
a maximum of 7, the OTP may select a setting of 3, 4, 5, 6 or 7).
Earlier this year--in April, the Exchange reduced from 100% to one
percent the minimum allowable parameter for the percentage-based risk
setting.\11\ For consistency and uniformity, the Exchange now proposes
to likewise adjust the minimum allowable parameter as established by
Rule for the other two risk settings: Transaction- and volume-based.
Currently, the transaction-based risk setting has a minimum allowable
parameter of three (trades) and the volume-based risk setting has a
minimum allowable parameter of 20 (contracts). The Exchange proposes to
reduce the minimum allowable parameter for both risk settings to
one.\12\ The following illustrates the potential impact should the
Exchange reduce to one (1) the minimum allowable parameter for each of
the transaction- and volume-based risk settings:
---------------------------------------------------------------------------
\11\ See supra note 4.
\12\ See proposed Commentary .03 to Rule 6.40-O. The manner in
which Rule 6.40-O operates is not being amended in this rule change.
---------------------------------------------------------------------------
Examples of Impact of Reducing Transaction-Based Minimum Allowable
Parameter
If a market participant utilizing the transaction-based risk
setting has interest in three series of the same underlying (A, B and
C), for 10 contracts each, and the market participant has set the
exposure risk to three, a single execution of any size in each series
(A, B and C) or a combination of three executions of any size in any
series (A, B or C) would result in the remaining interest in the class
being canceled. In this case, because the Mechanism is counting the
number of executions, the participant can be at risk for any number of
executions from 3 to thirty. However, if only two executions occur, no
other interest would be canceled. If there is a subsequent execution
within the applicable time period \13\ for any number of contracts, the
remaining interest in the class would be canceled.
---------------------------------------------------------------------------
\13\ See Commentary .03 to Rule 6.40-O (providing that the
Exchange will specify via Trader Update ``any applicable time
period(s) for the Risk Limitation Mechanisms; provided, however,
that the Exchange will not specify a time period of less than 100
milliseconds'').
---------------------------------------------------------------------------
If the same facts as above, but instead the participant's exposure
risk is set to 1 transaction (as opposed to 3), a single execution in
any series for any number of contracts, would result in the remaining
interest in the class being canceled.
Examples of Impact of Reducing Volume-Based Minimum Allowable Parameter
If a market participant utilizing the volume-based risk setting has
interest in three series of the same underlying (A, B and C), for 10
contracts each, and the market participant has set the exposure risk to
20 contracts, any combination of executions across the three series
that total twenty or more contracts would result in the remaining
interest in the class being canceled. In this case, because the
Mechanism is counting the volume (or number) of contracts executed, the
participant can be at risk for any number of contracts from 20 to 29
(executions of 10 contracts in series A and 9 contracts in series B
would not cause cancelation, but a subsequent execution of any number
of contracts in series C within the applicable time period \14\ would
result in the remaining interest in the class being canceled).
---------------------------------------------------------------------------
\14\ See id.
---------------------------------------------------------------------------
If the same facts as above, but instead the participant's exposure
risk is set to 1 contract (as opposed to 20), an execution in any
series for any number of contracts, will result in the remaining
interest in the class being canceled.
* * * * *
The proposed reduction of the minimum parameter for each of the
transaction- and volume-based risk settings was specifically requested
by some OTPs and would inure to their benefit as it would allow the
Exchange to offer more sensitive risk controls. The Exchange notes that
it is not modifying the maximum threshold for either of the transaction
or volume-based settings, which provide OTPs, and Market Makers in
particular, the ability to more finely calibrate their risk
exposure.\15\ The Exchange believes a modification to the minimum
parameter for these risk settings would account for increased market
volatility and fragmentation, as well as the ever-increasing
automation, speed and volume transacted in today's electronic trading
environment. In this regard, this proposed change would provide the
Exchange with more flexibility within which to establish the lower
bound risk parameter for OTPs that use this risk setting. To the extent
this flexibility is utilized, the Exchange believes this should afford
such OTPs the ability to better calibrate and manage risk.\16\
---------------------------------------------------------------------------
\15\ In 2016, the Exchange modified both the upper and lower
bound of the transaction-based setting and only the upper bound of
the volume-based (as well as the upper bound of the percentage-
based) risk setting. See Securities Exchange Act Release No. 79469
(December 5, 2016), 81 FR 89171 (December 9, 2016) (NYSEArca-2016-
155). See also Securities Exchange Act Release No. 67714 (August 22,
2012), 77 FR 52104 (August 28, 2012) (NYSEArca-2012-87) (immediate
effective filing to introduce minimum and maximum parameters for the
risk settings).
\16\ The Exchange would still announce by Trader Update the
actual minimum setting for the transaction- and volume-based risk
settings, which may be the same as or greater than the proposed
minimum parameter of one (1) (but no greater than the maximum
allowable transaction- or volume-based setting, as applicable). See
Commentary .03 to Rule 6.40-O.
---------------------------------------------------------------------------
Implementation
The Exchange will announce by Trader Update the implementation date
of the proposed rule change.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\17\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\18\ 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 regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
OTPs are vulnerable to the risk from a system or other error or a
market event that may cause them to send a large number of orders or
receive multiple, automatic executions before they can adjust their
exposure in the market. Without adequate risk management tools, such as
the available risk settings, OTPs may opt to reduce the amount of order
flow and liquidity that they provide to the market, which could
undermine the quality of the markets available to market participants.
The Exchange believes that the proposed reduction of the minimum
parameter for each of the transaction- and volume-based risk settings
would remove impediments to and perfect the mechanism of a free and
open market by providing the Exchange with more flexibility within
which to establish the appropriate lower bound of these risk settings,
in consideration of market conditions, which would enable this risk
setting to operate in the manner intended to the benefit of all market
participants. To the extent this flexibility is utilized, the Exchange
believes this should afford OTPs that utilize this risk setting the
ability to better calibrate and manage risk.
[[Page 43848]]
Further, this proposed change, which was specifically requested by
some OTPs, would remove impediments to and perfect the mechanism of a
free and open market because it would be available to all OTPs (if the
Exchange chooses to reduce the minimum parameter--down to one (1)--for
one or both of the transaction- and volume-based risk settings) and may
encourage more OTPs to utilize the transaction- or volume-based risk
settings, specifically, or the risk settings generally, which would
benefit all market participants. The Exchange believes this proposal
has the potential to help OTPs better manage their risk as it would
allow for more precise customization of their risk settings which
would, in turn, help OTPs avoid trading a number of contracts that
exceeds the OTP's risk tolerance level. In particular, this proposed
reduction in the minimum allowable parameter would mean that the
Exchange has the ability to set a minimum as low as one (1) for each of
the three risk settings.\19\
---------------------------------------------------------------------------
\19\ See supra note 4.
---------------------------------------------------------------------------
The Exchange notes that other options exchanges offer risk settings
for quotes and orders, including analogous transaction- and volume-
based settings. For example, Rule 21.16, Risk Monitor Mechanism, on
both Cboe BZX Exchange, Inc. (``BZX'') and Cboe EDGX Exchange, Inc.
(``EDGX'') states that each BZX or EDGX Member may (but is not required
to) configure a single counting program or multiple counting programs
to govern its trading activity (i.e., on a per port basis).\20\ Just as
with the Exchange's risk settings, both BZX and EDGX offer risk
settings based on the number of contracts (or ``volume'') executed and
the number of executions (or ``count'') within a time period designated
by the BZX/EDGX member (collectively, the ``risk limits'').\21\ These
risk limits are calculated similarly to the risk setting on the
Exchange: For each series of an option class, the number of executions
or contracts traded (depending on the applicable risk setting) are
counted and when they reach the applicable threshold, the risk
protections are activated. Unlike the Exchange's rule, which
establishes potential minimum and maximum settings to be determined by
the Exchange, BZX/EDGX Rule 21.16 has no minimum equivalent, which
would allow the Member (whether orders or market maker quotes) to set
its risk settings for its trading activity as low as one contract or
one execution. And unlike the Exchange, BZX/EDGX do not require its
market makers to establish risk settings for quotes, nor does it impose
a default setting for participants that do not establish such risk
settings. The proposed change would authorize the Exchange to set the
minimum parameters for the transaction- and volume-based to be as low
as one trade or one contract, as applicable, which would thus allow the
Exchange's rule to align with the minimum per the percentage-based risk
setting as well as with the BZX/EDGX rule.\22\ The Exchange believes
that this proposal is consistent with the BXZ/EDGX rules that allow
order senders (i.e., including non-Market Makers) to use a
transactional- or volume-based risk parameter that may be set as low as
one execution or one contract.
---------------------------------------------------------------------------
\20\ See BZX and EDGX Rule 21.16(a)(i)-(iv) (providing optional
risk control settings). On each market (BZX and EDGX), risk setting
limits have been reached, the Risk Monitor Mechanism cancels or
rejects such Member's orders or quotes in all underlying securities
and cancels or rejects any additional orders or quotes. See BZX and
EDGX Rule 21.16(b)(i)-(iii).
\21\ See BZX and EDGX Rule 21.16(a)(i), (iii) (setting forth
volume and count risk settings). See also BZX and EDGX Rule
21.16(a)(iv) (setting forth percentage-based setting).
\22\ The Exchange notes that other options in exchanges in the
Cboe family offer a similar Risk Monitor Mechanism. See, e.g., Cboe
C2 Exchange, Inc. (``C2'') Rule 6.14(c)(5)(A)(i)-(v) (setting forth
risk settings, with paragraphs (i) and (iii) setting forth the
volume- and count (or transaction)-based setting, each of which
mirror those offered by BZX and EDGX). See also Securities Exchange
Act Release No. 84778 (December 10, 2018), 83 FR 64384 (December 14,
2018) (SR-CboeEDGX-2018-058) (immediately effective EDGX filing to
harmonize risk mechanism to that of its affiliated exchange, C2 in
Rule 21.16).
---------------------------------------------------------------------------
Cboe Exchange Inc. (``Cboe'') Rule 8.18, Quote Risk Monitor
(``QRM'') likewise requires risk settings that apply solely to quotes.
For each such option class in which the Cboe market maker is engaged in
trading, that market maker must establish ``a maximum number of
contracts for such option class and ``the maximum number of series for
which either side of the quote is fully traded.\23\ While Cboe requires
a maximum for each of these risk settings, it does not require or set a
minimum. In addition, Nasdaq PHLX (``PHLX'')--like the Exchange and
Cboe--also requires its market makers to utilize one of its risk
settings (either volume-based or percentage-based) for quotes.\24\
PHLX's volume-based risk setting operates similar to the Exchange's
analogous setting, except that the PHLX market maker need only
establish a maximum volume threshold that, when reached, will trigger
PHLX to remove that market maker's quotes.\25\ The Exchange believes
that this proposal is consistent with the Cboe and PHLX rules that
require market makers on those exchanges to use a risk parameter that
may be set as low as one contract or one execution, given that those
exchanges only require that a maximum threshold be selected.
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\23\ The Exchange notes that the QRM also allows Cboe market
makers to establish ``a maximum cumulative percentage'' that the
market maker is willing to trade, where the cumulative percentage is
the sum of the percentages of the original quoted size of each side
of each series that traded, and a Measurement Interval.'' See Cboe
Rule 8.18.
\24\ See PHLX Rule 1099(c)(2)(A),(B).
\25\ See PHLX Rule 1099(c)(2)(B).
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Finally, the Exchange also believes that the proposed rule change
would promote just and equitable principles of trade because Market
Makers have the option to select any one of the three risk settings for
quotes and non-Market Makers have this same option or may choose to
utilize no risk settings at all. Thus, this proposal merely provides
the Exchange additional latitude in establishing the potential minimum
for the transaction- and volume-based risk settings and may encourage
more OTPs to utilize these or the third (percentage-based) risk
setting, which benefits all market participants.
The Exchange believes the technical change replacing ``one'' for
``1'' with regard to the minimum allowable percentage-based parameter
change would promote just and equitable principles of trade because it
would add internal consistency to Exchange rules.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange is proposing a
minimum parameter for two of its risk settings that would provide the
Exchange with greater flexibility in establishing the appropriate lower
bound of the transaction and volume-based settings, which may in turn
provide OTPs that utilize this setting with greater control and
flexibility over setting their risk tolerance and, potentially, more
protection over risk exposure. The proposal is structured to offer the
same enhancement to all OTPs, regardless of size, and would not impose
a competitive burden on any participant. The proposal may foster
competition among Market Makers by providing them with the ability to
enhance and customize their settings in order to compete for executions
and order flow.
The Exchange does not believe that the proposed enhancement to the
existing risk limitation mechanism would impose a burden on competing
options exchanges. Rather, it provides OTPs with the opportunity to
avail
[[Page 43849]]
themselves of risk settings for quotes and orders that are consistent
with such tools currently available on BZX, EDGX, Cboe and PHLX.\26\
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\26\ See supra notes 20-25.
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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 solicited or received with respect to the
proposed rule change.
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) of the Act \27\ and Rule 19b-
4(f)(6) thereunder.\28\
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\27\ 15 U.S.C. 78s(b)(3)(A).
\28\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of 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 \29\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \30\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has requested that the Commission waive the 30-day operative delay so
that the proposed rule change may become operative upon filing. The
Exchange states that such waiver would allow the Exchange to implement
without delay the proposed functionality and compete more evenly with
other exchanges that offer similar functionality for quotes and orders.
Therefore, the Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest. Accordingly, the Commission hereby waives the operative delay
and designates the proposed rule change operative upon filing.\31\
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\29\ 17 CFR 240.19b-4(f)(6).
\30\ 17 CFR 240.19b-4(f)(6)(iii).
\31\ 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 change 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 [email protected]. Please include
File Number SR-NYSEArca-2019-59 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-NYSEArca-2019-59. 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
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-NYSEArca-2019-59 and should be submitted
on or before September 12, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18058 Filed 8-21-19; 8:45 am]
BILLING CODE 8011-01-P
