Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend ATR and Re-Pricing Rules in Connection With a Technology Migration to Enhanced Nasdaq Functionality, 72556-72568 [2022-25673]
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Federal Register / Vol. 87, No. 226 / Friday, November 25, 2022 / Notices
memorializing them in the Policy, and
therefore helping to ensure that ICE
Clear Europe personnel follow these
processes on a consistent and
predictable basis, would help ICE Clear
Europe maintain operational resilience.
The Commission similarly believes
that identifying ICE Clear Europe’s
Important Business Services, setting
impact tolerances with respect to those
services, and conducting scenario and
analysis and testing for those services,
would help ICE Clear Europe to
maintain these Important Business
Services in the event of a disruption.
Because a prolonged disruption to an
Important Business Service would
significantly disrupt the orderly
functioning of a market that ICE Clear
Europe serves, thus impacting financial
stability, the Commission believes that
maintaining Important Business
Services against the threat of a
disruption and other operational risks
would help ICE Clear Europe maintain
its overall operational resilience.
Moreover, the Commission believes
that the other changes discussed in Part
II.C above would improve the Policy
and therefore ICE Clear Europe’s ability
to maintain operational resilience using
the Policy. For example, the
Commission believes that fixing
typographical errors, removing the
redundant reference to the Second Line
in Section 3.2.5, and updating
references would help to ensure that the
Policy can be applied consistently and
free from error. The Commission also
believes that making the Policy subject
to at least an annual review or earlier in
the event of a material change, rather
than a biennial review, would help to
identify any gaps and necessary
resolutions or updates sooner than what
is currently required.
For these reasons, the Commission
believes the proposed rule change
would help ICE Clear Europe maintain
operational resilience using the Policy.
ICE Clear Europe’s operational
resilience should decrease the
likelihood that operational incidents
disrupt its ability to promptly and
accurately clear and settle securities
transactions. The Commission believes
therefore the proposed rule change
would maintain ICE Clear Europe’s
ability to promptly and accurately clear
and settle securities transactions,
consistent with Section 17A(b)(3)(F) of
the Act.22
ii. Consistency With Rule 17Ad–
22(e)(2)(v)
Rule 17Ad–22(e)(2)(v) requires that
ICE Clear Europe establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
provide for governance arrangements
that, among other things, specify clear
and direct lines of responsibility.23 The
Commission believes that the proposed
changes discussed above would
maintain clear and direct lines of
responsibility for First Line and Second
Line personnel. For example, the First
Line would review each Important
Business Service annually, subject to
oversight by the Risk Oversight
Department and approval by a Boardlevel committee. The First Line
additionally would review the impact
tolerances annually, and the Second
Line would oversee this review. The
First Line also would, as discussed
above, develop plans to remediate
certain findings from scenario analysis
and testing. As discussed above, the
proposed rule change would
memorialize these lines of responsibility
to demonstrate compliance with certain
additional legal requirements applicable
to ICE Clear Europe in its home
jurisdiction. The Commission believes
all of these changes would specify clear
and direct lines of responsibility.
Therefore, the Commission finds that
the proposed rule change is consistent
with Rule 17Ad–22(e)(2)(v).24
iii. Consistency With Rule 17Ad–
22(e)(17)
Rule 17Ad–22(e)(17) requires that ICE
Clear Europe establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
manage its operational risks by, among
other things, identifying the plausible
sources of operational risk, both internal
and external, and mitigating their
impact through the use of appropriate
systems, policies, procedures, and
controls.25 The Commission believes
that by memorializing in the Policy how
ICE Clear Europe manages and
maintains its operational resilience, the
proposed rule change would mitigate
the impact of operational risk at ICE
Clear Europe by helping to ensure that
ICE Clear Europe personnel follow these
processes on a consistent and
predictable basis, and therefore are able
to maintain operational resilience and
mitigate the impact of operational risk at
ICE Clear Europe. The Commission also
believes that identifying ICE Clear
Europe’s Important Business Services,
setting impact tolerances with respect to
those services, and conducting scenario
and analysis and testing for those
services would help ICE Clear Europe to
23 17
CFR 240.17Ad–22(e)(2)(v).
CFR 240.17Ad–22(e)(2)(v).
25 17 CFR 240.17Ad–22(e)(17).
24 17
22 15
U.S.C. 78q–1(b)(3)(F).
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identify, manage, and mitigate the
impact of operational risks to these
Important Business Services. Therefore,
the Commission finds that the proposed
rule change is consistent with Rule
17Ad–22(e)(17).26
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act, and in
particular, with the requirements of
Section 17A(b)(3)(F) of the Act,27 and
Rules 17Ad–22(e)(2)(v) and 17Ad–
22(e)(17) thereunder.28
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 29 that the
proposed rule change (SR–ICEEU–2022–
015) be, and hereby is, approved.30
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–25662 Filed 11–23–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96363; File No. SR–GEMX–
2022–10]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend ATR and RePricing Rules in Connection With a
Technology Migration to Enhanced
Nasdaq Functionality
November 18, 2022.
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 November
9, 2022, Nasdaq GEMX, LLC (‘‘GEMX’’
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.
26 17
CFR 240.17Ad–22(e)(17).
U.S.C. 78q–1(b)(3)(F).
28 17 CFR 240.17Ad–22(e)(2)(v) and (e)(17).
29 15 U.S.C. 78s(b)(2).
30 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
31 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
27 15
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Federal Register / Vol. 87, No. 226 / Friday, November 25, 2022 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
certain rules in connection with a
technology migration to enhanced
Nasdaq, Inc. (‘‘Nasdaq’’) functionality.
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.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
In connection with a technology
migration to enhanced Nasdaq
functionality that will result in higher
performance, scalability, and more
robust architecture, the Exchange
proposes to amend its rules to adopt
certain trading functionality currently
utilized at Nasdaq BX, Inc. (‘‘BX’’). As
further discussed below, the Exchange
is proposing to adopt such functionality
substantially in the same form as
currently on BX, while retaining certain
intended differences between it and its
affiliates.
The Exchange intends to begin
implementation of the proposed rule
change by Q3 2023. GEMX would
commence its implementation with a
limited symbol migration and continue
to migrate symbols over several weeks.
The Exchange will issue an Options
Trader Alert to Members to provide
notification of the symbols that will
migrate and the relevant dates.
Re-Pricing
In connection with the technology
migration, the Exchange proposes to
adopt re-pricing functionality in
Options 3, Section 4 and Section 5 for
certain orders and quotes that lock or
cross an away market’s price. The
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proposed functionality will be
materially identical to current BX
functionality.3 As further described
below, the Exchange proposes a number
of corresponding amendments
throughout Options 2 and Options 3 in
connection with adopting the re-pricing
mechanism.
The Exchange notes that today, it
would cancel any unexecuted balances
of non-routable orders that cannot be
placed on the order book.4 With the
technology migration, any unexecuted
balances may rest on the order book as
the Exchange would re-price an order
that locks or crosses another market as
described in this proposal.
As proposed, the System will re-price
certain orders to avoid locking or
crossing an away market’s price. Orders
that are designated as non-routable and
that lock or cross an away market price
will be automatically re-priced to the
current national best offer (for bids) or
the current national best bid (for offers)
as non-displayed and displayed one
minimum price variance (‘‘MPV’’) above
(for offers) or below (for bids) the
national best price.5 Upon re-pricing in
3 Today, BX re-prices certain orders and quotes to
avoid locking and crossing away markets,
consistent with its Trade-Through compliance and
Locked or Crossed Markets obligations. See BX
Options 3, Sections 4(b)(6) and 5(d). See also
Securities Exchange Act Release No. 89476 (August
4, 2020), 85 FR 48274 (August 10, 2020) (SR–BX–
2020–017) (describing BX re-pricing mechanism in
BX Options 3, Section 5). In addition to re-pricing,
the Exchange also permits Members to cancel their
quotes by configuration.
4 Today, this would include cancelling
unexecuted balances of non-routable orders after
following the procedures set forth in
Supplementary Material .02 to Options 5, Section
2.
5 The Exchange notes that other rules may cause
a routable or non-routable order to re-price in the
manner described above. For example, the
Exchange will introduce a FIND routing strategy
with the technology migration. Orders marked as
FIND (i.e., ‘‘FIND Orders’’) are routable in nature
but could, in certain specified scenarios, re-price
and be treated as a non-routable order in such cases.
See e.g., Options 5, Section 4(a)(iii)(B)(4) (effective
but not yet operative), which provides that a FIND
Order received after an Opening Process that is
marketable against the BBO when the ABBO is
inferior to the BBO will be traded on the Exchange
at or better than the BBO price. If the FIND Order
has size remaining after exhausting the BBO, it may:
(1) trade at the next BBO price (or prices) if the
order price is locking or crossing that price (or
prices) up to and including the ABBO price, (2) be
entered into the Order Book at its limit price, or (3)
if locking or crossing the ABBO, be entered into the
Order Book at the ABBO price and displayed one
MPV away from the ABBO. The FIND Order will
be treated as DNR for the remainder of the trading
day, even in the event that there is a new Opening
Process after a trading halt. See also Securities
Exchange Act Release No. 94897 (May 12, 2022), 87
FR 30294 (May 18, 2022) (SR–ISE–2022–11) (Notice
of Filing and Immediate Effectiveness of Proposed
Rule Change to Amend Routing Functionality in
Connection With a Technology Migration,
including to adopt FIND Orders) (‘‘Routing Filing’’).
The changes proposed in the Routing Filing will
become operative at the same time as this proposal.
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72557
this manner, such order will be
displayed on OPRA at one MPV above
(for offers) or below (for bids) the
national best price. The order will
remain on the Exchange’s order book
and will be accessible at the nondisplayed price. For example, a nondisplayed limit order may be accessed
on the Exchange by a Member if the
limit order is priced better than the
NBBO. The following example
illustrates how the proposed re-pricing
mechanism would work:
Symbol ABCD in a Non-Penny name
CBOE BBO at 1.00 × 1.20
DNR order to buy ABCD for 1.30 arrives
DNR buy order books at 1.20 (current
national best offer) and displays at
1.15 (one MPV below national best
offer) *
* OPRA will show the displayed
price, not the booked non-displayed
price.
In order to effectuate the foregoing
changes, the Exchange proposes to
amend Options 3, Section 5(c), which
currently provides that the System
automatically executes eligible orders
using the Exchange’s displayed best bid
and offer (‘‘BBO’’). As amended,
Options 3, Section 5(c) would provide
that the System automatically executes
eligible orders using the Exchange’s
displayed best bid and offer (i.e., BBO)
or the Exchange’s non-displayed order
book (‘‘internal BBO’’) 6 if the best bid
and/or offer on the Exchange has been
re-priced pursuant to Options 3, Section
5(d). The proposed definition of an
internal BBO, which will be identical to
BX’s definition of internal BBO in BX
Options 3, Section 5(c), will cover repriced orders that remain on the order
book and are available at non-displayed
prices while resting on the order book.
The proposed re-pricing itself will be
described in Options 3, Section 5(d).
Currently, Options 3, Section 5(d)
describes Trade-Through Compliance
and Locked or Crossed Market behavior,
and further provides that an order that
is designated by the Member as routable
would be routed in compliance with
applicable Trade-Through and Locked
and Crossed Markets restrictions.7 The
Exchange proposes to add rule text
within Options 3, Section 5(d) to
6 A non-displayed order price is not visible to any
market participants other than the submitting
market participant until such order executes and
becomes visible at that time to all market
participants.
7 Options 3, Section 5(d) also currently provides
that orders that are not automatically executed will
be handled as provided in Supplementary Material
.02 to Options 5, Section 2; provided that Members
may specify that a Non-Customer order should
instead be cancelled automatically by the System at
the time of receipt.
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describe the manner in which a nonroutable order would be re-priced.
Specifically, the Exchange proposes to
state, ‘‘An order that is designated by a
Member as non-routable will be repriced in order to comply with
applicable Trade-Through and Locked
and Crossed Markets restrictions. If, at
the time of entry, an order that the
entering party has elected not to make
eligible for routing 8 would cause a
locked or crossed market violation or
would cause a trade-through violation,
it will be re-priced to the current
national best offer (for bids) or the
current national best bid (for offers) as
non-displayed, and displayed at one
minimum price variance above (for
offers) or below (for bids) the national
best price.’’ The Exchange believes that
the addition of this language,
substantially similar to language within
BX Options 3, Section 5(d),9 will
provide Members with additional
information as to the manner in which
orders are handled by the System when
those orders would lock or cross an
away market. Identical to BX, the
Exchange is specifying that the re-price
would occur ‘‘at the time of entry’’ to
avoid a locked or crossed market
violation or a trade-through violation.10
With respect to quotes, today as set
forth in Options 3, Section 4(b)(6), if, at
the time of entry, a quote would cause
a locked or crossed market violation or
would cause a trade-through violation,
it will either be re-priced and displayed
at one MPV above (for offers) or below
(for bids) the national best price or
immediately cancelled, as configured by
the Member. The Exchange now
proposes to amend the quote re-pricing
mechanism currently described in
GEMX Options 3, Section 4(b)(6) by
harmonizing it with BX Options 3,
Section 4(b)(6).11 As amended, the quote
8 As noted above, FIND Orders (which are
inherently routable but could then become nonroutable in specified circumstances) may also be repriced. See supra note 5.
9 Currently, BX Options 3, Section 5(d), in
relevant part, provides that if, at the time of entry,
an order that the entering party has elected not to
make eligible for routing would cause a locked or
crossed market violation or would cause a tradethrough violation, it will be re-priced to the current
national best offer (for bids) or the current national
best bid (for offers) and displayed at one minimum
price variance above (for offers) or below (for bids)
the national best price. BX intends to make a
clarifying change in a separate rule filing to align
its rule text with proposed GEMX Options 3,
Section 5(d) to also indicate that BX will re-price
to the current national best price as non-displayed.
10 After the re-price under Options 3, Section
5(d), continuous re-pricing could take place
pursuant to Options 5, Section 4 if the away market
price fades to inferior prices and the re-priced order
can move closer to its original limit price. See supra
note 5.
11 BX Options 3, Section 4(b)(6) provides that a
quote will not be executed at a price that trades
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re-pricing language in Options 3,
Section 4(b)(6) would provide: ‘‘If, at the
time of entry, a quote would cause a
locked or crossed market violation or
would cause a trade-through violation,
it will be re-priced to the current
national best offer (for bids) or the
current national best bid (for offers) as
non-displayed, and displayed at one
minimum price variance above (for
offers) or below (for bids) the national
best price, or immediately cancelled, as
configured by the Member.’’ As
reflected in the foregoing, the difference
between the current and proposed repricing is that the Exchange will reprice to the current national best price
under the proposal and book nondisplayed at this price (i.e., the current
national best price). Upon re-pricing in
this manner, the order would then be
displayed one MPV inferior to the
national best price. In contrast, today,
the Exchange re-prices and books as
displayed one MPV inferior to the
national best price. The proposed
process is identical to how BX quote repricing works today.12
In connection with the introduction of
the BX-like quote re-pricing mechanism,
the Exchange also proposes to add the
definition of internal BBO (similar to
the proposed definition of internal BBO
for order re-pricing) in new subsection
(7) of Options 3, Section 4(b) for quote
re-pricing. Specifically, subsection (7)
will provide that the System
automatically executes eligible quotes
using the Exchange’s displayed best bid
and offer (i.e., BBO) or the Exchange’s
non-displayed order book (i.e., internal
BBO) if the best bid and/or offer on the
Exchange has been re-priced pursuant to
Options 3, Section 5(d) and Options 3,
Section 4(b)(6). The proposed addition
is intended to make clear that quotes
may now be executed using either the
BBO or internal BBO, similar to how
orders may now be executed with the
proposed re-pricing changes.13 The
through another market or displayed at a price that
would lock or cross another market. If, at the time
of entry, a quote would cause a locked or crossed
market violation or would cause a trade-through,
violation, it will be re-priced to the current national
best offer (for bids) or the current national best bid
(for offers) and displayed at one minimum price
variance above (for offers) or below (for bids) the
national best price. BX intends to make a clarifying
change in a separate rule filing to align its rule text
with proposed GEMX Options 3, Section 4(b)(6) to
also indicate that it will re-price to the current
national best price as non-displayed.
12 See supra note 11.
13 While BX’s quote re-pricing rule does not
explicitly reference the term ‘‘internal BBO,’’ BX
describes the re-pricing of quotes in BX Options 3,
Section 4(b)(6) and also currently operates
identically to how GEMX is proposing for quotes in
GEMX Options 3, Section 4(b)(7) (the BX system
automatically executes eligible quotes using BX’s
displayed best bid and offer (i.e., BX BBO) or BX’s
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Exchange will also make a technical
amendment to renumber current
subsection (7) of Options 3, Section 4(b)
to new subsection (8).
In connection with the foregoing
changes, the Exchange proposes to add
references to ‘‘internal BBO’’ throughout
its rules to closely conform with the
concept of re-pricing at an internal BBO
as proposed in Options 3, Sections
4(b)(6), 4(b)(7), 5(c) and 5(d). First, the
Exchange proposes to add references to
the internal BBO in Options 2, Section
10(a), which currently describes
Preferred Market Makers 14 and
Preferenced Orders.15 The Exchange
proposes to amend paragraph (a)(3) of
Options 2, Section 10, which currently
stipulates that a Preferred Market Maker
must be quoting at the NBBO at the time
the Preferenced Order is received in
order to be entitled to the Preferred
Market Maker allocation set forth in
Options 3, Section 10(c)(1)(C). As
amended, the Rule will provide that if
the Preferred Market Maker is quoting at
the better of the internal BBO or the
NBBO at the time the Preferenced Order
is received, the allocation procedure
described in Options 3, Section
10(c)(1)(C) shall be applied to the
execution of the Preferenced Order. The
proposal to use the term ‘‘better of the
internal BBO or the NBBO’’ will
conform to the concept of re-pricing at
an internal BBO as proposed in Options
3, Sections 4(b)(6), 4(b)(7), 5(c) and 5(d),
and will make clear that the Preferred
Market Maker must now be quoting at
the better of the NBBO or internal BBO
to be entitled to the Preferred Market
Maker allocation.16 Today, BX has
similar language governing its Directed
Market Makers (‘‘DMMs’’) (analogous to
the Exchange’s Preferred Market
Makers), which requires Directed
Market Makers to be quoting at the
better of the internal BBO or the NBBO
in order to receive the Directed Market
Maker allocation entitlement.17 The
Exchange also proposes a corresponding
change in paragraph (a)(2) of Options 2,
Section 10, which currently states that
non-displayed order book (i.e., internal BX BBO) if
the best bid and/or offer on BX has been re-priced
pursuant to BX Options 3, Section 5(d) and BX
Options 3, Section 4(b)(6). BX intends to file a
separate rule change to add this clarification in BX
Options 3, Section 4.
14 A Preferred Market Maker may be the Primary
Market Maker appointed to the options class or any
Competitive Market Maker appointed to the options
class. See Options 2, Section 10(a).
15 A Preferenced Order is an order designated to
a Preferred Market Maker. See Options 2, Section
10.
16 As discussed below, the Exchange is proposing
corresponding changes in the Preferred Market
Maker allocation rule in Options 3, Section
10(c)(1)(C).
17 See BX Options 2, Section 10(a)(1).
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if the Preferred Market Maker is not
quoting at a price equal to the NBBO at
the time the Preferenced Order is
received, the allocation procedure
described in Options 3, Section
10(c)(1)(C) shall not be applied to the
execution of the Preferenced Order.
Specifically, the Exchange proposes that
the Preferred Market Maker will not be
entitled to the allocation in Options 3,
Section 10(c)(1)(C) if the Preferred
Market Maker is not quoting at a price
equal to or better than the better of the
internal BBO or the NBBO at the time
the Preferenced Order is received.
Second, the Exchange proposes to add
the concept of ‘‘better of the internal
BBO or the NBBO’’ in Options 3,
Section 10(c)(1)(B), which currently sets
forth an enhanced Primary Market
Maker allocation entitlement. As
amended, Options 3, Section 10(c)(1)(B)
will provide that after all Priority
Customer orders have been fully
executed, provided the Primary Market
Maker’s quote is at the better of the
internal BBO or the NBBO, the Primary
Market Maker shall be entitled to
receive the allocation described in
Options 3, Section 10(c)(1)(B)(i), unless
the incoming order to be allocated is a
Preferenced Order and the Primary
Market Maker is not the Preferred
Market Maker, in which case allocation
would be pursuant to (c)(1)(C). The
proposed changes will conform to the
concept of re-pricing at an internal BBO
as proposed in Options 3, Sections
4(b)(6), 4(b)(7), 5(c) and 5(d), and will
make clear that the Primary Market
Maker must now be quoting at the better
of the NBBO or internal BBO to be
entitled to the enhanced Primary Market
Maker allocation. The Exchange notes
that Nasdaq Phlx LLC (‘‘Phlx’’) has
similar language in Phlx Options 3,
Section 10 governing Lead Market
Maker (‘‘LMM’’) (analogous to the
Exchange’s Primary Market Maker)
allocation.18 The Exchange also
proposes to correct a citation in Options
3, Section 10(c)(1)(B)(i)(b) from
subparagraph (a)(1)(E) to subparagraph
(c)(1)(E).
Third, the Exchange proposes to add
the concept of ‘‘better of the internal
BBO or the NBBO’’ in Options 3,
Section 10(c)(1)(C), which currently sets
forth Preferred Market Maker allocation
entitlement. As amended, Options 3,
Section 10(c)(1)(C) will provide that
after all Priority Customer orders have
been fully executed, upon receipt of a
Preferenced Order pursuant to
Supplementary .01 to Options 3, Section
10, provided the Preferred Market
Maker’s quote is at the better of the
internal BBO or the NBBO, the Preferred
Market Maker will be afforded a
participation entitlement. The proposed
changes will conform to the concept of
re-pricing at an internal BBO as
proposed in Options 3, Sections 4(b)(6),
4(b)(7), 5(c) and 5(d), and will make
clear that the Preferred Market Maker
must now be quoting at the better of the
NBBO or internal BBO to be entitled to
the Preferred Market Maker allocation.
The Exchange notes that Phlx has
similar language in Phlx Options 3,
Section 10 governing DMM allocation.19
Fourth, the Exchange proposes to add
the concept of ‘‘better of the internal
BBO or the NBBO’’ throughout Options
3, Section 10(c)(1)(D), which currently
sets forth the Primary Market Maker
allocation entitlement for orders of five
(5) contracts or fewer. As amended,
subparagraph (i) of Options 3, Section
10(c)(1)(D) will provide that a Primary
Market Maker is entitled to priority with
respect to Orders of 5 Contracts or
Fewer if the Primary Market Maker has
a quote at the better of the internal BBO
or the NBBO with no other Priority
Customer or Preferenced Market Maker
interest present which has a higher
priority, including when the Primary
Market Maker is also the Preferred
Market Maker. As amended,
subparagraph (ii) of Options 3, Section
10(c)(1)(D) will provide that if the
Primary Market Maker is quoting at the
better of the internal BBO or the NBBO
and the Primary Market Maker is also
the Preferred Market Maker or there is
no Preferred Market Maker quoting at
the better of the internal BBO or the
NBBO, and a Priority Customer has a
higher priority at the time of execution,
the Priority Customer will be allocated
the Orders of 5 Contracts or Fewer up
to their displayed size pursuant Options
3, Section 10(c)(1)(A) and if contracts
remain, the Primary Market Maker will
be allocated the remainder. As
amended, subparagraph (iii) of Options
3, Section 10(c)(1)(D) will provide that
if the Primary Market Maker is quoting
at the better of the internal BBO or the
NBBO and no Priority Customer has a
higher priority at the time of execution
and a Preferred Market Maker, who is
not a Primary Market Maker, is quoting
at the better of the internal BBO or the
NBBO then allocation shall proceed
according to Section 10(c)(1)(C). The
proposal will conform to the concept of
re-pricing at an internal BBO as
proposed in Options 3, Sections 4(b)(6),
4(b)(7), 5(c) and 5(d). The Exchange
notes that BX has similar language in
BX Options 3, Section 10 governing
LMM allocation entitlement for orders
of five (5) contracts or fewer.20
Opening Process
In connection with the technology
migration, the Exchange proposes to
amend its Opening Process in Options
3, Section 8 to adopt language that
conforms to the proposed re-pricing
structure. The Exchange proposes to
amend Options 3, Section 8(j)(6)(i) to
reflect the new BX-like re-pricing that it
is proposing to adopt, as described in
the re-pricing section above. Currently,
Section 8(j)(6)(i) stipulates that for
contracts that are not routable, pursuant
to Options 3, Section 8(j)(6), the System
would cancel (1) any portion of the DNR
order that would otherwise have to be
routed to the exchange(s) disseminating
the ABBO for an opening to occur, or (2)
any order or quote that is priced through
the Opening Price.21 All other interest
would remain in the System and be
eligible for trading after opening. As it
relates to DNR order handling, this
reflects current System behavior where
the Exchange would cancel any
unexecuted balances of a non-routable
order that cannot be placed on the order
book because the residual interest
would lock or cross an away market.
With the technology migration, such
unexecuted balances may rest on the
order book as the Exchange would
instead re-price the non-routable order
that locks or crosses an away market to
align to current BX re-pricing
functionality. Accordingly, the
Exchange proposes to replace the
current rule text in Section 8(j)(6)(i)
with the following: ‘‘Pursuant to
Options 3, Section 8(j)(6), the System
will re-price DNR Orders (that would
otherwise have to be routed to the
exchange(s) disseminating the ABBO for
an opening to occur) to the current away
best offer (for bids) or the current away
best bid (for offers) as non-displayed,
and display at a price that is one
minimum trading increment inferior to
the ABBO, and disseminate such DNR
Order as part of the new BBO.’’
Proposed Section 8(j)(6)(i) will further
provide that the System will cancel any
order or quote that is priced through the
Opening Price, and that all other
interest will be eligible for trading after
the opening. This would reflect that the
Exchange will continue to cancel any
interest priced through the Opening
Price, and to keep all other interest in
the System for trading after opening.
Proposed Options 3, Section 8(j)(6)(i) is
substantially similar to BX Options 3,
20 See
BX Options 3, Section 10(a)(1)(C)(2)(iii).
Opening Price is described in Options 3,
Sections 8(h) and (j).
21 The
18 See
Phlx Options 3, Section 10(a)(1)(B).
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19 See
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Section 8(k)(4) and (5), and will bring
greater transparency in how nonroutable orders will be handled in the
Opening Process.22
Auction Mechanisms
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Facilitation and Solicited Order
Mechanisms
The Exchange proposes to amend
Options 3, Section 11 (Auction
Mechanisms) to modify the entry checks
for the Exchange’s Facilitation
Mechanism 23 and Solicited Order
Mechanism 24 to reflect the BX-like repricing changes under this proposal by
introducing the concept of an internal
BBO.25 As discussed in the re-pricing
section above, the Exchange proposes to
re-price orders that would otherwise
lock or cross an away market.26
Specifically, an order will be re-priced
to the current national best offer (for
bids) or the current national best bid (for
offers) as non-displayed and displayed
at one MPV above (for offers) or below
(for bids) the national best price.27 With
this re-pricing, an Exchange order could
be available at a price that is better than
the NBBO, but is non-displayed (i.e., the
Exchange’s non-displayed order book or
‘‘internal BBO’’). Accordingly, the
Exchange proposes to add the concept
of ‘‘internal BBO’’ in the order entry
checks for the Facilitation and Solicited
Order Mechanisms in Options 3,
22 BX Options 3, Sections 8(k)(4) and (5) provide
that pursuant to Options 3, Section 8(k)(3)(F), the
System will re-price Do Not Route Orders (that
would otherwise have to be routed to the
exchange(s) disseminating the ABBO for an opening
to occur) to a price that is one minimum trading
increment inferior to the ABBO, and disseminate
the re-priced DNR Order as part of the new BBO.
The System will cancel any order or quote that is
priced through the Opening Price. All other interest
will be eligible for trading after opening. BX intends
to align its rule to proposed GEMX Options 3,
Section 8(j)(6)(i) in a separate rule filing to clarify
that DNR Orders in the BX opening process can reprice to the current ABBO as non-displayed, and
display at a price that is one MPV inferior to the
ABBO.
23 The Facilitation Mechanism is a process by
which an Electronic Access Member can execute a
transaction wherein the Electronic Access Member
seeks to facilitate a block-size order it represents as
agent, and/or a transaction wherein the Electronic
Access Member solicited interest to execute against
a block-size order it represents as agent. See
Options 3, Section 11(b).
24 The Solicited Order Mechanism is a process by
which an Electronic Access Member can attempt to
execute orders of 500 or more contracts it represents
as agent against contra orders that it solicited. See
Options 3, Section 11(d).
25 As discussed later in the filing, while BX does
not have a Facilitation or Solicited Order
Mechanism like GEMX, BX currently considers the
internal BBO in its price improvement auction
(‘‘PRISM’’) in a similar manner as being proposed
for the GEMX Facilitation and Solicited Order
Mechanisms.
26 See supra notes 5 and 8.
27 See proposed Options 3, Section 5(d). See
supra notes 5 and 8.
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Sections 11(b)(1) and (d)(1),
respectively, to account for a nondisplayed better price that may be
available on the Exchange order book.
In particular, the Exchange proposes
to add the concept of ‘‘internal BBO’’ in
Options 3, Section 11(b)(1), which
currently sets forth the entry checks for
the Exchange’s Facilitation Mechanism.
As amended, the Rule will provide that
orders must be entered into the
Facilitation Mechanism at a price that is
(A) equal to or better than the NBBO
and the internal BBO on the same side
of the market as the agency order unless
there is a Priority Customer order on the
BBO or internal BBO on the same side
of the market as the agency order, in
which case the order must be entered at
an improved price over the Priority
Customer order; and (B) equal to or
better than the ABBO on the opposite
side.28 The proposal will make clear
that with the introduction of the repricing mechanism in proposed Options
3, Section 5(d), the System will now
check orders entered into the
Facilitation Mechanism against the
internal BBO as well. In addition, the
proposed changes will clarify that the
Facilitation order must be entered at an
improved price over the Priority
Customer order where there is a Priority
Customer order on the same side BBO
or internal BBO. By way of example, the
below examples demonstrate how the
internal BBO would operate in the
Facilitation Mechanism.
Facilitation Passes Entry Validation
Equal to or Better Than the NBBO and
Internal BBO on the Same Side of the
Market
Assume the following:
MIAX BBO: 3.10 × 3.20
GEMX BBO 3.05 × 3.25
Non-Priority Customer DNR order to
buy for 3.25 arrives at GEMX; books
at 3.20 non-displayed and re-prices/
displays at 3.15
GEMX Internal BBO: 3.20 × 3.25
NBBO: 3.15 × 3.20
Facilitation to buy @ 3.20 arrives and
is able to begin because the Facilitation
Agency side price is at or better than the
NBBO and internal BBO on the same
side of the market and at or better than
the ABBO on the opposite side of the
market.
28 The Facilitation Mechanism does not check the
Exchange best bid or offer on the opposite side of
the market because any interest that is available on
the opposite side of the market would allocate
against the Facilitation Agency Order and provide
price improvement.
PO 00000
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Facilitation Fails Entry Validation Equal
to or Better Than the NBBO and Internal
BBO on the Same Side of the Market
Assume the following:
MIAX BBO: 3.10 × 3.20
GEMX BBO 3.05 × 3.25
Non-Priority Customer DNR order to
buy for 3.25 arrives at GEMX; books
at 3.20 non-displayed and re-prices/
displays at 3.15
GEMX Internal BBO: 3.20 × 3.25
NBBO: 3.15 × 3.20
Facilitation to buy @ 3.15 arrives and
is rejected because the Facilitation
Agency side price is not at or better than
the internal BBO on the same side of the
market.
Similarly, the Exchange proposes to
add the concept of ‘‘internal BBO’’ in
Options 3, Section 11(d)(1), which
currently sets forth the entry checks for
the Exchange’s Solicited Order
Mechanism. As amended, the Rule will
provide that orders must be entered into
the Solicited Order Mechanism at a
price that is equal to or better than the
NBBO and the internal BBO on both
sides of the market; provided that, if
there is a Priority Customer order on the
BBO or internal BBO, the order must be
entered at an improved price over the
Priority Customer order. Similar to the
proposed changes for the Facilitation
Mechanism, the proposal will make
clear that with the introduction of the
re-pricing mechanism in proposed
Options 3, Section 5(d), the System will
now check orders entered into the
Solicited Order Mechanism against the
internal BBO as well. In addition, the
proposed changes will clarify that the
order entered into the Solicited Order
Mechanism must be entered at an
improved price over the Priority
Customer order where there is a Priority
Customer order on either side of the
BBO or internal BBO. By way of
example, the below examples
demonstrate how the internal BBO
would operate in the Solicited Order
Mechanism.
Solicitation Passes Entry Validation
Equal to or Better Than the NBBO and
Internal BBO on Both Sides of the
Market
MIAX BBO: 3.10 × 3.20
GEMX BBO 3.05 × 3.25
Non-Priority Customer DNR order to sell
for 3.05 arrives at GEMX; books at
3.10 non-displayed and re-prices/
displays at 3.15
GEMX Internal BBO: 3.05 × 3.10
NBBO: 3.10 × 3.15
Solicitation to buy @ 3.10 arrives and
is able to begin because the Solicitation
Agency side price is at or better than the
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NBBO and internal BBO on both sides
of the market.
khammond on DSKJM1Z7X2PROD with NOTICES
Solicitation Fails Entry Validation Equal
to or Better Than the NBBO and Internal
BBO on Both Sides of the Market
MIAX BBO: 3.10 × 3.20
GEMX BBO 3.05 × 3.25
Non-Priority Customer DNR order to sell
for 3.05 arrives at GEMX; books at
3.10 non-displayed and re-prices/
displays at 3.15
GEMX Internal BBO: 3.05 × 3.10
NBBO: 3.10 × 3.15
Solicitation to buy @ 3.15 arrives and
is rejected because the Solicitation
Agency side price is not at or better than
the internal BBO on both sides of the
market.
Lastly, the Exchange proposes a
clarifying change in Options 3, Section
11(b)(1), which governs the entry checks
for the Facilitation Mechanism.
Specifically, the Exchange proposes to
amend the provision as follows: ‘‘Orders
must be entered into the Facilitation
Mechanism at a price that is (A) equal
to or better than the NBBO and the
internal BBO on the same side of the
market as the agency order unless there
is a Priority Customer order on the same
side of the market as the agency order
. . . .’’ The proposed change does not
change current System behavior, and is
meant to align the language in the
Priority Customer order clause relating
to the same side of the market as the
agency order more closely with similar
language in the preceding clause.
Price Improvement Mechanism
The Exchange proposes to amend
Options 3, Section 13 (Price
Improvement Mechanism for Crossing
Transactions) to modify the entry
checks for the Exchange’s Price
Improvement Mechanism (‘‘PIM’’) to
reflect the BX-like re-pricing changes
under this proposal.29 The Exchange
proposes to amend Options 3, Section
13(b)(1) to provide, ‘‘If the Agency
Order is for less than 50 option
contracts, and if the difference between
the National Best Bid and National Best
Offer (‘‘NBBO’’) or the difference
between the internal best bid and
internal best offer is $0.01, the Crossing
Transaction must be entered at $0.01
better than the NBBO and the internal
BBO on the opposite side of the market
from the Agency Order and better than
the limit order or quote on the Nasdaq
GEMX order book on the same side of
the Agency Order.’’ 30 The addition of
29 BX intends to file a rule change to amend BX
Options 3, Section 13 to similarly refer to an
‘‘internal BBO.’’
30 Currently, Options 3, Section 13(b)(1) provides
that if the Agency Order is for less than 50 option
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‘‘internal BBO’’ herein is similar to the
changes proposed for the Facilitation
and Solicited Order Mechanisms
discussed above in that the Exchange is
reflecting the proposed re-pricing
changes in its PIM rule as illustrated by
the example below.
Today, an Agency Order for less than
50 contracts could begin a PIM if the
difference between the NBBO is $0.01.
With this change, an Agency Order for
less than 50 contracts could begin a PIM
if the difference between the NBBO or
between the internal BBO is $0.01.
Below is an example of the how the
System would treat an order for less
than 50 contracts where the internal
BBO is greater than the NBBO with
respect to the rule text within Options
3, Section 13(b)(1).
Assume GEMX Market Maker quotes an
option series at 1.09 (10) × 1.15 (10)
Next assume ABBO quotes that option
series at 1.10 (10) × 1.11 (10)
Assume an order locks the ABBO quote
with a buy order in that options series
of 5 @ 1.11
With the proposed repricing, this
order would book at 1.11 and display 1
MPV (penny in this case) away at 1.10
on the order book.
In this scenario:
D the PIM to buy 49 @ 1.10 would be
rejected;
D the PIM to buy 49 @ 1.11 would be
rejected;
D the PIM to sell 49 @ 1.10 would be
rejected; and
D the PIM to sell 49 @ 1.11 would be
rejected.
This proposed new rule text accounts
for a non-displayed better price that
may be available on the order book. A
similar change is proposed for the
Crossing Transaction within that same
paragraph. Additionally, in lieu of
stating ‘‘one minimum price
improvement increment’’ the Exchange
proposes to replace that rule text with
‘‘$0.01.’’ Amending the rule text to
$0.01 does not amend the current
System operation, rather it more simply
states what that minimum increment is
today. The Exchange proposes similar
changes within Options 3, Section
13(b)(2) to add references to ‘‘difference
between the internal BBO’’ and
‘‘$0.01.’’ 31 Below is an example of the
how the System would treat an order for
contracts, and if the difference between the
National Best Bid and National Best Offer
(‘‘NBBO’’) is $0.01, the Crossing Transaction must
be entered at one minimum price improvement
increment better than the NBBO on the opposite
side of the market from the Agency Order and better
than the limit order or quote on the Nasdaq GEMX
order book on the same side of the Agency Order.
31 See supra note 29.
PO 00000
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72561
50 contracts or more where the internal
BBO is greater than the NBBO with
respect to the rule text within Options
3, Section 13(b)(2).
Assume GEMX Market Maker quotes an
option series at 1.09 (10) × 1.15 (10)
Next assume ABBO quotes that option
series at 1.10 (10) × 1.11 (10)
Assume an order locks the ABBO quote
with a buy order in that option series
at 5 @1.11
With the proposed repricing this
order would book at 1.11 and display 1
MPV (penny in this case) away at 1.10
on the order book.
In this scenario:
D the PIM to buy 50 @ 1.10 would be
rejected;
D the PIM to buy 50 @ 1.11 would be
rejected;
D the PIM to sell 50 @ 1.10 would be
rejected; and
D the PIM to sell 50 @ 1.11 would be
accepted and would begin a PIM
auction.
Assuming no other interest arrives
during the PIM auction timer, this order
would trade at the end of the auction
timer, thereby filling the order 5 @1.11
and the remainder would allocate to the
contra side/counter side order.
Acceptable Trade Range
As set forth in Options 3, Section
15(a)(2)(A), the Exchange currently
offers an Acceptable Trade Range
(‘‘ATR’’) risk protection that sets
dynamic boundaries within which
quotes and orders may trade. ATR is
designed to guard against the System
from experiencing dramatic price
swings by preventing the immediate
execution of quotes and orders beyond
the thresholds set by the protection.
With the proposed adoption of the BXlike re-pricing mechanism described
above, the Exchange proposes to
introduce an iterative process for ATR
wherein the Exchange will attempt to
execute interest that exceeds the outer
limit of the ATR for a brief period of
time while that interest is automatically
re-priced in the manner discussed
below. The Exchanges notes that today,
it would cancel rather than re-price any
interest that exceeds the outer limit of
the ATR. The proposed changes will
harmonize the Exchange’s ATR with
BX’s ATR.32
Currently, subparagraph (i) of Options
3, Section 15(a)(2)(A) provides that the
System will calculate an ATR to limit
the range of prices at which an order or
32 See BX Options 3, Section 15(b)(1). As
discussed further below, the Exchange will also add
references to ‘‘internal BBO’’ in the ATR reference
price description. BX intends to file a similar rule
change to clarify this behavior.
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quote will be allowed to execute. The
ATR is calculated by taking the
reference price, plus or minus a value to
be determined by the Exchange (i.e., the
reference price¥(x) for sell orders and
the reference price + (x) for buy
orders).33 ATR is not available for Allor-None Orders. Subparagraph (ii)
provides that the reference price is the
National Best Bid (‘‘NBB’’) for sell
orders/quotes and the National Best
Offer (‘‘NBO’’) for buy orders/quotes.34
The reference price is calculated upon
receipt of a new order or quote,
provided that if the applicable NBB or
NBO price is improved at the time an
order is routed to an away market, a
new reference price is calculated based
on the NBB or NBO at that time. Today,
as set forth in subparagraph (iii), if an
order or quote reaches the outer limit of
the ATR without being fully executed,
then any unexecuted balance will be
cancelled.
The Exchange now proposes to amend
this rule to adopt an iterative process
like BX wherein an order/quote that
reaches its ATR boundary will be
paused for a brief period of time to
allow more liquidity to be collected,
before the order/quote is automatically
re-priced and a new ATR is calculated.
Specifically, the Exchange proposes to
amend subparagraph (iii) of Options 3,
Section 15(a)(2)(A) to provide that if an
order or quote reaches the outer limit of
the ATR (‘‘Threshold Price’’) without
being fully executed, it will be posted at
the Threshold Price for a brief period,
not to exceed one second (‘‘Posting
Period’’), to allow the market to refresh
and determine whether or not more
liquidity will become available (on the
Exchange or any other exchange if the
order is designated as routable) within
the posted price of the order or quote
khammond on DSKJM1Z7X2PROD with NOTICES
33 The ATR settings values are tied to the option
premium and will be set out in the ATR table in
the GEMX system settings document on a publicly
available website. The GEMX settings will be
identical to BX ATR. The Exchange would notify
all Members through an Options Trader Alert if it
determined to amend that value and also publish
the settings on a publicly available website.
34 In the event of a crossed ABBO, ATR will use
the NBO instead of the NBB for incoming sell
orders and the NBB instead of the NBO for
incoming buy orders as the reference price.
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before moving on to a new Threshold
Price. Upon posting, either the current
Threshold Price of the order/quote or an
updated NBB for buy orders/quotes or
the NBO for sell orders/quotes
(whichever is higher for a buy order/
quote or lower for a sell order/quote)
then becomes the reference price for
calculating a new ATR. If the order/
quote remains unexecuted after the
Posting Period, a new Acceptable Trade
Range will be calculated and the order/
quote will execute, route, or post up to
the new Threshold Price. This process
will repeat until either (1) the order/
quote is executed, cancelled, or posted
at its limit price or (2) the order/quote
has been subject to a configurable
number of instances of the ATR as
determined by the Exchange 35 (in
which case it will be returned).36 The
proposed changes will be functionally
identical to BX’s ATR, as set forth in BX
Options 3, Section 15(b)(1)(A).
In light of the foregoing changes, the
Exchange also proposes to update the
reference price definition in
subparagraph (ii) to provide that upon
receipt of a new order or quote, the
reference price will now be the better of
the NBB or internal best bid for sell
orders/quotes and the better of the NBO
or internal best offer for buy orders/
quotes or the last price at which the
order/quote is posted, whichever is
higher for a buy order/quote or lower for
a sell order/quote.37
This will be functionally identical to
BX’s ATR reference price, as set forth in
BX Options 3, Section 15(b)(1).38
35 The Exchange intends to initially set the
configurable number to 5 iterations, similar to BX.
The Exchange would issue an Options Trader Alert
if it determined to amend that timeframe and also
publish the settings on a publicly available website.
36 Under this proposal, DNR orders that are
locked against the ABBO will pause their ATR
iterations (i.e., a new ATR will not be calculated
based on the reference price at that time) and will
remain this way until the ATR process can be
completed. This will be the same as BX DNR order
handling. Returning an order to the customer means
that the order would be cancelled.
37 The additions of ‘‘internal BBO’’ in this rule
text are consistent with the proposed re-pricing
described above.
38 BX Options 3, Section 15(b)(1) states, in
relevant part, that ‘‘[t]he system will calculate an
Acceptable Trade Range to limit the range of prices
at which an order will be allowed to execute. The
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In addition, the Exchange proposes in
new subparagraph (iv) 39 that during the
Posting Period, the Exchange will
disseminate as a quotation: (1) the
Threshold Price for the remaining size
of the order/quote triggering the ATR
and (2) on the opposite side of the
market, the best price will be displayed
using the ‘‘non-firm’’ indicator message
in accordance with the specifications of
the network processor. This would
allow the order or quote setting the ATR
Threshold Price to retain priority in the
Exchange book and also prevent any
later-entered order from accessing
liquidity ahead of it. If the Exchange
were to display trading interest
available on the opposite side of the
market, that trading interest would be
automatically accessible to later-entered
orders during the period when the order
triggering the ATR is paused. This is
identical to how BX currently
disseminates such interest during the
ATR Posting Period.40 Identical to BX,
following the Posting Period, the
Exchange will return to a normal trading
state and disseminate its best bid and
offer.41
Acceptable Trade Range is calculated by taking the
reference price, plus or minus a value to be
determined by the Exchange. (i.e., the reference
price¥(x) for sell orders and the reference price +
(x) for buy orders). Upon receipt of a new order, the
reference price is the NBB for sell orders and the
NBO for buy orders or the last price at which the
order is posted whichever is higher for a buy order
or lower for a sell order.’’ The Exchange notes that
BX’s rule does not reference ‘‘quotes,’’ but BX’s
ATR currently applies to both orders and quotes
like the Exchange’s ATR. The Exchange further
notes that BX’s rule does not refer to an ‘‘internal
BBO’’ but that today, BX’s ATR reference price also
takes the better of the NBB (NBO) or internal best
bid (best offer) for sell (buy) orders/quotes, or the
last price at which the order/quote is posted.
39 The Exchange will make a related change to
update current subparagraph (iv) to subparagraph
(v).
40 See BX Options 3, Section 15(b)(1)(B). Like BX
today, with the proposed changes, route timers
pursuant to Options 5, Section 4(a), will continue
to run on the Exchange during ATR iterations and
‘‘firm’’ quote posting can occur if, for example, the
order is re-priced to one MPV away from the ABBO
pursuant to proposed Options 3, Section 5(d) to
comply with the trade-through and locked or
crossed market restrictions pursuant to Options 5,
Section 2. In such cases, the quotation will
disseminate as a ‘‘firm’’ quote.
41 See BX Options 3, Section 15(b)(1)(B).
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Importantly, the ATR is neutral with
respect to away markets. The order may
route to other destinations to access
liquidity priced within the ATR
provided the order is designated as
routable, as shown in the example
below.42 With the proposed changes, if
the order still remains unexecuted, this
process will repeat 43 until the order is
executed, cancelled, or posted at its
limit price. Pursuant to Options 5,
Section 4, if after an order is routed to
the full size of an away exchange and
additional size remains available for the
routed order, the remaining contracts
will be posted on the Exchange’s order
book at a price that assumes the away
market has been fully executed and
exhausted by the routed order.44 This
practice of routing and then posting is
consistent with the national market
system plan governing trading and
Exchange
Bid size
ISE ...........................................................................................
AMEX .......................................................................................
PHLX ........................................................................................
routing of options orders and the
Exchange policies and procedures that
implement that plan.45
The following examples illustrate the
proposed ATR functionality.
Example 1
Assume that the Acceptable Trade
Range is set for $0.05 and the following
quotations are posted in all markets:
Away Exchange Quotes:
Bid price
10
10
10
72563
Offer price
$0.75
0.75
0.75
Offer size
$0.90
0.92
0.94
10
10
10
GEMX Price Levels:
Exchange
GEMX
GEMX
GEMX
GEMX
......................................................................................
......................................................................................
......................................................................................
......................................................................................
GEMX receives a routable order to
buy 70 contracts at $1.10. The
Acceptable Trade Range is $0.05 and the
reference price is the National Best
Offer¥$0.90. The Acceptable Trade
Range threshold is then $0.90 + $0.05 =
$0.95 which is the Threshold Price. The
order is allowed to execute up to and
including $0.95.
• 10 contracts will be executed at $0.90
against GEMX
• 10 contracts will be executed at $0.90
against ISE
• 10 contracts will be executed at $0.92
against AMEX
• 10 contracts will be executed at $0.94
against PHLX
Bid size
Bid price
10
..............................
..............................
..............................
$0.75
..............................
..............................
..............................
• 10 contracts will be executed at $0.95
against GEMX
Bid size
ISE ...........................................................................................
AMEX .......................................................................................
PHLX ........................................................................................
$0.90
0.95
0.97
1.00
10
10
10
20
Example 2
Away Exchange Quotes:
Bid price
10
10
10
Offer size
liquidity becomes available within the
order’s posted price of $0.95, then at the
conclusion of the Posting Period, the
System will execute 10 contracts at
$0.97, and 10 contracts at $1.00.46
Similarly, if a new order is received
when a previous order has reached the
Acceptable Trade Range threshold, the
Threshold Price will be used as the
reference price for the new Acceptable
Trade Range threshold. Both orders
would then be allowed to execute up
(down) to the new Threshold Price.
• Then, after executing at multiple
price levels, the order is posted at the
Threshold Price of $0.95 for a brief
period not to exceed one second
(‘‘Posting Period’’) to determine whether
additional liquidity will become
available.
• During the Posting Period, a new
Acceptable Trade Range Threshold
Price of $1.00 is determined (new
reference price of $0.95 + $0.05 =
$1.00).
• If, during the Posting Period (brief
pause not to exceed 1 second), no
Exchange
Offer price
Offer price
$0.75
0.75
0.75
Offer size
$0.90
0.92
0.94
10
10
10
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GEMX Price Levels:
Exchange
Bid size
Bid price
GEMX ......................................................................................
GEMX ......................................................................................
GEMX ......................................................................................
10
..............................
..............................
$0.75
..............................
..............................
42 When a Threshold Price is calculated, an order
can route and execute at away venues at multiple
prices that are at or better than the calculated
Threshold Price.
43 As proposed in Options 3, Section
15(a)(2)(A)(iii)(2), the Exchange will establish a
maximum number of ATR iterations until the order
or quote is returned back to the Member.
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44 See Options 5, Section 4(a)(iii) (effective but
not yet operative).
45 See Options Order Protection and Locked/
Crossed Markets Plan, Securities Exchange Act
Release No. 60405 (July 30, 2009), 74 FR 39362
(August 6, 2009).
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Offer price
$0.90
0.95
1.05
Offer size
10
10
20
46 The brief pause described above will not
disadvantage customers seeking the best price in
any market. For example, if in the example above
an NYSE ARCA quote of $0.75 × $0.96 with size
of 10 × 10 is received, a routable order would first
route to NYSE ARCA at $0.96, then execute against
GEMX at $0.97.
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GEMX receives a routable order to
buy 60 contracts at $1.10. The
Acceptable Trade Range is $0.05 and the
reference price is the National Best
Offer¥$0.90. The Acceptable Trade
Range Threshold Price is then $0.90 +
$0.05 = $0.95 which is the Threshold
Price. The order is allowed to execute
up to and including $0.95.
• 10 contracts will be executed at $0.90
against GEMX
• 10 contracts will be executed at $0.90
against ISE
• 10 contracts will be executed at $0.92
against AMEX
• 10 contracts will be executed at $0.94
against PHLX
• 10 contracts will be executed at $0.95
against GEMX
• Then, after executing at multiple
price levels, the order is posted at $0.95
for a Posting Period (brief period not to
exceed one second) to determine
whether additional liquidity will
become available.
• No new liquidity was received
during the Posting Period. A new
Acceptable Trade Range Threshold
Price of $1.00 is determined (new
reference price of $0.95 + $0.05 = $1.00)
• If, during the previous Posting
Period, a second order is received to buy
10 contracts at $1.25, the two orders
would then post at the new Acceptable
Trade Range Threshold price of $1.00
for another Posting Period (brief period
not to exceed one second) to determine
whether additional liquidity will
become available.
• A new Acceptable Trade Range
Threshold Price of $1.05 will be
calculated.
• If no additional liquidity becomes
available within the posted price of the
orders ($1.00) during the Posting Period,
the orders would execute 10 contracts
each against the order on the GEMX
book at $1.05 at the conclusion of the
Posting Period.
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Example 3
Assume the following:
Acceptable Trade Range is configured to
$0.07
ABBO 1.91 (10) × 2.01 (10)
Buy order 1 @ 2.00
DNR Order to Buy 1 @ 2.01—slides back
to display at 2.00
MM1 Quote 1.99 (10) × 2.12 (10)
Order1 Buy 10 @ 1.94
Order2 Buy 10 @ 1.93
Order3 Buy 5 @ 1.92
Order4 Buy 5 @ 1.91
Order to Sell 100 @ 1.90 comes in
• First trades 1 @ 2.01 with slid DNR
order
• Then trades 1 @ 2.00 with other buy
order
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• Then trades 10 @ 1.99 with MM quote
(then quote purges since bid side
volume has been exhausted)
• Then trades with Order1 (10 @ 1.94)
• Then posts 78 @ 1.94, the ATR
Threshold (calculated by taking the
initial reference price of 2.01 (i.e., the
better of the internal best bid and
NBB) minus the 0.07 Acceptable
Trade Range)
After the ATR Posting Period
completes:
• Trades 10 @ 1.93 with Order2
• Trades 5 @ 1.92 with Order3
• Trades 5 @ 1.91 with Order4
• Posts to book at 1.91 non-displayed
and re-prices to display 1 MPV
(penny) from ABBO at 1.92, exposes
58 @ 1.91
After route timer passes:
• Routes 10 @ 1.91 to ABBO
• Posts to book at its limit with
remaining 48 @ 1.90 47
Finally, the Exchange proposes to add
clarifying language in the first sentence
of subparagraph (i) of Options 3, Section
15(a)(2)(A) that the System will
calculate the ATR after the Opening
Process.48 This is a clarifying change
that does not amend current
functionality. ATR does not apply until
after the Opening Process because the
order book (and the ATR reference
price) is established once options series
are open for trading.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,49 in general, and furthers the
objectives of Section 6(b)(5) of the Act,50
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.
Generally, the Exchange’s proposal is
intended to add or align certain System
functionality with functionality
currently offered on BX in order to
provide a more consistent technology
offering across affiliated Nasdaq options
exchanges. A more harmonized
technology offering, in turn, will
simplify technology implementation,
changes, and maintenance by market
participants of the Exchange that are
also participants on Nasdaq affiliated
options exchanges. The Exchange’s
proposal also seeks to provide greater
47 See
supra note 40 regarding route timer.
BX’s ATR does not have this clarification
today, BX’s ATR likewise applies after the Opening
Process.
49 15 U.S.C. 78f(b).
50 15 U.S.C. 78f(b)(5).
48 While
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harmonization between the rules of the
Exchange and BX, which would result
in greater uniformity, and less
burdensome and more efficient
regulatory compliance by market
participants. As such, the proposal
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 believes that
more consistent rules will increase the
understanding of the Exchange’s
operations for market participants that
are also participants on the Nasdaq
affiliated options exchanges, thereby
contributing to the protection of
investors and the public interest. The
Exchange believes that such changes
would remove impediments to and
perfect the mechanism of a free and
open market and a national market
system because the proposed changes
would promote transparency in
Exchange rules and reducing potential
confusion, thereby ensuring that
Members, regulators, and the public can
more easily navigate the Exchange’s
rulebook and better understand how
options trading is conducted on the
Exchange.
Re-Pricing
The Exchange believes that re-pricing
quotes and orders that would otherwise
lock or cross an away market, as
proposed in Options 3, Sections 4(b)(6),
5(c) and (d), is consistent with the Act.
Today, BX re-prices such quotes and
orders by re-pricing them to the current
national best price as non-displayed,
and displaying them one MPV away
from the best bid or offer.51 This
behavior is consistent with the
protection of investors and the general
public because it affords Members the
ability to obtain the best price offered
among the various options markets
while not locking or crossing an away
market. With the proposed changes, the
Exchange will continue to not trade
through an away market. As a result, the
Exchange’s proposal would be
consistent with the Options Order
Protection and Locked/Crossed Market
Plan. Any quote or non-routable order
that locks or crosses an away market on
the Exchange would be re-priced as a
result of this amendment. The proposed
changes to Options 3, Section 4(b)(6)
will clearly articulate the proposed repricing mechanism, and will provide
Members with additional information as
to how quotes will be handled by the
System when those quotes would lock
51 See
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or cross an away market. As discussed
above, the difference between the
current and proposed quote re-pricing is
that the Exchange will re-price to the
current national best price under the
proposal as non-displayed (instead of
re-pricing and displaying one MPV
inferior as it does today). The Exchange
will continue to display one MPV
inferior to the national best price under
this proposal. As such, the proposed
quote re-pricing mechanism will
continue to prevent the Exchange from
disseminating a price that locks or
crosses another market. This process is
identical to how BX quote re-pricing
functions today, as described in BX
Options 3, Section 4(b)(6).
In connection with the introduction of
the BX-like quote re-pricing mechanism,
the Exchange also proposes to add the
definition of internal BBO (similar to
the proposed definition of internal BBO
for order re-pricing) in Options 3,
Section 4(b)(7). As discussed above, the
proposed addition is intended to make
clear that quotes may now be executed
using either the BBO or internal BBO if
the Exchange best bid or offer has been
re-priced pursuant to the order repricing mechanism proposed in Options
3, Section 5(d) and the quote re-pricing
mechanism proposed in Options 3,
Section 4(b)(6). As noted above, BX
handles quotes in the same manner as
proposed for GEMX Options 3, Section
4(b)(7).52
The proposed changes to Options 3,
Section 5(c) will allow the Exchange to
define an internal BBO in its Rules
when describing re-priced orders that
remain on the order book and are
available at non-displayed prices while
resting on the order book. The proposed
changes to Options 3, Section 5(d) will
clearly articulate the proposed repricing mechanism itself, and provide
Members with additional information as
to how orders are handled by the
System when those orders would lock
or cross an away market. The Exchange
notes that allocation priority for repriced orders would be consistent with
the current rules in Options 3, Section
10(c).
The Exchange also believes that the
related proposals to add references to
internal BBO in Options 2, Section 10
and Options 3, Section 10 are consistent
with the Act. Overall, the proposed
addition of internal BBO will ensure
that the rules conform to the concept of
re-pricing at an internal BBO as
proposed in Options 5(c) and (d) and
will make clear that a re-priced order is
accessible on the Exchange’s order book
at the non-displayed price. Specifically,
52 See
supra note 13.
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the Exchange believes that adding
references to the internal BBO in the
allocation rules for Preferred Market
Makers and Primary Market Makers will
make clear that in connection with the
proposed re-pricing mechanism, such
market participants must now be
quoting at the better of the NBBO or the
internal BBO in order to be entitled to
the applicable allocations set forth in
their respective rules. The introduction
of the internal BBO would have no
impact on a Primary Market Maker’s
quoting obligations as Primary Market
Makers do not need to be at the NBBO
today, or as proposed, the better of
NBBO or the internal BBO in order to
meet their quoting obligations.53 The
Exchange also notes that the proposed
quote re-pricing mechanism described
above will allow the Primary Market
Maker or Preferred Market Maker to reprice to the internal BBO and receive
their enhanced allocation when the
internal BBO is better than the NBBO.54
In addition, by not providing the
enhanced allocation for Market Makers
that are not at the internal BBO when it
is better than the NBBO, the Exchange
is protecting investors with more
aggressively priced interest by allocating
to them first. The Exchange does not
believe that Market Makers should be
entitled to enhanced allocations in the
foregoing instance given that there are
better available internal BBO prices on
the market. Like BX, the Exchange
believes that the overall benefit to the
marketplace is that market participants
will be able to obtain the best price
offered among the various options
markets while avoiding a trade-through
or locked or cross market violation.
Opening Process
The Exchange believes that the
proposed changes to the Opening
Process in Options 3, Section 8 are
consistent with the Act. Specifically, the
Exchange believes that the proposed
changes to Options 3, Section 8(j)(6)(i)
will bring greater transparency as to
how non-routable orders will be
handled during the Opening Process. As
discussed above, the Exchange proposes
to no longer cancel any unexecuted
53 Quoting obligations include, for example, a
Market Maker’s continuous quoting obligations. See
Options 2, Section 5(e).
54 Market Makers are incentivized to quote at the
internal BBO as there is sufficient market
information provided to quote accordingly. BX and
Phlx also allow their Lead Market Makers and
Directed Market Makers to re-price to the internal
BBO and receive their enhanced allocation when
the internal BBO is better than the NBBO. See BX
and Phlx Options 3, Section 10. The Nasdaq
Options Market LLC (‘‘NOM’’) also re-prices orders
and quotes but does not have the concept of a Lead
Market Makers or Directed Market Markers.
PO 00000
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72565
portions of a DNR Order that locks or
crosses an away market, and instead
will re-price the DNR Order to the
current away best offer (for bids) or the
current away best bid (for offers) as nondisplayed, and display a price that is
one minimum trading increment
inferior to the ABBO, and disseminate
such DNR Order as part of the new BBO.
The proposed changes reflect the new
BX-like re-pricing mechanism that the
Exchange is proposing to adopt as part
of the technology migration. The
Exchange believes that the proposed repricing of DNR Orders during the
Opening Process is consistent with the
protection of investors and the general
public because it affords Members the
ability to obtain the best price offered
among the various options markets
while not locking or crossing an away
market. As discussed above, proposed
Options 3, Section 8(j)(6)(i) will also
continue to reflect that the Exchange
will cancel any interest that is priced
through the opening price and keep all
other interest in the System for trading
after opening. The Exchange notes with
the proposed changes, Options 3,
Section 8(j)(6)(i) will be substantially
similar to BX Options 3, Section 8(k)(4)
and (5), thereby promoting greater
consistency among the rules of Nasdaq
affiliated options exchanges.55 Finally,
the proposed changes to the Opening
Process attempts to maximize the
number of contracts executed on the
Exchange during such Opening Process,
while taking into consideration away
market interests and ensuring that better
away prices are not traded through.
Auction Mechanisms
Facilitation and Solicited Order
Mechanisms
The Exchange believes that the
proposed addition of ‘‘or the internal
BBO’’ in the entry check provisions for
the Facilitation and Solicited Order
Mechanisms at Options 3, Sections
11(b)(1) and (d)(1), respectively, is
consistent with the Act. The proposed
changes will account for BX-like repricing, which would result in an
Exchange order being available at a
price that is better than the NBBO but
is non-displayed. The proposed changes
to add ‘‘or the internal BBO’’ will make
clear that the System will now check
orders entered into those auction
mechanisms against a non-displayed
order book priced better than the NBBO
as well the NBBO.56 As a result, the
55 See
supra note 22.
BX and Phlx similarly consider the
internal BBO when initiating their price
improvement auctions, BX PRISM and Phlx PIXL.
56 Today,
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proposed changes would ensure that
Members submitting an order through
the Facilitation Mechanism or Solicited
Order Mechanism submit such orders at
the best price, which (i) for the
Facilitation Mechanism, must be at a
price that is equal to or better than the
displayed NBBO and the non-displayed
BBO (i.e., the internal BBO) on the same
side of the market as the agency order,
and (ii) for the Solicited Order
Mechanism, must be at a price that is
equal to or better than the NBBO and
the internal BBO on both sides of the
market.57
The Exchange also believes that the
clarifying changes in Options 3, Section
11(b)(1) relating to Facilitation order
entry checks are consistent with the Act
as the proposed changes seek to align
the language in the Priority Customer
order clause relating to the same side of
the market as the agency order more
closely with similar language in the
preceding clause and clarify current
System behavior. Similarly, the
Exchange believes that the clarifying
changes in Options 3, Section 11(d)(1)
relating to Solicited Order Mechanism
order entry checks are consistent with
the Act as the proposed changes seek to
align the language in the Priority
Customer order clause with the
preceding clause and clarify current
System behavior. The Exchange believes
that the proposed changes will promote
transparency in the Rulebook, and
reduce potential confusion by Members
and investors.
khammond on DSKJM1Z7X2PROD with NOTICES
Price Improvement Mechanism
Similarly, the Exchange’s proposal to
amend Options 3, Section 13(b)(1) and
(b)(2) to account for re-pricing, which
would result in a GEMX order being
available at a price which is better than
the NBBO but is non-displayed, is
consistent with the Act. The addition of
‘‘or the internal BBO’’ will make clear
that a non-displayed order book priced
better than the NBBO would cause a
PIM auction to initiate. Stating ‘‘$0.01’’
in lieu of ‘‘one minimum price
improvement increment’’ is consistent
with the Act as this non-substantive
amendment more simply states the
The Exchange would continue to abide by the rules
approved by the Commission and not commence an
auction in the Facilitation or Solicited Order
Mechanisms or in PIM if better priced interest was
resting on the book.
57 As proposed, for the Facilitation Mechanism, if
there is a Priority Customer order on the BBO or
internal BBO on the same side of the market as the
agency order, the order must be entered at an
improved price over the Priority Customer order.
For the Solicited Order Mechanism, if there is a
Priority Customer order on the BBO or internal BBO
on either side of the market, the order must be
entered at an improved price over the Priority
Customer order.
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current minimum increment.58 Similar
to the changes described above for the
Facilitation and Solicited Order
Mechanisms, the proposed changes for
PIM would ensure that Members
submitting an order through PIM submit
such orders at the best price, which
must be (i) better than the displayed
NBBO and non-displayed BBO (i.e., the
internal BBO) on the Exchange’s order
book when the PIM is less than 50
contracts and the difference between the
NBBO or the difference between the
internal BBO is $0.01 wide or (ii) equal
to or better than the displayed NBBO
and internal BBO when the PIM is 50
contracts or more, or if the difference
between the NBBO or the difference
between the internal BBO is greater than
$0.01.59
Acceptable Trade Range
The Exchange believes that the
proposed changes to its ATR risk
protection in Options 3, Section
15(a)(2)(A) are consistent with the Act.
The Exchange is proposing to introduce
an iterative process for ATR wherein an
order/quote that reaches the outer limit
of the ATR (i.e., the Threshold Price)
without being fully executed will be
paused for a brief Posting Period to
allow more liquidity to be collected and
determine whether or not more liquidity
will become available (on the Exchange
or an away market if the order is
designated as routable) within the
posted price of the order/quote before
moving on to a new Threshold Price.
The Threshold Price, at which the order
is posted, would then become the new
reference price,60 and a new ATR would
be calculated. The Exchange notes that
the proposed iterative ATR process is
identical to current BX ATR
functionality in BX Options 3, Section
15(b)(1), and therefore is not new or
novel.
The Exchange believes that with the
proposed changes, ATR will continue to
reduce the negative impacts of sudden,
unanticipated volatility in individual
Exchange options, serve to preserve an
orderly market in a transparent manner,
increase overall market confidence, and
promote fair and orderly markets and
the protection of investors. The
proposed ATR iterative process should
also continue to result in greater
58 See
supra note 55.
they are better than any limit order
or quote on the same side of the Nasdaq GEMX
order book as the PIM agency order for both
scenarios.
60 As described above, if a new NBB is received
that is greater than a buy order posted at the
Threshold Price, or a new NBO is received that is
lower than a sell order posted at the Threshold
Price, the new NBB (for buy orders) or NBO (for sell
orders) would become the new reference price.
59 Provided
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continuity in prices as it is designed to
prevent immediate or rapid executions
at far away prices, thereby protecting
investors and the public interest. As
discussed above, the Exchange is
bounding how far interest can trade into
the depth of the Exchange’s book based
on the best prices that are available to
the market. The Exchange therefore
believes that its proposal protects
investors and the public interest by
basing the ATR reference price on the
best available prices.
The Exchange also believes that the
addition of configurable instances of
iterations when the ATR would apply
will provide Members with more
certainty as to the application of the
rule.61
The Exchange believes that
disseminating a ‘‘non-firm’’ indicator
message during the Posting Period, as
discussed above, is consistent with its
obligations under the SEC Quote Rule.62
As discussed above, this would allow
the order or quote setting the ATR
Threshold Price to retain priority in the
Exchange book and also prevent any
later-entered order from accessing
liquidity ahead of it. If the Exchange
were to display trading interest
available on the opposite side of the
market, that trading interest would be
automatically accessible to later-entered
orders during the period when the order
triggering the ATR is paused. The ‘‘nonfirm’’ indicator is meant to relieve
eligible exchanges from having to apply
locked and crossed rules to the
quotation of the market.63 Since the
opposite side interest is likely to be
traded through at the completion of the
Posting Period, the Exchange would
display that interest as ‘‘non-firm’’ to
alleviate away exchanges from having to
apply lock/crossed violation protections
(when routing) against this price.64
The fact that the Exchange is
experiencing volatility that is strong
enough to trigger the ATR mechanism
qualifies as an unusual market
condition. The Exchange expects such
situations to be rare, and it has set the
current parameters of the mechanism at
levels that ensures that it is triggered
quite infrequently. In addition, the
proposed ATR mechanism will cause
the market to pause for no more than
one second to try to dampen volatility,
61 See
supra notes 33 and 35.
17 CFR 242.602(a)(3).
63 To the away venue, this quotation is simply the
top of book quotation on GEMX (which could be
made of orders and/or quotes).
64 In addition, Options 5, Section 1(k) defines
‘‘Non-Firm’’ as, with respect to Quotations, that
Members of an Eligible Exchange are relieved of
their obligation to be firm for their Quotations
pursuant to Rule 602 under the Exchange Act.
62 See
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the same pause that currently exists on
BX. Importantly, the brief pause occurs
only after the Exchange has already
executed transactions—potentially at
multiple price levels—rather than
pausing before executing any
transactions in the hopes of attracting
initial liquidity.
Finally, the Exchange believes that
the proposed clarifying language to add
that the System will calculate ATR after
the Opening Process will better
articulate current System behavior. ATR
does not apply until after the opening
because the order book (and the ATR
reference price) is established once
options series are open for trading.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange operates in a competitive
market and regularly competes with
other options exchanges for order flow.
As discussed above, the Exchange is replatforming its System in connection
with the technology migration to
enhanced Nasdaq functionality, which
the Exchange believes would promote
competition among options exchanges
by potentially attracting additional
order flow to the Exchange with the
enhanced trading platform. The basis for
the majority of the proposed rule
changes are the rules of the Nasdaq
affiliated options exchanges, which
have been previously filed with the
Commission as consistent with the Act.
The quote re-pricing proposal in
Options 3, Section 4(b)(6) and (7) will
be functionally identical to BX quote repricing in Options 3, Section 4(b)(6).65
The order re-pricing proposal in
Options 3, Section 5(c) and (d) will be
functionally identical to BX order repricing in BX Options 3, Section 5(c)
and (d).66 Also, the proposed ATR
enhancement in Options 3, Section
15(a)(2)(A) will be functionally identical
to BX ATR in BX Options 3, Section
15(b)(1).
The Exchange reiterates that the
proposed rule change is being proposed
in the context of the technology
migration to enhanced Nasdaq
functionality. As such, the Exchange
believes that this proposed rule change
is necessary to permit fair competition
65 See
supra note 13.
re-pricing rule changes impact the
following rule provisions: Options 2, Section 10;
Options 3, Section 8(j)(6)(i); Options 3, Section
10(c)(1)(B), (C) and (D)(i)–(iii); Options 3, Section
11(b)(1) and (d)(1); and Options 3, Section 13(b)(1)
and (2).
66 The
VerDate Sep<11>2014
18:43 Nov 23, 2022
Jkt 259001
among options exchanges because the
proposed rule changes will permit
GEMX to re-price orders and quotes
similar to BX. Additionally, with this
proposal, GEMX would be able to offer
its Members the same ATR functionality
currently available to BX Participants.
The Exchange further believes the
proposed rule change will benefit
Members by providing a more
consistent technology offering, as well
as consistent rules, for market
participants on the Nasdaq affiliated
options exchanges.
The Exchange does not believe that
the proposed rule change will impose
any burden on intra-market competition
that is not necessary or appropriate in
furtherance of the purposes of the Act,
as the majority of the proposed changes
will apply to all Members. ATR allows
Members to potentially receive better
prices for their aggressive orders or
quotes as they work through the ATR
Threshold Prices and look to
accumulate additional interest at each
posted price during the Posting Periods.
Re-pricing affords Members the ability
to obtain the best price offered among
the various options markets while
continuing to be consistent with the
Options Order Protection and Locked/
Crossed Market Plan, as discussed
above. The ability to leverage these
mechanisms to achieve better prices for
market participants will drive
competition from Members to provide
tighter markets and more liquidity in
order to participate in the trading
opportunities while still being bound by
reasonable risk protections.
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 67 and
subparagraph (f)(6) of Rule 19b–4
thereunder.68
67 15
U.S.C. 78s(b)(3)(A)(iii).
68 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
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
72567
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–2022–10 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–GEMX–2022–10. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
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.
E:\FR\FM\25NON1.SGM
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72568
Federal Register / Vol. 87, No. 226 / Friday, November 25, 2022 / Notices
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–2022–10 and
should be submitted on or before
December 16, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.69
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–25673 Filed 11–23–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96353; File No. SR–CBOE–
2022–057]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Increase
Position and Exercise Limits for
Options on Apple Inc. Stock (‘‘AAPL’’)
November 18, 2022.
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 November
7, 2022, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to increase
position and exercise limits for options
khammond on DSKJM1Z7X2PROD with NOTICES
69 17
CFR 200.30–3(a)(12).
15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
18:43 Nov 23, 2022
Rules of Cboe Exchange, Inc.
*
*
*
*
*
Rule 8.30. Position Limits
*
*
*
*
*
Interpretations and Policies
.01 No change.
.02 Option Contract Limits.
(a)–(f) No change.
(g) Notwithstanding paragraphs (a) through
(e) above, the position limit for AAPL options
is 1,000,000 option contracts. However, if the
most recent six-month trading volume of
AAPL stock totals less than 200,000,000
shares or the most recent six-month trading
volume of AAPL stock totals less than
150,000,000 shares and AAPL stock has
fewer than 600,000,000 shares currently
outstanding, the position limit for AAPL
options will be determined as set forth in
paragraphs (a) through (e) above.
*
*
*
*
*
Rule 8.42. Exercise Limits
(a) General. Except with the prior
permission of the President or his designee,
to be confirmed in writing, no Trading Permit
Holder shall exercise, for any account in
which it has an interest or for the account of
any customer, a long position in any option
contract where such Trading Permit Holder
or customer, acting alone or in concert with
others, directly or indirectly:
(1) has or will have exercised within any
five consecutive business days aggregate long
positions in any class of options dealt in on
the Exchange in excess of 25,000 or 50,000
or 75,000 or 200,000, or 250,000 or 1,000,000
option contracts or such other number of
options contracts as may be fixed from time
to time by the Exchange as the exercise limit
for that class of options; or
*
*
*
*
*
The text of the proposed rule change
is [also] available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.aspx), at the Exchange’s Office of
the Secretary, 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
1
VerDate Sep<11>2014
on Apple Inc. stock (‘‘AAPL’’). The text
of the proposed rule change is provided
below.
(additions are italicized; deletions are
[bracketed])
*
*
*
*
*
Jkt 259001
PO 00000
Frm 00127
Fmt 4703
Sfmt 4703
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
Position limits are designed to
address potential manipulative schemes
and adverse market impacts
surrounding the use of options, such as
disrupting the market in the security
underlying the options. While position
limits should address and discourage
the potential for manipulative schemes
and adverse market impact, if such
limits are set too low, participation in
the options market may be discouraged.
The Exchange believes that position
limits must therefore be balanced
between mitigating concerns of any
potential manipulation and the cost of
inhibiting potential hedging activity that
could be used for legitimate economic
purposes.
Cboe Options Rule 8.30 sets forth the
position limits for equity options.3
Specifically, Rule 8.30 provides that the
position limits for equity options are
25,000 or 50,000 or 75,000 or 200,000 or
250,000 option contracts (with
adjustments for splits, re-capitalizations,
etc.) on the same side of the market or
such other number of option contracts
as may be fixed from time to time by the
Exchange. Interpretation and Policy .02
to Rule 8.30 describes how the
Exchange determines which of the five
position limit amounts will apply to an
equity option class. Specifically, the
position limit applicable to a class is
determined based on the trading volume
and outstanding shares of the
underlying security.
3 Pursuant to Rule 8.42, the exercise limit for an
equity option is the same as the position limit
established in Rule 8.30 for that equity option.
E:\FR\FM\25NON1.SGM
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]]>Agencies
[Federal Register Volume 87, Number 226 (Friday, November 25, 2022)]
[Notices]
[Pages 72556-72568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-25673]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96363; File No. SR-GEMX-2022-10]
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend ATR and
Re-Pricing Rules in Connection With a Technology Migration to Enhanced
Nasdaq Functionality
November 18, 2022.
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 November 9, 2022, Nasdaq GEMX, LLC (``GEMX'' 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
[[Page 72557]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend certain rules in connection with a
technology migration to enhanced Nasdaq, Inc. (``Nasdaq'')
functionality.
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
In connection with a technology migration to enhanced Nasdaq
functionality that will result in higher performance, scalability, and
more robust architecture, the Exchange proposes to amend its rules to
adopt certain trading functionality currently utilized at Nasdaq BX,
Inc. (``BX''). As further discussed below, the Exchange is proposing to
adopt such functionality substantially in the same form as currently on
BX, while retaining certain intended differences between it and its
affiliates.
The Exchange intends to begin implementation of the proposed rule
change by Q3 2023. GEMX would commence its implementation with a
limited symbol migration and continue to migrate symbols over several
weeks. The Exchange will issue an Options Trader Alert to Members to
provide notification of the symbols that will migrate and the relevant
dates.
Re-Pricing
In connection with the technology migration, the Exchange proposes
to adopt re-pricing functionality in Options 3, Section 4 and Section 5
for certain orders and quotes that lock or cross an away market's
price. The proposed functionality will be materially identical to
current BX functionality.\3\ As further described below, the Exchange
proposes a number of corresponding amendments throughout Options 2 and
Options 3 in connection with adopting the re-pricing mechanism.
---------------------------------------------------------------------------
\3\ Today, BX re-prices certain orders and quotes to avoid
locking and crossing away markets, consistent with its Trade-Through
compliance and Locked or Crossed Markets obligations. See BX Options
3, Sections 4(b)(6) and 5(d). See also Securities Exchange Act
Release No. 89476 (August 4, 2020), 85 FR 48274 (August 10, 2020)
(SR-BX-2020-017) (describing BX re-pricing mechanism in BX Options
3, Section 5). In addition to re-pricing, the Exchange also permits
Members to cancel their quotes by configuration.
---------------------------------------------------------------------------
The Exchange notes that today, it would cancel any unexecuted
balances of non-routable orders that cannot be placed on the order
book.\4\ With the technology migration, any unexecuted balances may
rest on the order book as the Exchange would re-price an order that
locks or crosses another market as described in this proposal.
---------------------------------------------------------------------------
\4\ Today, this would include cancelling unexecuted balances of
non-routable orders after following the procedures set forth in
Supplementary Material .02 to Options 5, Section 2.
---------------------------------------------------------------------------
As proposed, the System will re-price certain orders to avoid
locking or crossing an away market's price. Orders that are designated
as non-routable and that lock or cross an away market price will be
automatically re-priced to the current national best offer (for bids)
or the current national best bid (for offers) as non-displayed and
displayed one minimum price variance (``MPV'') above (for offers) or
below (for bids) the national best price.\5\ Upon re-pricing in this
manner, such order will be displayed on OPRA at one MPV above (for
offers) or below (for bids) the national best price. The order will
remain on the Exchange's order book and will be accessible at the non-
displayed price. For example, a non-displayed limit order may be
accessed on the Exchange by a Member if the limit order is priced
better than the NBBO. The following example illustrates how the
proposed re-pricing mechanism would work:
---------------------------------------------------------------------------
\5\ The Exchange notes that other rules may cause a routable or
non-routable order to re-price in the manner described above. For
example, the Exchange will introduce a FIND routing strategy with
the technology migration. Orders marked as FIND (i.e., ``FIND
Orders'') are routable in nature but could, in certain specified
scenarios, re-price and be treated as a non-routable order in such
cases. See e.g., Options 5, Section 4(a)(iii)(B)(4) (effective but
not yet operative), which provides that a FIND Order received after
an Opening Process that is marketable against the BBO when the ABBO
is inferior to the BBO will be traded on the Exchange at or better
than the BBO price. If the FIND Order has size remaining after
exhausting the BBO, it may: (1) trade at the next BBO price (or
prices) if the order price is locking or crossing that price (or
prices) up to and including the ABBO price, (2) be entered into the
Order Book at its limit price, or (3) if locking or crossing the
ABBO, be entered into the Order Book at the ABBO price and displayed
one MPV away from the ABBO. The FIND Order will be treated as DNR
for the remainder of the trading day, even in the event that there
is a new Opening Process after a trading halt. See also Securities
Exchange Act Release No. 94897 (May 12, 2022), 87 FR 30294 (May 18,
2022) (SR-ISE-2022-11) (Notice of Filing and Immediate Effectiveness
of Proposed Rule Change to Amend Routing Functionality in Connection
With a Technology Migration, including to adopt FIND Orders)
(``Routing Filing''). The changes proposed in the Routing Filing
will become operative at the same time as this proposal.
Symbol ABCD in a Non-Penny name
CBOE BBO at 1.00 x 1.20
DNR order to buy ABCD for 1.30 arrives
DNR buy order books at 1.20 (current national best offer) and displays
at 1.15 (one MPV below national best offer) *
* OPRA will show the displayed price, not the booked non-displayed
price.
In order to effectuate the foregoing changes, the Exchange proposes
to amend Options 3, Section 5(c), which currently provides that the
System automatically executes eligible orders using the Exchange's
displayed best bid and offer (``BBO''). As amended, Options 3, Section
5(c) would provide that the System automatically executes eligible
orders using the Exchange's displayed best bid and offer (i.e., BBO) or
the Exchange's non-displayed order book (``internal BBO'') \6\ if the
best bid and/or offer on the Exchange has been re-priced pursuant to
Options 3, Section 5(d). The proposed definition of an internal BBO,
which will be identical to BX's definition of internal BBO in BX
Options 3, Section 5(c), will cover re-priced orders that remain on the
order book and are available at non-displayed prices while resting on
the order book. The proposed re-pricing itself will be described in
Options 3, Section 5(d). Currently, Options 3, Section 5(d) describes
Trade-Through Compliance and Locked or Crossed Market behavior, and
further provides that an order that is designated by the Member as
routable would be routed in compliance with applicable Trade-Through
and Locked and Crossed Markets restrictions.\7\ The Exchange proposes
to add rule text within Options 3, Section 5(d) to
[[Page 72558]]
describe the manner in which a non-routable order would be re-priced.
Specifically, the Exchange proposes to state, ``An order that is
designated by a Member as non-routable will be re-priced in order to
comply with applicable Trade-Through and Locked and Crossed Markets
restrictions. If, at the time of entry, an order that the entering
party has elected not to make eligible for routing \8\ would cause a
locked or crossed market violation or would cause a trade-through
violation, it will be re-priced to the current national best offer (for
bids) or the current national best bid (for offers) as non-displayed,
and displayed at one minimum price variance above (for offers) or below
(for bids) the national best price.'' The Exchange believes that the
addition of this language, substantially similar to language within BX
Options 3, Section 5(d),\9\ will provide Members with additional
information as to the manner in which orders are handled by the System
when those orders would lock or cross an away market. Identical to BX,
the Exchange is specifying that the re-price would occur ``at the time
of entry'' to avoid a locked or crossed market violation or a trade-
through violation.\10\
---------------------------------------------------------------------------
\6\ A non-displayed order price is not visible to any market
participants other than the submitting market participant until such
order executes and becomes visible at that time to all market
participants.
\7\ Options 3, Section 5(d) also currently provides that orders
that are not automatically executed will be handled as provided in
Supplementary Material .02 to Options 5, Section 2; provided that
Members may specify that a Non-Customer order should instead be
cancelled automatically by the System at the time of receipt.
\8\ As noted above, FIND Orders (which are inherently routable
but could then become non-routable in specified circumstances) may
also be re-priced. See supra note 5.
\9\ Currently, BX Options 3, Section 5(d), in relevant part,
provides that if, at the time of entry, an order that the entering
party has elected not to make eligible for routing would cause a
locked or crossed market violation or would cause a trade-through
violation, it will be re-priced to the current national best offer
(for bids) or the current national best bid (for offers) and
displayed at one minimum price variance above (for offers) or below
(for bids) the national best price. BX intends to make a clarifying
change in a separate rule filing to align its rule text with
proposed GEMX Options 3, Section 5(d) to also indicate that BX will
re-price to the current national best price as non-displayed.
\10\ After the re-price under Options 3, Section 5(d),
continuous re-pricing could take place pursuant to Options 5,
Section 4 if the away market price fades to inferior prices and the
re-priced order can move closer to its original limit price. See
supra note 5.
---------------------------------------------------------------------------
With respect to quotes, today as set forth in Options 3, Section
4(b)(6), if, at the time of entry, a quote would cause a locked or
crossed market violation or would cause a trade-through violation, it
will either be re-priced and displayed at one MPV above (for offers) or
below (for bids) the national best price or immediately cancelled, as
configured by the Member. The Exchange now proposes to amend the quote
re-pricing mechanism currently described in GEMX Options 3, Section
4(b)(6) by harmonizing it with BX Options 3, Section 4(b)(6).\11\ As
amended, the quote re-pricing language in Options 3, Section 4(b)(6)
would provide: ``If, at the time of entry, a quote would cause a locked
or crossed market violation or would cause a trade-through violation,
it will be re-priced to the current national best offer (for bids) or
the current national best bid (for offers) as non-displayed, and
displayed at one minimum price variance above (for offers) or below
(for bids) the national best price, or immediately cancelled, as
configured by the Member.'' As reflected in the foregoing, the
difference between the current and proposed re-pricing is that the
Exchange will re-price to the current national best price under the
proposal and book non-displayed at this price (i.e., the current
national best price). Upon re-pricing in this manner, the order would
then be displayed one MPV inferior to the national best price. In
contrast, today, the Exchange re-prices and books as displayed one MPV
inferior to the national best price. The proposed process is identical
to how BX quote re-pricing works today.\12\
---------------------------------------------------------------------------
\11\ BX Options 3, Section 4(b)(6) provides that a quote will
not be executed at a price that trades through another market or
displayed at a price that would lock or cross another market. If, at
the time of entry, a quote would cause a locked or crossed market
violation or would cause a trade-through, violation, it will be re-
priced to the current national best offer (for bids) or the current
national best bid (for offers) and displayed at one minimum price
variance above (for offers) or below (for bids) the national best
price. BX intends to make a clarifying change in a separate rule
filing to align its rule text with proposed GEMX Options 3, Section
4(b)(6) to also indicate that it will re-price to the current
national best price as non-displayed.
\12\ See supra note 11.
---------------------------------------------------------------------------
In connection with the introduction of the BX-like quote re-pricing
mechanism, the Exchange also proposes to add the definition of internal
BBO (similar to the proposed definition of internal BBO for order re-
pricing) in new subsection (7) of Options 3, Section 4(b) for quote re-
pricing. Specifically, subsection (7) will provide that the System
automatically executes eligible quotes using the Exchange's displayed
best bid and offer (i.e., BBO) or the Exchange's non-displayed order
book (i.e., internal BBO) if the best bid and/or offer on the Exchange
has been re-priced pursuant to Options 3, Section 5(d) and Options 3,
Section 4(b)(6). The proposed addition is intended to make clear that
quotes may now be executed using either the BBO or internal BBO,
similar to how orders may now be executed with the proposed re-pricing
changes.\13\ The Exchange will also make a technical amendment to
renumber current subsection (7) of Options 3, Section 4(b) to new
subsection (8).
---------------------------------------------------------------------------
\13\ While BX's quote re-pricing rule does not explicitly
reference the term ``internal BBO,'' BX describes the re-pricing of
quotes in BX Options 3, Section 4(b)(6) and also currently operates
identically to how GEMX is proposing for quotes in GEMX Options 3,
Section 4(b)(7) (the BX system automatically executes eligible
quotes using BX's displayed best bid and offer (i.e., BX BBO) or
BX's non-displayed order book (i.e., internal BX BBO) if the best
bid and/or offer on BX has been re-priced pursuant to BX Options 3,
Section 5(d) and BX Options 3, Section 4(b)(6). BX intends to file a
separate rule change to add this clarification in BX Options 3,
Section 4.
---------------------------------------------------------------------------
In connection with the foregoing changes, the Exchange proposes to
add references to ``internal BBO'' throughout its rules to closely
conform with the concept of re-pricing at an internal BBO as proposed
in Options 3, Sections 4(b)(6), 4(b)(7), 5(c) and 5(d). First, the
Exchange proposes to add references to the internal BBO in Options 2,
Section 10(a), which currently describes Preferred Market Makers \14\
and Preferenced Orders.\15\ The Exchange proposes to amend paragraph
(a)(3) of Options 2, Section 10, which currently stipulates that a
Preferred Market Maker must be quoting at the NBBO at the time the
Preferenced Order is received in order to be entitled to the Preferred
Market Maker allocation set forth in Options 3, Section 10(c)(1)(C). As
amended, the Rule will provide that if the Preferred Market Maker is
quoting at the better of the internal BBO or the NBBO at the time the
Preferenced Order is received, the allocation procedure described in
Options 3, Section 10(c)(1)(C) shall be applied to the execution of the
Preferenced Order. The proposal to use the term ``better of the
internal BBO or the NBBO'' will conform to the concept of re-pricing at
an internal BBO as proposed in Options 3, Sections 4(b)(6), 4(b)(7),
5(c) and 5(d), and will make clear that the Preferred Market Maker must
now be quoting at the better of the NBBO or internal BBO to be entitled
to the Preferred Market Maker allocation.\16\ Today, BX has similar
language governing its Directed Market Makers (``DMMs'') (analogous to
the Exchange's Preferred Market Makers), which requires Directed Market
Makers to be quoting at the better of the internal BBO or the NBBO in
order to receive the Directed Market Maker allocation entitlement.\17\
The Exchange also proposes a corresponding change in paragraph (a)(2)
of Options 2, Section 10, which currently states that
[[Page 72559]]
if the Preferred Market Maker is not quoting at a price equal to the
NBBO at the time the Preferenced Order is received, the allocation
procedure described in Options 3, Section 10(c)(1)(C) shall not be
applied to the execution of the Preferenced Order. Specifically, the
Exchange proposes that the Preferred Market Maker will not be entitled
to the allocation in Options 3, Section 10(c)(1)(C) if the Preferred
Market Maker is not quoting at a price equal to or better than the
better of the internal BBO or the NBBO at the time the Preferenced
Order is received.
---------------------------------------------------------------------------
\14\ A Preferred Market Maker may be the Primary Market Maker
appointed to the options class or any Competitive Market Maker
appointed to the options class. See Options 2, Section 10(a).
\15\ A Preferenced Order is an order designated to a Preferred
Market Maker. See Options 2, Section 10.
\16\ As discussed below, the Exchange is proposing corresponding
changes in the Preferred Market Maker allocation rule in Options 3,
Section 10(c)(1)(C).
\17\ See BX Options 2, Section 10(a)(1).
---------------------------------------------------------------------------
Second, the Exchange proposes to add the concept of ``better of the
internal BBO or the NBBO'' in Options 3, Section 10(c)(1)(B), which
currently sets forth an enhanced Primary Market Maker allocation
entitlement. As amended, Options 3, Section 10(c)(1)(B) will provide
that after all Priority Customer orders have been fully executed,
provided the Primary Market Maker's quote is at the better of the
internal BBO or the NBBO, the Primary Market Maker shall be entitled to
receive the allocation described in Options 3, Section 10(c)(1)(B)(i),
unless the incoming order to be allocated is a Preferenced Order and
the Primary Market Maker is not the Preferred Market Maker, in which
case allocation would be pursuant to (c)(1)(C). The proposed changes
will conform to the concept of re-pricing at an internal BBO as
proposed in Options 3, Sections 4(b)(6), 4(b)(7), 5(c) and 5(d), and
will make clear that the Primary Market Maker must now be quoting at
the better of the NBBO or internal BBO to be entitled to the enhanced
Primary Market Maker allocation. The Exchange notes that Nasdaq Phlx
LLC (``Phlx'') has similar language in Phlx Options 3, Section 10
governing Lead Market Maker (``LMM'') (analogous to the Exchange's
Primary Market Maker) allocation.\18\ The Exchange also proposes to
correct a citation in Options 3, Section 10(c)(1)(B)(i)(b) from
subparagraph (a)(1)(E) to subparagraph (c)(1)(E).
---------------------------------------------------------------------------
\18\ See Phlx Options 3, Section 10(a)(1)(B).
---------------------------------------------------------------------------
Third, the Exchange proposes to add the concept of ``better of the
internal BBO or the NBBO'' in Options 3, Section 10(c)(1)(C), which
currently sets forth Preferred Market Maker allocation entitlement. As
amended, Options 3, Section 10(c)(1)(C) will provide that after all
Priority Customer orders have been fully executed, upon receipt of a
Preferenced Order pursuant to Supplementary .01 to Options 3, Section
10, provided the Preferred Market Maker's quote is at the better of the
internal BBO or the NBBO, the Preferred Market Maker will be afforded a
participation entitlement. The proposed changes will conform to the
concept of re-pricing at an internal BBO as proposed in Options 3,
Sections 4(b)(6), 4(b)(7), 5(c) and 5(d), and will make clear that the
Preferred Market Maker must now be quoting at the better of the NBBO or
internal BBO to be entitled to the Preferred Market Maker allocation.
The Exchange notes that Phlx has similar language in Phlx Options 3,
Section 10 governing DMM allocation.\19\
---------------------------------------------------------------------------
\19\ See Phlx Options 3, Section 10(a)(1)(C).
---------------------------------------------------------------------------
Fourth, the Exchange proposes to add the concept of ``better of the
internal BBO or the NBBO'' throughout Options 3, Section 10(c)(1)(D),
which currently sets forth the Primary Market Maker allocation
entitlement for orders of five (5) contracts or fewer. As amended,
subparagraph (i) of Options 3, Section 10(c)(1)(D) will provide that a
Primary Market Maker is entitled to priority with respect to Orders of
5 Contracts or Fewer if the Primary Market Maker has a quote at the
better of the internal BBO or the NBBO with no other Priority Customer
or Preferenced Market Maker interest present which has a higher
priority, including when the Primary Market Maker is also the Preferred
Market Maker. As amended, subparagraph (ii) of Options 3, Section
10(c)(1)(D) will provide that if the Primary Market Maker is quoting at
the better of the internal BBO or the NBBO and the Primary Market Maker
is also the Preferred Market Maker or there is no Preferred Market
Maker quoting at the better of the internal BBO or the NBBO, and a
Priority Customer has a higher priority at the time of execution, the
Priority Customer will be allocated the Orders of 5 Contracts or Fewer
up to their displayed size pursuant Options 3, Section 10(c)(1)(A) and
if contracts remain, the Primary Market Maker will be allocated the
remainder. As amended, subparagraph (iii) of Options 3, Section
10(c)(1)(D) will provide that if the Primary Market Maker is quoting at
the better of the internal BBO or the NBBO and no Priority Customer has
a higher priority at the time of execution and a Preferred Market
Maker, who is not a Primary Market Maker, is quoting at the better of
the internal BBO or the NBBO then allocation shall proceed according to
Section 10(c)(1)(C). The proposal will conform to the concept of re-
pricing at an internal BBO as proposed in Options 3, Sections 4(b)(6),
4(b)(7), 5(c) and 5(d). The Exchange notes that BX has similar language
in BX Options 3, Section 10 governing LMM allocation entitlement for
orders of five (5) contracts or fewer.\20\
---------------------------------------------------------------------------
\20\ See BX Options 3, Section 10(a)(1)(C)(2)(iii).
---------------------------------------------------------------------------
Opening Process
In connection with the technology migration, the Exchange proposes
to amend its Opening Process in Options 3, Section 8 to adopt language
that conforms to the proposed re-pricing structure. The Exchange
proposes to amend Options 3, Section 8(j)(6)(i) to reflect the new BX-
like re-pricing that it is proposing to adopt, as described in the re-
pricing section above. Currently, Section 8(j)(6)(i) stipulates that
for contracts that are not routable, pursuant to Options 3, Section
8(j)(6), the System would cancel (1) any portion of the DNR order that
would otherwise have to be routed to the exchange(s) disseminating the
ABBO for an opening to occur, or (2) any order or quote that is priced
through the Opening Price.\21\ All other interest would remain in the
System and be eligible for trading after opening. As it relates to DNR
order handling, this reflects current System behavior where the
Exchange would cancel any unexecuted balances of a non-routable order
that cannot be placed on the order book because the residual interest
would lock or cross an away market. With the technology migration, such
unexecuted balances may rest on the order book as the Exchange would
instead re-price the non-routable order that locks or crosses an away
market to align to current BX re-pricing functionality. Accordingly,
the Exchange proposes to replace the current rule text in Section
8(j)(6)(i) with the following: ``Pursuant to Options 3, Section
8(j)(6), the System will re-price DNR Orders (that would otherwise have
to be routed to the exchange(s) disseminating the ABBO for an opening
to occur) to the current away best offer (for bids) or the current away
best bid (for offers) as non-displayed, and display at a price that is
one minimum trading increment inferior to the ABBO, and disseminate
such DNR Order as part of the new BBO.'' Proposed Section 8(j)(6)(i)
will further provide that the System will cancel any order or quote
that is priced through the Opening Price, and that all other interest
will be eligible for trading after the opening. This would reflect that
the Exchange will continue to cancel any interest priced through the
Opening Price, and to keep all other interest in the System for trading
after opening. Proposed Options 3, Section 8(j)(6)(i) is substantially
similar to BX Options 3,
[[Page 72560]]
Section 8(k)(4) and (5), and will bring greater transparency in how
non-routable orders will be handled in the Opening Process.\22\
---------------------------------------------------------------------------
\21\ The Opening Price is described in Options 3, Sections 8(h)
and (j).
\22\ BX Options 3, Sections 8(k)(4) and (5) provide that
pursuant to Options 3, Section 8(k)(3)(F), the System will re-price
Do Not Route Orders (that would otherwise have to be routed to the
exchange(s) disseminating the ABBO for an opening to occur) to a
price that is one minimum trading increment inferior to the ABBO,
and disseminate the re-priced DNR Order as part of the new BBO. The
System will cancel any order or quote that is priced through the
Opening Price. All other interest will be eligible for trading after
opening. BX intends to align its rule to proposed GEMX Options 3,
Section 8(j)(6)(i) in a separate rule filing to clarify that DNR
Orders in the BX opening process can re-price to the current ABBO as
non-displayed, and display at a price that is one MPV inferior to
the ABBO.
---------------------------------------------------------------------------
Auction Mechanisms
Facilitation and Solicited Order Mechanisms
The Exchange proposes to amend Options 3, Section 11 (Auction
Mechanisms) to modify the entry checks for the Exchange's Facilitation
Mechanism \23\ and Solicited Order Mechanism \24\ to reflect the BX-
like re-pricing changes under this proposal by introducing the concept
of an internal BBO.\25\ As discussed in the re-pricing section above,
the Exchange proposes to re-price orders that would otherwise lock or
cross an away market.\26\ Specifically, an order will be re-priced to
the current national best offer (for bids) or the current national best
bid (for offers) as non-displayed and displayed at one MPV above (for
offers) or below (for bids) the national best price.\27\ With this re-
pricing, an Exchange order could be available at a price that is better
than the NBBO, but is non-displayed (i.e., the Exchange's non-displayed
order book or ``internal BBO''). Accordingly, the Exchange proposes to
add the concept of ``internal BBO'' in the order entry checks for the
Facilitation and Solicited Order Mechanisms in Options 3, Sections
11(b)(1) and (d)(1), respectively, to account for a non-displayed
better price that may be available on the Exchange order book.
---------------------------------------------------------------------------
\23\ The Facilitation Mechanism is a process by which an
Electronic Access Member can execute a transaction wherein the
Electronic Access Member seeks to facilitate a block-size order it
represents as agent, and/or a transaction wherein the Electronic
Access Member solicited interest to execute against a block-size
order it represents as agent. See Options 3, Section 11(b).
\24\ The Solicited Order Mechanism is a process by which an
Electronic Access Member can attempt to execute orders of 500 or
more contracts it represents as agent against contra orders that it
solicited. See Options 3, Section 11(d).
\25\ As discussed later in the filing, while BX does not have a
Facilitation or Solicited Order Mechanism like GEMX, BX currently
considers the internal BBO in its price improvement auction
(``PRISM'') in a similar manner as being proposed for the GEMX
Facilitation and Solicited Order Mechanisms.
\26\ See supra notes 5 and 8.
\27\ See proposed Options 3, Section 5(d). See supra notes 5 and
8.
---------------------------------------------------------------------------
In particular, the Exchange proposes to add the concept of
``internal BBO'' in Options 3, Section 11(b)(1), which currently sets
forth the entry checks for the Exchange's Facilitation Mechanism. As
amended, the Rule will provide that orders must be entered into the
Facilitation Mechanism at a price that is (A) equal to or better than
the NBBO and the internal BBO on the same side of the market as the
agency order unless there is a Priority Customer order on the BBO or
internal BBO on the same side of the market as the agency order, in
which case the order must be entered at an improved price over the
Priority Customer order; and (B) equal to or better than the ABBO on
the opposite side.\28\ The proposal will make clear that with the
introduction of the re-pricing mechanism in proposed Options 3, Section
5(d), the System will now check orders entered into the Facilitation
Mechanism against the internal BBO as well. In addition, the proposed
changes will clarify that the Facilitation order must be entered at an
improved price over the Priority Customer order where there is a
Priority Customer order on the same side BBO or internal BBO. By way of
example, the below examples demonstrate how the internal BBO would
operate in the Facilitation Mechanism.
---------------------------------------------------------------------------
\28\ The Facilitation Mechanism does not check the Exchange best
bid or offer on the opposite side of the market because any interest
that is available on the opposite side of the market would allocate
against the Facilitation Agency Order and provide price improvement.
---------------------------------------------------------------------------
Facilitation Passes Entry Validation Equal to or Better Than the NBBO
and Internal BBO on the Same Side of the Market
Assume the following:
MIAX BBO: 3.10 x 3.20
GEMX BBO 3.05 x 3.25
Non-Priority Customer DNR order to buy for 3.25 arrives at GEMX; books
at 3.20 non-displayed and re-prices/displays at 3.15
GEMX Internal BBO: 3.20 x 3.25
NBBO: 3.15 x 3.20
Facilitation to buy @ 3.20 arrives and is able to begin because the
Facilitation Agency side price is at or better than the NBBO and
internal BBO on the same side of the market and at or better than the
ABBO on the opposite side of the market.
Facilitation Fails Entry Validation Equal to or Better Than the NBBO
and Internal BBO on the Same Side of the Market
Assume the following:
MIAX BBO: 3.10 x 3.20
GEMX BBO 3.05 x 3.25
Non-Priority Customer DNR order to buy for 3.25 arrives at GEMX; books
at 3.20 non-displayed and re-prices/displays at 3.15
GEMX Internal BBO: 3.20 x 3.25
NBBO: 3.15 x 3.20
Facilitation to buy @ 3.15 arrives and is rejected because the
Facilitation Agency side price is not at or better than the internal
BBO on the same side of the market.
Similarly, the Exchange proposes to add the concept of ``internal
BBO'' in Options 3, Section 11(d)(1), which currently sets forth the
entry checks for the Exchange's Solicited Order Mechanism. As amended,
the Rule will provide that orders must be entered into the Solicited
Order Mechanism at a price that is equal to or better than the NBBO and
the internal BBO on both sides of the market; provided that, if there
is a Priority Customer order on the BBO or internal BBO, the order must
be entered at an improved price over the Priority Customer order.
Similar to the proposed changes for the Facilitation Mechanism, the
proposal will make clear that with the introduction of the re-pricing
mechanism in proposed Options 3, Section 5(d), the System will now
check orders entered into the Solicited Order Mechanism against the
internal BBO as well. In addition, the proposed changes will clarify
that the order entered into the Solicited Order Mechanism must be
entered at an improved price over the Priority Customer order where
there is a Priority Customer order on either side of the BBO or
internal BBO. By way of example, the below examples demonstrate how the
internal BBO would operate in the Solicited Order Mechanism.
Solicitation Passes Entry Validation Equal to or Better Than the NBBO
and Internal BBO on Both Sides of the Market
MIAX BBO: 3.10 x 3.20
GEMX BBO 3.05 x 3.25
Non-Priority Customer DNR order to sell for 3.05 arrives at GEMX; books
at 3.10 non-displayed and re-prices/displays at 3.15
GEMX Internal BBO: 3.05 x 3.10
NBBO: 3.10 x 3.15
Solicitation to buy @ 3.10 arrives and is able to begin because the
Solicitation Agency side price is at or better than the
[[Page 72561]]
NBBO and internal BBO on both sides of the market.
Solicitation Fails Entry Validation Equal to or Better Than the NBBO
and Internal BBO on Both Sides of the Market
MIAX BBO: 3.10 x 3.20
GEMX BBO 3.05 x 3.25
Non-Priority Customer DNR order to sell for 3.05 arrives at GEMX; books
at 3.10 non-displayed and re-prices/displays at 3.15
GEMX Internal BBO: 3.05 x 3.10
NBBO: 3.10 x 3.15
Solicitation to buy @ 3.15 arrives and is rejected because the
Solicitation Agency side price is not at or better than the internal
BBO on both sides of the market.
Lastly, the Exchange proposes a clarifying change in Options 3,
Section 11(b)(1), which governs the entry checks for the Facilitation
Mechanism. Specifically, the Exchange proposes to amend the provision
as follows: ``Orders must be entered into the Facilitation Mechanism at
a price that is (A) equal to or better than the NBBO and the internal
BBO on the same side of the market as the agency order unless there is
a Priority Customer order on the same side of the market as the agency
order . . . .'' The proposed change does not change current System
behavior, and is meant to align the language in the Priority Customer
order clause relating to the same side of the market as the agency
order more closely with similar language in the preceding clause.
Price Improvement Mechanism
The Exchange proposes to amend Options 3, Section 13 (Price
Improvement Mechanism for Crossing Transactions) to modify the entry
checks for the Exchange's Price Improvement Mechanism (``PIM'') to
reflect the BX-like re-pricing changes under this proposal.\29\ The
Exchange proposes to amend Options 3, Section 13(b)(1) to provide, ``If
the Agency Order is for less than 50 option contracts, and if the
difference between the National Best Bid and National Best Offer
(``NBBO'') or the difference between the internal best bid and internal
best offer is $0.01, the Crossing Transaction must be entered at $0.01
better than the NBBO and the internal BBO on the opposite side of the
market from the Agency Order and better than the limit order or quote
on the Nasdaq GEMX order book on the same side of the Agency Order.''
\30\ The addition of ``internal BBO'' herein is similar to the changes
proposed for the Facilitation and Solicited Order Mechanisms discussed
above in that the Exchange is reflecting the proposed re-pricing
changes in its PIM rule as illustrated by the example below.
---------------------------------------------------------------------------
\29\ BX intends to file a rule change to amend BX Options 3,
Section 13 to similarly refer to an ``internal BBO.''
\30\ Currently, Options 3, Section 13(b)(1) provides that if the
Agency Order is for less than 50 option contracts, and if the
difference between the National Best Bid and National Best Offer
(``NBBO'') is $0.01, the Crossing Transaction must be entered at one
minimum price improvement increment better than the NBBO on the
opposite side of the market from the Agency Order and better than
the limit order or quote on the Nasdaq GEMX order book on the same
side of the Agency Order.
---------------------------------------------------------------------------
Today, an Agency Order for less than 50 contracts could begin a PIM
if the difference between the NBBO is $0.01. With this change, an
Agency Order for less than 50 contracts could begin a PIM if the
difference between the NBBO or between the internal BBO is $0.01. Below
is an example of the how the System would treat an order for less than
50 contracts where the internal BBO is greater than the NBBO with
respect to the rule text within Options 3, Section 13(b)(1).
Assume GEMX Market Maker quotes an option series at 1.09 (10) x 1.15
(10)
Next assume ABBO quotes that option series at 1.10 (10) x 1.11 (10)
Assume an order locks the ABBO quote with a buy order in that options
series of 5 @ 1.11
With the proposed repricing, this order would book at 1.11 and
display 1 MPV (penny in this case) away at 1.10 on the order book.
In this scenario:
[ssquf] the PIM to buy 49 @ 1.10 would be rejected;
[ssquf] the PIM to buy 49 @ 1.11 would be rejected;
[ssquf] the PIM to sell 49 @ 1.10 would be rejected; and
[ssquf] the PIM to sell 49 @ 1.11 would be rejected.
This proposed new rule text accounts for a non-displayed better
price that may be available on the order book. A similar change is
proposed for the Crossing Transaction within that same paragraph.
Additionally, in lieu of stating ``one minimum price improvement
increment'' the Exchange proposes to replace that rule text with
``$0.01.'' Amending the rule text to $0.01 does not amend the current
System operation, rather it more simply states what that minimum
increment is today. The Exchange proposes similar changes within
Options 3, Section 13(b)(2) to add references to ``difference between
the internal BBO'' and ``$0.01.'' \31\ Below is an example of the how
the System would treat an order for 50 contracts or more where the
internal BBO is greater than the NBBO with respect to the rule text
within Options 3, Section 13(b)(2).
---------------------------------------------------------------------------
\31\ See supra note 29.
Assume GEMX Market Maker quotes an option series at 1.09 (10) x 1.15
(10)
Next assume ABBO quotes that option series at 1.10 (10) x 1.11 (10)
Assume an order locks the ABBO quote with a buy order in that option
series at 5 @1.11
With the proposed repricing this order would book at 1.11 and
display 1 MPV (penny in this case) away at 1.10 on the order book.
In this scenario:
[ssquf] the PIM to buy 50 @ 1.10 would be rejected;
[ssquf] the PIM to buy 50 @ 1.11 would be rejected;
[ssquf] the PIM to sell 50 @ 1.10 would be rejected; and
[ssquf] the PIM to sell 50 @ 1.11 would be accepted and would begin a
PIM auction.
Assuming no other interest arrives during the PIM auction timer, this
order would trade at the end of the auction timer, thereby filling the
order 5 @1.11 and the remainder would allocate to the contra side/
counter side order.
Acceptable Trade Range
As set forth in Options 3, Section 15(a)(2)(A), the Exchange
currently offers an Acceptable Trade Range (``ATR'') risk protection
that sets dynamic boundaries within which quotes and orders may trade.
ATR is designed to guard against the System from experiencing dramatic
price swings by preventing the immediate execution of quotes and orders
beyond the thresholds set by the protection. With the proposed adoption
of the BX-like re-pricing mechanism described above, the Exchange
proposes to introduce an iterative process for ATR wherein the Exchange
will attempt to execute interest that exceeds the outer limit of the
ATR for a brief period of time while that interest is automatically re-
priced in the manner discussed below. The Exchanges notes that today,
it would cancel rather than re-price any interest that exceeds the
outer limit of the ATR. The proposed changes will harmonize the
Exchange's ATR with BX's ATR.\32\
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\32\ See BX Options 3, Section 15(b)(1). As discussed further
below, the Exchange will also add references to ``internal BBO'' in
the ATR reference price description. BX intends to file a similar
rule change to clarify this behavior.
---------------------------------------------------------------------------
Currently, subparagraph (i) of Options 3, Section 15(a)(2)(A)
provides that the System will calculate an ATR to limit the range of
prices at which an order or
[[Page 72562]]
quote will be allowed to execute. The ATR is calculated by taking the
reference price, plus or minus a value to be determined by the Exchange
(i.e., the reference price-(x) for sell orders and the reference price
+ (x) for buy orders).\33\ ATR is not available for All-or-None Orders.
Subparagraph (ii) provides that the reference price is the National
Best Bid (``NBB'') for sell orders/quotes and the National Best Offer
(``NBO'') for buy orders/quotes.\34\ The reference price is calculated
upon receipt of a new order or quote, provided that if the applicable
NBB or NBO price is improved at the time an order is routed to an away
market, a new reference price is calculated based on the NBB or NBO at
that time. Today, as set forth in subparagraph (iii), if an order or
quote reaches the outer limit of the ATR without being fully executed,
then any unexecuted balance will be cancelled.
---------------------------------------------------------------------------
\33\ The ATR settings values are tied to the option premium and
will be set out in the ATR table in the GEMX system settings
document on a publicly available website. The GEMX settings will be
identical to BX ATR. The Exchange would notify all Members through
an Options Trader Alert if it determined to amend that value and
also publish the settings on a publicly available website.
\34\ In the event of a crossed ABBO, ATR will use the NBO
instead of the NBB for incoming sell orders and the NBB instead of
the NBO for incoming buy orders as the reference price.
---------------------------------------------------------------------------
The Exchange now proposes to amend this rule to adopt an iterative
process like BX wherein an order/quote that reaches its ATR boundary
will be paused for a brief period of time to allow more liquidity to be
collected, before the order/quote is automatically re-priced and a new
ATR is calculated. Specifically, the Exchange proposes to amend
subparagraph (iii) of Options 3, Section 15(a)(2)(A) to provide that if
an order or quote reaches the outer limit of the ATR (``Threshold
Price'') without being fully executed, it will be posted at the
Threshold Price for a brief period, not to exceed one second (``Posting
Period''), to allow the market to refresh and determine whether or not
more liquidity will become available (on the Exchange or any other
exchange if the order is designated as routable) within the posted
price of the order or quote before moving on to a new Threshold Price.
Upon posting, either the current Threshold Price of the order/quote or
an updated NBB for buy orders/quotes or the NBO for sell orders/quotes
(whichever is higher for a buy order/quote or lower for a sell order/
quote) then becomes the reference price for calculating a new ATR. If
the order/quote remains unexecuted after the Posting Period, a new
Acceptable Trade Range will be calculated and the order/quote will
execute, route, or post up to the new Threshold Price. This process
will repeat until either (1) the order/quote is executed, cancelled, or
posted at its limit price or (2) the order/quote has been subject to a
configurable number of instances of the ATR as determined by the
Exchange \35\ (in which case it will be returned).\36\ The proposed
changes will be functionally identical to BX's ATR, as set forth in BX
Options 3, Section 15(b)(1)(A).
---------------------------------------------------------------------------
\35\ The Exchange intends to initially set the configurable
number to 5 iterations, similar to BX. The Exchange would issue an
Options Trader Alert if it determined to amend that timeframe and
also publish the settings on a publicly available website.
\36\ Under this proposal, DNR orders that are locked against the
ABBO will pause their ATR iterations (i.e., a new ATR will not be
calculated based on the reference price at that time) and will
remain this way until the ATR process can be completed. This will be
the same as BX DNR order handling. Returning an order to the
customer means that the order would be cancelled.
---------------------------------------------------------------------------
In light of the foregoing changes, the Exchange also proposes to
update the reference price definition in subparagraph (ii) to provide
that upon receipt of a new order or quote, the reference price will now
be the better of the NBB or internal best bid for sell orders/quotes
and the better of the NBO or internal best offer for buy orders/quotes
or the last price at which the order/quote is posted, whichever is
higher for a buy order/quote or lower for a sell order/quote.\37\
---------------------------------------------------------------------------
\37\ The additions of ``internal BBO'' in this rule text are
consistent with the proposed re-pricing described above.
---------------------------------------------------------------------------
This will be functionally identical to BX's ATR reference price, as
set forth in BX Options 3, Section 15(b)(1).\38\
---------------------------------------------------------------------------
\38\ BX Options 3, Section 15(b)(1) states, in relevant part,
that ``[t]he system will calculate an Acceptable Trade Range to
limit the range of prices at which an order will be allowed to
execute. The Acceptable Trade Range is calculated by taking the
reference price, plus or minus a value to be determined by the
Exchange. (i.e., the reference price-(x) for sell orders and the
reference price + (x) for buy orders). Upon receipt of a new order,
the reference price is the NBB for sell orders and the NBO for buy
orders or the last price at which the order is posted whichever is
higher for a buy order or lower for a sell order.'' The Exchange
notes that BX's rule does not reference ``quotes,'' but BX's ATR
currently applies to both orders and quotes like the Exchange's ATR.
The Exchange further notes that BX's rule does not refer to an
``internal BBO'' but that today, BX's ATR reference price also takes
the better of the NBB (NBO) or internal best bid (best offer) for
sell (buy) orders/quotes, or the last price at which the order/quote
is posted.
---------------------------------------------------------------------------
In addition, the Exchange proposes in new subparagraph (iv) \39\
that during the Posting Period, the Exchange will disseminate as a
quotation: (1) the Threshold Price for the remaining size of the order/
quote triggering the ATR and (2) on the opposite side of the market,
the best price will be displayed using the ``non-firm'' indicator
message in accordance with the specifications of the network processor.
This would allow the order or quote setting the ATR Threshold Price to
retain priority in the Exchange book and also prevent any later-entered
order from accessing liquidity ahead of it. If the Exchange were to
display trading interest available on the opposite side of the market,
that trading interest would be automatically accessible to later-
entered orders during the period when the order triggering the ATR is
paused. This is identical to how BX currently disseminates such
interest during the ATR Posting Period.\40\ Identical to BX, following
the Posting Period, the Exchange will return to a normal trading state
and disseminate its best bid and offer.\41\
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\39\ The Exchange will make a related change to update current
subparagraph (iv) to subparagraph (v).
\40\ See BX Options 3, Section 15(b)(1)(B). Like BX today, with
the proposed changes, route timers pursuant to Options 5, Section
4(a), will continue to run on the Exchange during ATR iterations and
``firm'' quote posting can occur if, for example, the order is re-
priced to one MPV away from the ABBO pursuant to proposed Options 3,
Section 5(d) to comply with the trade-through and locked or crossed
market restrictions pursuant to Options 5, Section 2. In such cases,
the quotation will disseminate as a ``firm'' quote.
\41\ See BX Options 3, Section 15(b)(1)(B).
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[[Page 72563]]
Importantly, the ATR is neutral with respect to away markets. The
order may route to other destinations to access liquidity priced within
the ATR provided the order is designated as routable, as shown in the
example below.\42\ With the proposed changes, if the order still
remains unexecuted, this process will repeat \43\ until the order is
executed, cancelled, or posted at its limit price. Pursuant to Options
5, Section 4, if after an order is routed to the full size of an away
exchange and additional size remains available for the routed order,
the remaining contracts will be posted on the Exchange's order book at
a price that assumes the away market has been fully executed and
exhausted by the routed order.\44\ This practice of routing and then
posting is consistent with the national market system plan governing
trading and routing of options orders and the Exchange policies and
procedures that implement that plan.\45\
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\42\ When a Threshold Price is calculated, an order can route
and execute at away venues at multiple prices that are at or better
than the calculated Threshold Price.
\43\ As proposed in Options 3, Section 15(a)(2)(A)(iii)(2), the
Exchange will establish a maximum number of ATR iterations until the
order or quote is returned back to the Member.
\44\ See Options 5, Section 4(a)(iii) (effective but not yet
operative).
\45\ See Options Order Protection and Locked/Crossed Markets
Plan, Securities Exchange Act Release No. 60405 (July 30, 2009), 74
FR 39362 (August 6, 2009).
---------------------------------------------------------------------------
The following examples illustrate the proposed ATR functionality.
Example 1
Assume that the Acceptable Trade Range is set for $0.05 and the
following quotations are posted in all markets:
Away Exchange Quotes:
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Offer price Offer size
----------------------------------------------------------------------------------------------------------------
ISE................................. 10 $0.75 $0.90 10
AMEX................................ 10 0.75 0.92 10
PHLX................................ 10 0.75 0.94 10
----------------------------------------------------------------------------------------------------------------
GEMX Price Levels:
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Offer price Offer size
----------------------------------------------------------------------------------------------------------------
GEMX................................ 10 $0.75 $0.90 10
GEMX................................ ................. ................. 0.95 10
GEMX................................ ................. ................. 0.97 10
GEMX................................ ................. ................. 1.00 20
----------------------------------------------------------------------------------------------------------------
GEMX receives a routable order to buy 70 contracts at $1.10. The
Acceptable Trade Range is $0.05 and the reference price is the National
Best Offer-$0.90. The Acceptable Trade Range threshold is then $0.90 +
$0.05 = $0.95 which is the Threshold Price. The order is allowed to
execute up to and including $0.95.
10 contracts will be executed at $0.90 against GEMX
10 contracts will be executed at $0.90 against ISE
10 contracts will be executed at $0.92 against AMEX
10 contracts will be executed at $0.94 against PHLX
10 contracts will be executed at $0.95 against GEMX
Then, after executing at multiple price levels, the order
is posted at the Threshold Price of $0.95 for a brief period not to
exceed one second (``Posting Period'') to determine whether additional
liquidity will become available.
During the Posting Period, a new Acceptable Trade Range
Threshold Price of $1.00 is determined (new reference price of $0.95 +
$0.05 = $1.00).
If, during the Posting Period (brief pause not to exceed 1
second), no liquidity becomes available within the order's posted price
of $0.95, then at the conclusion of the Posting Period, the System will
execute 10 contracts at $0.97, and 10 contracts at $1.00.\46\
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\46\ The brief pause described above will not disadvantage
customers seeking the best price in any market. For example, if in
the example above an NYSE ARCA quote of $0.75 x $0.96 with size of
10 x 10 is received, a routable order would first route to NYSE ARCA
at $0.96, then execute against GEMX at $0.97.
---------------------------------------------------------------------------
Similarly, if a new order is received when a previous order has
reached the Acceptable Trade Range threshold, the Threshold Price will
be used as the reference price for the new Acceptable Trade Range
threshold. Both orders would then be allowed to execute up (down) to
the new Threshold Price.
Example 2
Away Exchange Quotes:
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Offer price Offer size
----------------------------------------------------------------------------------------------------------------
ISE................................. 10 $0.75 $0.90 10
AMEX................................ 10 0.75 0.92 10
PHLX................................ 10 0.75 0.94 10
----------------------------------------------------------------------------------------------------------------
GEMX Price Levels:
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Offer price Offer size
----------------------------------------------------------------------------------------------------------------
GEMX................................ 10 $0.75 $0.90 10
GEMX................................ ................. ................. 0.95 10
GEMX................................ ................. ................. 1.05 20
----------------------------------------------------------------------------------------------------------------
[[Page 72564]]
GEMX receives a routable order to buy 60 contracts at $1.10. The
Acceptable Trade Range is $0.05 and the reference price is the National
Best Offer-$0.90. The Acceptable Trade Range Threshold Price is then
$0.90 + $0.05 = $0.95 which is the Threshold Price. The order is
allowed to execute up to and including $0.95.
10 contracts will be executed at $0.90 against GEMX
10 contracts will be executed at $0.90 against ISE
10 contracts will be executed at $0.92 against AMEX
10 contracts will be executed at $0.94 against PHLX
10 contracts will be executed at $0.95 against GEMX
Then, after executing at multiple price levels, the order
is posted at $0.95 for a Posting Period (brief period not to exceed one
second) to determine whether additional liquidity will become
available.
No new liquidity was received during the Posting Period. A
new Acceptable Trade Range Threshold Price of $1.00 is determined (new
reference price of $0.95 + $0.05 = $1.00)
If, during the previous Posting Period, a second order is
received to buy 10 contracts at $1.25, the two orders would then post
at the new Acceptable Trade Range Threshold price of $1.00 for another
Posting Period (brief period not to exceed one second) to determine
whether additional liquidity will become available.
A new Acceptable Trade Range Threshold Price of $1.05 will
be calculated.
If no additional liquidity becomes available within the
posted price of the orders ($1.00) during the Posting Period, the
orders would execute 10 contracts each against the order on the GEMX
book at $1.05 at the conclusion of the Posting Period.
Example 3
Assume the following:
Acceptable Trade Range is configured to $0.07
ABBO 1.91 (10) x 2.01 (10)
Buy order 1 @ 2.00
DNR Order to Buy 1 @ 2.01--slides back to display at 2.00
MM1 Quote 1.99 (10) x 2.12 (10)
Order1 Buy 10 @ 1.94
Order2 Buy 10 @ 1.93
Order3 Buy 5 @ 1.92
Order4 Buy 5 @ 1.91
Order to Sell 100 @ 1.90 comes in
First trades 1 @ 2.01 with slid DNR order
Then trades 1 @ 2.00 with other buy order
Then trades 10 @ 1.99 with MM quote (then quote purges since
bid side volume has been exhausted)
Then trades with Order1 (10 @ 1.94)
Then posts 78 @ 1.94, the ATR Threshold (calculated by taking
the initial reference price of 2.01 (i.e., the better of the internal
best bid and NBB) minus the 0.07 Acceptable Trade Range)
After the ATR Posting Period completes:
Trades 10 @ 1.93 with Order2
Trades 5 @ 1.92 with Order3
Trades 5 @ 1.91 with Order4
Posts to book at 1.91 non-displayed and re-prices to display 1
MPV (penny) from ABBO at 1.92, exposes 58 @ 1.91
After route timer passes:
Routes 10 @ 1.91 to ABBO
Posts to book at its limit with remaining 48 @ 1.90 \47\
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\47\ See supra note 40 regarding route timer.
Finally, the Exchange proposes to add clarifying language in the
first sentence of subparagraph (i) of Options 3, Section 15(a)(2)(A)
that the System will calculate the ATR after the Opening Process.\48\
This is a clarifying change that does not amend current functionality.
ATR does not apply until after the Opening Process because the order
book (and the ATR reference price) is established once options series
are open for trading.
---------------------------------------------------------------------------
\48\ While BX's ATR does not have this clarification today, BX's
ATR likewise applies after the Opening Process.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\49\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\50\ 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.
---------------------------------------------------------------------------
\49\ 15 U.S.C. 78f(b).
\50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Generally, the Exchange's proposal is intended to add or align
certain System functionality with functionality currently offered on BX
in order to provide a more consistent technology offering across
affiliated Nasdaq options exchanges. A more harmonized technology
offering, in turn, will simplify technology implementation, changes,
and maintenance by market participants of the Exchange that are also
participants on Nasdaq affiliated options exchanges. The Exchange's
proposal also seeks to provide greater harmonization between the rules
of the Exchange and BX, which would result in greater uniformity, and
less burdensome and more efficient regulatory compliance by market
participants. As such, the proposal 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
believes that more consistent rules will increase the understanding of
the Exchange's operations for market participants that are also
participants on the Nasdaq affiliated options exchanges, thereby
contributing to the protection of investors and the public interest.
The Exchange believes that such changes would remove impediments to and
perfect the mechanism of a free and open market and a national market
system because the proposed changes would promote transparency in
Exchange rules and reducing potential confusion, thereby ensuring that
Members, regulators, and the public can more easily navigate the
Exchange's rulebook and better understand how options trading is
conducted on the Exchange.
Re-Pricing
The Exchange believes that re-pricing quotes and orders that would
otherwise lock or cross an away market, as proposed in Options 3,
Sections 4(b)(6), 5(c) and (d), is consistent with the Act. Today, BX
re-prices such quotes and orders by re-pricing them to the current
national best price as non-displayed, and displaying them one MPV away
from the best bid or offer.\51\ This behavior is consistent with the
protection of investors and the general public because it affords
Members the ability to obtain the best price offered among the various
options markets while not locking or crossing an away market. With the
proposed changes, the Exchange will continue to not trade through an
away market. As a result, the Exchange's proposal would be consistent
with the Options Order Protection and Locked/Crossed Market Plan. Any
quote or non-routable order that locks or crosses an away market on the
Exchange would be re-priced as a result of this amendment. The proposed
changes to Options 3, Section 4(b)(6) will clearly articulate the
proposed re-pricing mechanism, and will provide Members with additional
information as to how quotes will be handled by the System when those
quotes would lock
[[Page 72565]]
or cross an away market. As discussed above, the difference between the
current and proposed quote re-pricing is that the Exchange will re-
price to the current national best price under the proposal as non-
displayed (instead of re-pricing and displaying one MPV inferior as it
does today). The Exchange will continue to display one MPV inferior to
the national best price under this proposal. As such, the proposed
quote re-pricing mechanism will continue to prevent the Exchange from
disseminating a price that locks or crosses another market. This
process is identical to how BX quote re-pricing functions today, as
described in BX Options 3, Section 4(b)(6).
---------------------------------------------------------------------------
\51\ See BX Options 3, Sections 4(b)(6), 5(c) and (d).
---------------------------------------------------------------------------
In connection with the introduction of the BX-like quote re-pricing
mechanism, the Exchange also proposes to add the definition of internal
BBO (similar to the proposed definition of internal BBO for order re-
pricing) in Options 3, Section 4(b)(7). As discussed above, the
proposed addition is intended to make clear that quotes may now be
executed using either the BBO or internal BBO if the Exchange best bid
or offer has been re-priced pursuant to the order re-pricing mechanism
proposed in Options 3, Section 5(d) and the quote re-pricing mechanism
proposed in Options 3, Section 4(b)(6). As noted above, BX handles
quotes in the same manner as proposed for GEMX Options 3, Section
4(b)(7).\52\
---------------------------------------------------------------------------
\52\ See supra note 13.
---------------------------------------------------------------------------
The proposed changes to Options 3, Section 5(c) will allow the
Exchange to define an internal BBO in its Rules when describing re-
priced orders that remain on the order book and are available at non-
displayed prices while resting on the order book. The proposed changes
to Options 3, Section 5(d) will clearly articulate the proposed re-
pricing mechanism itself, and provide Members with additional
information as to how orders are handled by the System when those
orders would lock or cross an away market. The Exchange notes that
allocation priority for re-priced orders would be consistent with the
current rules in Options 3, Section 10(c).
The Exchange also believes that the related proposals to add
references to internal BBO in Options 2, Section 10 and Options 3,
Section 10 are consistent with the Act. Overall, the proposed addition
of internal BBO will ensure that the rules conform to the concept of
re-pricing at an internal BBO as proposed in Options 5(c) and (d) and
will make clear that a re-priced order is accessible on the Exchange's
order book at the non-displayed price. Specifically, the Exchange
believes that adding references to the internal BBO in the allocation
rules for Preferred Market Makers and Primary Market Makers will make
clear that in connection with the proposed re-pricing mechanism, such
market participants must now be quoting at the better of the NBBO or
the internal BBO in order to be entitled to the applicable allocations
set forth in their respective rules. The introduction of the internal
BBO would have no impact on a Primary Market Maker's quoting
obligations as Primary Market Makers do not need to be at the NBBO
today, or as proposed, the better of NBBO or the internal BBO in order
to meet their quoting obligations.\53\ The Exchange also notes that the
proposed quote re-pricing mechanism described above will allow the
Primary Market Maker or Preferred Market Maker to re-price to the
internal BBO and receive their enhanced allocation when the internal
BBO is better than the NBBO.\54\ In addition, by not providing the
enhanced allocation for Market Makers that are not at the internal BBO
when it is better than the NBBO, the Exchange is protecting investors
with more aggressively priced interest by allocating to them first. The
Exchange does not believe that Market Makers should be entitled to
enhanced allocations in the foregoing instance given that there are
better available internal BBO prices on the market. Like BX, the
Exchange believes that the overall benefit to the marketplace is that
market participants will be able to obtain the best price offered among
the various options markets while avoiding a trade-through or locked or
cross market violation.
---------------------------------------------------------------------------
\53\ Quoting obligations include, for example, a Market Maker's
continuous quoting obligations. See Options 2, Section 5(e).
\54\ Market Makers are incentivized to quote at the internal BBO
as there is sufficient market information provided to quote
accordingly. BX and Phlx also allow their Lead Market Makers and
Directed Market Makers to re-price to the internal BBO and receive
their enhanced allocation when the internal BBO is better than the
NBBO. See BX and Phlx Options 3, Section 10. The Nasdaq Options
Market LLC (``NOM'') also re-prices orders and quotes but does not
have the concept of a Lead Market Makers or Directed Market Markers.
---------------------------------------------------------------------------
Opening Process
The Exchange believes that the proposed changes to the Opening
Process in Options 3, Section 8 are consistent with the Act.
Specifically, the Exchange believes that the proposed changes to
Options 3, Section 8(j)(6)(i) will bring greater transparency as to how
non-routable orders will be handled during the Opening Process. As
discussed above, the Exchange proposes to no longer cancel any
unexecuted portions of a DNR Order that locks or crosses an away
market, and instead will re-price the DNR Order to the current away
best offer (for bids) or the current away best bid (for offers) as non-
displayed, and display a price that is one minimum trading increment
inferior to the ABBO, and disseminate such DNR Order as part of the new
BBO. The proposed changes reflect the new BX-like re-pricing mechanism
that the Exchange is proposing to adopt as part of the technology
migration. The Exchange believes that the proposed re-pricing of DNR
Orders during the Opening Process is consistent with the protection of
investors and the general public because it affords Members the ability
to obtain the best price offered among the various options markets
while not locking or crossing an away market. As discussed above,
proposed Options 3, Section 8(j)(6)(i) will also continue to reflect
that the Exchange will cancel any interest that is priced through the
opening price and keep all other interest in the System for trading
after opening. The Exchange notes with the proposed changes, Options 3,
Section 8(j)(6)(i) will be substantially similar to BX Options 3,
Section 8(k)(4) and (5), thereby promoting greater consistency among
the rules of Nasdaq affiliated options exchanges.\55\ Finally, the
proposed changes to the Opening Process attempts to maximize the number
of contracts executed on the Exchange during such Opening Process,
while taking into consideration away market interests and ensuring that
better away prices are not traded through.
---------------------------------------------------------------------------
\55\ See supra note 22.
---------------------------------------------------------------------------
Auction Mechanisms
Facilitation and Solicited Order Mechanisms
The Exchange believes that the proposed addition of ``or the
internal BBO'' in the entry check provisions for the Facilitation and
Solicited Order Mechanisms at Options 3, Sections 11(b)(1) and (d)(1),
respectively, is consistent with the Act. The proposed changes will
account for BX-like re-pricing, which would result in an Exchange order
being available at a price that is better than the NBBO but is non-
displayed. The proposed changes to add ``or the internal BBO'' will
make clear that the System will now check orders entered into those
auction mechanisms against a non-displayed order book priced better
than the NBBO as well the NBBO.\56\ As a result, the
[[Page 72566]]
proposed changes would ensure that Members submitting an order through
the Facilitation Mechanism or Solicited Order Mechanism submit such
orders at the best price, which (i) for the Facilitation Mechanism,
must be at a price that is equal to or better than the displayed NBBO
and the non-displayed BBO (i.e., the internal BBO) on the same side of
the market as the agency order, and (ii) for the Solicited Order
Mechanism, must be at a price that is equal to or better than the NBBO
and the internal BBO on both sides of the market.\57\
---------------------------------------------------------------------------
\56\ Today, BX and Phlx similarly consider the internal BBO when
initiating their price improvement auctions, BX PRISM and Phlx PIXL.
The Exchange would continue to abide by the rules approved by the
Commission and not commence an auction in the Facilitation or
Solicited Order Mechanisms or in PIM if better priced interest was
resting on the book.
\57\ As proposed, for the Facilitation Mechanism, if there is a
Priority Customer order on the BBO or internal BBO on the same side
of the market as the agency order, the order must be entered at an
improved price over the Priority Customer order. For the Solicited
Order Mechanism, if there is a Priority Customer order on the BBO or
internal BBO on either side of the market, the order must be entered
at an improved price over the Priority Customer order.
---------------------------------------------------------------------------
The Exchange also believes that the clarifying changes in Options
3, Section 11(b)(1) relating to Facilitation order entry checks are
consistent with the Act as the proposed changes seek to align the
language in the Priority Customer order clause relating to the same
side of the market as the agency order more closely with similar
language in the preceding clause and clarify current System behavior.
Similarly, the Exchange believes that the clarifying changes in Options
3, Section 11(d)(1) relating to Solicited Order Mechanism order entry
checks are consistent with the Act as the proposed changes seek to
align the language in the Priority Customer order clause with the
preceding clause and clarify current System behavior. The Exchange
believes that the proposed changes will promote transparency in the
Rulebook, and reduce potential confusion by Members and investors.
Price Improvement Mechanism
Similarly, the Exchange's proposal to amend Options 3, Section
13(b)(1) and (b)(2) to account for re-pricing, which would result in a
GEMX order being available at a price which is better than the NBBO but
is non-displayed, is consistent with the Act. The addition of ``or the
internal BBO'' will make clear that a non-displayed order book priced
better than the NBBO would cause a PIM auction to initiate. Stating
``$0.01'' in lieu of ``one minimum price improvement increment'' is
consistent with the Act as this non-substantive amendment more simply
states the current minimum increment.\58\ Similar to the changes
described above for the Facilitation and Solicited Order Mechanisms,
the proposed changes for PIM would ensure that Members submitting an
order through PIM submit such orders at the best price, which must be
(i) better than the displayed NBBO and non-displayed BBO (i.e., the
internal BBO) on the Exchange's order book when the PIM is less than 50
contracts and the difference between the NBBO or the difference between
the internal BBO is $0.01 wide or (ii) equal to or better than the
displayed NBBO and internal BBO when the PIM is 50 contracts or more,
or if the difference between the NBBO or the difference between the
internal BBO is greater than $0.01.\59\
---------------------------------------------------------------------------
\58\ See supra note 55.
\59\ Provided they are better than any limit order or quote on
the same side of the Nasdaq GEMX order book as the PIM agency order
for both scenarios.
---------------------------------------------------------------------------
Acceptable Trade Range
The Exchange believes that the proposed changes to its ATR risk
protection in Options 3, Section 15(a)(2)(A) are consistent with the
Act. The Exchange is proposing to introduce an iterative process for
ATR wherein an order/quote that reaches the outer limit of the ATR
(i.e., the Threshold Price) without being fully executed will be paused
for a brief Posting Period to allow more liquidity to be collected and
determine whether or not more liquidity will become available (on the
Exchange or an away market if the order is designated as routable)
within the posted price of the order/quote before moving on to a new
Threshold Price. The Threshold Price, at which the order is posted,
would then become the new reference price,\60\ and a new ATR would be
calculated. The Exchange notes that the proposed iterative ATR process
is identical to current BX ATR functionality in BX Options 3, Section
15(b)(1), and therefore is not new or novel.
---------------------------------------------------------------------------
\60\ As described above, if a new NBB is received that is
greater than a buy order posted at the Threshold Price, or a new NBO
is received that is lower than a sell order posted at the Threshold
Price, the new NBB (for buy orders) or NBO (for sell orders) would
become the new reference price.
---------------------------------------------------------------------------
The Exchange believes that with the proposed changes, ATR will
continue to reduce the negative impacts of sudden, unanticipated
volatility in individual Exchange options, serve to preserve an orderly
market in a transparent manner, increase overall market confidence, and
promote fair and orderly markets and the protection of investors. The
proposed ATR iterative process should also continue to result in
greater continuity in prices as it is designed to prevent immediate or
rapid executions at far away prices, thereby protecting investors and
the public interest. As discussed above, the Exchange is bounding how
far interest can trade into the depth of the Exchange's book based on
the best prices that are available to the market. The Exchange
therefore believes that its proposal protects investors and the public
interest by basing the ATR reference price on the best available
prices.
The Exchange also believes that the addition of configurable
instances of iterations when the ATR would apply will provide Members
with more certainty as to the application of the rule.\61\
---------------------------------------------------------------------------
\61\ See supra notes 33 and 35.
---------------------------------------------------------------------------
The Exchange believes that disseminating a ``non-firm'' indicator
message during the Posting Period, as discussed above, is consistent
with its obligations under the SEC Quote Rule.\62\ As discussed above,
this would allow the order or quote setting the ATR Threshold Price to
retain priority in the Exchange book and also prevent any later-entered
order from accessing liquidity ahead of it. If the Exchange were to
display trading interest available on the opposite side of the market,
that trading interest would be automatically accessible to later-
entered orders during the period when the order triggering the ATR is
paused. The ``non-firm'' indicator is meant to relieve eligible
exchanges from having to apply locked and crossed rules to the
quotation of the market.\63\ Since the opposite side interest is likely
to be traded through at the completion of the Posting Period, the
Exchange would display that interest as ``non-firm'' to alleviate away
exchanges from having to apply lock/crossed violation protections (when
routing) against this price.\64\
---------------------------------------------------------------------------
\62\ See 17 CFR 242.602(a)(3).
\63\ To the away venue, this quotation is simply the top of book
quotation on GEMX (which could be made of orders and/or quotes).
\64\ In addition, Options 5, Section 1(k) defines ``Non-Firm''
as, with respect to Quotations, that Members of an Eligible Exchange
are relieved of their obligation to be firm for their Quotations
pursuant to Rule 602 under the Exchange Act.
---------------------------------------------------------------------------
The fact that the Exchange is experiencing volatility that is
strong enough to trigger the ATR mechanism qualifies as an unusual
market condition. The Exchange expects such situations to be rare, and
it has set the current parameters of the mechanism at levels that
ensures that it is triggered quite infrequently. In addition, the
proposed ATR mechanism will cause the market to pause for no more than
one second to try to dampen volatility,
[[Page 72567]]
the same pause that currently exists on BX. Importantly, the brief
pause occurs only after the Exchange has already executed
transactions--potentially at multiple price levels--rather than pausing
before executing any transactions in the hopes of attracting initial
liquidity.
Finally, the Exchange believes that the proposed clarifying
language to add that the System will calculate ATR after the Opening
Process will better articulate current System behavior. ATR does not
apply until after the opening because the order book (and the ATR
reference price) is established once options series are open for
trading.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange operates in a
competitive market and regularly competes with other options exchanges
for order flow. As discussed above, the Exchange is re-platforming its
System in connection with the technology migration to enhanced Nasdaq
functionality, which the Exchange believes would promote competition
among options exchanges by potentially attracting additional order flow
to the Exchange with the enhanced trading platform. The basis for the
majority of the proposed rule changes are the rules of the Nasdaq
affiliated options exchanges, which have been previously filed with the
Commission as consistent with the Act.
The quote re-pricing proposal in Options 3, Section 4(b)(6) and (7)
will be functionally identical to BX quote re-pricing in Options 3,
Section 4(b)(6).\65\ The order re-pricing proposal in Options 3,
Section 5(c) and (d) will be functionally identical to BX order re-
pricing in BX Options 3, Section 5(c) and (d).\66\ Also, the proposed
ATR enhancement in Options 3, Section 15(a)(2)(A) will be functionally
identical to BX ATR in BX Options 3, Section 15(b)(1).
---------------------------------------------------------------------------
\65\ See supra note 13.
\66\ The re-pricing rule changes impact the following rule
provisions: Options 2, Section 10; Options 3, Section 8(j)(6)(i);
Options 3, Section 10(c)(1)(B), (C) and (D)(i)-(iii); Options 3,
Section 11(b)(1) and (d)(1); and Options 3, Section 13(b)(1) and
(2).
---------------------------------------------------------------------------
The Exchange reiterates that the proposed rule change is being
proposed in the context of the technology migration to enhanced Nasdaq
functionality. As such, the Exchange believes that this proposed rule
change is necessary to permit fair competition among options exchanges
because the proposed rule changes will permit GEMX to re-price orders
and quotes similar to BX. Additionally, with this proposal, GEMX would
be able to offer its Members the same ATR functionality currently
available to BX Participants. The Exchange further believes the
proposed rule change will benefit Members by providing a more
consistent technology offering, as well as consistent rules, for market
participants on the Nasdaq affiliated options exchanges.
The Exchange does not believe that the proposed rule change will
impose any burden on intra-market competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as the majority
of the proposed changes will apply to all Members. ATR allows Members
to potentially receive better prices for their aggressive orders or
quotes as they work through the ATR Threshold Prices and look to
accumulate additional interest at each posted price during the Posting
Periods. Re-pricing affords Members the ability to obtain the best
price offered among the various options markets while continuing to be
consistent with the Options Order Protection and Locked/Crossed Market
Plan, as discussed above. The ability to leverage these mechanisms to
achieve better prices for market participants will drive competition
from Members to provide tighter markets and more liquidity in order to
participate in the trading opportunities while still being bound by
reasonable risk protections.
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 \67\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\68\
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\67\ 15 U.S.C. 78s(b)(3)(A)(iii).
\68\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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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-2022-10 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-GEMX-2022-10. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for
[[Page 72568]]
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-2022-10 and should be
submitted on or before December 16, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
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\69\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-25673 Filed 11-23-22; 8:45 am]
BILLING CODE 8011-01-P
