Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Priority of Quotes and Orders Rule, 49158-49165 [2019-20152]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 181 (Wednesday, September 18, 2019)]
[Notices]
[Pages 49158-49165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20152]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86946; File No. SR-GEMX-2019-10]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Priority of Quotes and Orders Rule

September 12, 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 28, 2019, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III, below, which 
Items have been prepared by the Exchange. The 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 GEMX Options 2, Section 5 titled 
``Market Maker Quotations,'' Options 3, Section 7, titled ``Types of 
Orders,'' and Options 3, Section 10, titled ``Priority of Quotes and 
Orders.''
    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.

[[Page 49159]]

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

1. Purpose
    The Exchange proposes to amend Options 3, Section 10, titled 
``Priority of Quotes and Orders'' to provide additional detail to the 
rule and make other technical and organizational modifications. The 
Exchange also proposes to amend cross-references within Options 2, 
Section 5 titled ``Market Maker Quotations'' and Options 3, Section 7, 
titled ``Types of Orders.'' Finally, the Exchange proposes to relocate 
certain rule text as described herein. Each change is described below 
in detail. This rule change is intended to further clarify the 
Exchange's current allocation process. This rule change does not amend 
the current System.
Options 3, Section 10
    The Exchange proposes to retitle this rule, ``Allocation and 
Priority of Quotes and Orders.''
Definitions
    The Exchange proposes to capitalize the defined terms ``Market 
Order'' \3\ and ``Limit Order'' \4\ within Options 3, Section 10.
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    \3\ Market Order is defined within Options 3, Section 7(a).
    \4\ Limit Order is defined within Options 3, Section 7(b).
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    The Exchange proposes to amend Options 3, Section 10(a) to re-title 
this section ``Definitions and Applicability'' instead of simply 
``Definitions.'' The Exchange proposes to renumber the current rule 
text as ``(i)'' and add the following to proposed new ``(ii)'':

    Applicability. This rule does not apply to the Block Order 
Mechanism described within Options 3, Section 11(a), the 
Facilitation Mechanism described within Options 3, Section 11(b), 
the Solicited Order Mechanism described within Options 3, Section 
11(d), the Price Improvement Mechanism described within Options 3, 
Section 13, orders described within Options 3, Section 12 or an 
exposure period as provided in Options 5, Section 2 at Supplementary 
Material .02, unless Options 3, Section 10 is specifically 
referenced within GEMX Rules applicable to the aforementioned 
functionality.

    The Exchange notes that today, Options 3, Section 10 is applicable 
to interest on the Order Book. The Exchange has separate and distinct 
rules for functionality related to the Block Order Mechanism, the 
Facilitation Mechanism and the Solicited Order Mechanism within Options 
3, Section 11, the Price Improvement Mechanism within Options 3, 
Section 13, and an exposure period as provided in Options 5, Section 2 
at Supplementary Material .02. The Exchange proposes to make clear that 
Options 3, Section 10 shall not apply to the aforementioned 
functionalities unless Options 3, Section 10 is specifically referred 
to within GEMX Rules applicable to the aforementioned functionality. 
The Exchange notes that the current Options 3, Section 10 at Commentary 
.01(c) only makes reference to the Facilitation Mechanism. The Exchange 
notes that it is amending the rule to reflect all the mechanisms which 
have their own allocation methodologies. Proposed Options 3, Section 
10(a)(ii) reflects the current System. This is not a change to the 
current System. The Exchange believes that adding the proposed 
applicability section will better explain the interaction as between 
Options 3, Section 10 and other trading functionality.
Zero-Bid
    The Exchange proposes to create a new proposed Options 3, Section 
10(b)(1) and title that rule ``Zero-Bid Option Series.'' The Exchange 
proposes to capitalize the defined terms ``Market Order'' \5\ and 
``Limit Order'' within this rule. The Exchange proposes to amend the 
first sentence to add the phrase ``accepted by the System'' to provide 
more context to the rule. This rule does not apply to a Market Order 
that is not accepted because it was rejected upon entry.\6\ The 
Exchange also proposes to add greater detail to the zero bid rule by 
providing, ``With respect to Market Orders to sell which are submitted 
prior to the Opening Process and persist after the Opening Process, 
those orders are posted at a price equal to the minimum trading 
increment as defined in Options 3, Section 3.'' This detail represents 
the Exchange's current practice. The Exchange believes this rule text 
will add greater detail to the GEMX rule which operates in a similar 
manner to the Nasdaq Phlx, LLC (``Phlx'').\7\
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    \5\ Market Order is defined within Options 3, Section 7(a).
    \6\ For example, a Market Order that it rejected due to Limit-Up 
Limit-Down would not be treated as a Limit Order because it was not 
accepted by the System.
    \7\ See Phlx 1035, which contains a similar sentence as proposed 
herein.
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Priority
    The Exchange proposes to amend Options 3, Section 10 because the 
proposed description of priority adds greater detail to each allocation 
tier. The general allocation and priority provisions are contained 
within the Supplementary Material to Options 3, Section 10. The rule 
therefore needs to be read by referring to the Supplementary Material 
while reading the main rule. The Exchange proposes to amend the current 
priority rule within Options 3, Section 10 to explain the allocation of 
interest and the priority of such allocation in a timeline format to 
avoid confusion and ease the reading of the rule. Further, the Exchange 
proposes to add greater detail to the current rule.
    The Exchange proposes to rename current Options 3, Section 10(c) 
titled, ``Priority,'' as ``Execution Priority and Processing in the 
System.'' The Exchange proposes to provide greater detail to this rule. 
The Exchange proposes to state that it will apply a Size Pro-Rata 
execution algorithm to orders, unless otherwise specified. The Exchange 
proposes to detail the manner in which it applies Size Pro-Rata 
execution today by stating, ``The System shall execute trading interest 
within the System in price priority, meaning it will execute all 
trading interest at the best price level within the System before 
executing trading interest at the next best price. Size Pro-Rata 
Priority shall mean that if there are two or more resting orders or 
quotes at the same price, the System allocates contracts from an 
incoming order or quote to resting orders and quotes beginning with the 
resting order or quote displaying the largest size proportionally 
according to displayed size, based on the total number of contracts 
displayed at that price. If the result is not a whole number, it will 
be rounded up to the nearest whole number. If there are still contracts 
to be allocated after the displayed size of all orders at that price 
has been executed, the remaining size from the incoming order will be 
allocated proportionally against non-displayed interest according to 
remaining total size of each resting order at such price, beginning 
with the order which has the largest total size remaining.'' The 
Exchange notes that this proposed rule text represents the Exchange's 
current practice. The Exchange is not amending the manner in which it 
applies the Size Pro-Rata allocation. This practice is explained in 
Supplementary Material .01(a) to Options 3, Section 10 wherein it 
states, ``Professional Orders and market maker quotes at the best price 
receive allocations based upon the percentage of the total number of 
contracts available at the best price that is represented by the size 
of the Professional Order or quote.'' The Exchange believes that this 
rule text will provide Members with transparency as to the allocation

[[Page 49160]]

methodology applied within the System.
    The Exchange proposes to add a new Options 3, Section 10(c)(1) 
which provides, ``Priority Overlays Applicable to Size Pro-Rata 
Execution Algorithm: The Exchange will apply the following designated 
Member priority overlays. No Member shall be entitled to receive a 
number of contracts that is greater than the size that is associated 
with their quotation or order.'' This language represents current 
practice within Supplementary Material .01(c) to Options 3, Section 10. 
The Exchange is proposing to introduce each priority category in the 
order that they are allocated, as is currently expressed in the rule 
today, and note specifically that no Member may receive an allocation 
greater than their size which is the case today. Current rule text 
within Supplementary Material .01(c) to Options 3, Section 10 provides, 
``No market participant is allocated any portion of an execution unless 
it has an existing interest at the execution price. Moreover, no market 
participant can execute a greater number of contracts than is 
associated with the price of its existing interest.''
    The below priority overlays described herein will be applied by the 
Exchange as explained within the proposed rule for all options series.
Priority Customer
    Proposed Options 3, Section 10(c)(1)(A) describes Priority Customer 
\8\ allocation. As is the case today, Priority Customers on the 
Exchange have priority over other market participants at the same price 
and in the same option series as specified in current Options 3, 
Section 10(c). The Exchange proposes to replace Options 3, Section 
10(c) and (d) with the following rule text which represents the current 
System:
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    \8\ The term ``Priority Customer'' means a person or entity that 
(i) is not a broker or dealer in securities, and (ii) does not place 
more than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s). See Options 1, 
Section 1 (a)(36).

    (A) Priority Customer: the highest bid and lowest offer shall 
have priority except that Priority Customer orders shall have 
priority over non-Priority Customer interest at the same price in 
the same options series. If there are two or more Priority Customer 
orders for the same options series at the same price, priority shall 
be afforded to such Priority Customer orders in the sequence in 
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which they are received by the System.

    The Exchange proposes to initially note the priority that is 
afforded to Priority Customers and make clear that time priority 
continues to apply. Specifically, the Exchange proposes to make clear 
in the introductory paragraph of proposed Options 3, Section 10(c) that 
non-displayed Priority Customer interest will not trade ahead of other 
displayed interest at the same price regardless of the displayed 
interest's capacity, as is the case today within Options 3, Section 
10(1)(c) and (d). The Exchange believes that the proposed rule text 
provides clarity to the current allocation methodology.
Primary Market Maker
    The Exchange proposes new rule text at Options 3, Section 
10(c)(1)(B) to describe the current manner in which the System handles 
Enhanced Primary Market Maker \9\ Priority:
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    \9\ The term ``Primary Market Maker'' means a Member that is 
approved to exercise trading privileges associated with PMM Rights. 
See Options 1, Section 1(a)(34).

    Enhanced Primary Market Maker Priority: A Primary Market Maker 
may be assigned by the Exchange in each option class in accordance 
with Options 2, Section 3(b). After all Priority Customer orders 
have been fully executed, provided the Primary Market Maker's quote 
is at the NBBO, the Primary Market Maker shall be entitled to 
receive the allocation described in Options 3, Section 
10(c)(1)(B)(i), unless the incoming order to be allocated is a 
Preferenced Order and the Primary Market Maker is not the Preferred 
Market Maker, in which case allocation would be pursuant to 
(c)(1)(C). If the order is a Preferenced Order and the Primary 
Market Maker is also the Preferred Market Maker (``Preferred Market 
Maker Priority'') then the Preferred Market Maker Participation 
Entitlement in (c)(1)(C) or (c)(1)(E) applies. The Primary Market 
Maker shall not be entitled to receive a number of contracts that is 
greater than the size associated with such Primary Market Maker's 
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quote.

    The Exchange proposes to note that a Primary Market Maker may be 
assigned by the Exchange in each option class in accordance with 
Options 2, Section 3(b). Reiterating the priority afforded to Priority 
Customer orders, the Exchange notes that Priority Customers must be 
first fully executed and then Primary Market Maker allocation would be 
accounted for in that order.
    The Exchange proposes to state that provided the Primary Market 
Maker's quote is at the NBBO the Primary Market Maker shall be entitled 
to receive the allocation described in Options 3, Section 
10(c)(1)(B)(i), unless the incoming order to be allocated is a 
Preferenced Order and the Primary Market Maker is not the Preferred 
Market Maker.
    Current Options 3, Section 10(e) provides,

    Precedence of Professional Orders and Market Maker Quotes. 
Except as provided under Options 3, Section 7(g), if there are two 
(2) or more Professional Orders or Market Maker quotes at the 
Exchange's best bid or offer, after all Priority Customer Orders (if 
any) at that price have been filled, executions at that price will 
be allocated between the Professional Orders and Market Maker quotes 
pursuant to an allocation procedure to be determined by the Exchange 
from time to time; provided, however, that if the Primary Market 
Maker is quoting at the Exchange's best bid or offer, it shall have 
precedence over Professional Orders and Competitive Market Maker 
quotes for execution of orders that are for a specified number of 
contracts or fewer, which number shall be determined by the Exchange 
from time to time.

    Current Supplementary Material .01 to Options 3, Section 10(a) and 
(b) provide,

    (a) Subject to the two limitations in paragraphs (b) and (c) 
below and subject to paragraph .03 (Preferenced Orders), 
Professional Orders and Market Maker quotes at the best price 
receive allocations based upon the percentage of the total number of 
contracts available at the best price that is represented by the 
size of the Professional Order or quote;
    (b) If the Primary Market Maker is quoting at the best price, it 
has participation rights equal to the greater of (i) the proportion 
of the total size at the best price represented by the size of its 
quote, or (ii) sixty percent (60%) of the contracts to be allocated 
if there is only one (1) other Professional Order or Market Maker 
quotation at the best price, forty percent (40%) if there are two 
(2) other Professional Orders and/or Market Maker quotes at the best 
price, and thirty percent (30%) if there are more than two (2) other 
Professional Orders and/or Market Maker quotes at the best price . . 
.

    The current rule text describes the precedence of orders for 
Professional Orders \10\ and market maker \11\ quotes together. The 
Exchange notes that Primary Market Makers may receive certain 
allocations that other market participants do not receive and therefore 
the Exchange is proposing to provide for Primary Market Maker 
allocations separately and then account for allocations of all other 
market participant allocations. As is the case today, after Priority 
Customers are allocated, Primary Market Makers would be allocated 
before any other market participant. The Exchange notes that pursuant 
to the current rule, a Primary Market Maker quoting at the

[[Page 49161]]

Exchange's best bid or offer shall have precedence over Professional 
Orders and Competitive Market Maker quotes for execution of orders that 
are for a specified number of contracts or fewer.
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    \10\ The term ``Professional Order'' means an order that is for 
the account of a person or entity that is not a Priority Customer. 
See Options 1, Section 1(a)(37).
    \11\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See Options 1, 
Section 1(a)(20). The term ``Competitive Market Maker'' means a 
Member that is approved to exercise trading privileges associated 
with CMM Rights. See Options 1, Section 1(a)(11).
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    First, the Exchange proposes to replace the term ``best price'' 
with ``NBBO.'' \12\ The best price in this case is the NBBO. The 
amendment to this term does not reflect a substantive change to the 
current System. With respect to a Primary Market Maker's quote, the 
quote will not be executed at a price that trades through another 
market or displayed at a price that would lock or cross another market. 
The ``NBBO'' is the best Protected Bid and Protected Offer as defined 
in the Options Order Protection and Locked/Crossed Markets Plan; 
Protected Bids and Protected Offers that are displayed at a price but 
available on the Exchange at a better non-displayed price shall be 
included in the NBBO at their better non-displayed price for purposes 
of this rule.\13\
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    \12\ A Primary Market Maker's quote may be executed at the BBO 
provided the BBO is not inferior to the NBBO. The Primary or 
Preferenced Market Maker may receive either the Enhanced Primary 
Market Maker Allocation or the Preferenced Market Maker Allocation 
if they are quoting at the BBO, which would be equivalent to the 
NBBO, if an ISO Order is received because the ISO Order would have 
been routed simultaneously with other orders to any better priced 
interest at away markets in accordance with GEMX Options 5, Section 
1(h). Other options markets have a rule equivalent to Options 5, 
Section 1(h). See also Options 3, Section 7(b)(4) which provides, 
``An Intermarket Sweep Order (ISO) is a limit order that meets the 
requirements of Options 5, Section 1(h).''
    \13\ See 17 CFR 242.600(a)(43). National best bid and national 
best offer means, with respect to quotations for an NMS security, 
the best bid and best offer for such security that are calculated 
and disseminated on a current and continuing basis by a plan 
processor pursuant to an effective national market system plan; 
provided, that in the event two or more market centers transmit to 
the plan processor pursuant to such plan identical bids or offers 
for an NMS security, the best bid or best offer (as the case may be) 
shall be determined by ranking all such identical bids or offers (as 
the case may be) first by size (giving the highest ranking to the 
bid or offer associated with the largest size), and then by time 
(giving the highest ranking to the bid or offer received first in 
time).
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    Second, the Exchange proposes to replace the words ``other 
Professional Orders and market maker quotes'' with ``other non-Priority 
Customer orders and Market Maker quotes.'' While the term 
``Professional Orders'' is defined within Options 1, Section 1(a)(37) 
to mean an order that is for the account of a person or entity that is 
not a Priority Customer, the Exchange believes that simply stating 
``non-Priority Customer'' is a less circular manner in which to 
describe the type of market participant to which the allocation 
applies. The Exchange believes that the term ``non-Priority Customer'' 
reduces any confusion regarding any reference to Professional Order or 
Professional Customer. Orders and quotes are counted individually for 
purposes of allocation even if they are from the same market 
participant.\14\ The Exchange notes that if a Competitive Market Maker 
had both a quote and order at the NBBO, the Competitive Market Maker's 
quote and order would be considered separately for purposes of 
allocation pursuant to proposed Options 3, Section 10(c)(1)(E) based on 
Size Pro-Rata. Whichever quote or order is larger at the best price 
level will be allocated first based on its individually represented 
size. This amendment is not a change to current System operations.
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    \14\ For example, if a Competitive Market Maker submits 2 orders 
and one quote, this would equate to 3 non-Priority Customer interest 
(orders and quotes) for purposes of determining the number of market 
participants for the allocation percentage.
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    Third, the Exchange proposes to reiterate the language in current 
Supplementary Material .01(b) to Options 3, Section 10 by stating 
within proposed Options 3, Section 10(c)(1)(B)(i),

    (i) When the Primary Market Maker is at the same price as a non-
Priority Customer Order or Market Maker quote and the number of 
contracts is greater than 5, the Primary Market Maker shall receive 
the greater of:
    a. 60% of remaining interest if there is one other non-Priority 
Customer Order or Market Maker quote at that price; 40% of remaining 
interest if there are two other non-Priority Customer Orders or 
Market Maker quotes at that price; or 30% of remaining interest if 
there are more than two other non-Priority Customer Orders and 
Market Maker quotes at that price (the ``Primary Market Maker 
Participation Entitlement''); or
    b. the Primary Market Maker's Size Pro-Rata share under 
subparagraph (a)(1)(E) (``All Other Remaining Interest'').

    Fourth, the Exchange proposes to provide within Options 3, Section 
10(a)(1)(B) the following new rule text, ``The Primary Market Maker 
shall not be entitled to receive a number of contracts that is greater 
than the size associated with such Primary Market Maker's quote.'' This 
is also the case today.
    The Exchange proposes to explain the allocation methodology based 
on the size of the order within Options 3, Section 10(c)(1)(B)(i). When 
the number of contracts is greater than 5 allocation would be pursuant 
to Options 3, Section 10(c)(1)(B) and when the number of contracts is 5 
or fewer, allocation would be pursuant to Options 3, Section 
10(c)(1)(D). Further, the Exchange proposes within proposed Options 3, 
Section 10(c)(1)(B) to distinguish when the Primary Market Maker and 
the Preferred Market Maker Participation Entitlement apply. The 
Exchange notes if the incoming order to be allocated is a Preferenced 
Order and the Primary Market Maker is not the Preferred Market Maker, 
allocation would be pursuant to (c)(1)(C) provided the Preferred Market 
Maker's quote is at the NBBO. The Preferred Market Maker allocation is 
provided for within proposed Options 3, Section 10(c)(1)(C). If the 
order is a Preferenced Order and the Primary Market Maker is also the 
Preferred Market Maker (``Preferred Market Maker Priority'') then the 
Preferred Market Maker Participation Entitlement in (c)(1)(C) or 
(c)(1)(E) applies, depending on whether the Primary Market Maker is 
quoting at the NBBO.
Preferred Market Maker
    The Exchange proposes to provide for the allocation that a 
Preferred Market Maker is entitled to within proposed Options 3, 
Section 10(c)(1)(C). The Exchange notes within proposed Options 3, 
Section 10(c)(1)(B) that if the incoming order to be allocated is a 
Preferenced Order and the Primary Market Maker is not the Preferred 
Market Maker, the Enhanced Primary Market Maker Priority shall not 
apply. The Exchange rules currently provides within Supplementary 
Material .03 to Options 3, Section 10 the following:

    Preferenced Orders. An Electronic Access Member may designate a 
``Preferred Market Maker'' on orders it enters into the System 
(``Preferenced Orders'').
    (a) A Preferred Market Maker may be the Primary Market Maker 
appointed to the options class or any Competitive Market Maker 
appointed to the options class.
    (b) If the Preferred Market Maker is not quoting at a price 
equal to the NBBO at the time the Preferenced Order is received, the 
allocation procedure contained in paragraph .01 shall be applied to 
the execution of the Preferenced Order.
    (c) If the Preferred Market Maker is quoting at the NBBO at the 
time the Preferenced Order is received, the allocation procedure 
contained in paragraph .01 shall be applied to the execution of the 
Preferenced Order except that the Primary Market Maker will not 
receive the participation rights described in paragraphs .01(b) and 
(c), and instead the Preferred Market Maker shall have participation 
rights equal to the greater of:
    (i) the proportion of the total size at the best price 
represented by the size of its quote,
    (ii) sixty percent (60%) of the contracts to be allocated if 
there is only one (1) other Professional Order or market maker 
quotation at the best price and forty percent (40%) if there are two 
(2) or more other Professional Orders and/or market maker quotes at 
the best price, or
    (iii) the full size of a Preferenced Order for five (5) 
contracts or fewer if the Primary Market Maker appointed to the 
options class is designated as the Preferred Market Maker.

    First, the Exchange proposes to amend cross-references within this

[[Page 49162]]

current rule text and relocate certain rule text into new proposed 
Options 3, Section 10(c)(1)(C) which proposes to state,

    (C) Preferred Market Maker Priority: After all Priority Customer 
orders have been fully executed, upon receipt of a Preferenced Order 
pursuant to Supplementary .01 to Options 3, Section 10, provided the 
Preferred Market Maker's quote is at the NBBO, the Preferred Market 
Maker will be afforded a participation entitlement. Preferred Market 
Maker participation entitlements will apply only after the Opening 
Process.
    (i) When the Preferred Market Maker is at the same price as a 
non-Priority Customer Order or Market Maker quote, pursuant to the 
Preferred Market Maker participation entitlement, the Preferred 
Market Maker shall receive, with respect to a Preferenced Order, the 
greater of:
    a. 60% of remaining interest if there is one other non-Priority 
Customer Order or Market Maker quote at that price; or 40% of 
remaining interest if there are two or more other non-Priority 
Customer Orders or Market Maker quotes at that price; or
    b. the Preferred Market Maker's Size Pro-Rata share under 
subparagraph (c)(1)(E) (``All Other Remaining Interest''); or
    c. the entitlement for Orders of 5 Contracts or Fewer under 
subparagraph (c)(1)(D) if the Preferred Market Maker is also the 
Primary Market Maker and the incoming Order is for 5 Contracts or 
Fewer.

    Second, the Exchange is proposing to reiterate that a Preferred 
Market Maker shall be allocated after Priority Customer orders have 
been fully executed. The Exchange notes that the Preferred Market 
Maker's bid/offer must be at the NBBO for an entitlement to apply. The 
Exchange notes that the Preferred Market Maker participation 
entitlements will apply only after the Opening Process. This is the 
case today, but is not currently noted within Options 3, Section 10. 
The Exchange proposes to memorialize this limitation for clarity.
    Third, the Exchange proposes to replace the words ``other 
Professional Orders and market maker quotes'' with ``other non-Priority 
Customer Orders and Market Maker quotes.'' The Exchange believes that 
the term ``non-Priority Customer'' reduces any confusion regarding any 
reference to Professional Order or Professional Customer. Orders and 
quotes are counted individually for purposes of allocation even if they 
are from the same market participant. This amendment is not a change to 
current System operations.
    The new proposed rule text seeks to capture allocation text 
currently within Supplementary Material .03 to Options 3, Section 10 
and add text to demonstrate the interaction between the Entitlement for 
Orders of 5 Contracts or Fewer and the new proposed bucket of 
allocation within proposed Options 3, Section 10(c)(1)(E) for all other 
market participants. The Exchange believes that new rule text makes 
clear the manner in which the various allocations interact with one 
another and make clear that the Member is entitled to the greater of 
all potential allocations.
Orders for 5 Contracts or fewer
    Current Supplementary .01(c) to Options 3, Section 10 provides,

    Orders for five (5) contracts or fewer will be executed first by 
the Primary Market Maker; provided however, that on a quarterly 
basis the Exchange will evaluate what percentage of the volume 
executed on the Exchange (excluding volume resulting from the 
execution of orders in the Facilitation Mechanism (see Options 3, 
Section 11(d))) is comprised of orders for five (5) contracts or 
fewer executed by Primary Market Makers, and will reduce the size of 
the orders included in this provision if such percentage is over 
forty percent (40%).

    The Exchange proposes new rule text within Options 3, Section 
10(c)(1)(D) to specifically describe in greater detail the manner in 
which Orders of 5 Contracts or Fewer are handled. The Exchange notes 
that the Entitlement for Orders of 5 Contracts or Fewer shall only 
apply after the Opening Process. The Exchange noted within proposed 
Options 3, Section 10(a)(ii) that Options 3, Section 10 was not 
applicable to the Block Order Mechanism, Facilitation Mechanism or the 
Solicited Order Mechanism within Options 3, Sections 11, the Price 
Improvement Mechanism within Options 3, Section 13 and an exposure 
period as provided in Options 5, Section 2 at Supplementary Material 
.02, unless Options 3, Section 10 is specifically referenced within 
GEMX Rules applicable to the aforementioned functionality. These 
limitations apply today and the Exchange proposes to memorialize the 
limitations within the rule for clarity. The Exchange proposes to amend 
and relocate the language concerning the quarterly evaluation into this 
proposed new rule text. Specifically, the Exchange proposes to delete 
the rule text which excludes volume resulting from the execution of 
orders in the Facilitation Mechanism as explained herein with the 
proposed applicability rule text. The Exchange specifically describes 
allocating orders on the Order Book within Options 3, Section 10. The 
Exchange describes functionality and allocations for the Block Order 
Mechanism, the Facilitation Mechanism, the Solicited Order Mechanism, 
the Price Improvement Mechanism, orders described within Options 3, 
Section 11 or an exposure period within other GEMX Rules.\15\ The 
Entitlement for Orders of 5 Contracts or Fewer is only allocated 
pursuant to proposed Options 3, Section 10(c)(1)(D) and applies 
specifically to the Order Book.
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    \15\ See Options 5, Section 2 at Supplementary Material .02, 
unless Options 3, Section 10.
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    The Exchange proposes to make clear the manner in which Orders of 5 
Contracts or Fewer may be allocated by providing that a Primary Market 
Maker is entitled to priority with respect to Orders of 5 Contracts or 
Fewer if the Primary Market Maker has a quote at the NBBO with no other 
Priority Customer or Preferenced Market Maker interest present which 
has a higher priority, including when the Primary Market Maker is also 
the Preferred Market Maker. Further, the Exchange notes that if the 
Primary Market Maker is quoting at the NBBO and the Primary Market 
Maker is also the Preferred Market Maker or there is no Preferred 
Market Maker quoting at the NBBO, and a Priority Customer has a higher 
priority at the time of execution, the Priority Customer will be 
allocated the Orders of 5 Contracts or Fewer up to their displayed size 
\16\ pursuant to Options 3, Section 10(c)(1)(A) and if contracts 
remain, the Primary Market Maker will be allocated the remainder 
pursuant to Options 3, Section 10(c)(1)(D).\17\ Finally, if the Primary 
Market Maker is quoting at the NBBO and no Priority Customer has a 
higher priority at the time of execution and a Preferred Market Maker, 
who is not the Primary Market Maker, is quoting at the NBBO then 
allocation shall proceed according to Options 3, Section 10(c)(1)(C). 
This rule text represents the current practice. The Exchange believes 
that spelling out the potential scenarios and explaining the resulting 
allocations will make the allocation of Orders of 5 Contracts or Fewer 
more transparent.
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    \16\ The Exchange notes that the inverse is also true. If the 
Primary Market Maker is quoting at the NBBO and the Preferenced 
Market Maker is not the Primary Market Maker and is quoting at the 
NBBO then the Priority Customer would receive the allocation.
    \17\ The Primary Market Maker may receive the remaining 
contracts (i.e. if a Priority Customer has 1 contract order and the 
Primary Market Maker and a Competitive Market Maker have 5 contracts 
each, an incoming order of 5 contracts would be allocated such that 
the Priority Customer receives 1 contract and the remaining 4 
contracts would be allocated to the Primary Market Maker).
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    The Exchange proposes a new category of allocation for all other 
market participants. The Exchange proposes to note within proposed new 
Options 3, Section 10(c)(1)(E), ``If there are contracts remaining 
after all priorities in (A)-(D) have been fully executed, 
notwithstanding Options 3,

[[Page 49163]]

Section 7(g)(3),\18\ such contracts shall be executed based on the Size 
Pro-Rata execution algorithm as described within Options 3, Section 
10(c). The Exchange notes that the priority of allocation for all other 
market participants' changes with respect to the order in which 
displayed and non-displayed volume is allocated for non-Priority 
Customer market participants. Displayed volume will be allocated before 
non-displayed volume. Further Priority Customer non-displayed Reserve 
Orders will be allocated before non-Priority Customer non-displayed 
Reserve Orders. Proposed Options 3, Section 10(c) describes the manner 
in which Priority Customers are allocated pursuant to Size Pro-Rata 
priority. The Exchange believes that separating out all other market 
participants as a new category as well as referring to the allocation 
methodology within each bucket of allocation will make clear the manner 
in which the Exchange allocates. This amendment does not change the 
operation of the current System.
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    \18\ Options 3, Section 7(g) concerns Reserve Orders. A Reserve 
Order is a limit order that contains both a displayed portion and a 
non-displayed portion. Specifically, Options 3, Section 7(g) 
provides, ``The displayed portion of a Reserve Order will trade in 
accordance with Options 3, Section 10(c) and (d) for Priority 
Customer Orders, and Options 3, Section 10(e) and Supplementary 
Material .01, for Professional Orders.''
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    Finally, the Exchange proposes to state that, ``A Market Maker is 
entitled only to an Enhanced Primary Market Maker Priority pursuant to 
Options 3, Section 10(c)(1)(B) or the Entitlement for Orders of 5 
Contracts or Fewer pursuant to Options 3, Section 10(c)(1)(D) on a 
quote, or the Preferred Market Maker Priority pursuant to Options 3, 
Section 10(c)(1)(C) on a quote.'' The Exchange believes that this text 
makes clear that only a market maker quote may receive these enhanced 
allocations. Only a Primary Market Maker quote entitles a Primary 
Market Maker to the allocations within Options 3, Section 10(c)(1)(B) 
or (D) while a quote or a Market Maker Order entitles a Preferred 
Market Maker to the allocation within Options 3, Section 10(c)(1)(C). 
This amendment does not change the operation of the current System.
Current Rule Text
    The Exchange proposes to delete current Options 3, Section 10(c)-
(e) as this rule text is being replaced by proposed Options 3, Section 
10(c)(1)(A), (B) and (E). The Exchange proposes to delete current 
Supplementary Material .01 to Options 3, Section 10 which is being 
replaced by proposed Options 3, Section 10(a)(1)(A), (B), (D) and (E). 
The Exchange proposes to delete current Supplementary Material .02 to 
Options 3, Section 10 which is reserved.
    The Exchange proposes to relocate current Supplementary Material 
.03 (a) and (b) and part of (c) to Options 2, Section 10, which is 
currently reserved, and title that section ``Preferenced Orders''. The 
Exchange is proposing to delete part of current Supplementary Material 
.03(c) to Options 3, Section 10 which is being replaced by proposed 
Options 3, Section 10(c)(1)(C). The Exchange believes that providing a 
separate rule for Preferenced Orders will make it easier to locate.
GEMX Options 3, Section 7(g) and Options 2, Section 4
    The Exchange proposes to amend Options 3, Section 7 and Options 2, 
Section 4 to update cross-references to Options 3, Section 10.
    The Exchange also proposes, similar to the changes made within 
Options 3, Section 10 to remove the term ``Professional'' and 
substitute that term with a broader term. In this case, the Exchange 
proposes to utilize the term ``non-Priority Customer'' in place of 
Professional to indicate market participants who are not Priority 
Customers.

Examples

1. Size-Pro Rate Description. This provides a description of size 
pro-rata allocation.

Primary Market Maker quote [email protected] x [email protected]
Order1 Priority Customer Buy [email protected]
Order2 Priority Customer Reserve Buy [email protected]">2[email protected] (display qty = 5)
Order3 Firm Reserve Buy [email protected]">2[email protected] (display qty = 5)
Order4 Firm Buy [email protected]">2[email protected]
Order5 Firm Reserve Buy [email protected] (display qty = 5) Sell 7[email protected]

First Allocation Tier--Priority Customer, displayed, price time

    Sell order trades with:
--Order1 [email protected]
--Order[email protected]">2[email protected] (displayed only)

Second Allocation Tier--non- Priority Customer, displayed, pro-rata

    Sell Order Trades with:

--Order4 [email protected]">2[email protected]
--Order3 [email protected]
--Order5 [email protected]

    Order 4 has priority because it is the largest order. The 
displayed size determines the priority of allocation. If there are 
two or more resting orders or quotes at the same price, the System 
allocates contracts beginning with the resting order or quote 
displaying the largest size proportionally according to displayed 
size, based on the total number of contracts displayed at that 
price.

Third Allocation Tier--Priority Customer, non-displayed, price time

    Sell Order Trades with:

--Order2 [email protected]

Fourth Allocation Tier--non-Priority Customer, non-displayed, pro-rata

    Sell Order trades with:

Order3 [email protected]">1[email protected]
Order5 [email protected]

    The sell order had a size of 75 contracts. In this final 
allocation, there were still contracts to be allocated after the 
displayed size of all orders at that price has been executed. The 
remaining size from the incoming order is allocated proportionally 
according to remaining total size of each resting order at such 
price, beginning with the order which has the largest total size 
remaining.

2. Priority Customer with no other interest

Priority Customer Buy [email protected]$12.00
Priority Customer Sell [email protected]
Sell order trades with resting buy order @8.00 pursuant to Section 
10(c)(1)(A)

3. Priority Customer with other interest present and displayed v. 
non-displayed

Primary Market Maker quote [email protected] x [email protected]
Order1 Priority Customer Buy [email protected]
Order2 Priority Customer Reserve Buy [email protected]">2[email protected] (display qty = 5)
Order3 Priority Customer Reserve Buy [email protected]">2[email protected] (display qty = 5)
Order4 Priority Customer Buy [email protected]">2[email protected]
Order5 Firm Reserve Buy [email protected] (display qty = 5)
Sell [email protected]

Sell order trades with: Priority Customer displayed, price-time

--Order1 [email protected]
--Order[email protected]">2[email protected] (displayed only)
--Order3 [email protected] (displayed only)
--Order4 [email protected]">2[email protected]
Non-Priority Customer displayed, Size Pro-Rata

    In this case the Primary Market Maker is allocated the full 
quantity which is better than entitlement pursuant to Section 
10(c)(1)(B)(i). The incoming sell order has only executed 36 of its 
100 contracts; 64 remain. There are only 15 displayed contracts 
remaining (10 PMM and 5 Firm), so each of those displayed quantities 
are able to be completely filled.

--Primary Market Maker quote [email protected]
--Order5 [email protected] (displayed only)

Priority Customer non-displayed, price-time

--Order2 [email protected] (non-displayed)
--Order3 [email protected] (non-displayed)

Non-Priority Customer non-displayed, pro-rata

Order5 [email protected]
Remaining Sell [email protected] rests on the order book

4. Primary Market Maker allocation where it is 30% and with 5 lot 
include rounding

30% example below in #4
    5 lot:

Primary Market Maker quote [email protected] x [email protected] (at NBBO)

[[Page 49164]]

Order1 Firm Sell [email protected]
Order2 Firm Sell [email protected]
Buy [email protected]
Buy order trades with Primary Market Maker quote [email protected] pursuant to 
Section 10(c)(1)(B)(a)

5. Primary Market Maker's Size Pro-Rata share pursuant Section 
10(c)(1)(E) (``All Other Remaining Interest'')

Primary Market Maker quote [email protected] x [email protected] (at NBBO)
Order1 Firm sell [email protected]
Order2 Firm sell [email protected]
MM quote [email protected] x [email protected]
Buy 1[email protected]

Buy order trades with: Best price

--MM quote [email protected]
Final price, other interest Size Pro-Rata

    Primary Market Maker is allocated the Size Pro-Rate quantity 
pursuant to Section 10(c)(1)(B)(i)(b). This allocation quantity was 
greater than 30% allocation pursuant to 10(c)(1)(B)(i)(a).

--Primary Market Maker quote [email protected]
--Order1 [email protected]
--Order2 [email protected]

6. Primary Market Maker is Preferenced Market Maker and gets 
Preferenced Allocation

Primary Market Maker quote [email protected] x [email protected] (at NBBO)
Order1 Firm sell [email protected]
MM1 Quote [email protected] x [email protected]
MM2 Quote [email protected] x [email protected]
Buy order [email protected], preferenced to Primary Market Maker

    Buy order trades with: Preferenced Market Maker 40% priority 
share pursuant to Section 10(c)(1)(c)(i)(a).

--Primary Market Maker quote [email protected]

    Pro-rata with other interest:

--Order1 [email protected]
--MM1 Quote [email protected]
--MM2 Quote [email protected]

7. Primary Market Maker and Preferenced Market Maker are not the 
same

Primary Market Maker quote [email protected] x [email protected] (at NBBO)
Order1 Firm sell [email protected]
MM1 Quote [email protected] x [email protected] (at NBBO)
MM2 Quote [email protected] x [email protected]
Buy order [email protected], preferenced to MM1

    Buy order trades with: Preferenced Market Maker 40% priority 
share pursuant to Section 10(c)(1)(c)(i)(a).

--MM1 Quote [email protected]

Pro-rata with other interest:

--Primary Maker Maker quote [email protected]
--Order1 [email protected]
--MM2 Quote [email protected]
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\19\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\20\ 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. The Exchange's proposal to 
reorganize Options 3, Section 10, add additional context and provide 
for limitations in the Opening Process and the auctions is consistent 
with the Act because the additional organization and detail will bring 
greater transparency to the Exchange's rule. Proposed Options 3, 
Section 10(a)(ii) reflects the current System. This rule change does 
not amend the current System.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, with respect to zero-bid options series, indicating 
that Market Orders to sell which are submitted prior to the Opening 
Process and persist after the Opening Process will be posted at a price 
equal to the minimum trading increment as defined in Options 3, Section 
3 will provide additional information to Members about the Exchange's 
current practice. The Exchange believes that providing Members with the 
anticipated outcome of submitting zero-bid Market Orders will remove 
impediments to and perfect the mechanism of a free and open market.
    The Exchange proposes to replace the words ``other Professional 
Orders and market maker quotes'' with ``other non-Priority Customer 
orders and Market Maker quotes.'' The Exchange believes that the term 
``non-Priority Customer'' reduces any confusion regarding any reference 
to Professional Order or Professional Customer. Orders and quotes are 
counted individually for purposes of allocation even if they are from 
the same market participant. This amendment is not a change to current 
System operations.
    The Exchange's proposal to replace the term ``best price'' with 
``NBBO'' is consistent with the Act because it will provide greater 
transparency to the allocation process. The best price in this case is 
the NBBO. The amendment to this term does not reflect a substantive 
change to the current System. With respect to a Primary Market Maker's 
quote, the quote will not be executed at a price that trades through 
another market or displayed at a price that would lock or cross another 
market. The ``NBBO'' is the best Protected Bid and Protected Offer as 
defined in the Options Order Protection and Locked/Crossed Markets 
Plan; Protected Bids and Protected Offers that are displayed at a price 
but available on the Exchange at a better non-displayed price shall be 
included in the NBBO at their better non-displayed price for purposes 
of this rule.\21\
---------------------------------------------------------------------------

    \21\ See 17 CFR 242.600(b)(43).
---------------------------------------------------------------------------

    Providing a more detailed description of the manner in which the 
System applied Size Pro-Rata allocation in the current rule text, which 
is not currently contained in current Options 3, Section 10, is 
consistent with the Act because expanding upon the Exchange's current 
practice will further detail for Members the manner in which allocation 
occurs in the System. The Exchange's proposal is not intended to change 
the Exchange's allocation methodology, rather the Exchange is proposing 
to make clear the manner in which allocation is structured within the 
System. Further the Exchange's proposal to describe the manner in which 
orders are allocated to various types of market participants by 
category of participant and the possible outcomes if multiple 
allocations apply is consistent with the Act because understanding the 
potential outcomes protects investors and the public interest by 
increasing transparency. The Exchange's proposal to relocate current 
rule text into the current rule and provide additional detail including 
limitations for Preferred Market Maker participation entitlements 
during the Opening Process and limitations on allocations of Orders of 
5 Contracts or Fewer during the Opening Process and auctions will 
increase transparency for the protection of investors and the public 
interest. These limitations exist today. Finally, the Exchange believes 
that including all potential scenarios for allocation Orders of 5 
Contracts or Fewer more clearly explains the Exchange's current 
allocation process. The Exchange believes that providing more detail 
benefits investors and the public interest.

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's proposal does 
not amend the current manner in which the Exchange allocates interest 
among market participants. The amendments to the rule reflect the 
manner in which the current System operates. The Exchange notes that 
Priority Customers will continue to be afforded certain allocation 
rights which are not available to other market participants. This is 
the case today. Primary Market Makers and

[[Page 49165]]

Preferred Market Makers will continue to be afforded certain 
entitlements because of the continuing obligations they are bound to 
with respect to provide liquidity and quoting on the Exchange.\22\ The 
Exchange notes that other market participants will continue to be 
allocated in the same manner as they are today on a Size Pro-Rata basis 
after other entitlements have been allocated. The Exchange believes the 
proposed rule provides more detail and offers more transparency into 
the allocation process.
---------------------------------------------------------------------------

    \22\ See GEMX Rule Options 2, Section 3.
---------------------------------------------------------------------------

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 \23\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\24\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \24\ 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.
---------------------------------------------------------------------------

    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 [email protected]. Please include 
File Number SR-GEMX-2019-10 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-2019-10. 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 
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-2019-10 and should be submitted on or before October 9, 2019.
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20152 Filed 9-17-19; 8:45 am]
 BILLING CODE 8011-01-P