Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Various Rules in Options 3, 16801-16806 [2021-06559]

Download as PDF Federal Register / Vol. 86, No. 60 / Wednesday, March 31, 2021 / Notices 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–NYSE–2021–19 and should be submitted on or before April 21, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–06558 Filed 3–30–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91408; File No. SR–GEMX– 2021–01] Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Various Rules in Options 3 March 25, 2021. 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 March 12, 2021, 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. jbell on DSKJLSW7X2PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend various rules in Options 3. The text of the proposed rule change is available on the Exchange’s website at https://listingcenter.nasdaq.com/ rulebook/gemx/rules, 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 22 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 18:54 Mar 30, 2021 Jkt 253001 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 amend various rules in Options 3. The proposed changes consist of conforming existing rules to current System technology, amending rule text to add greater detail on how certain Exchange functionality operate today. Furthermore, the proposed changes are intended to harmonize the Exchange’s rules where appropriate with the rules of the Exchange’s affiliated options markets, including by using consistent language to describe identical functionality.3 As such, no System changes to existing functionality are being made pursuant to this proposal. Rather, this proposal is designed to reduce any potential investor confusion as to the features and applicability of certain functionality presently available on the Exchange. These changes are described in detail below, and include amending Exchange rules governing: (1) The Block Order Mechanism (‘‘Block’’),4 (2) the Facilitation Mechanism (‘‘Facilitation’’),5 (3) the Solicited Order Mechanism (‘‘Solicitation’’),6 (4) the Price Improvement Mechanism (‘‘PIM’’),7 and (5) Anti-Internalization.8 Universal Changes In September 2019, the Exchange amended its regular allocation rule in Options 7, Section 10 (Priority of Quotes and Orders) to make non-substantive changes, among other changes, to replace references to Professional interest with non-Priority Customer interest.9 The Exchange now proposes to make similar changes to replace all 3 The Exchange’s affiliate, Nasdaq ISE, LLC (‘‘ISE’’) recently filed a substantially similar rule change as part of this exercise. See Securities Exchange Act Release No. 91223 (February 26, 2021) (SR–ISE–2021–01). 4 See Options 3, Section 11(a). 5 See Options 3, Section 11(b). 6 See Options 3, Section 11(d). 7 See Options 3, Section 13. 8 See Options 3, Section 15(a)(3)(A). 9 See Securities Exchange Act Release No. 86946 (September 12, 2019), 84 FR 49158 (September 18, 2019) (SR–GEMX–2019–10). PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 16801 instances of ‘‘Professional’’ interest with ‘‘non-Priority Customer’’ interest throughout its auction allocation rules in Options 3, Section 11 and Section 13 to align with the changes made in SR– GEMX–2019–10.10 While the term ‘‘Professional Orders’’ is defined within Options 1, Section 1(a)(38) as an order that is for the account of a person or entity that is not a Priority Customer, the Exchange believes that using the term ‘‘non-Priority Customer’’ is more clear in describing the types of market participant to which the allocation applies, and also reduces confusion regarding any reference to Professional Orders or Professional Customer orders. In addition, the Exchange proposes to make universal changes in its Facilitation and Solicitation rules 11 to clearly delineate between orders and Responses 12 of the same capacity. For example, where the existing rule text currently states ‘‘Priority Customer bids (offers),’’ the Exchange proposes instead to state ‘‘Priority Customer Orders and Priority Customer Responses to buy (sell).’’ The Exchange notes that this is merely a non-substantive change as auction orders and Responses of the same capacity do not get treated differently for allocation purposes today. With the proposed changes, the Exchange is merely seeking to bring greater transparency around how allocation takes place in those auction mechanisms today. Block Order Mechanism The Exchange proposes minor changes to the current descriptions of the Block execution and allocation process in Options 3, Section 11(a). As discussed below, the proposed Block changes are non-substantive in nature, and are intended to harmonize with the Block rule on its affiliated market, BX Options (‘‘BX’’) in order to ensure rule consistency between the Exchange and its affiliate offering identical functionality. First, the Exchange proposes to add ‘‘up to the size of the block order’’ at the end of subsection (a)(2)(i). As amended, the rule will provide that bids (offers) on the Exchange at the time the block order is time the block order is executed 10 Specifically in Options 3, Section 11, the Exchange will amend current subsections (a)(2)(ii), (b)(3)(i)–(iii) (renumbered to (b)(4)(i)–(iii) under this proposal), and (d)(2)(iii) (renumbered to (d)(3)(iii) under this proposal). In Options 3, Section 13, the Exchange will amend current subsections (d)(1)–(3). 11 Specifically in Options 3, Section 11, subsections (b)(3)(i)–(iii) (renumbered to (b)(4)(i)– (iii)), and (d)(2)(i) and (iii) (renumbered to (d)(3)(i) and (iii)) will be updated. 12 A ‘‘Response’’ is an electronic message that is sent by Members in response to a broadcast message. See Options 3, Section 11. E:\FR\FM\31MRN1.SGM 31MRN1 16802 Federal Register / Vol. 86, No. 60 / Wednesday, March 31, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES that are priced higher (lower) than the block execution price, as well as Responses that are priced higher (lower) than the block execution price, will be executed in full at the block execution price up to the size of the block order. The Exchange is making this nonsubstantive change to align with BX’s Block rule,13 which will ensure rule consistency for identical functionality across affiliated markets. The language states that better priced interest gets executed in full only if there is sufficient size to execute against such interest, which is how block orders are executed and priced on the Exchange and BX today. Second, the Exchange proposes a nonsubstantive change in the first sentence of subsection (a)(2)(ii) to replace ‘‘first and in time priority’’ with ‘‘first in price time priority.’’ As amended, the rule will provide that at the block execution price, Priority Customer Orders and Priority Customer Responses will be executed first in price time priority. This is not a change to the current Block allocation methodology, but rather a non-substantive change for better readability, and to align with BX’s Block rule 14 in order to ensure rule consistency for identical functionality across affiliated markets. Block orders will continue to trade at a single execution price that allows the maximum number of contracts of the block order to be executed against both the Responses entered to trade against the order and unrelated interest on the Exchange’s order book. Example 1 Block order is entered to buy 50 contracts @1.50 The following Responses are received: Priority Customer Response 1 to sell 40 contracts @ 1.40 Priority Customer Response 2 to sell 10 contracts @ 1.40 Priority Customer Response 3 to sell 10 contracts @ 1.39 The block execution price would be $1.40 (i.e., the price at which the maximum number of contracts could be executed) and would be executed as follows: Block order trades 10 with Priority Customer Response 3 @1.40 Block order trades 40 with Priority Customer Response 1 @1.40 As shown above, Priority Customer Response 3 would be executed in full since it is priced better than the block execution price and there is sufficient size to execute Response 3 against the 13 See 14 See BX Options 3, Section 11(a)(2)(A). BX Options 3, Section 11(a)(2)(B). VerDate Sep<11>2014 18:54 Mar 30, 2021 Jkt 253001 block order, while Priority Customer Responses 1 and 2, which are priced at the block execution price, would participate in price time priority—i.e., the remaining 40 contracts would go to Response 1, which was received before Response 2. Facilitation Mechanism The Exchange proposes a number of changes to its Facilitation rule, none of which will change the current operation of this technology offering. In Options 3, Section 11(b), the Exchange proposes to add new subsection (b)(1),15 which will provide that Orders must be entered into the Facilitation Mechanism at a price that is (A) equal to or better than the NBBO on the same side of the market as the agency order unless there is a Priority Customer order on the same side Exchange best bid or offer, in which case the order must be entered at an improved price; and (B) equal to or better than the ABBO 16 on the opposite side. Orders that do not meet these requirements are not eligible for the Facilitation Mechanism and will be rejected. The Exchange is not proposing any other changes to the current entry requirements for Facilitation. The new subsection (b)(1) would simply provide additional detail about Facilitation’s existing entry checks. Example 2 Assume the following market: Exchange BBO: 1 × 2 (also NBBO) CBOE: 0.75. × 2.25 (next best exchange quote) Facilitation order is entered to buy 50 contracts @ 2.05 No Responses are received. The Facilitation order executes with resting 50 lot quote @2. In this instance, the Facilitation order is able to begin crossed with the contra side Exchange BBO because in execution, the resting 50 lot quote @2 is able to provide price improvement to the facilitation order. In renumbered subsection (b)(3), the Exchange proposes to replace the words ‘‘must not exceed’’ with ‘‘will only be considered up to.’’ This change more accurately describes current behavior in that the System will cap Responses to the size of the auction for purposes of allocation methodology. In renumbered subsections (b)(4)(ii) and (b)(4)(iii), the Exchange proposes to 15 As a result, current subsections (b)(1)–(3) will be renumbered as (b)(2)–(4). The Exchange will also renumber current subsection (b)(3)(iv) as subsection (b)(5). 16 The term ‘‘Away Best Bid or Offer’’ or ‘‘ABBO’’ means the displayed National Best Bid or Offer not including the Exchange’s Best Bid or Offer. See Options 1, Section 1(a)(4). PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 amend the rule to provide that the facilitating Member will be allocated up to forty percent (40%) (or such lower percentage requested by the Member) of the original size of the facilitation order. If the Member requests a lower allocation percentage, the contra-side order would receive an allocation consistent with the percentage requested by the Member. Regardless of the Member’s request, the contra-side order would still be responsible for executing up to the full size of the agency order if there is not enough interest to execute the agency order at a particular price.17 The Exchange also proposes to more accurately describe Facilitation’s automatch functionality, which provides an enhanced price improvement opportunity for the agency order by permitting the contra-side order to further participate in the cross by automatching the price and size of competing interest providing price improvement from other market participants. The Exchange adopted Facilitation (and its auto-match functionality) as part of its application to be registered as a national securities exchange.18 In approving Facilitation, the Commission noted that it was largely based on similar functionality offered by ISE.19 The rule currently provides that upon entry of an order into the Facilitation Mechanism, the facilitating Electronic Access Member can elect to automatically match the price and size of orders, quotes and responses received during the exposure period up to a specified limit price or without specifying a limit price. In this case, the facilitating Electronic Access Member will be allocated its full size at each price point, or at each price point within its limit price is a limit is specified, until a price point is reached 17 Other options exchanges such as BX provide similar functionality that allows members using an auction mechanism to configure allocation priority. See, e.g., BX Options 3, Section 13, which provides a similar feature for the BX Options Price Improvement Auction (‘‘PRISM’’) called ‘‘Surrender.’’ ISE also recently amended its Facilitation rule in ISE Options 3, Section 11(b), which governs identical functionality on ISE as the Exchange’s Facilitation Mechanism, to make the same change as proposed herein. See supra note 3. 18 See Securities Exchange Act Release No. 70050 (July 26, 2013), 78 FR 46622 (August 1, 2013) (File No. 10–209). 19 ISE adopted its auto-match functionality in 2010. See Securities Exchange Act Release No. 62644 (August 4, 2010), 75 FR 48395 (August 10, 2010) (SR–ISE–2010–61) (‘‘Auto-Match Filing’’). As discussed later in this filing, the Auto-Match Filing also introduced the auto-match feature on ISE’s PIM, which is functionally identical to the Exchange’s PIM. As such, the Exchange is proposing to make similar changes in PIM’s automatch rule as proposed for Facilitation’s auto-match rule. E:\FR\FM\31MRN1.SGM 31MRN1 Federal Register / Vol. 86, No. 60 / Wednesday, March 31, 2021 / Notices where the balance of the order can be fully executed.20 The Exchange proposes to state that if a Member elects to auto-match, the facilitating Electronic Access Member will be allocated the aggregate size of all competing quotes, orders, and Responses (instead of ‘‘its full size’’) at each price point, or at each price point up to the specified limit price (instead of ‘‘within its limit price’’) if a limit is specified, until a price point is reached where the balance of the order can be fully executed. The Exchange believes that the modified language more accurately explains how the functionality works today, and better aligns with how this feature is described in the Auto-Match Filing.21 Lastly, the Exchange proposes to add at the end of Supplementary Material .01 to Options 3, Section 11 that any solicited contra orders entered by Members into the Facilitation Mechanism to trade against Agency Orders may not be for the account of an Exchange Market Maker that is assigned to the options class.22 This language was included in the approval order to SR– ISE–2006–78 to allow solicited transactions in ISE’s Facilitation Mechanism. As discussed above, the Exchange’s Facilitation Mechanism is functionally identical to ISE’s Facilitation Mechanism. As such, the Exchange seeks to import the same prohibition into the Exchange’s rule text for greater transparency. jbell on DSKJLSW7X2PROD with NOTICES Solicited Order Mechanism The Exchange proposes the below changes to its Solicitation rule, none of which will change the current operation of this technology offering. In Options 3, Section 11(d), the Exchange proposes to add new subsection (d)(1),23 which will provide that orders must be must be entered into the Solicited Order Mechanism at a price that is equal to or better than the NBBO on both sides of the market; provided that, if there is a Priority 20 See Options 3, Section 11(b)(3)(iii) (renumbered to Section 11(b)(4)(iii) under this proposal). 21 The Auto-Match Filing describes the automatch feature as allowing the initiating member to submit a contra-side order that will automatically match the price and size set forth by the competing interest from other market participants (i.e., auction responses, quotes, and orders) at any price level during the auction or up to a specified limit price if a limit is specified. 22 See Securities Exchange Act Release No. 55557 (March 29, 2007), 72 FR 16838 (April 5, 2007) (SR– ISE–2006–78) (Order Granting Approval of Proposed Rule Change Relating to Facilitation Mechanism). 23 As a result, current paragraphs (d)(1)–(3) will be renumbered accordingly. The Exchange will also renumber current paragraph (d)(2)(iv) as paragraph (d)(4). VerDate Sep<11>2014 18:54 Mar 30, 2021 Jkt 253001 Customer order on the Exchange best bid or offer, the order must be entered at an improved price. Orders that do not meet these requirements are not eligible for the Solicited Order Mechanism and will be rejected. The Exchange is not proposing any other changes to the current entry requirements for Solicitation. The new subsection (d)(1) would simply provide additional detail about Solicitation’s existing entry checks. Example 3 Assume the following market: Exchange BBO: 1 × 2 (also NBBO) CBOE: 0.75. × 2.25 (next best exchange quote) Solicitation order is entered to buy 500 contracts @2.05 The Solicitation order is rejected upon entry for being crossed with the NBBO on the contra side. In contrast to Example 2 above for Facilitation, the Solicitation order in this instance is not able to begin crossed with the contra side Exchange BBO because of the allor-none contingency of the Solicitation order.24 Price Improvement Mechanism The Exchange proposes a number of changes to the PIM rule, none of which will change the current operation of this technology offering. As noted above, many of these modifications are similar to the changes proposed for Facilitation. The Exchange proposes in Options 3, Section 13(b)(2) to delete ‘‘national best bid or offer’’ as NBBO is already defined in subsection (b)(1) above. The Exchange proposes in subsection (c)(2) to provide that responses in the PIM (i.e., ‘‘Improvement Orders’’) will only be considered up to the size of the Agency Order. The proposed amendment will specify that the System will cap the size of the Improvement Orders to the auction size for purposes of the allocation methodology. This is similar to the change proposed above for Facilitation. The Exchange also proposes in subsection (c)(3) to amend the internal numbering from (1) and (2) to (i) and (ii) for greater numbering consistency within the PIM rule. In subsection (d)(3), which describes how allocation and execution takes place in PIM, the Exchange proposes that the Counter-Side Order will be allocated the greater of one contract or 40% (or such lower percentage requested by the Member) of the initial size of the Agency Order. Similar to Facilitation as discussed above, the 24 See Options 3, Section 11(d) (requiring that each Solicitation order be designated as all-ornone). PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 16803 System currently permits Members entering orders into PIM to elect to receive a percentage allocation that is less than 40%, although the current rule is silent in this regard. If the Member requests a lower allocation percentage, the Counter-Side Order would receive an allocation consistent with the percentage requested by the Member. Regardless of the Member’s request, the Counter-Side Order would still be responsible for executing up to the full size of the agency order if there is not enough interest to execute the agency order at a particular price.25 The Exchange also proposes to more accurately describe PIM’s auto-match functionality in a similar manner as Facilitation’s auto-match functionality, as discussed above. In this instance, the Exchange proposes to amend the third sentence of subsection (d)(3) to provide: ‘‘If a Member elects to auto-match, the Counter-Side Order will be allocated the aggregate size of all competing quotes, orders, and Responses at each price point up to the specified limit price if a limit is specified, until a price point is reached where the balance of the order can be fully executed.’’ Similar to the proposed amendments to Facilitation’s auto-match, the Exchange believes that the proposed language for PIM’s auto-match more clearly explains how the functionality works today, and better aligns with how this feature is described in the Auto-Match Filing. The Exchange further proposes technical amendments in subsection (d)(3) to replace all instances of ‘‘Counter-Side order’’ as ‘‘Counter-Side Order’’ to use the correct terminology. Anti-Internalization The Exchange proposes to amend its anti-internalization (‘‘AIQ’’) rule in Options 3, Section 15(a)(3)(A). Specifically, the Exchange proposes to add that AIQ does not apply during the opening process or reopening process following a trading halt pursuant to Options 3, Section 8 to provide more specificity on how this functionality currently operates. The Exchange notes that the same procedures used during the opening process are used to reopen an option series after a trading halt, and therefore proposes to specify that AIQ will not apply during an Opening Process (i.e., the opening and halt reopening process) in addition to an auction, as currently within the Rule. AIQ is unnecessary during an Opening Process due to the high level of control that Market Makers exercise over their quotes during this process. The 25 As noted above, BX has a similar feature called Surrender for its PRISM auction. See supra note 17. E:\FR\FM\31MRN1.SGM 31MRN1 16804 Federal Register / Vol. 86, No. 60 / Wednesday, March 31, 2021 / Notices proposed changes will align the Exchange’s AIQ rule with BX’s AIQ rule, which sets forth materially identical functionality.26 jbell on DSKJLSW7X2PROD with NOTICES Technical Amendments The Exchange proposes two technical changes in the Supplementary Material to Options 3, Section 11. First, the Exchange proposes in Supplementary Material .03 to update an incorrect cross-cite from Options 3, Section 22(d) to Section 22(b), which limits principal transactions. Second, the Exchange proposes in Supplementary Material .05 to update the reference to ‘‘Block Mechanism’’ to ‘‘Block Order Mechanism’’ to use the correct terminology. Lastly, the Exchange proposes to retitle General 4 (currently titled ‘‘Regulation’’) to ‘‘Registration Requirements’’ to harmonize its General Rule titles with that of its affiliates The Nasdaq Stock Market LLC and Nasdaq BX, Inc. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,27 in general, and furthers the objectives of Section 6(b)(5) of the Act,28 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 believes that its proposal is consistent with the protection of investors and public interest as all of the proposed changes will increase transparency around how various existing Exchange mechanisms work today. As such, no System changes to existing functionality are being made pursuant to this proposal. Rather, this proposal is designed to reduce any potential investor confusion as to the features and applicability of certain functionality presently available on the Exchange. Furthermore, the proposed changes seek to provide greater harmonization between the rules of the Exchange and its affiliates.29 The Exchange believes that these harmonizing changes would result in greater uniformity, and ultimately less burdensome and more efficient regulatory compliance by market participants. As such, the proposed rule change would foster cooperation and coordination with 26 See BX Options 3, Section 15(c)(1). U.S.C. 78f(b). 28 15 U.S.C. 78f(b)(5). 29 See supra note 3. 27 15 VerDate Sep<11>2014 18:54 Mar 30, 2021 Jkt 253001 persons engaged in facilitating transactions in securities and would remove impediments to and perfect the mechanism of a free and open market and a national market system. The Exchange also believes that more consistent rules will increase the understanding of the Exchange’s operations for Members that are also members on the Exchange’s affiliates, thereby contributing to the protection of investors and the public interest. Specifically, the Exchange believes that the proposed universal changes to replace all instances of Professional interest with non-Priority Customer interest throughout the Exchange’s auction allocation rules will add greater consistency within the Exchange’s rules. As discussed above, the Exchange previously made the same modifications within its standard allocation rule in Options 7, Section 10, so the proposed changes will promote more consistent terminology in the rules and make them easier for market participants to navigate and comprehend. The Exchange also believes that using the term ‘‘non-Priority Customer’’ reduces any potential confusion regarding any reference to Professional Orders or Professional Customer orders. In addition, the Exchange believes that clearly delineating between orders and Reponses of the same capacity in the Facilitation and Solicitation rules will bring clarity and transparency around how allocation takes place in those auction mechanisms today. The Exchange is simply adding more granularity within its rules and specifying the capacity of such order or Response. As noted above, the Exchange is not changing the current allocation methodology, and auction orders and Responses of the same capacity do not get treated differently for allocation purposes today. The Exchange believes that the proposed changes to the Block rule are consistent with the protection of investors and the public interest as the modifications will more accurately reflect the handling of auctions in Block, specifically as it relates to execution and allocation. The proposed changes will specify that better priced interest entered into Block gets executed in full only if there is sufficient size to execute against such interest, and that Priority Customer interest gets executed first in price time priority. This specificity will be helpful to market participants utilizing Block and provide greater certainty as to how their Block orders will be executed and allocated. The Exchange also believes that the proposed changes will continue to ensure a fair and orderly market by PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 maintaining and protecting the priority of Priority Customer orders, while still affording the opportunity for all market participants to seek liquidity and potential price improvement during each Block auction commenced on the Exchange. As noted above, the Exchange is not proposing any changes to the current execution or allocation methodology but believes that the changes will promote consistency with the rulebook of its affiliated exchange BX, which offers identical functionality.30 Similarly, the Exchange believes that specifying the entry checks for Facilitation and Solicitation is consistent with the protection of investors and the public interest by bringing more transparency around how the entry checks operate today. The Exchange is not amending the current Facilitation and Solicitation entry checks; rather, the proposed changes are simply intended to add a more robust description of current System behavior in the Exchange’s rules. The Exchange also believes it is appropriate to require that the Facilitation order be entered at an improved price if there is a Priority Customer order on the same side Exchange best bid or offer as the agency order. The Exchange believes this will ensure a fair and orderly market by maintaining priority of orders and quotes and protecting Priority Customer orders, while still affording the opportunity to seek liquidity and for potential price improvement during each Facilitation auction commenced on the Exchange. For the same reasons, the Exchange believes that it is appropriate to require that the Solicitation order be entered at an improved price if there is a Priority Customer order on the Exchange best bid or offer. The proposed changes to replace ‘‘must not exceed’’ with ‘‘will only be considered up to’’ in the Facilitation and PIM rules are intended to more accurately describe that the System will cap the size of Responses to the size of the agency order for purposes of allocation. The Exchange is not amending current System behavior; rather, the modifications will more clearly articulate the handling of Responses by the System. The Exchange believes that its proposal to specify in the Facilitation and PIM rules that an initiating Member may elect to receive a percentage allocation lower than 40% is consistent with the Act. This feature provides an initiating Member that submits an order into Facilitation or PIM with the flexibility to configure its allocation 30 See E:\FR\FM\31MRN1.SGM supra notes 13–14, and accompanying text. 31MRN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 86, No. 60 / Wednesday, March 31, 2021 / Notices percentage up to the full 40% entitlement. The Exchange notes that regardless of the Member’s instruction, the contra-side order would still be responsible for executing up to the full size of the agency order if there is not enough interest to execute the agency order at a particular price. The Exchange continues to believe that the 40% allocation entitlement is consistent with the statutory standards for competition and free and open markets by promoting price competition within Facilitation and PIM as Members would still have a reasonable opportunity to compete for a significant percentage of the incoming order. The Exchange also notes that the configurable 40% allocation entitlement for Facilitation and PIM is consistent with the configurable allocation entitlements in place on its affiliated exchanges.31 Accordingly, the Exchange believes that the proposed changes will promote consistency across the rulebooks of exchanges offering identical functionality. With respect to the proposed changes to the Facilitation and PIM auto-match feature, the Exchange is amending the current rule text so that it more accurately explains how the Exchange will allocate an order designated for auto-match today. As discussed above, the Exchange is not making any substantive changes to the allocation procedure itself; rather the proposed changes are intended to better align how this feature is described in the AutoMatch Filing.32 Similarly, the Exchange believes that the proposed change in Supplementary Material .01 to Options 3, Section 11 to add the provision that any solicited contra orders entered by Members into the Facilitation Mechanism to trade against Agency Orders may not be for the account of an Exchange Market Maker that is assigned to the options class will better align the rule text with SR–ISE–2006–78. As discussed above, this restriction was included in the approval order to the rule filing that allowed solicited transactions in ISE’s Facilitation Mechanism, which is identical to the Exchange’s Facilitation Mechanism, so the Exchange will import that language into the rule text for greater transparency.33 The Exchange believes its proposal to provide that AIQ will not apply during an Opening Process (i.e., the opening process or halt reopening process) will more accurately state how this functionality currently operates. AIQ 31 See supra note 17. supra note 21. 33 See supra note 22. 18:54 Mar 30, 2021 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. As indicated above, no System changes to existing functionality are being made pursuant to this proposal; rather, this proposal is designed to reduce any potential investor confusion as to the features and applicability of certain functionality presently available on the Exchange. Therefore, the proposed changes are designed to enhance clarity and consistency in the Exchange’s Rulebook. Furthermore, many of the proposed changes seek to provide greater harmonization between the rules of the Exchange and its affiliates, and therefore promotes fair competition among the options exchanges. In particular, the proposed changes discussed above for Block and AIQ are based on BX rules governing identical functionality.35 The Exchange notes that it operates in a highly competitive market in which market participants can readily direct order flow to competing venues who offer similar functionality. The Exchange believes that the proposed rule change will enhance competition 34 See supra note 26. BX Options 3, Section 11(a) (Block) and Section 15(c)(1) (AIQ). 32 See VerDate Sep<11>2014 prevents Market Makers from trading against their own quotes and orders. While the Exchange believes that this protection is useful for Market Makers to manage their trading during regular market hours, applying AIQ is unnecessary during an Opening Process due to the high level of control that Market Makers already exercise over their quotes during this process. Furthermore, the proposed AIQ changes will promote consistency with the rulebook of its affiliated exchange BX, which offers identical functionality.34 The Exchange further believes that the technical changes it is proposing throughout Options 3 are nonsubstantive changes intended to enhance the accuracy of the Exchange’s Rulebook, which will alleviate potential confusion as to the applicability of its rules. As discussed above, these changes consist of updating cross-cites and using correct terminology. Lastly, the Exchange believes that the harmonizing change to retitle General 4, as discussed above, will serve to further harmonize its Rule titling with that of its affiliates, thereby promoting efficiency and conformity of its processes with those of its affiliated exchanges. 35 See Jkt 253001 PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 16805 among the various markets for auction execution, potentially resulting in more active trading in auction mechanisms across all options exchanges. 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 36 and subparagraph (f)(6) of Rule 19b–4 thereunder.37 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– GEMX–2021–01 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange 36 15 U.S.C. 78s(b)(3)(A)(iii). 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. 37 17 E:\FR\FM\31MRN1.SGM 31MRN1 16806 Federal Register / Vol. 86, No. 60 / Wednesday, March 31, 2021 / Notices Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–GEMX–2021–01. 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–GEMX–2021–01, and should be submitted on or before April 21, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–06559 Filed 3–30–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION jbell on DSKJLSW7X2PROD with NOTICES [Release No. 34–91407; File No. SR–MRX– 2021–01] Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Various Rules in Options 3 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 CFR 200.30–3(a)(12). VerDate Sep<11>2014 18:54 Mar 30, 2021 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The purpose of the proposed rule change is to amend various rules in Options 3. The text of the proposed rule change is available on the Exchange’s website at https://listingcenter.nasdaq.com/ rulebook/mrx/rules, 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 amend various rules in Options 3. The proposed changes consist of conforming existing rules to current System technology, amending rule text to add greater detail on how certain Exchange functionality operate today. Furthermore, the proposed changes are intended to harmonize the Exchange’s rules where appropriate with the rules of the Exchange’s affiliated options markets, including by using consistent language to describe identical functionality.3 As such, no 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 The Exchange’s affiliate, Nasdaq ISE, LLC (‘‘ISE’’) recently filed a substantially similar rule change as part of this exercise. See Securities Exchange Act Release No. 91223 (February 26, 2021) (SR–ISE–2021–01). 2 17 March 25, 2021. 38 17 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 12, 2021, Nasdaq MRX, LLC (‘‘MRX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. Jkt 253001 PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 System changes to existing functionality are being made pursuant to this proposal. Rather, this proposal is designed to reduce any potential investor confusion as to the features and applicability of certain functionality presently available on the Exchange. These changes are described in detail below, and include amending Exchange rules governing: (1) The Block Order Mechanism (‘‘Block’’),4 (2) the Facilitation Mechanism (‘‘Facilitation’’),5 (3) the Solicited Order Mechanism (‘‘Solicitation’’),6 (4) the Price Improvement Mechanism (‘‘PIM’’),7 (5) Trade Value Allowance (‘‘TVA’’),8 and (6) Anti-Internalization.9 Universal Changes In September 2019, the Exchange amended its regular allocation rule in Options 7, Section 10 (Priority of Quotes and Orders) to make non-substantive changes, among other changes, to replace references to Professional interest with non-Priority Customer interest.10 The Exchange now proposes to make similar changes to replace all instances of ‘‘Professional’’ interest with ‘‘non-Priority Customer’’ interest throughout its auction allocation rules in Options 3, Section 11 and Section 13 to align with the changes made in SR– MRX–2019–17.11 While the term ‘‘Professional Orders’’ is defined within Options 1, Section 1(a)(38) as an order that is for the account of a person or entity that is not a Priority Customer, the Exchange believes that using the term ‘‘non-Priority Customer’’ is more clear in describing the types of market participant to which the allocation applies, and also reduces confusion regarding any reference to Professional Orders or Professional Customer orders. In addition, the Exchange proposes to make universal changes in its Facilitation and Solicitation rules 12 to clearly delineate between orders and 4 See Options 3, Section 11(a). Options 3, Section 11(b). 6 See Options 3, Section 11(d). 7 See Options 3, Section 13. 8 See Supplementary Material .03 to Options 3, Section 14. 9 See Options 3, Section 15(a)(3)(A). 10 See Securities Exchange Act Release No. 86949 (September 12, 2019), 84 FR 49151 (September 18, 2019) (SR–MRX–2019–17). 11 Specifically in Options 3, Section 11, the Exchange will amend current subsections (a)(2)(ii), (b)(3)(i)–(iii) (renumbered to (b)(4)(i)–(iii) under this proposal), (c)(7)(A)–(C), (d)(2)(iii) (renumbered to (d)(3)(iii) under this proposal), and (e)(4)(D). In Options 3, Section 13, the Exchange will amend current subsections (d)(1)–(3) and (e)(5)(i)–(iii). 12 Specifically in Options 3, Section 11, subsections (b)(3)(i)–(iii) (renumbered to (b)(4)(i)– (iii)), and (d)(2)(i) and (iii) (renumbered to (d)(3)(i) and (iii)) will be updated. 5 See E:\FR\FM\31MRN1.SGM 31MRN1

Agencies

[Federal Register Volume 86, Number 60 (Wednesday, March 31, 2021)]
[Notices]
[Pages 16801-16806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06559]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91408; File No. SR-GEMX-2021-01]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Various 
Rules in Options 3

March 25, 2021.
    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 March 12, 2021, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend various rules in Options 3.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/gemx/rules, 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 amend various rules 
in Options 3. The proposed changes consist of conforming existing rules 
to current System technology, amending rule text to add greater detail 
on how certain Exchange functionality operate today. Furthermore, the 
proposed changes are intended to harmonize the Exchange's rules where 
appropriate with the rules of the Exchange's affiliated options 
markets, including by using consistent language to describe identical 
functionality.\3\ As such, no System changes to existing functionality 
are being made pursuant to this proposal. Rather, this proposal is 
designed to reduce any potential investor confusion as to the features 
and applicability of certain functionality presently available on the 
Exchange. These changes are described in detail below, and include 
amending Exchange rules governing: (1) The Block Order Mechanism 
(``Block''),\4\ (2) the Facilitation Mechanism (``Facilitation''),\5\ 
(3) the Solicited Order Mechanism (``Solicitation''),\6\ (4) the Price 
Improvement Mechanism (``PIM''),\7\ and (5) Anti-Internalization.\8\
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    \3\ The Exchange's affiliate, Nasdaq ISE, LLC (``ISE'') recently 
filed a substantially similar rule change as part of this exercise. 
See Securities Exchange Act Release No. 91223 (February 26, 2021) 
(SR-ISE-2021-01).
    \4\ See Options 3, Section 11(a).
    \5\ See Options 3, Section 11(b).
    \6\ See Options 3, Section 11(d).
    \7\ See Options 3, Section 13.
    \8\ See Options 3, Section 15(a)(3)(A).
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Universal Changes
    In September 2019, the Exchange amended its regular allocation rule 
in Options 7, Section 10 (Priority of Quotes and Orders) to make non-
substantive changes, among other changes, to replace references to 
Professional interest with non-Priority Customer interest.\9\ The 
Exchange now proposes to make similar changes to replace all instances 
of ``Professional'' interest with ``non-Priority Customer'' interest 
throughout its auction allocation rules in Options 3, Section 11 and 
Section 13 to align with the changes made in SR-GEMX-2019-10.\10\ While 
the term ``Professional Orders'' is defined within Options 1, Section 
1(a)(38) as an order that is for the account of a person or entity that 
is not a Priority Customer, the Exchange believes that using the term 
``non-Priority Customer'' is more clear in describing the types of 
market participant to which the allocation applies, and also reduces 
confusion regarding any reference to Professional Orders or 
Professional Customer orders.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 86946 (September 12, 
2019), 84 FR 49158 (September 18, 2019) (SR-GEMX-2019-10).
    \10\ Specifically in Options 3, Section 11, the Exchange will 
amend current subsections (a)(2)(ii), (b)(3)(i)-(iii) (renumbered to 
(b)(4)(i)-(iii) under this proposal), and (d)(2)(iii) (renumbered to 
(d)(3)(iii) under this proposal). In Options 3, Section 13, the 
Exchange will amend current subsections (d)(1)-(3).
---------------------------------------------------------------------------

    In addition, the Exchange proposes to make universal changes in its 
Facilitation and Solicitation rules \11\ to clearly delineate between 
orders and Responses \12\ of the same capacity. For example, where the 
existing rule text currently states ``Priority Customer bids 
(offers),'' the Exchange proposes instead to state ``Priority Customer 
Orders and Priority Customer Responses to buy (sell).'' The Exchange 
notes that this is merely a non-substantive change as auction orders 
and Responses of the same capacity do not get treated differently for 
allocation purposes today. With the proposed changes, the Exchange is 
merely seeking to bring greater transparency around how allocation 
takes place in those auction mechanisms today.
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    \11\ Specifically in Options 3, Section 11, subsections 
(b)(3)(i)-(iii) (renumbered to (b)(4)(i)-(iii)), and (d)(2)(i) and 
(iii) (renumbered to (d)(3)(i) and (iii)) will be updated.
    \12\ A ``Response'' is an electronic message that is sent by 
Members in response to a broadcast message. See Options 3, Section 
11.
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Block Order Mechanism
    The Exchange proposes minor changes to the current descriptions of 
the Block execution and allocation process in Options 3, Section 11(a). 
As discussed below, the proposed Block changes are non-substantive in 
nature, and are intended to harmonize with the Block rule on its 
affiliated market, BX Options (``BX'') in order to ensure rule 
consistency between the Exchange and its affiliate offering identical 
functionality.
    First, the Exchange proposes to add ``up to the size of the block 
order'' at the end of subsection (a)(2)(i). As amended, the rule will 
provide that bids (offers) on the Exchange at the time the block order 
is time the block order is executed

[[Page 16802]]

that are priced higher (lower) than the block execution price, as well 
as Responses that are priced higher (lower) than the block execution 
price, will be executed in full at the block execution price up to the 
size of the block order. The Exchange is making this non-substantive 
change to align with BX's Block rule,\13\ which will ensure rule 
consistency for identical functionality across affiliated markets. The 
language states that better priced interest gets executed in full only 
if there is sufficient size to execute against such interest, which is 
how block orders are executed and priced on the Exchange and BX today.
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    \13\ See BX Options 3, Section 11(a)(2)(A).
---------------------------------------------------------------------------

    Second, the Exchange proposes a non-substantive change in the first 
sentence of subsection (a)(2)(ii) to replace ``first and in time 
priority'' with ``first in price time priority.'' As amended, the rule 
will provide that at the block execution price, Priority Customer 
Orders and Priority Customer Responses will be executed first in price 
time priority. This is not a change to the current Block allocation 
methodology, but rather a non-substantive change for better 
readability, and to align with BX's Block rule \14\ in order to ensure 
rule consistency for identical functionality across affiliated markets. 
Block orders will continue to trade at a single execution price that 
allows the maximum number of contracts of the block order to be 
executed against both the Responses entered to trade against the order 
and unrelated interest on the Exchange's order book.
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    \14\ See BX Options 3, Section 11(a)(2)(B).
---------------------------------------------------------------------------

Example 1
Block order is entered to buy 50 contracts @1.50

    The following Responses are received:

Priority Customer Response 1 to sell 40 contracts @ 1.40
Priority Customer Response 2 to sell 10 contracts @ 1.40
Priority Customer Response 3 to sell 10 contracts @ 1.39

    The block execution price would be $1.40 (i.e., the price at which 
the maximum number of contracts could be executed) and would be 
executed as follows:

Block order trades 10 with Priority Customer Response 3 @1.40
Block order trades 40 with Priority Customer Response 1 @1.40

    As shown above, Priority Customer Response 3 would be executed in 
full since it is priced better than the block execution price and there 
is sufficient size to execute Response 3 against the block order, while 
Priority Customer Responses 1 and 2, which are priced at the block 
execution price, would participate in price time priority--i.e., the 
remaining 40 contracts would go to Response 1, which was received 
before Response 2.
Facilitation Mechanism
    The Exchange proposes a number of changes to its Facilitation rule, 
none of which will change the current operation of this technology 
offering.
    In Options 3, Section 11(b), the Exchange proposes to add new 
subsection (b)(1),\15\ which will provide that Orders must be entered 
into the Facilitation Mechanism at a price that is (A) equal to or 
better than the NBBO on the same side of the market as the agency order 
unless there is a Priority Customer order on the same side Exchange 
best bid or offer, in which case the order must be entered at an 
improved price; and (B) equal to or better than the ABBO \16\ on the 
opposite side. Orders that do not meet these requirements are not 
eligible for the Facilitation Mechanism and will be rejected. The 
Exchange is not proposing any other changes to the current entry 
requirements for Facilitation. The new subsection (b)(1) would simply 
provide additional detail about Facilitation's existing entry checks.
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    \15\ As a result, current subsections (b)(1)-(3) will be 
renumbered as (b)(2)-(4). The Exchange will also renumber current 
subsection (b)(3)(iv) as subsection (b)(5).
    \16\ The term ``Away Best Bid or Offer'' or ``ABBO'' means the 
displayed National Best Bid or Offer not including the Exchange's 
Best Bid or Offer. See Options 1, Section 1(a)(4).
---------------------------------------------------------------------------

Example 2
    Assume the following market:

Exchange BBO: 1 x 2 (also NBBO)
CBOE: 0.75. x 2.25 (next best exchange quote)
Facilitation order is entered to buy 50 contracts @ 2.05

    No Responses are received.
    The Facilitation order executes with resting 50 lot quote @2. In 
this instance, the Facilitation order is able to begin crossed with the 
contra side Exchange BBO because in execution, the resting 50 lot quote 
@2 is able to provide price improvement to the facilitation order.
    In renumbered subsection (b)(3), the Exchange proposes to replace 
the words ``must not exceed'' with ``will only be considered up to.'' 
This change more accurately describes current behavior in that the 
System will cap Responses to the size of the auction for purposes of 
allocation methodology.
    In renumbered subsections (b)(4)(ii) and (b)(4)(iii), the Exchange 
proposes to amend the rule to provide that the facilitating Member will 
be allocated up to forty percent (40%) (or such lower percentage 
requested by the Member) of the original size of the facilitation 
order. If the Member requests a lower allocation percentage, the 
contra-side order would receive an allocation consistent with the 
percentage requested by the Member. Regardless of the Member's request, 
the contra-side order would still be responsible for executing up to 
the full size of the agency order if there is not enough interest to 
execute the agency order at a particular price.\17\
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    \17\ Other options exchanges such as BX provide similar 
functionality that allows members using an auction mechanism to 
configure allocation priority. See, e.g., BX Options 3, Section 13, 
which provides a similar feature for the BX Options Price 
Improvement Auction (``PRISM'') called ``Surrender.'' ISE also 
recently amended its Facilitation rule in ISE Options 3, Section 
11(b), which governs identical functionality on ISE as the 
Exchange's Facilitation Mechanism, to make the same change as 
proposed herein. See supra note 3.
---------------------------------------------------------------------------

    The Exchange also proposes to more accurately describe 
Facilitation's auto-match functionality, which provides an enhanced 
price improvement opportunity for the agency order by permitting the 
contra-side order to further participate in the cross by auto-matching 
the price and size of competing interest providing price improvement 
from other market participants. The Exchange adopted Facilitation (and 
its auto-match functionality) as part of its application to be 
registered as a national securities exchange.\18\ In approving 
Facilitation, the Commission noted that it was largely based on similar 
functionality offered by ISE.\19\ The rule currently provides that upon 
entry of an order into the Facilitation Mechanism, the facilitating 
Electronic Access Member can elect to automatically match the price and 
size of orders, quotes and responses received during the exposure 
period up to a specified limit price or without specifying a limit 
price. In this case, the facilitating Electronic Access Member will be 
allocated its full size at each price point, or at each price point 
within its limit price is a limit is specified, until a price point is 
reached

[[Page 16803]]

where the balance of the order can be fully executed.\20\ The Exchange 
proposes to state that if a Member elects to auto-match, the 
facilitating Electronic Access Member will be allocated the aggregate 
size of all competing quotes, orders, and Responses (instead of ``its 
full size'') at each price point, or at each price point up to the 
specified limit price (instead of ``within its limit price'') if a 
limit is specified, until a price point is reached where the balance of 
the order can be fully executed. The Exchange believes that the 
modified language more accurately explains how the functionality works 
today, and better aligns with how this feature is described in the 
Auto-Match Filing.\21\
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    \18\ See Securities Exchange Act Release No. 70050 (July 26, 
2013), 78 FR 46622 (August 1, 2013) (File No. 10-209).
    \19\ ISE adopted its auto-match functionality in 2010. See 
Securities Exchange Act Release No. 62644 (August 4, 2010), 75 FR 
48395 (August 10, 2010) (SR-ISE-2010-61) (``Auto-Match Filing''). As 
discussed later in this filing, the Auto-Match Filing also 
introduced the auto-match feature on ISE's PIM, which is 
functionally identical to the Exchange's PIM. As such, the Exchange 
is proposing to make similar changes in PIM's auto-match rule as 
proposed for Facilitation's auto-match rule.
    \20\ See Options 3, Section 11(b)(3)(iii) (renumbered to Section 
11(b)(4)(iii) under this proposal).
    \21\ The Auto-Match Filing describes the auto-match feature as 
allowing the initiating member to submit a contra-side order that 
will automatically match the price and size set forth by the 
competing interest from other market participants (i.e., auction 
responses, quotes, and orders) at any price level during the auction 
or up to a specified limit price if a limit is specified.
---------------------------------------------------------------------------

    Lastly, the Exchange proposes to add at the end of Supplementary 
Material .01 to Options 3, Section 11 that any solicited contra orders 
entered by Members into the Facilitation Mechanism to trade against 
Agency Orders may not be for the account of an Exchange Market Maker 
that is assigned to the options class.\22\ This language was included 
in the approval order to SR-ISE-2006-78 to allow solicited transactions 
in ISE's Facilitation Mechanism. As discussed above, the Exchange's 
Facilitation Mechanism is functionally identical to ISE's Facilitation 
Mechanism. As such, the Exchange seeks to import the same prohibition 
into the Exchange's rule text for greater transparency.
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release No. 55557 (March 29, 
2007), 72 FR 16838 (April 5, 2007) (SR-ISE-2006-78) (Order Granting 
Approval of Proposed Rule Change Relating to Facilitation 
Mechanism).
---------------------------------------------------------------------------

Solicited Order Mechanism
    The Exchange proposes the below changes to its Solicitation rule, 
none of which will change the current operation of this technology 
offering.
    In Options 3, Section 11(d), the Exchange proposes to add new 
subsection (d)(1),\23\ which will provide that orders must be must be 
entered into the Solicited Order Mechanism at a price that is equal to 
or better than the NBBO on both sides of the market; provided that, if 
there is a Priority Customer order on the Exchange best bid or offer, 
the order must be entered at an improved price. Orders that do not meet 
these requirements are not eligible for the Solicited Order Mechanism 
and will be rejected. The Exchange is not proposing any other changes 
to the current entry requirements for Solicitation. The new subsection 
(d)(1) would simply provide additional detail about Solicitation's 
existing entry checks.
---------------------------------------------------------------------------

    \23\ As a result, current paragraphs (d)(1)-(3) will be 
renumbered accordingly. The Exchange will also renumber current 
paragraph (d)(2)(iv) as paragraph (d)(4).
---------------------------------------------------------------------------

Example 3
    Assume the following market:

Exchange BBO: 1 x 2 (also NBBO)
CBOE: 0.75. x 2.25 (next best exchange quote)
Solicitation order is entered to buy 500 contracts @2.05

    The Solicitation order is rejected upon entry for being crossed 
with the NBBO on the contra side. In contrast to Example 2 above for 
Facilitation, the Solicitation order in this instance is not able to 
begin crossed with the contra side Exchange BBO because of the all-or-
none contingency of the Solicitation order.\24\
---------------------------------------------------------------------------

    \24\ See Options 3, Section 11(d) (requiring that each 
Solicitation order be designated as all-or-none).
---------------------------------------------------------------------------

Price Improvement Mechanism
    The Exchange proposes a number of changes to the PIM rule, none of 
which will change the current operation of this technology offering. As 
noted above, many of these modifications are similar to the changes 
proposed for Facilitation.
    The Exchange proposes in Options 3, Section 13(b)(2) to delete 
``national best bid or offer'' as NBBO is already defined in subsection 
(b)(1) above. The Exchange proposes in subsection (c)(2) to provide 
that responses in the PIM (i.e., ``Improvement Orders'') will only be 
considered up to the size of the Agency Order. The proposed amendment 
will specify that the System will cap the size of the Improvement 
Orders to the auction size for purposes of the allocation methodology. 
This is similar to the change proposed above for Facilitation. The 
Exchange also proposes in subsection (c)(3) to amend the internal 
numbering from (1) and (2) to (i) and (ii) for greater numbering 
consistency within the PIM rule.
    In subsection (d)(3), which describes how allocation and execution 
takes place in PIM, the Exchange proposes that the Counter-Side Order 
will be allocated the greater of one contract or 40% (or such lower 
percentage requested by the Member) of the initial size of the Agency 
Order. Similar to Facilitation as discussed above, the System currently 
permits Members entering orders into PIM to elect to receive a 
percentage allocation that is less than 40%, although the current rule 
is silent in this regard. If the Member requests a lower allocation 
percentage, the Counter-Side Order would receive an allocation 
consistent with the percentage requested by the Member. Regardless of 
the Member's request, the Counter-Side Order would still be responsible 
for executing up to the full size of the agency order if there is not 
enough interest to execute the agency order at a particular price.\25\
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    \25\ As noted above, BX has a similar feature called Surrender 
for its PRISM auction. See supra note 17.
---------------------------------------------------------------------------

    The Exchange also proposes to more accurately describe PIM's auto-
match functionality in a similar manner as Facilitation's auto-match 
functionality, as discussed above. In this instance, the Exchange 
proposes to amend the third sentence of subsection (d)(3) to provide: 
``If a Member elects to auto-match, the Counter-Side Order will be 
allocated the aggregate size of all competing quotes, orders, and 
Responses at each price point up to the specified limit price if a 
limit is specified, until a price point is reached where the balance of 
the order can be fully executed.'' Similar to the proposed amendments 
to Facilitation's auto-match, the Exchange believes that the proposed 
language for PIM's auto-match more clearly explains how the 
functionality works today, and better aligns with how this feature is 
described in the Auto-Match Filing.
    The Exchange further proposes technical amendments in subsection 
(d)(3) to replace all instances of ``Counter-Side order'' as ``Counter-
Side Order'' to use the correct terminology.
Anti-Internalization
    The Exchange proposes to amend its anti-internalization (``AIQ'') 
rule in Options 3, Section 15(a)(3)(A). Specifically, the Exchange 
proposes to add that AIQ does not apply during the opening process or 
reopening process following a trading halt pursuant to Options 3, 
Section 8 to provide more specificity on how this functionality 
currently operates. The Exchange notes that the same procedures used 
during the opening process are used to reopen an option series after a 
trading halt, and therefore proposes to specify that AIQ will not apply 
during an Opening Process (i.e., the opening and halt reopening 
process) in addition to an auction, as currently within the Rule. AIQ 
is unnecessary during an Opening Process due to the high level of 
control that Market Makers exercise over their quotes during this 
process. The

[[Page 16804]]

proposed changes will align the Exchange's AIQ rule with BX's AIQ rule, 
which sets forth materially identical functionality.\26\
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    \26\ See BX Options 3, Section 15(c)(1).
---------------------------------------------------------------------------

Technical Amendments
    The Exchange proposes two technical changes in the Supplementary 
Material to Options 3, Section 11. First, the Exchange proposes in 
Supplementary Material .03 to update an incorrect cross-cite from 
Options 3, Section 22(d) to Section 22(b), which limits principal 
transactions. Second, the Exchange proposes in Supplementary Material 
.05 to update the reference to ``Block Mechanism'' to ``Block Order 
Mechanism'' to use the correct terminology.
    Lastly, the Exchange proposes to retitle General 4 (currently 
titled ``Regulation'') to ``Registration Requirements'' to harmonize 
its General Rule titles with that of its affiliates The Nasdaq Stock 
Market LLC and Nasdaq BX, Inc.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\27\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\28\ 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.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposal is consistent with the 
protection of investors and public interest as all of the proposed 
changes will increase transparency around how various existing Exchange 
mechanisms work today. As such, no System changes to existing 
functionality are being made pursuant to this proposal. Rather, this 
proposal is designed to reduce any potential investor confusion as to 
the features and applicability of certain functionality presently 
available on the Exchange.
    Furthermore, the proposed changes seek to provide greater 
harmonization between the rules of the Exchange and its affiliates.\29\ 
The Exchange believes that these harmonizing changes would result in 
greater uniformity, and ultimately less burdensome and more efficient 
regulatory compliance by market participants. As such, the proposed 
rule change would foster cooperation and coordination with persons 
engaged in facilitating transactions in securities and would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system. The Exchange also believes that more 
consistent rules will increase the understanding of the Exchange's 
operations for Members that are also members on the Exchange's 
affiliates, thereby contributing to the protection of investors and the 
public interest.
---------------------------------------------------------------------------

    \29\ See supra note 3.
---------------------------------------------------------------------------

    Specifically, the Exchange believes that the proposed universal 
changes to replace all instances of Professional interest with non-
Priority Customer interest throughout the Exchange's auction allocation 
rules will add greater consistency within the Exchange's rules. As 
discussed above, the Exchange previously made the same modifications 
within its standard allocation rule in Options 7, Section 10, so the 
proposed changes will promote more consistent terminology in the rules 
and make them easier for market participants to navigate and 
comprehend. The Exchange also believes that using the term ``non-
Priority Customer'' reduces any potential confusion regarding any 
reference to Professional Orders or Professional Customer orders. In 
addition, the Exchange believes that clearly delineating between orders 
and Reponses of the same capacity in the Facilitation and Solicitation 
rules will bring clarity and transparency around how allocation takes 
place in those auction mechanisms today. The Exchange is simply adding 
more granularity within its rules and specifying the capacity of such 
order or Response. As noted above, the Exchange is not changing the 
current allocation methodology, and auction orders and Responses of the 
same capacity do not get treated differently for allocation purposes 
today.
    The Exchange believes that the proposed changes to the Block rule 
are consistent with the protection of investors and the public interest 
as the modifications will more accurately reflect the handling of 
auctions in Block, specifically as it relates to execution and 
allocation. The proposed changes will specify that better priced 
interest entered into Block gets executed in full only if there is 
sufficient size to execute against such interest, and that Priority 
Customer interest gets executed first in price time priority. This 
specificity will be helpful to market participants utilizing Block and 
provide greater certainty as to how their Block orders will be executed 
and allocated. The Exchange also believes that the proposed changes 
will continue to ensure a fair and orderly market by maintaining and 
protecting the priority of Priority Customer orders, while still 
affording the opportunity for all market participants to seek liquidity 
and potential price improvement during each Block auction commenced on 
the Exchange. As noted above, the Exchange is not proposing any changes 
to the current execution or allocation methodology but believes that 
the changes will promote consistency with the rulebook of its 
affiliated exchange BX, which offers identical functionality.\30\
---------------------------------------------------------------------------

    \30\ See supra notes 13-14, and accompanying text.
---------------------------------------------------------------------------

    Similarly, the Exchange believes that specifying the entry checks 
for Facilitation and Solicitation is consistent with the protection of 
investors and the public interest by bringing more transparency around 
how the entry checks operate today. The Exchange is not amending the 
current Facilitation and Solicitation entry checks; rather, the 
proposed changes are simply intended to add a more robust description 
of current System behavior in the Exchange's rules. The Exchange also 
believes it is appropriate to require that the Facilitation order be 
entered at an improved price if there is a Priority Customer order on 
the same side Exchange best bid or offer as the agency order. The 
Exchange believes this will ensure a fair and orderly market by 
maintaining priority of orders and quotes and protecting Priority 
Customer orders, while still affording the opportunity to seek 
liquidity and for potential price improvement during each Facilitation 
auction commenced on the Exchange. For the same reasons, the Exchange 
believes that it is appropriate to require that the Solicitation order 
be entered at an improved price if there is a Priority Customer order 
on the Exchange best bid or offer.
    The proposed changes to replace ``must not exceed'' with ``will 
only be considered up to'' in the Facilitation and PIM rules are 
intended to more accurately describe that the System will cap the size 
of Responses to the size of the agency order for purposes of 
allocation. The Exchange is not amending current System behavior; 
rather, the modifications will more clearly articulate the handling of 
Responses by the System.
    The Exchange believes that its proposal to specify in the 
Facilitation and PIM rules that an initiating Member may elect to 
receive a percentage allocation lower than 40% is consistent with the 
Act. This feature provides an initiating Member that submits an order 
into Facilitation or PIM with the flexibility to configure its 
allocation

[[Page 16805]]

percentage up to the full 40% entitlement. The Exchange notes that 
regardless of the Member's instruction, the contra-side order would 
still be responsible for executing up to the full size of the agency 
order if there is not enough interest to execute the agency order at a 
particular price. The Exchange continues to believe that the 40% 
allocation entitlement is consistent with the statutory standards for 
competition and free and open markets by promoting price competition 
within Facilitation and PIM as Members would still have a reasonable 
opportunity to compete for a significant percentage of the incoming 
order. The Exchange also notes that the configurable 40% allocation 
entitlement for Facilitation and PIM is consistent with the 
configurable allocation entitlements in place on its affiliated 
exchanges.\31\ Accordingly, the Exchange believes that the proposed 
changes will promote consistency across the rulebooks of exchanges 
offering identical functionality.
---------------------------------------------------------------------------

    \31\ See supra note 17.
---------------------------------------------------------------------------

    With respect to the proposed changes to the Facilitation and PIM 
auto-match feature, the Exchange is amending the current rule text so 
that it more accurately explains how the Exchange will allocate an 
order designated for auto-match today. As discussed above, the Exchange 
is not making any substantive changes to the allocation procedure 
itself; rather the proposed changes are intended to better align how 
this feature is described in the Auto-Match Filing.\32\ Similarly, the 
Exchange believes that the proposed change in Supplementary Material 
.01 to Options 3, Section 11 to add the provision that any solicited 
contra orders entered by Members into the Facilitation Mechanism to 
trade against Agency Orders may not be for the account of an Exchange 
Market Maker that is assigned to the options class will better align 
the rule text with SR-ISE-2006-78. As discussed above, this restriction 
was included in the approval order to the rule filing that allowed 
solicited transactions in ISE's Facilitation Mechanism, which is 
identical to the Exchange's Facilitation Mechanism, so the Exchange 
will import that language into the rule text for greater 
transparency.\33\
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    \32\ See supra note 21.
    \33\ See supra note 22.
---------------------------------------------------------------------------

    The Exchange believes its proposal to provide that AIQ will not 
apply during an Opening Process (i.e., the opening process or halt 
reopening process) will more accurately state how this functionality 
currently operates. AIQ prevents Market Makers from trading against 
their own quotes and orders. While the Exchange believes that this 
protection is useful for Market Makers to manage their trading during 
regular market hours, applying AIQ is unnecessary during an Opening 
Process due to the high level of control that Market Makers already 
exercise over their quotes during this process. Furthermore, the 
proposed AIQ changes will promote consistency with the rulebook of its 
affiliated exchange BX, which offers identical functionality.\34\
---------------------------------------------------------------------------

    \34\ See supra note 26.
---------------------------------------------------------------------------

    The Exchange further believes that the technical changes it is 
proposing throughout Options 3 are non-substantive changes intended to 
enhance the accuracy of the Exchange's Rulebook, which will alleviate 
potential confusion as to the applicability of its rules. As discussed 
above, these changes consist of updating cross-cites and using correct 
terminology. Lastly, the Exchange believes that the harmonizing change 
to retitle General 4, as discussed above, will serve to further 
harmonize its Rule titling with that of its affiliates, thereby 
promoting efficiency and conformity of its processes with those of its 
affiliated exchanges.

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. As indicated above, no System 
changes to existing functionality are being made pursuant to this 
proposal; rather, this proposal is designed to reduce any potential 
investor confusion as to the features and applicability of certain 
functionality presently available on the Exchange. Therefore, the 
proposed changes are designed to enhance clarity and consistency in the 
Exchange's Rulebook.
    Furthermore, many of the proposed changes seek to provide greater 
harmonization between the rules of the Exchange and its affiliates, and 
therefore promotes fair competition among the options exchanges. In 
particular, the proposed changes discussed above for Block and AIQ are 
based on BX rules governing identical functionality.\35\ The Exchange 
notes that it operates in a highly competitive market in which market 
participants can readily direct order flow to competing venues who 
offer similar functionality. The Exchange believes that the proposed 
rule change will enhance competition among the various markets for 
auction execution, potentially resulting in more active trading in 
auction mechanisms across all options exchanges.
---------------------------------------------------------------------------

    \35\ See BX Options 3, Section 11(a) (Block) and Section 
15(c)(1) (AIQ).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \36\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\37\
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    \36\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \37\ 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-2021-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange

[[Page 16806]]

Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-GEMX-2021-01. 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-GEMX-2021-01, and should be submitted on 
or before April 21, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-06559 Filed 3-30-21; 8:45 am]
BILLING CODE 8011-01-P
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