Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Make Permanent Certain Options Market Rules That Are Linked to the Equity Market Plan To Address Extraordinary Market Volatility, 57525-57528 [2019-23259]
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Federal Register / Vol. 84, No. 207 / Friday, October 25, 2019 / Notices
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:
• 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–
EMERALD–2019–34 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–EMERALD–2019–34. 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–EMERALD–2019–34 and
should be submitted on or before
November 15, 2019.
18:04 Oct 24, 2019
[FR Doc. 2019–23262 Filed 10–24–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
VerDate Sep<11>2014
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Eduardo A. Aleman,
Deputy Secretary.
Jkt 250001
[Release No. 34–87373; File No. SR–MRX–
2019–23]
Self-Regulatory Organizations; Nasdaq
MRX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Make Permanent
Certain Options Market Rules That Are
Linked to the Equity Market Plan To
Address Extraordinary Market
Volatility
October 21, 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 October
18, 2019, Nasdaq MRX, LLC (‘‘MRX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to make
permanent certain options market rules
that are linked to the equity market Plan
to Address Extraordinary Market
Volatility.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqmrx.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
26 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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57525
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to make permanent certain
options market rules in connection with
the equity market Plan to Address
Extraordinary Market Volatility (the
‘‘Limit Up-Limit Down Plan’’ or the
‘‘Plan’’). This change is being proposed
in connection with the recently
approved amendment to the Limit UpLimit Down Plan that allows the Plan to
continue to operate on a permanent
basis (‘‘Amendment 18’’).3 This
proposed rule change is substantially
similar to a recently-approved rule
change by Cboe Exchange, Inc.
(‘‘Cboe’’).4
In an attempt to address extraordinary
market volatility in NMS Stocks, and, in
particular, events like the severe
volatility on May 6, 2010, U.S. national
securities exchanges and the Financial
Industry Regulatory Authority, Inc.
(collectively, ‘‘Participants’’) drafted the
Plan pursuant to Rule 608 of Regulation
NMS and under the Act.5 On May 31,
2012, the Commission approved the
Plan, as amended, on a one-year pilot
basis.6 Though the Plan was primarily
designed for equity markets, the
Exchange believed it would, indirectly,
potentially impact the options markets
as well. Thus, the Exchange has
previously adopted and amended
Options 3, Section 9(d) and
Supplementary Material .01 to Options
3, Section 20 to ensure the option
markets were not harmed as a result of
the Plan’s implementation and has
implemented such rules on a pilot basis
that has coincided with the pilot period
3 See Securities Exchange Act Release No. 85623
(April 11, 2019), 84 FR 16086 (April 17, 2019)
(Order Approving Amendment No. 18).
4 See Securities Exchange Act Release Nos. 86744
(August 23, 2019), 84 FR 45565 (August 29, 2019)
(SR–CBOE–2019–049) (Notice of Filing); and 87311
(October 15, 2019) (SR–CBOE–2019–049) (Notice of
Filing of Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed Rule Change,
as Modified by Amendment Nos. 1 and 2). The
Exchange understands that the other national
securities exchanges will also file similar proposals
to make permanent their respective pilot programs.
5 See Securities Exchange Act Release No. 64547
(May 25, 2011), 76 FR 31647 (June 1, 2011) (File
No. 4–631).
6 See Securities and Exchange Act Release No.
67091 (May 31, 2012) 77 FR 33498 (June 6, 2012).
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Federal Register / Vol. 84, No. 207 / Friday, October 25, 2019 / Notices
for the Plan (the ‘‘Options Pilots’’).7
Options 3, Section 9(d) addresses the
interplay of the Exchange’s rules in
response to the Plan, and includes
provisions on how the Exchange will
treat certain options orders during a
limit or straddle state as well as options
market maker quoting obligations
during a limit or straddle state. In
addition, Supplementary Material .01 to
Options 3, Section 20 provides that an
execution will not be subject to obvious
or catastrophic error review if it
occurred during a limit or straddle state.
A limit or straddle state occurs when at
least one side of the National Best Bid
(‘‘NBB’’) or Offer (‘‘NBO’’) bid/ask is
priced at a non-tradable level.
Specifically, a straddle state exists when
the NBB is below the lower price band
while the NBO is inside the prices band
or when the NBO is above the upper
price band and the NBB is within the
band, while a limit state occurs when
the NBO equals the lower price band
(without crossing the NBB), or the NBB
equals the upper price band (without
crossing the NBO). The Exchange
adopted the Options Pilots to protect
investors because when an underlying
security is in a limit up-limit down
state, there will not be a reliable price
for the security to serve as a benchmark
for the price of the option. Specifically,
the Exchange adopted Supplementary
Material .01 to Options 3, Section 20
because the application of the obvious
and catastrophic error rules would be
impracticable given the potential for
lack of a reliable NBBO in the options
market during limit and straddle states.
When adjusting or busting a trade
pursuant to the obvious error rule, the
determination of theoretical value of a
trade generally references the NBB (for
erroneous sell transactions) or NBO (for
erroneous buy transactions) just prior to
the trade in question, and is therefore
not reliable when at least one side of the
NBBO is priced at a non-tradeable level,
as is the case in limit and straddle
states. In such a situation, determining
theoretical value may often times be a
very subjective rather than an objective
determination and could give rise to
additional uncertainty and confusion for
investors. As a result, application of the
7 See Securities Exchange Act Release Nos. 76998
(January 29, 2016), 81 FR 6066 (February 4, 2016)
(File No. 10–221) (In the Matter of the Application
of ISE Mercury, LLC for Registration as a National
Securities Exchange); and 81204 (July 25, 2017), 82
FR 35557 (July 31, 2017). The Exchange notes that
it adopted the limit up-limit down obvious error
pilot currently within Supplementary Material .01
to Options 3, Section 20 (originally within Rule
703A(d)) as part of the Exchange’s Form 1
Application for registration as a national securities
exchange. See also MRX Form 1 Application,
Exhibit B.
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18:04 Oct 24, 2019
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obvious and catastrophic error rules
would be impracticable given the lack of
a reliable NBBO in the options market
during limit and straddle states, and
may produce undesirable effects or
unanticipated consequences. As noted
above, the Exchange adopted additional
measures via other Options Pilot rules
that are designed to protect investors
during limit and straddle states.8 For
example, the Exchange will reject
Market Orders (as defined in Options 3,
Section 7(a)) and cancel Stop Orders 9
during a Limit Up-Limit Down state to
ensure that only those orders with a
limit price will be executed during a
limit or straddle state given the
uncertainty of market prices during
such a state. Furthermore, the Exchange
believes that eliminating the application
of obvious error rules during a limit or
straddle state eliminates the reevaluation of a transaction executed
during such a state that could
potentially create an unreasonable
adverse selection opportunity due to the
lack of a reliable reference price on one
side of the market or another and
discourage participants from providing
liquidity during limit and straddle
states, which is contrary to the goal in
limiting participants’ adverse selection
with the application of the obvious error
rule during normal trading states. For
these reasons, the Exchange believes the
Options Pilots and related rules are
designed to add certainty on the options
markets, which encourages more
investors to participate in light of the
changes associated with the Plan. The
Plan was originally implemented on a
pilot-basis in order to allow the public,
the participating exchanges, and the
Commission to assess the operation of
the Plan and whether the Plan should be
modified prior to approval on a
permanent basis. As stated, the
Exchange adopted the Option Pilots to
coincide with this pilot; to continue the
protections therein while the industry
gains further experience operating the
Plan.
In connection with the order
approving the establishment of the
obvious error pilot, as well as the
extensions of the obvious error pilot, the
Exchange committed to submit monthly
data regarding the program and to
submit an overall analysis of the
obvious error pilot in conjunction with
the data submitted under the Plan and
any other data as requested by the
Commission. Pursuant to the Exchange’s
Form 1 Application, approved on
January 29, 2016, each month, the
Exchange committed to provide the
Commission, and the public, a dataset
containing the data for each straddle
and limit state in optionable stocks that
had at least one trade on the
Exchange.10 The Exchange has
continued to provide the Commission
with this data on a monthly basis. For
each trade on the Exchange, the
Exchange provides (a) the stock symbol,
option symbol, time at the start of the
straddle or limit state, an indicator for
whether it is a straddle or limit state,
and (b) for the trades on the Exchange,
the executed volume, time-weighted
quoted bid-ask spread, time-weighted
average quoted depth at the bid, timeweighted average quoted depth at the
offer, high execution price, low
execution price, number of trades for
which a request for review for error was
received during straddle and limit
states, an indicator variable for whether
those options outlined above have a
price change exceeding 30% during the
underlying stock’s limit or straddle state
compared to the last available option
price as reported by OPRA before the
start of the limit or straddle state. In
addition, to help evaluate the impact of
the pilot program, the Exchange has
provided to the Commission, and the
public, assessments relating to the
impact of the operation of the obvious
error rules during limit and straddle
states including: (1) An evaluation of
the statistical and economic impact of
limit and straddle states on liquidity
and market quality in the options
markets, and (2) an assessment of
whether the lack of obvious error rules
in effect during the straddle and limit
states are problematic. The Exchange
has concluded that the Options Pilots
do not negatively impact market quality
during normal market conditions,11 and
that there has been insufficient data to
assess whether a lack of obvious error
rules is problematic, however, the
Exchange believes the continuation of
the Options Pilots function to protect
against any unanticipated consequences
in the options markets during a limit or
8 As set forth in Options 3, Section 9(d), this
includes rules in connection with special handling
for Market Orders and Stop Orders, and options
market maker quoting obligations during a limit or
straddle state.
9 The Exchange will elect Stop Orders if the
condition as provided in Options 3, Section 7(d) is
met, and, because they become Market Orders, will
then cancel them back. See Options 3, Section
9(d)(3).
10 See MRX Form 1 Application supra note 7. See
also MRX LULD Reports, available at: https://
www.nasdaq.com/solutions/options/LULD.
11 See also MRX LULD Reports, available at:
https://www.nasdaq.com/solutions/options/LULD.
During the most recent Review Period the Exchange
did not receive any obvious error review requests
for Limit-Up-Limit Down trades, and Limit UpLimit Down trade volume accounted for nominal
overall trade volume.
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Federal Register / Vol. 84, No. 207 / Friday, October 25, 2019 / Notices
straddle state and add certainty on the
options markets.
The Commission recently approved
the Plan on a permanent basis
(Amendment 18).12 In connection with
this approval, the Exchange now
proposes to amend Options 3, Section
9(d) and Supplementary Material .01 to
Options 3, Section 20 that currently
implement provisions of the Plan on a
pilot basis to eliminate the pilot basis,
which effectiveness expires on October
18, 2019, and to make such rules
permanent. In its approval order to
make the Plan permanent, the
Commission recognized that, as a result
of the Participants’ and industry
analysis of the Plan’s operation, the
Limit Up-Limit Down mechanism
effectively addresses extraordinary
market volatility. Indeed, the Plan
benefits markets and market
participants by helping to ensure
orderly markets, but also, the Exchange
believes, based on the data made
available to the public and the
Commission during the pilot period,
that the obvious error pilot does not
negatively impact market quality during
normal market conditions.13 Rather, the
Exchange believes the obvious error
pilot functions to protect against any
unanticipated consequences in the
options markets during a limit or
straddle state and add certainty on the
options markets. The Exchange also
believes the other Options Pilots rules
provide additional measures designed to
protect investors during limit and
straddle states. For example, the
Exchange will reject Market Orders and
cancel Stop Orders during a Limit UpLimit Down state to ensure that only
those orders with a limit price will be
executed during a limit or straddle state
given the uncertainty of market prices
during such a state.14 This removes
impediments to and perfects the
mechanism of a free and open market
and national market system by
encouraging more investors to
participate in light of the changes
associated with the Plan. The Exchange
believes that if approved on a
permanent basis, the Options Pilots
would permanently provide investors
with the above-described additional
certainty of market prices and
mitigation of unanticipated
consequences and unreasonable adverse
selection risk during limit and straddle
states.
Since the Commission’s approval of
Amendment 18 allowing the Plan to
operate on a permanent basis, the
12 See
supra note 3.
13 See supra note 11.
14 See supra notes 8 and 9.
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18:04 Oct 24, 2019
Jkt 250001
Exchange and other national securities
exchanges have determined that no
further amendments should be made to
the Options Pilots; 15 the current
Options Pilots effectively address
extraordinary market volatility, are
reasonably designed to comply with the
requirements of the Plan, facilitate
compliance with the Plan and should
now operate on a permanent basis,
consistent with the Plan. The Exchange
does not propose any substantive or
additional changes to Options 3, Section
9(d) or Supplementary Material .01 to
Options 3, Section 20.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
requirements of Section 6(b) of the
Act,16 in general, and Section 6(b)(5) of
the Act,17 in particular, in that it is
designed to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest
and not to permit unfair discrimination
between customers, issuers, brokers, or
dealers.
In particular, the Exchange believes
that the proposed rule supports the
objectives of perfecting the mechanism
of a free and open market and the
national market system because it
promotes transparency and uniformity
across markets concerning rules for
options markets adopted to coincide
with the Plan. The Exchange believes
that eliminating the pilot basis for the
Options Pilots and making such rules
permanent facilitates compliance with
the Plan by adding certainty to the
markets during periods of market
volatility, which has been approved and
found by the Commission to be
reasonably designed to prevent
potentially harmful price volatility in
NMS Stocks. It has been determined by
the Commission that the Plan benefits
markets and market participants by
helping to ensure orderly markets, and,
based on the data made available to the
public and the Commission during the
pilot period for Supplementary Material
.01 to Options 3, Section 20, the Plan
does not negatively impact options
market quality during normal market
conditions. Rather, the Plan, as it is
implemented under the obvious error
pilot, functions to protect against any
unanticipated consequences in the
15 See Securities Exchange Act Release No. 85614
(April 11, 2019), 84 FR 16110 (April 17, 2019) (SR–
MRX–2019–07).
16 15 U.S.C. 78f(b).
17 15 U.S.C. 78f(b)(5).
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57527
options markets during a limit or
straddle state and add certainty on the
options markets. During a limit or
straddle state, determining theoretical
value of an option may be a subjective
rather than an objective determination
given the lack of a reliable NBBO, which
may create an unreasonable adverse
selection opportunity and discourage
participants from providing liquidity
during limit and straddle states.
Therefore, the Exchange believes
eliminating obvious error review in
such states would, in turn, eliminate
uncertainty and confusion for investors
and benefit investors by encouraging
more participation in light of the
changes associated with the Plan. As
stated, the Exchange believes the other
Options Pilots rules provide additional
measures designed to protect investors
during limit and straddle states. For
example, the Exchange will reject
Market Orders and cancel Stop Orders
during a Limit Up-Limit Down state to
ensure that only those orders with a
limit price will be executed during a
limit or straddle state given the
uncertainty of market prices during
such a state.18 Accordingly, the
Exchange believes that making the
Options Pilots permanent will further
the goals of investor protection and fair
and orderly markets as the rules
effectively address extraordinary market
volatility pursuant to the Plan.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change is necessary to
reflect that the Plan no longer operates
as a pilot and has been approved to
operate on a permanent basis by the
Commission. As such, Options 3,
Section 9(d) and Supplementary
Material .01 to Options 3, Section 20,
which implement protections in
connection with the Plan, should be
amended to operate on a permanent
basis. The Exchange understands that
the other national securities exchanges
will also file similar proposals to make
permanent their respective pilot
programs.19 Thus, the proposed rule
change will help to ensure consistency
across market centers without
implicating any competitive issues.
18 See
supra notes 8 and 9.
addition, the Exchange’s proposal is
substantially similar to Cboe’s recently approved
rule change. See supra note 4.
19 In
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Federal Register / Vol. 84, No. 207 / Friday, October 25, 2019 / Notices
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) of the Act 20 and Rule 19b–
4(f)(6) thereunder.21
A proposed rule change filed under
Rule 19b–4(f)(6) 22 normally does not
become operative prior to 30 days after
the date of the filing. However, Rule
19b–4(f)(6)(iii) 23 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 asked the
Commission to waive the 30-day
operative delay so that the proposed
rule change may become effective and
operative immediately upon filing. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest, as it will allow the
current Options Pilots to continue on a
permanent basis without any changes,
prior to the pilot expiration on October
18, 2019. For this reason, the
Commission hereby waives the 30-day
operative delay and designates the
proposed rule change as operative upon
filing.24
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
20 15
U.S.C. 78s(b)(3)(A).
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.
22 17 CFR 240.19b–4(f)(6).
23 17 CFR 240.19b–4(f)(6)(iii).
24 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
21 17
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18:04 Oct 24, 2019
Jkt 250001
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–
MRX–2019–23 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MRX–2019–23. 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–MRX–2019–23 and should
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be submitted on or before November 15,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–23259 Filed 10–24–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87364; File No. SR–
CboeBYX–2019–018]
Self-Regulatory Organizations; Cboe
BYX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Extend the
Current Pilot Program Related to BYX
Rule 11.17, Clearly Erroneous
Executions, to the Close of Business
on April 20, 2020
October 21, 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 October
16, 2019, Cboe BYX Exchange, Inc.
(‘‘Exchange’’ or ‘‘BYX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BYX Exchange, Inc. (‘‘BYX’’ or
the ‘‘Exchange’’) is filing with the
Securities and Exchange Commission
(the ‘‘Commission’’) a proposed rule
change to extend the current pilot
program related to BYX Rule 11.17,
Clearly Erroneous Executions, to the
close of business on April 20, 2020. The
text of the proposed rule change is
provided in Exhibit 5. [sic]
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/byx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
25 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\25OCN1.SGM
25OCN1
]]>Agencies
[Federal Register Volume 84, Number 207 (Friday, October 25, 2019)]
[Notices]
[Pages 57525-57528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23259]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87373; File No. SR-MRX-2019-23]
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Make Permanent
Certain Options Market Rules That Are Linked to the Equity Market Plan
To Address Extraordinary Market Volatility
October 21, 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 October 18, 2019, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to make permanent certain options market
rules that are linked to the equity market Plan to Address
Extraordinary Market Volatility.
The text of the proposed rule change is available on the Exchange's
website at https://nasdaqmrx.cchwallstreet.com/, at the principal office
of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to make permanent
certain options market rules in connection with the equity market Plan
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down
Plan'' or the ``Plan''). This change is being proposed in connection
with the recently approved amendment to the Limit Up-Limit Down Plan
that allows the Plan to continue to operate on a permanent basis
(``Amendment 18'').\3\ This proposed rule change is substantially
similar to a recently-approved rule change by Cboe Exchange, Inc.
(``Cboe'').\4\
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\3\ See Securities Exchange Act Release No. 85623 (April 11,
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No.
18).
\4\ See Securities Exchange Act Release Nos. 86744 (August 23,
2019), 84 FR 45565 (August 29, 2019) (SR-CBOE-2019-049) (Notice of
Filing); and 87311 (October 15, 2019) (SR-CBOE-2019-049) (Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2). The
Exchange understands that the other national securities exchanges
will also file similar proposals to make permanent their respective
pilot programs.
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In an attempt to address extraordinary market volatility in NMS
Stocks, and, in particular, events like the severe volatility on May 6,
2010, U.S. national securities exchanges and the Financial Industry
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the
Plan pursuant to Rule 608 of Regulation NMS and under the Act.\5\ On
May 31, 2012, the Commission approved the Plan, as amended, on a one-
year pilot basis.\6\ Though the Plan was primarily designed for equity
markets, the Exchange believed it would, indirectly, potentially impact
the options markets as well. Thus, the Exchange has previously adopted
and amended Options 3, Section 9(d) and Supplementary Material .01 to
Options 3, Section 20 to ensure the option markets were not harmed as a
result of the Plan's implementation and has implemented such rules on a
pilot basis that has coincided with the pilot period
[[Page 57526]]
for the Plan (the ``Options Pilots'').\7\ Options 3, Section 9(d)
addresses the interplay of the Exchange's rules in response to the
Plan, and includes provisions on how the Exchange will treat certain
options orders during a limit or straddle state as well as options
market maker quoting obligations during a limit or straddle state. In
addition, Supplementary Material .01 to Options 3, Section 20 provides
that an execution will not be subject to obvious or catastrophic error
review if it occurred during a limit or straddle state. A limit or
straddle state occurs when at least one side of the National Best Bid
(``NBB'') or Offer (``NBO'') bid/ask is priced at a non-tradable level.
Specifically, a straddle state exists when the NBB is below the lower
price band while the NBO is inside the prices band or when the NBO is
above the upper price band and the NBB is within the band, while a
limit state occurs when the NBO equals the lower price band (without
crossing the NBB), or the NBB equals the upper price band (without
crossing the NBO). The Exchange adopted the Options Pilots to protect
investors because when an underlying security is in a limit up-limit
down state, there will not be a reliable price for the security to
serve as a benchmark for the price of the option. Specifically, the
Exchange adopted Supplementary Material .01 to Options 3, Section 20
because the application of the obvious and catastrophic error rules
would be impracticable given the potential for lack of a reliable NBBO
in the options market during limit and straddle states. When adjusting
or busting a trade pursuant to the obvious error rule, the
determination of theoretical value of a trade generally references the
NBB (for erroneous sell transactions) or NBO (for erroneous buy
transactions) just prior to the trade in question, and is therefore not
reliable when at least one side of the NBBO is priced at a non-
tradeable level, as is the case in limit and straddle states. In such a
situation, determining theoretical value may often times be a very
subjective rather than an objective determination and could give rise
to additional uncertainty and confusion for investors. As a result,
application of the obvious and catastrophic error rules would be
impracticable given the lack of a reliable NBBO in the options market
during limit and straddle states, and may produce undesirable effects
or unanticipated consequences. As noted above, the Exchange adopted
additional measures via other Options Pilot rules that are designed to
protect investors during limit and straddle states.\8\ For example, the
Exchange will reject Market Orders (as defined in Options 3, Section
7(a)) and cancel Stop Orders \9\ during a Limit Up-Limit Down state to
ensure that only those orders with a limit price will be executed
during a limit or straddle state given the uncertainty of market prices
during such a state. Furthermore, the Exchange believes that
eliminating the application of obvious error rules during a limit or
straddle state eliminates the re-evaluation of a transaction executed
during such a state that could potentially create an unreasonable
adverse selection opportunity due to the lack of a reliable reference
price on one side of the market or another and discourage participants
from providing liquidity during limit and straddle states, which is
contrary to the goal in limiting participants' adverse selection with
the application of the obvious error rule during normal trading states.
For these reasons, the Exchange believes the Options Pilots and related
rules are designed to add certainty on the options markets, which
encourages more investors to participate in light of the changes
associated with the Plan. The Plan was originally implemented on a
pilot-basis in order to allow the public, the participating exchanges,
and the Commission to assess the operation of the Plan and whether the
Plan should be modified prior to approval on a permanent basis. As
stated, the Exchange adopted the Option Pilots to coincide with this
pilot; to continue the protections therein while the industry gains
further experience operating the Plan.
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\5\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
\6\ See Securities and Exchange Act Release No. 67091 (May 31,
2012) 77 FR 33498 (June 6, 2012).
\7\ See Securities Exchange Act Release Nos. 76998 (January 29,
2016), 81 FR 6066 (February 4, 2016) (File No. 10-221) (In the
Matter of the Application of ISE Mercury, LLC for Registration as a
National Securities Exchange); and 81204 (July 25, 2017), 82 FR
35557 (July 31, 2017). The Exchange notes that it adopted the limit
up-limit down obvious error pilot currently within Supplementary
Material .01 to Options 3, Section 20 (originally within Rule
703A(d)) as part of the Exchange's Form 1 Application for
registration as a national securities exchange. See also MRX Form 1
Application, Exhibit B.
\8\ As set forth in Options 3, Section 9(d), this includes rules
in connection with special handling for Market Orders and Stop
Orders, and options market maker quoting obligations during a limit
or straddle state.
\9\ The Exchange will elect Stop Orders if the condition as
provided in Options 3, Section 7(d) is met, and, because they become
Market Orders, will then cancel them back. See Options 3, Section
9(d)(3).
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In connection with the order approving the establishment of the
obvious error pilot, as well as the extensions of the obvious error
pilot, the Exchange committed to submit monthly data regarding the
program and to submit an overall analysis of the obvious error pilot in
conjunction with the data submitted under the Plan and any other data
as requested by the Commission. Pursuant to the Exchange's Form 1
Application, approved on January 29, 2016, each month, the Exchange
committed to provide the Commission, and the public, a dataset
containing the data for each straddle and limit state in optionable
stocks that had at least one trade on the Exchange.\10\ The Exchange
has continued to provide the Commission with this data on a monthly
basis. For each trade on the Exchange, the Exchange provides (a) the
stock symbol, option symbol, time at the start of the straddle or limit
state, an indicator for whether it is a straddle or limit state, and
(b) for the trades on the Exchange, the executed volume, time-weighted
quoted bid-ask spread, time-weighted average quoted depth at the bid,
time-weighted average quoted depth at the offer, high execution price,
low execution price, number of trades for which a request for review
for error was received during straddle and limit states, an indicator
variable for whether those options outlined above have a price change
exceeding 30% during the underlying stock's limit or straddle state
compared to the last available option price as reported by OPRA before
the start of the limit or straddle state. In addition, to help evaluate
the impact of the pilot program, the Exchange has provided to the
Commission, and the public, assessments relating to the impact of the
operation of the obvious error rules during limit and straddle states
including: (1) An evaluation of the statistical and economic impact of
limit and straddle states on liquidity and market quality in the
options markets, and (2) an assessment of whether the lack of obvious
error rules in effect during the straddle and limit states are
problematic. The Exchange has concluded that the Options Pilots do not
negatively impact market quality during normal market conditions,\11\
and that there has been insufficient data to assess whether a lack of
obvious error rules is problematic, however, the Exchange believes the
continuation of the Options Pilots function to protect against any
unanticipated consequences in the options markets during a limit or
[[Page 57527]]
straddle state and add certainty on the options markets.
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\10\ See MRX Form 1 Application supra note 7. See also MRX LULD
Reports, available at: https://www.nasdaq.com/solutions/options/LULD.
\11\ See also MRX LULD Reports, available at: https://www.nasdaq.com/solutions/options/LULD. During the most recent Review
Period the Exchange did not receive any obvious error review
requests for Limit-Up-Limit Down trades, and Limit Up-Limit Down
trade volume accounted for nominal overall trade volume.
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The Commission recently approved the Plan on a permanent basis
(Amendment 18).\12\ In connection with this approval, the Exchange now
proposes to amend Options 3, Section 9(d) and Supplementary Material
.01 to Options 3, Section 20 that currently implement provisions of the
Plan on a pilot basis to eliminate the pilot basis, which effectiveness
expires on October 18, 2019, and to make such rules permanent. In its
approval order to make the Plan permanent, the Commission recognized
that, as a result of the Participants' and industry analysis of the
Plan's operation, the Limit Up-Limit Down mechanism effectively
addresses extraordinary market volatility. Indeed, the Plan benefits
markets and market participants by helping to ensure orderly markets,
but also, the Exchange believes, based on the data made available to
the public and the Commission during the pilot period, that the obvious
error pilot does not negatively impact market quality during normal
market conditions.\13\ Rather, the Exchange believes the obvious error
pilot functions to protect against any unanticipated consequences in
the options markets during a limit or straddle state and add certainty
on the options markets. The Exchange also believes the other Options
Pilots rules provide additional measures designed to protect investors
during limit and straddle states. For example, the Exchange will reject
Market Orders and cancel Stop Orders during a Limit Up-Limit Down state
to ensure that only those orders with a limit price will be executed
during a limit or straddle state given the uncertainty of market prices
during such a state.\14\ This removes impediments to and perfects the
mechanism of a free and open market and national market system by
encouraging more investors to participate in light of the changes
associated with the Plan. The Exchange believes that if approved on a
permanent basis, the Options Pilots would permanently provide investors
with the above-described additional certainty of market prices and
mitigation of unanticipated consequences and unreasonable adverse
selection risk during limit and straddle states.
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\12\ See supra note 3.
\13\ See supra note 11.
\14\ See supra notes 8 and 9.
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Since the Commission's approval of Amendment 18 allowing the Plan
to operate on a permanent basis, the Exchange and other national
securities exchanges have determined that no further amendments should
be made to the Options Pilots; \15\ the current Options Pilots
effectively address extraordinary market volatility, are reasonably
designed to comply with the requirements of the Plan, facilitate
compliance with the Plan and should now operate on a permanent basis,
consistent with the Plan. The Exchange does not propose any substantive
or additional changes to Options 3, Section 9(d) or Supplementary
Material .01 to Options 3, Section 20.
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\15\ See Securities Exchange Act Release No. 85614 (April 11,
2019), 84 FR 16110 (April 17, 2019) (SR-MRX-2019-07).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\16\ in general, and
Section 6(b)(5) of the Act,\17\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes that the proposed rule
supports the objectives of perfecting the mechanism of a free and open
market and the national market system because it promotes transparency
and uniformity across markets concerning rules for options markets
adopted to coincide with the Plan. The Exchange believes that
eliminating the pilot basis for the Options Pilots and making such
rules permanent facilitates compliance with the Plan by adding
certainty to the markets during periods of market volatility, which has
been approved and found by the Commission to be reasonably designed to
prevent potentially harmful price volatility in NMS Stocks. It has been
determined by the Commission that the Plan benefits markets and market
participants by helping to ensure orderly markets, and, based on the
data made available to the public and the Commission during the pilot
period for Supplementary Material .01 to Options 3, Section 20, the
Plan does not negatively impact options market quality during normal
market conditions. Rather, the Plan, as it is implemented under the
obvious error pilot, functions to protect against any unanticipated
consequences in the options markets during a limit or straddle state
and add certainty on the options markets. During a limit or straddle
state, determining theoretical value of an option may be a subjective
rather than an objective determination given the lack of a reliable
NBBO, which may create an unreasonable adverse selection opportunity
and discourage participants from providing liquidity during limit and
straddle states. Therefore, the Exchange believes eliminating obvious
error review in such states would, in turn, eliminate uncertainty and
confusion for investors and benefit investors by encouraging more
participation in light of the changes associated with the Plan. As
stated, the Exchange believes the other Options Pilots rules provide
additional measures designed to protect investors during limit and
straddle states. For example, the Exchange will reject Market Orders
and cancel Stop Orders during a Limit Up-Limit Down state to ensure
that only those orders with a limit price will be executed during a
limit or straddle state given the uncertainty of market prices during
such a state.\18\ Accordingly, the Exchange believes that making the
Options Pilots permanent will further the goals of investor protection
and fair and orderly markets as the rules effectively address
extraordinary market volatility pursuant to the Plan.
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\18\ See supra notes 8 and 9.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change is
necessary to reflect that the Plan no longer operates as a pilot and
has been approved to operate on a permanent basis by the Commission. As
such, Options 3, Section 9(d) and Supplementary Material .01 to Options
3, Section 20, which implement protections in connection with the Plan,
should be amended to operate on a permanent basis. The Exchange
understands that the other national securities exchanges will also file
similar proposals to make permanent their respective pilot
programs.\19\ Thus, the proposed rule change will help to ensure
consistency across market centers without implicating any competitive
issues.
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\19\ In addition, the Exchange's proposal is substantially
similar to Cboe's recently approved rule change. See supra note 4.
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[[Page 57528]]
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) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 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 under Rule 19b-4(f)(6) \22\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \23\ 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 asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become effective and operative immediately upon filing.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest, as
it will allow the current Options Pilots to continue on a permanent
basis without any changes, prior to the pilot expiration on October 18,
2019. For this reason, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change as operative
upon filing.\24\
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\22\ 17 CFR 240.19b-4(f)(6).
\23\ 17 CFR 240.19b-4(f)(6)(iii).
\24\ For purposes only of waiving the 30-day operative delay,
the Commission has also 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-MRX-2019-23 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-MRX-2019-23. 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-MRX-2019-23 and should be submitted on
or before November 15, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23259 Filed 10-24-19; 8:45 am]
BILLING CODE 8011-01-P
