Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Adopt Rules To Govern the Trading of Options on the Exchange for a New Facility Called IEX Options, 12890-12914 [2025-04515]

Download as PDF 12890 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices In sum, the Exchange believes that this proposal is consistent with the requirements of Section 6(b)(5) of the Act, that on the whole the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by investor protection issues that would be resolved by approving this proposal. The Exchange believes that the proposal is, in particular, designed to protect investors and the public interest. The investor protection issues for U.S. investors has grown significantly over the last several years, through premium/ discount volatility and management fees for OTC XRP Funds. As discussed throughout, this growth investor protection concerns need to be reevaluated and rebalanced with the prevention of fraudulent and manipulative acts and practices concerns that previous disapproval orders have relied upon. For the above reasons, the Exchange believes that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change, rather will facilitate the listing and trading of an additional exchange-traded product that will enhance competition among both market participants and listing venues, to the benefit of investors and the marketplace. lotter on DSK11XQN23PROD with NOTICES1 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. by order approve or disapprove such proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– CboeBZX–2025–040 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–CboeBZX–2025–040. 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 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–CboeBZX–2025–040 and should be submitted on or before April 9, 2025. Frm 00195 Fmt 4703 [FR Doc. 2025–04509 Filed 3–18–25; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Electronic Comments PO 00000 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 Vanessa A. Countryman, Secretary. Sfmt 4703 [Release No. 34–102663; File No. SR–IEX– 2025–02] Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Adopt Rules To Govern the Trading of Options on the Exchange for a New Facility Called IEX Options March 13, 2025. On January 10, 2025, the Investors Exchange LLC (‘‘IEX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt rules to govern the trading of options on IEX Options LLC, a facility of the Exchange that will be established in a separate rule filing. The proposed rule change was published for comment in the Federal Register on January 21, 2025.3 On March 6, 2025, the Commission designated a longer period within which to take action on the proposed rule change.4 On March 12, 2025, the Exchange filed Amendment No. 1 to the proposed rule change.5 The Commission has received comments on the proposed rule change.6 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended by Amendment No. 1, from interested persons. Items I and II below have been prepared by the Exchange. 34 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 102190 (Jan. 14, 2025), 90 FR 7205. 4 See Securities Exchange Act Release No. 102536, 90 FR 11866 (Mar. 12, 2025). The Commission designated April 21, 2025 as the date by which it should either approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change. See id. 5 Amendment No. 1 is publicly available on the Commission’s website at: sriex202502–580115– 1667463.pdf. See infra, notes 9—12 and accompanying text for a further explanation of the proposed revisions to the proposed rule change set forth in Amendment No. 1. 6 Comments on the proposed rule change are available at https://www.sec.gov/comments/sr-iex2025-02/sriex202502.htm. 1 15 E:\FR\FM\19MRN1.SGM 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change On January 10, 2025, IEX, pursuant to the provisions of Section 19(b)(1) under the Act and Rule 19b–4 thereunder, filed with the Commission proposed rule change SR–IEX–2025–02 (the ‘‘Initial Proposal’’).7 As described in the Initial Proposal, IEX is proposing to adopt rules to govern the trading of options on IEX Options LLC, a facility of the Exchange that will be established in a separate rule filing (referred to herein as ‘‘IEX Options’’). The Exchange is filing this proposal (‘‘Amendment No. 1’’) to amend the Initial Proposal as described herein. Amendment No. 1 replaces and supersedes the Initial Proposal in its entirety. As proposed, the Exchange will operate IEX Options as a fully automated trading system built on the core functionality of the Exchange’s approved equities platform, and in a manner similar to that of other options exchanges. In addition, IEX Options will utilize a de minimis delay on incoming order and quote messages designed to enable IEX to update its view of the market prior to processing orders and quotes, and an optional Market Maker quote parameter designed to protect Market Makers from excessive risk due to execution of stale quotes, in addition to other risk protections substantially similar to those offered by other options exchanges. The text of the proposed rule change is available at the Exchange’s website at https://www.iexexchange.io/resources/ regulation/rule-filings, at the principal office of the Exchange, and at the Commission’s Public Reference Room. lotter on DSK11XQN23PROD with NOTICES1 II. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. 7 See Securities Exchange Act Release No. 102190 (January 14, 2025), 90 FR 7205 (January 21, 2025) (‘‘Initial Filing’’), available at https:// www.iexexchange.io/resources/regulation/rulefilings. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Overview The Commission published the proposed rule change for comment in the Federal Register on January 21, 2025,8 and on March 6, 2025, extended the review period to April 21, 2025.9 The Exchange is filing this Amendment No. 1 to the Initial Proposal in order to provide increased clarity and modify certain aspects of the Initial Filing. First, IEX proposes that the duration of the latency mechanism (i.e., the de minimis delay on incoming order and quote messages) set forth in proposed Rule 22.100(n) would be a fixed duration of 350 microseconds rather than being configurable by the Exchange. Second, as described herein, IEX proposes changes to more narrowly tailor the application of the proposed Options Risk Parameter (‘‘ORP’’),10 the optional Market Maker quote parameter designed to protect Market Makers from excessive risk due to execution of stale quotes. Specifically, IEX proposes to amend language pertaining to the ORP to refine and clarify its function, as follows: (i) revise proposed Rule 23.150(h)(1) to provide that the Exchange will determine on a class-byclass basis whether to apply the ORP, which determination will be communicated by Trading Alert; (ii) revise proposed Rule 23.150(h)(1)(C) to specify that if a quote instability determination is generated for an options series being quoted by a Market Maker and the quote is above (below) the price level of the quote instability determination, the quote will be cancelled or repriced to the price level of the quote instability determination, as selected by the Market Maker; (iii) revise the Indicator formula specified in Supplementary Material .04 to proposed Rule 23.150 (‘‘quote instability calculation’’) to provide that the formula will assess price changes in the underlying security in the context of the value of the options series (rather than the value of the underlying) when determining whether to issue a quote instability determination; and (iv) provide that the Exchange would introduce a new variable to the quote instability determination formula, a 8 Id. 9 See Securities Exchange Act Release No. 102536 (March 6, 2025), 90 FR 11866 (March 12, 2025). 10 See proposed Rule 23.150(h)(1). PO 00000 Frm 00196 Fmt 4703 Sfmt 4703 12891 delta 11 bound band, that would prevent quote instability determinations for those options series with deltas outside of the band, in order to more narrowly tailor application of the ORP to those options series that present the greatest risk of adverse selection to Market Makers. In addition, as described herein, this Amendment 1 clarifies that the quote instability threshold range of 0–1, set forth in subsection (2)(e) of the quote instability calculation, reflects a scale from 0% to 100%, referencing the extent of the anticipated change in the quoted option price compared to the thencurrent price of the option. The quote instability threshold thus operates as a measure of whether the value of the quote instability determination price change is sufficiently meaningful enough to warrant generation of a quote instability determination. Additionally, the Exchange proposes several minor non-substantive stylistic edits and corrections to typographical errors in the Exhibit 5 to the Initial Proposal.12 The Exchange proposes to adopt a series of rules in connection with IEX Options, which will be a facility of the Exchange.13 As proposed, the Exchange will operate IEX Options as a fully automated trading system built on the core functionality of the Exchange’s approved equities platform, and in a manner similar to that of other options exchanges.14 As proposed, IEX Options will operate an electronic trading system to 11 Delta is a measure of how sensitive an options series price is to changes in the price of the underlying security. 12 See proposed Rule 23.120, Supplementary Material .01 (text corrected to be formatted in italics), proposed Rule 23.130(g)(2)(B) (was denoted as (A) incorrectly), proposed Rule 23.150(h) (intro language misspelled ‘‘cancellation’’), proposed Rule 23.150(h)(1)(C) (misspelled ‘‘cancelled’’). In addition, in proposed Supplementary Material .04 to Rule 23.150, IEX replaced brackets around several formula inputs with parentheses to avoid confusion with the use of brackets to indicate deleted text. Further, IEX confirmed the capitalization of the word ‘‘proposed’’ in several places. 13 IEX will file a separate proposed rule change with the Commission pursuant to Section 19 of the Act to provide that IEX Options will be operated by IEX Options LLC, a Delaware limited liability company wholly owned by the Exchange, as a facility of the Exchange as that term is defined in Section 3(a)(2) of the Act. 14 The IEX Options proposed rules are largely based on the rules of other options exchanges, as described herein. When a particular proposed rule is described as ‘‘substantively identical’’ to a rule(s) of another exchanges that means that the substance of the proposed IEX Options rule is identical to the referenced rule of the other exchange, with differences only to reflect terminology and numbering. When a particular proposed rule is described as ‘‘substantially similar’’ to a rule(s) of another exchange this rule filing describes the relevant differences. E:\FR\FM\19MRN1.SGM 19MRN1 12892 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices list and trade options issued by the Options Clearing Corporation (‘‘Clearing Corporation’’ or ‘‘OCC’’). Specifically, IEX proposes to operate a fully automated, pro-rata priority options market in a manner similar to that of other options exchanges. In addition, IEX Options will utilize a de minimis delay on incoming order and quote messages designed to enable IEX to update its view of the market prior to processing orders and quotes, and an optional Market Maker quote parameter designed to protect Market Makers from excessive risk due to execution of stale quotes, in addition to other risk protections substantially similar to those offered by other options exchanges. The Exchange proposes to adopt rules applicable to IEX Options that are substantially similar to the approved rules of the MEMX, C1, MIAX, and NYSE Amex and Arca options exchanges, with the material proposed differences described herein.15 As provided in proposed Rule 17.110 (Applicability), existing Exchange Rules 16 applicable to the IEX equities market contained in Chapters 1 through 16 of the Exchange Rules will apply to Options Members unless a specific Exchange Rule applicable to the IEX Options market (in proposed Chapters 17 through 29 of the Exchange Rules) governs or unless the context otherwise requires. The IEX Options Trading System 17 will provide for the electronic display and execution of orders on a pro-rata basis. All Exchange Members will be eligible to participate in IEX Options by qualifying as Options Members 18 and obtaining one or more trading permits for their activity on IEX Options, in accordance with applicable IEX Options rules. The IEX Options Trading System will provide an optional routing service for orders when trading interest is not present on IEX Options and will comply with all applicable securities laws and regulations and the obligations of the Options Order Protection and Locked/ Crossed Market Plan. lotter on DSK11XQN23PROD with NOTICES1 IEX Options Members Pursuant to the proposed rules in Chapter 18 (Participation on IEX Options), the Exchange will authorize 15 See rulebooks of MEMX LLC (‘‘MEMX’’), Cboe Exchange, Inc. (‘‘C1’’), Miami International Securities Exchange, LLC (‘‘MIAX’’), NYSE Arca, Inc. (‘‘NYSE Arca Options’’), and NYSE American LLC (‘‘NYSE Amex Options’’). However, IEX is not proposing to trade index options at this time and therefore is not proposing rules for the listing and trading of index options. 16 See IEX Rule 1.160(jj). 17 See proposed Rule 22.100(a). 18 See proposed Rule 17.100. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 any Exchange Member that meets certain enumerated qualification requirements (any such Member, an ‘‘Options Member’’) and any Options Member’s Sponsored Participants to obtain access to, and transact business on, IEX Options.19 There will be three types of Options Members—Options Order Entry Firms (‘‘OEFs’’), Options Market Makers, and Options Clearing Members. Options Members may act in one, two, or all such capacities. OEFs will be those Options Members representing Customer Orders as agent on IEX Options or trading as principal on IEX Options. Options Market Makers, in turn, will be eligible to participate as Registered Market Makers or Specialists, as set forth in Rule 23.100. Additionally, all Options Market Makers may participate as Directed Marker Makers.20 Clearing Members will be those Options Members that have been admitted to membership in the Clearing Corporation pursuant to the provisions of the Rules of the Clearing Corporation and are selfclearing or that clear IEX Options Transactions for other Options Members. IEX proposes to issue different types of Trading Permits to Options Members that allow the Trading Permit Holders to: (i) trade one or more products authorized for trading on the Exchange; (ii) act in one or more trading functions authorized by the Rules of IEX Options; and/or (iii) act as a Clearing Member.21 Trading Permits shall be for the types and terms as shall be determined by the Exchange from time to time, and subject to effectiveness of one or more rule filings pursuant to Section 19(b) of the Act. The proposed rule governing IEX’s Trading Permits, 18.140, is based on C1 Rule 3.1.22 The rules governing Registered Market Makers and Specialists are 19 See proposed Rules 18.100, 18.110, 18.120, and 18.130. 20 Directed Market Makers are subject to enhanced quoting obligations (as compared to Registered Market Markers) as set forth in proposed Rule 23.150(e)(3), which is substantively identical to NYSE Amex Options Rule 964.1NYP. 21 See proposed Rule 18.140. 22 On C1, part of the process of applying to be a Trading Permit Holder is for a broker-dealer to qualify as a participant or member of the exchange. IEX’s proposed rule therefore differs from C1 Rule 3.1 because it does not include the membership qualification-related provisions that are addressed elsewhere in IEX’s proposed Chapter 18. In particular, IEX is not proposing to incorporate C1 Rule 3.1(a)(3)’s language regarding jurisdiction over Trading Permit Holders because it is covered by Rule 2.120 (requiring all IEX Members to consent to the Exchange’s jurisdiction) and proposed Rule 18.140(e) (applying the Exchange’s jurisdictional authority to all Options Members). In addition, C1’s rule includes limitations on the number of trading permits the exchange may issue. IEX is not proposing such limitations. PO 00000 Frm 00197 Fmt 4703 Sfmt 4703 substantially based on MIAX and C1 rules.23 To become an Options Market Maker, an Options Member will be required to register by filing a written application and obtain any required trading permits.24 The Exchange will not place any limit on the number of entities that may become Options Market Makers, the number of appointments an Options Market Maker may have, or the number of Options Market Makers that may have appointments in a class unless the Exchange determines to impose any such limit based on system constraints, capacity restrictions, or other factors relevant to protecting the integrity of the Trading System. The Exchange will not impose any such limitations until it has submitted objective standards for imposing the limits to the Commission for its review and approval.25 As proposed, the Exchange shall appoint Registered Market Makers to one or more classes of options contracts traded on the Exchange. In making such appointments the Exchange shall consider the financial resources available to the Registered Market Maker, the Registered Market Maker’s experience and expertise in market making or options trading, the preferences of the Registered Market Maker to receive appointments in specific options classes, and the maintenance and enhancement of competition among Registered Market Makers in each class of options contracts to which they are appointed.26 While there may be several Registered Market Makers appointed to a particular class of options contracts, the Exchange may appoint only one Specialist to each options class traded on the Exchange.27 23 See MIAX Rules 600–609 (regarding market maker qualifications and obligations) and MIAX Rules 514(d), (e), and (g) (regarding market maker quoting and priority). The primary differences between these MIAX rules and IEX’s proposed Market Maker rules are: (1) MIAX has three tiers of market makers, while IEX proposes to have two tiers; (2) MIAX puts Market Makers at a priority level above other non-Priority Customer interest, while IEX will not (IEX’s proposed rules are substantively identical to the priority rules in C1 Rule 5.32 as it pertains to C1’s Preferred Market Makers); (3) IEX proposes to allocate participation entitlements for Specialists with a priority quote based on the amount of non-Priority customer interest (which is how C1 Rule 5.32(a)(2)(B) allocates priority overlays), while MIAX only looks at the amount of other market marker interest; and (4) MIAX offers a Market Turner priority overlay which IEX is not proposing to adopt. 24 See proposed Rules 23.100 and 18.140. 25 This provision is substantively identical to MEMX Rule 22.2(c) and MIAX Rule 600(d). 26 See proposed Rule 23.120(a)(1). 27 See proposed Rule 23.130(g)(1)(A), which is substantively identical to NYSE Amex Options Rule 923NY(b). The language providing that the Exchange ‘‘may’’ appoint only one Specialist to E:\FR\FM\19MRN1.SGM 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 To be appointed as a Specialist, an Options Member must first satisfy the criteria for appointment as a Registered Market Maker set forth in Rule 23.120(a)(1) and then must participate in the Specialist Qualification Process conducted by the Exchange and detailed in proposed Rule 23.130(b).28 Factors to be considered for selection as a Specialist include, but are not limited to, representations regarding capital operations, personnel or technical resources.29 After designating certain Market Makers as Specialists, the Exchange will conduct a process to determine which options classes to allocate to which Specialist, based upon which candidate appears best able to perform the functions of a Specialist in the designated options classes. Factors to be considered in the allocation of options classes to Specialists by the Exchange include, but are not limited to the following: experience with trading the options issue; adequacy of capital; willingness to promote the Exchange as a marketplace; operational capacity; support personnel; history of adherence to Exchange rules and securities laws; and evaluations made pursuant to Rule 23.130(f).30 The Exchange will also consider the number and quality of issues that have been allocated, reallocated or transferred to a Specialist and the Specialist’s willingness to promote the Exchange as a marketplace.31 The Exchange will also evaluate the performance of Specialists, and upon a finding that a Specialist failed to meet minimum performance standards, may take adverse action against the Specialist; Specialists shall have the right to appeal any adverse actions against them pursuant to IEX Rule Series 9.500, which governs adverse actions.32 Quotations may only be entered by a Market Maker and only in classes of each options class is based upon and substantively identical to NYSE Amex Options Rule 923NY(b). 28 IEX based the proposed Specialist rule (23.130) on NYSE Amex Options Rules 927NY, 927.1NY, and 927.2NY because these rules provide clear instructions to prospective Specialist candidates about the manner in which the Exchange selects and evaluates Specialists, and detailed rules about Specialist rights and obligations. 29 See proposed Rule 23.130(b)(1). This rule is substantively identical to NYSE Amex Options Rule 927NY, with the exception that IEX is not proposing to obligate Specialists to make FLEX quotes, because those are not offered by the Exchange. 30 See proposed Rule 23.130(g). This rule is substantively identical to NYSE Amex Options Rule 927.2NY 31 Id. 32 See proposed Rule 23.130(b)(2), and (f). These rules are substantively identical to NYSE Amex Options Rules 927NY(b)(2) and 927.1NY, respectively. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 options contracts to which the Market Maker is appointed.33 Market Makers may also submit orders in classes of options contracts to which the Market Maker is appointed, which shall constitute a quote, and thus would help to satisfy the Market Maker’s quoting obligation.34 In addition, an Options Market Maker with an OEF trading permit may submit orders in classes of options in which the Market Maker has no appointment, provided that the total number of such orders executed by the Market Maker do not exceed 25% of all contracts the Market Maker executes on the Exchange in any calendar quarter.35 Options Market Makers will be required to electronically engage in a course of dealing reasonably calculated to contribute to the maintenance of fair and orderly markets.36 IEX does not propose to incorporate MIAX’s requirement that Market Makers refrain from purchasing an option at a price more than $0.25 below parity,37 because IEX does not believe the restriction is necessary to the maintenance of fair and orderly markets requirement, and notes that other exchanges do not include this restriction.38 Market Makers will be required to maintain a two-sided market on a continuous basis 39 in at least 60% of the non-adjusted options series to which they are appointed as Registered Market Makers and at least 90% of the non-adjusted options series to which they are appointed as Specialists, provided the options classes have a time to expiration of less than nine months.40 And, as noted above, Directed Market Makers are subject to enhanced quoting obligations compared to Registered Market Makers.41 Market Makers and Specialists may use quotes and orders to meet the applicable quoting requirements. These obligations will not apply to an intra-day add-on series on the day during which such series was added for trading. Market Maker quotes must be firm quotes that comply with enumerated price and size rules.42 33 See proposed Rule 23.150(a). proposed Rule 17.100 (defining ‘‘Quote’’ to include orders entered by a Market Maker in the option series to which such Market Maker is registered). 35 See proposed Rule 23.150(g). 36 See proposed Rule 23.140(a). 37 See MIAX rule 603(a). 38 See, e.g., NYSE Arca Options Rule 6.37–O. 39 ‘‘Continuous quoting’’ is defined as 90% of the time. See proposed Rule 23.150(e). 40 See proposed Rule 23.150(e)(2) and (e)(1). Proposed Rule 23.150(e)(1) is based upon and substantively identical to NYSE Amex Options Rule 925.1NYP(b) and proposed Rule 23.150(e)(2) is based upon and substantively identical to NYSE Amex Options Rule 925.1NYP(c). 41 See supra note 20. 42 See proposed Rule 23.150(b) and (d). 34 See PO 00000 Frm 00198 Fmt 4703 Sfmt 4703 12893 These obligations also will not apply when an Options series is halted because the underlying security has entered a Limit or Straddle state.43 Registered Market Makers and Specialists also must maintain minimum net capital in accordance with Commission and Exchange rules.44 Substantial or continued failure by an Options Market Maker to meet any of its obligations and duties will subject the Options Market Maker to disciplinary action, suspension, or revocation of the Market Maker’s registration as such or its appointment in one or more of its appointed options classes.45 As on other exchanges, Options Market Makers receive certain benefits for carrying out their duties. For example, a lender may extend credit to a broker-dealer without regard to the restrictions in Regulation T of the Board of Governors of the Federal Reserve System if the credit is to be used to finance the broker-dealer’s activities as a specialist or market maker on a national securities exchange. Thus, an Options Market Maker has a corresponding obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis to justify this favorable treatment. Every Options Member shall at all times maintain membership in another registered options exchange that is not registered solely under Section 6(g) of the Exchange Act or in FINRA.46 OEFs and other Options Members that transact business with Public Customers must at all times be members of FINRA. Pursuant to proposed Rule 18.110(h), every Options Member will be required to have at least one registered Options Principal who satisfies the criteria of that rule, including the satisfaction of a proper qualification examination. An OEF may only transact business with Public Customers if such Options Member also is an Options Member of another registered national securities 43 See Supplementary Material .01 to proposed Rule 23.150(h), which is substantively identical to MIAX Rule 530(f)(1). 44 See proposed Rule 23.180 ($200,000 net capital requirement for Registered Market Makers), which is substantively identical to MEMX Rule 22.9 and proposed Rule 23.130(c)(1)(H) ($1,000,000 net capital requirement for Specialists), which is substantively identical to Amex Options Rule 927NY(c)(10). 45 See proposed Rule 23.120(f). NYSE Amex Options Rule 927.1NY(1)(B) specifies that NYSE Amex Options provides its specialists information related to their market share in allocated issues on a monthly basis as part of the evaluation process. IEX is not proposing to include this provision because it understands that Specialist firms are well-equipped to monitor their market share and performance on IEX and other markets. 46 See proposed Rule 18.110(g). E:\FR\FM\19MRN1.SGM 19MRN1 12894 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices exchange or association with which the Exchange has entered into an agreement under Rule 17d-2 under the Exchange Act 47 pursuant to which such other exchange or association shall be the designated options examining authority for the OEF.48 The proposed rules relating to qualification and participation on IEX Options as an Options Member (including as an OEF, Options Market Maker, or Clearing Member) are substantively identical to the relevant rules of MEMX Options.49 As provided in proposed Rule 17.110, existing Exchange Rules applicable to the IEX equities market contained in Chapters 1 through 16 of the Exchange Rules will apply to Options Members unless a specific Exchange Rule applicable to the IEX Options market (proposed Chapters 17 through 29 of the Exchange Rules) governs or unless the context otherwise requires. Options Members can therefore provide sponsored access to the IEX Options Exchange to a non-Member (i.e., a Sponsored Participant) pursuant to Rule 11.130 of the Exchange Rules. lotter on DSK11XQN23PROD with NOTICES1 Definitions The Exchange proposes to define a series of terms under proposed Rule 17.100 (Definitions), which are to be used in proposed Chapters 17 to 29 relating to the trading of options contracts on the Exchange. Unless otherwise indicated, all of the terms defined in proposed Rule 17.100 are either identical or substantially similar to definitions included in MEMX Rule 16.1. Any modifications to the MEMX definitions, or definitions based upon the rules of other exchanges are specifically indicated below. The definitions under proposed Rule 17.100 are as follows: • ABBO. The term ‘‘ABBO’’ or ‘‘Away Best Bid or Offer’’ means the best bid(s) or offer(s) disseminated by other Eligible Exchanges (as defined in Rule 28.100) and calculated by the Exchange based on market information the Exchange receives from OPRA.50 • Aggregate Exercise Price. The term ‘‘Aggregate Exercise Price’’ means the exercise price of an options contract multiplied by the number of units of the underlying security covered by the options contract. • American-Style Option. The term ‘‘American-Style’’ option means an 47 17 CFR 240.17d–2. Rule 27.100. 49 See MEMX Rulebook Chapters 17 and 22. 50 IEX notes that this definition differs from the MEMX definition of ABBO by spelling out the phrase ‘‘Away Best Bid or Offer’’ that ABBO refers to for added clarity. 48 See VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 options contract that, subject to the provisions of Rule 24.100 (relating to the cutoff time for exercise instructions) and to the Rules of the Clearing Corporation, may be exercised at any time from its commencement time until its expiration. • Associated Person and Person Associated with an Options Member. The terms ‘‘associated person’’ and ‘‘person associated with an Options Member’’ mean any partner, officer, director, or branch manager of an Options Member (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with an Options Member or any employee of an Options Member, except that any person associated with an Options Member whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of these Rules. • Bid. The term ‘‘bid’’ means a Limit order to buy one or more options contracts. • Board. The term ‘‘Board’’ means the Board of Directors of Investors’ Exchange LLC. • Call. The term ‘‘call’’ means an options contract under which the holder of the option has the right, in accordance with the terms of the option, to purchase from the Clearing Corporation the number of shares of the underlying security covered by the options contract. • Capacity. The term ‘‘capacity’’ means the capacity in which a User submits an order, which the User specifies by applying the corresponding code to the order. The capacity codes available on IEX Options will be listed in publicly available specifications and published in a Regulatory Circular. • Class of Options. The terms ‘‘class’’ or ‘‘class of options’’ mean all options contracts with the same unit of trading covering the same underlying security. • Clearing Corporation and OCC. The terms ‘‘Clearing Corporation’’ and ‘‘OCC’’ mean The Options Clearing Corporation. • Clearing Member. The term ‘‘Clearing Member’’ means an Options Member that is self-clearing or an Options Member that clears IEX Options Transactions for other Options Members. • Closing Purchase Transaction. The term ‘‘closing purchase transaction’’ means an IEX Options Transaction that reduces or eliminates a short position in an options contract. • Closing Writing Transaction. The term ‘‘closing writing transaction’’ means an IEX Options Transaction that PO 00000 Frm 00199 Fmt 4703 Sfmt 4703 reduces or eliminates a long position in an options contract. • Control. The term ‘‘control’’ means the power to exercise a controlling influence over the management or policies of a person, unless such power is solely the result of an official position with such person. Any person who owns beneficially, directly or indirectly, more than 20% of the voting power in the election of directors of a corporation, or more than 25% of the voting power in the election of directors of any other corporation which directly or through one or more affiliates owns beneficially more than 25% of the voting power in the election of directors of such corporation, shall be presumed to control such corporation.51 • Covered Short Position. The term ‘‘covered short position’’ means (i) an options position where the obligation of the writer of a call option is secured by a ‘‘specific deposit’’ or an ‘‘escrow deposit’’ meeting the conditions of Rules 610(f) or 610(g), respectively, of the Rules of the Clearing Corporation, or the writer holds in the same account as the short position, on a share-for-share basis, a long position either in the underlying security or in an options contract of the same class of options where the exercise price of the options contract in such long position is equal to or less than the exercise price of the options contract in such short position; and (ii) an options position where the writer of a put option holds in the same account as the short position, on a share-for-share basis, a long position in an options contract of the same class of options where the exercise price of the options contract in such long position is equal to or greater than the exercise price of the options contract in such short position. • Customer. The term ‘‘Customer’’ means a Public Customer or a brokerdealer. • Customer Order. The term ‘‘Customer order’’ means an agency order for the account of a Customer. • Directed Order. The term ‘‘Directed Order’’ is an order entered into the Trading System by an Options Member with a designation for a Market Maker in that class (referred to as a ‘‘Directed Market Maker’’ or ‘‘DMM’’). To qualify as a Directed Order, an order must be 51 This definition is substantively identical to the definition in C1 Rule 1.1. IEX proposes to incorporate this definition, because the term is not specifically defined in the MEMX rulebook and IEX believes that term would provide helpful context to Options Members with respect to other rules that use the term, e.g., proposed IEX Rule 19.200. E:\FR\FM\19MRN1.SGM 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 entered on behalf of a Priority Customer.52 • Discretion. The term ‘‘discretion’’ means the authority of a broker or dealer to determine for a Customer the type of option, the class or series of options, the number of contracts, or whether options are to be bought or sold. • European-Style Option. The term ‘‘European-style option’’ means an options contract that, subject to the provisions of Rule 24.100 (relating to the cutoff time for exercise instructions) and to the Rules of the Clearing Corporation, can be exercised only on its expiration date. • Exchange Act. The term ‘‘Exchange Act’’ or ‘‘Act’’ means the Securities Exchange Act of 1934, as amended, or Rules thereunder. • Exercise Price. The term ‘‘exercise price’’ means the specified price per unit at which the underlying security may be purchased or sold upon the exercise of an options contract. • He, Him, and His. The terms ‘‘he,’’ ‘‘him’’ and ‘‘his’’ are deemed to refer to persons of female as well as male gender, and to include organizations, as well as individuals, when the context so requires. • IEX Exchange and Exchange. The terms ‘‘IEX Exchange’’ and ‘‘Exchange’’ mean Investors’ Exchange LLC, a registered national securities exchange. • IEX Options. The term ‘‘IEX Options’’ means IEX Options LLC, a Delaware limited liability company wholly owned by the Exchange, which operates as an options trading facility of the Exchange under Section 3(a)(2) of the Exchange Act. • IEX Options Book. The term ‘‘IEX Options Book’’ means the electronic book of options orders maintained by the Trading System.53 • IEX Options Transaction. The term ‘‘IEX Options Transaction’’ means a transaction involving an options contract that is effected on or through IEX Options or its facilities or systems.54 52 This definition is based upon the definition in MIAX Options Exchange (‘‘MIAX’’) Rule 100, with the distinction that IEX proposes to make any Market Maker eligible to receive a Directed Order, while MIAX only allows their Lead Market Makers (akin to IEX’s proposed ‘‘Specialists’’) and Primary Lead Market Makers eligible; this aspect of IEX’s proposed rule change is based upon and substantially similar to C1 Rule 5.32. Additionally, IEX proposes to include language in the last sentence of this definition based on NYSE Amex Rule 900.3NYP(i)(4) to clarify that an order submitted on behalf of a non-Priority Customer would be treated as a non-Directed Order. 53 This definition is substantively identical to the equivalent definition in the MEMX rulebook, except that it refers to IEX, not MEMX. 54 This definition is substantively identical to the equivalent definition in the MEMX rulebook, except that it refers to IEX, not MEMX. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 • Individual Equity Option. The term ‘‘individual equity option’’ means an options contract which is an option on an equity security. • Long Position. The term ‘‘long position’’ means a person’s interest as the holder of one or more options contracts. • Market Makers (and Options Market Makers). The terms ‘‘Market Makers’’ or ‘‘Options Market Makers’’ refer collectively to Options Members registered, pursuant to Rule 23.100, as either a ‘‘Registered Market Maker’’ or a ‘‘Specialist’’.55 • MPID. The term ‘‘MPID’’ means unique market participant identifier assigned to an Options Member. • NBB, NBO, and NBBO. The term ‘‘NBB’’ means the national best bid, the term ‘‘NBO’’ means the national best offer, and the term ‘‘NBBO’’ means the national best bid or offer as calculated by IEX Options based on market information received by IEX Options from OPRA. • Offer. The term ‘‘offer’’ means a Limit order to sell one or more options contracts. • OPRA. The term ‘‘OPRA’’ means the Options Price Reporting Authority. • Opening Purchase Transaction. The term ‘‘opening purchase transaction’’ means a IEX Options Transaction that creates or increases a long position in an options contract. • Opening Writing Transaction. The term ‘‘opening writing transaction’’ means a IEX Options Transaction that creates or increases a short position in an options contract. • Options Contracts. The term ‘‘options contract’’ means a put or a call issued, or subject to issuance by the Clearing Corporation pursuant to the Rules of the Clearing Corporation. • Options Market Close and Market Close. The terms ‘‘options market close’’ and ‘‘market close’’ mean the time the Exchange specifies for the end of a trading session on the Exchange on that trading day. • Options Market Open and Market Open. The terms ‘‘options market open’’ and ‘‘market open’’ mean the time the Exchange specifies for the beginning of a trading session on the Exchange on that trading day. 55 This definition is substantively identical to the definition in the MIAX rulebook, except that MIAX has three classes of Market Makers (Registered Market Makers, Lead Market Makers, and Primary Lead Market Makers) while IEX proposes to have two classes of Market Makers: Registered Market Makers (equivalent to MIAX Registered Market Maker) and Specialists (which is based on MIAX’s Lead Market Maker and Primary Lead Market Maker rules). IEX proposes to incorporate this definition, because the Market Maker rules proposed herein are substantially based upon the rules of MIAX. PO 00000 Frm 00200 Fmt 4703 Sfmt 4703 12895 • Options Member. The term ‘‘Options Member’’ means a firm, or organization that is registered with the Exchange pursuant to Chapter 18 of these Rules for purposes of participating in options trading on IEX Options as an ‘‘Options Order Entry Firm’’, ‘‘Options Market Maker’’, or ‘‘Clearing Member.’’ • Options Member Agreement. The term ‘‘Options Member Agreement’’ means the agreement to be executed by Options Members to qualify to participate on IEX Options. • Options Order Entry Firm, Order Entry Firm, and OEF. The terms ‘‘Options Order Entry Firm’’ and ‘‘Order Entry Firm’’ or ‘‘OEF’’ mean those Options Members representing as agent Customer Orders on IEX Options and those non-Market Maker Members conducting proprietary trading. • Options Principal. The term ‘‘Options Principal’’ means a person engaged in the management and supervision of the Options Member’s business pertaining to options contracts that has responsibility for the overall oversight of the Options Member’s options related activities on the Exchange. • Order. The term ‘‘order’’ means a firm commitment to buy or sell options contracts as defined in Rule 22.100. • Outstanding. The term ‘‘outstanding’’ means an options contract which has been issued by the Clearing Corporation and has neither been the subject of a closing writing transaction nor has reached its expiration date. • Primary Market. The term ‘‘primary market’’ means the primary exchange on which an underlying security is listed.56 • Priority Customer and Priority Customer Order. The term ‘‘Priority Customer’’ means any person or entity that is not: (A) a broker or dealer in securities; or (B) a Professional. The term ‘‘Priority Customer Order’’ means an order for the account of a Priority Customer. • Professional. The term ‘‘Professional’’ means any person or entity that (A) is not a broker or dealer in securities; and (B) places more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s). All Professional orders shall be appropriately marked by Options Members.57 56 This definition is based on the definition in C1 Rule 1.1, because IEX believed the definition was easier to understand than the equivalent definition in the MEMX rulebook. 57 See Proposed Supplementary Material .01 to Rule 17.100, which sets forth the methodology for calculation of Professional orders. E:\FR\FM\19MRN1.SGM 19MRN1 lotter on DSK11XQN23PROD with NOTICES1 12896 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices • Protected Quotation. The term ‘‘Protected Quotation’’ has the meaning provided in Rule 28.100. • Public Customer and Public Customer Order. The term ‘‘Public Customer’’ means a person that is not a broker or dealer in securities. The term ‘‘Public Customer Order’’ means an order for the account of a Public Customer. • Put. The term ‘‘put’’ means an options contract under which the holder of the option has the right, in accordance with the terms and provisions of the option and the Rules of the OCC, to sell to the Clearing Corporation the number of units of the underlying security covered by the options contract, at a price per unit equal to the exercise price, upon the timely exercise of such option. • Quarterly Options Series. The term ‘‘Quarterly Options Series’’ means a series in an options class that is approved for listing and trading on the Exchange in which the series is opened for trading on any business day and expires at the close of business on the last business day of a calendar quarter. • Quote or Quotation. The terms ‘‘quote’’ or ‘‘quotation’’ means a bid or offer entered by a Market Maker as a firm order that updates the Market Maker’s previous bid or offer, if any. When the term order is used in these Rules and a bid or offer is entered by the Market Maker in the options series to which such Market Maker is registered, such order shall, as applicable, constitute a quote or quotation for purposes of these Rules. A quote or quotation may be canceled or repriced in accordance with Rules 22.250, 22.260, or 23.150, if so designated by the Market Maker to assist in its risk management. • Registered Market Maker. The term ‘‘Registered Market Maker’’ means an Options Member registered with the Exchange for the purpose of making markets in securities traded on the Exchange, who is vested with the rights and responsibilities specified in Chapter 23 of these Rules with respect to Registered Market Makers.58 • Responsible Person. The term ‘‘Responsible Person’’ means a U.S.based officer, director, or managementlevel employee of an Options Member, who is registered with the Exchange as an Options Principal, responsible for the direct supervision and control of associated persons of that Options Member. 58 This definition is substantively identical to the definition in MIAX Rule 100. IEX proposes to incorporate this definition, because the Market Maker rules proposed herein are substantially based upon the rules of MIAX. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 • Rules of IEX Options. The term ‘‘Rules of IEX Options’’ mean the rules contained in Chapters 17 to 29 of the Investors Exchange Rules governing the trading of options on the Exchange. • Rules of the Clearing Corporation and Rules of the OCC. The terms ‘‘Rules of the Clearing Corporation’’ and ‘‘Rules of the OCC’’ mean the Certificate of Incorporation, the By-Laws and the Rules of the Clearing Corporation, and all written interpretations thereof, as may be in effect from time to time. • SEC or Commission. The terms ‘‘SEC’’ or ‘‘Commission’’ mean the United States Securities and Exchange Commission. • Series of Options. The terms ‘‘series’’ or ‘‘series of options’’ mean all options contracts of the same class that are the same type of options and have the same exercise price and expiration date. • Short Position. The term ‘‘short position’’ means a person’s interest as the writer of one or more options contracts. • Short Term Options Series. The term ‘‘Short Term Options Series’’ means a series in an options class that is approved for listing and trading on the Exchange in which the series is opened for trading on any Monday, Tuesday, Wednesday, Thursday or Friday that is a business day and that expires on the Monday, Tuesday, Wednesday, Thursday or Friday of the next business week, or, in the case of a series that is listed on a Friday and expires on a Monday, is listed one business week and one business day prior to that expiration. If a Tuesday, Wednesday, Thursday or Friday is not a business day, the series may be opened (or shall expire) on the first business day immediately prior to that Tuesday, Wednesday, Thursday or Friday, respectively. For a series listed pursuant to this section for Monday expiration, if a Monday is not a business day, the series shall expire on the first business day immediately following that Monday. • Specialist. The term ‘‘Specialist’’ means a Market Maker appointed by the Exchange to act as the primary lead Market Maker for the purpose of making markets in securities traded on the Exchange. The Specialist is vested with the rights and responsibilities specified in Chapter 23 of these Rules with respect to Specialists.59 59 This definition is substantively identical to the definition of Lead Market Makers and Primary Lead Market Makers in MIAX Rule 100. As discussed above, IEX proposes to incorporate the MIAX definitions for both Lead Market Makers and Primary Lead Market Makers into its definition for Specialists, because the Market Maker rules PO 00000 Frm 00201 Fmt 4703 Sfmt 4703 • SRO. The term ‘‘SRO’’ means a selfregulatory organization as defined in Section 3(a)(26) of the Exchange Act. • Timestamp. The term ‘‘timestamp’’ means the effective time sequence assigned to an order for purposes of determining its priority ranking. • Trading Permit. The term ‘‘Trading Permit’’ means a license issued by the Exchange to an Options Member that grants the Trading Permit Holder (‘‘TPH’’) the right to access one or more of the facilities of the Exchange for the purpose of effecting transactions in options traded on the Exchange without the services of another person acting as broker, and otherwise to access the facilities of the Exchange for purposes of trading or reporting transactions or transmitting orders or quotations in options traded on the Exchange, or to engage in other activities that, under the Rules of IEX Options, may only be engaged in by the TPH that satisfies any applicable qualification requirements to exercise those rights. A Trading Permit conveys no ownership interest in the Exchange, is only available through the Exchange, and is subject to the terms and conditions set forth in Rule 18.140.60 • Trading Permit Holder. The term ‘‘Trading Permit Holder’’ or ‘‘TPH’’ means the holder of a Trading Permit, as described in IEX Rule 18.140.61 • Trading System. The term ‘‘Trading System’’ means the automated trading system used by IEX Options for the trading of options contracts. • Type of Option. The term ‘‘type of option’’ means the classification of an options contract as either a put or a call. • Uncovered. The term ‘‘uncovered’’ means a short position in an options contract that is not covered. • Underlying Security. The term ‘‘underlying security’’ means the security that the Clearing Corporation shall be obligated to sell (in the case of a call option) or purchase (in the case of a put option) upon the valid exercise of an options contract. • User. The term ‘‘User’’ means any Options Member or Sponsored Participant who is authorized to obtain access to the Trading System pursuant to Rule 11.130 (Access). proposed herein are substantially based upon the rules of MIAX. 60 This definition is substantively identical to the definition in C1 Rule 1.1. IEX proposes to incorporate this definition, because its proposed Trading Permit rule (Rule 18.140), is substantively similar to the equivalent C1 Rule (C1 Rule 3.1). 61 This definition is substantively identical to the definition in C1 Rule 1.1. IEX proposes to incorporate this definition, because its proposed Trading Permit rule (Rule 18.140), is substantively similar to the equivalent C1 Rule (C1 Rule 3.1). E:\FR\FM\19MRN1.SGM 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices Execution System IEX Options will utilize a pro-rata allocation model with execution priority dependent on the size and capacity of an order; specifically, Priority Customer or non-Priority Customer, as well as status as a Registered Market Maker or Specialist, as applicable. The proposed pro-rata allocation model is similar to the MIAX and NYSE Amex options exchanges.62 The Exchange will become an exchange member of the OCC. The Trading System will be linked to OCC for the Exchange to transmit locked-in trades for clearance and settlement.63 IEX Options will include a de minimis delay on incoming order and quote messages designed to enable IEX to update its view of the market prior to processing orders and quotes, and an optional Market Maker quote parameter designed to protect Market Makers from excessive risk due to execution of stale quotes, in addition to other risk protections substantially similar to those offered by other options exchanges. Anonymity. As set forth in proposed Rule 22.190, aggregated and individual transaction reports produced by the Trading System will indicate the details of a User’s transactions, including the contra party’s unique market participant identifier (‘‘MPID’’), capacity, and clearing firm account number.64 Latency Mechanism.65 IEX’s proposal includes a de minimis hardware based latency mechanism (or speedbump) of 350 microseconds added to each incoming order and quote message 66 designed to enable IEX to update its 62 See infra note 86. Rule 22.220(a) notes that all Options transactions shall be submitted for clearance to the Clearing Corporation, and the Exchange shall assume no responsibility with respect to any unmatched trade or for any delays or errors in the reporting to it of trade information. This provision is based upon and substantively identical to MIAX Rule 524. 64 The Exchange shall also reveal a User’s identity: (i) when a registered clearing agency ceases to act for a participant, or the User’s clearing firm, and the registered clearing agency determines not to guarantee the settlement of the User’s trades; and (ii) for regulatory purposes or to comply with an order of an arbitrator or court. See proposed Rule 22.190. The Exchange notes that proposed Rule 22.190 is identical to MEMX Rule 21.10. 65 See proposed Rule 22.100(n). 66 As it does for with equities trading (which also applies an inbound latency of 350 microseconds), IEX will subject incoming order and quote messages to a de minimis delay using coiled optical fiber. See Rule 11.510(a). Due to force majeure events and acts of third parties, the Exchange does not guarantee that the delay will always be consistent. The Exchange will periodically monitor such latency and will make adjustments to the latency as reasonably necessary to achieve consistency with the latency targets as soon as commercially practicable. lotter on DSK11XQN23PROD with NOTICES1 63 Proposed VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 view of the market prior to processing orders and quotes as well as to perform the Options Quote Indicator (‘‘Indicator’’) calculation with current market data.67 If the Exchange determines to change the duration of the delay, it will do so only pursuant to an effective rule filing submitted to the Commission pursuant to Section 19 of the Exchange Act.68 Hours of Operation. As provided in proposed Rule 22.110(a), the IEX Options Trading System will begin accepting orders and quotes beginning at 8:00 a.m.69 pursuant to the market opening procedures described in proposed Rule 22.160. Orders and bids and offers shall be open and available until 4:00 p.m. except for options contracts on Fund Shares, as defined in proposed Rule 20.120(i), which may close as of 4:15 p.m. The Proposed Hours of Operation rule is based on MEMX Rule 21.2, except that MEMX does not allow for submission of quotes before the market opens for trading; IEX notes that other exchanges begin accepting orders and quotes before the market opens, for example C1 begins accepting quotes at 7:30 a.m.70 Except as set forth above, IEX Options shall operate during the normal business days and hours set forth in the rules of the primary market trading the securities underlying options traded on IEX Options, absent unusual conditions as may be determined by the Exchange.71 IEX Options will not be open for business on any holiday observed by the Exchange.72 Units of Trading. As stated in proposed Rule 22.120, the unit of trading in each series of options traded on IEX Options will be the unit of trading established for that series by the OCC pursuant to the rules of the OCC and the agreements of the Exchange with the OCC. The proposed determination of the unit of trading for a series of options traded on IEX Options is the same as on MEMX Options pursuant to MEMX Rule 21.3. Minimum Quotation and Trading Increments. As stated in proposed Rule 67 See infra for more information about the Indicator. 68 The latency mechanism will not apply to outbound communications from the Exchange to a User, inbound and outbound communications between the Exchange and an Away Market regarding a routed order, inbound communications from data feeds, order processing and order execution on the IEX Options Order Book, outbound communications to the Exchange’s proprietary data feeds or OPRA. 69 All times in this filing refer to the Eastern time zone. 70 See C1 Rule 5.7. 71 See proposed IEX Rule 22.110(b). 72 See proposed IEX Rule 22.110(c). PO 00000 Frm 00202 Fmt 4703 Sfmt 4703 12897 22.140(a), the Exchange is proposing to apply the following quotation increments: (1) if the options series is trading at less than $3.00, five (5) cents; (2) if the options series is trading at $3.00 or higher, ten (10) cents; and (3) if the options series is trading pursuant to the Penny Interval Program one (1) cent if the options series is trading at less than $3.00, five (5) cents if the options series is trading at $3.00 or higher, except for QQQ, SPY, or IWM where the minimum quoting increment will be one (1) cent for all series. In addition, as stated in proposed Rule 22.140(b), the Exchange is proposing that the minimum trading increment for options contracts traded on IEX Options will be one (1) cent for all series. Such proposed minimum quotation and trading increments are the same as on MEMX Options pursuant to MEMX Rules 21.5(a) and (b). Penny Interval Program. As set forth in proposed Rule 22.140(c), the Exchange is proposing to adopt a Penny Interval Program that is substantially similar to the penny programs of other exchanges, including MEMX Options pursuant to MEMX Rule 21.5(d), which includes minimum quoting requirements for options classes listed under the Penny Interval Program. However, eligibility for inclusion in the Penny Interval Program will be limited to those classes already operating under penny programs of other options exchanges at the time IEX Options is launched. The list of options classes included in the Penny Interval Program will be announced by the Exchange via circular distributed to Options Members and published by the Exchange on its website. Order Types and Handling Instructions. The Trading System will make available to Users two Order Types (as defined in proposed Rule 22.100(d))—Limit orders and Market orders—as well as various order instructions and modifiers that can be appended to such orders. The characteristics and functionality of each Order Type is substantially similar to what is currently approved for use in the Exchange’s equities trading facility or on other options exchanges, including MEMX Options, except where described below. IEX Options will support bulk messages for Options Market Makers as specified in the description of each Order Type or other instruction. Proposed Rule 22.100(d) includes the following details with respect to Limit orders and Market orders: • Limit order. Limit orders are orders (including bulk messages) to buy or sell an option at a specified price or better. E:\FR\FM\19MRN1.SGM 19MRN1 lotter on DSK11XQN23PROD with NOTICES1 12898 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices A Limit order is marketable when, for a Limit order to buy, at the time it is entered into the Trading System, the order is priced at the current inside offer or higher, or for a Limit order to sell, at the time it is entered into the Trading System, the order is priced at the current inside bid or lower. • Market order. Market orders are orders to buy or sell at the best price available at the time of execution. Market orders to buy or sell an option traded on IEX Options will be rejected if they are received when the underlying security is subject to a ‘‘Limit State’’ or ‘‘Straddle State’’ as defined in the Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act (the ‘‘Limit Up-Limit Down Plan’’). Bulk messages may not be Market orders. Pursuant to Rule 22.100(d)(3), Users have the option to designate an order as ‘‘attributable’’ to that User’s MPID. Attributable orders are Market or Limit orders which display the User’s MPID for purposes of trading on the Exchange. Use of attributable orders is voluntary. Attributable orders may not be available for all Exchange processes. The Exchange will distribute a circular to Options Members specifying the processes for which the attributable order-type shall be available.73 The Trading System will also make available to Users several additional instructions that can be designated on an order (‘‘Handling Instructions’’). A Handling Instruction applied to a bulk message applies to each bid and offer within that bulk message. The Handling Instructions available on IEX Options are described in proposed Rule 22.100(e) and will include the following: • Book Only. Book Only is an instruction that an order is to be ranked and executed on the Exchange pursuant to proposed Rule 22.170 (Order Display and Book Processing) or to be repriced or cancelled, as appropriate, without routing away to another options exchange. • Post Only. Post Only is an instruction that an order is to be ranked and executed on the Exchange pursuant to proposed Rule 22.170 (Order Display and Book Processing) or cancelled, as appropriate, without routing away to another options exchange except that the order will not remove liquidity from the IEX Options Book. The Trading System reprices, cancels or rejects a bid (offer) designated as Post Only with a 73 The proposed definition is substantively identical to the definition in MIAX Rule 516(e). IEX proposes to incorporate this definition and functionality, because MEMX Options does not have Attributable Orders. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 price that locks or crosses the Exchange’s best offer (bid). A Market order cannot be designated as Post Only. • Intermarket Sweep Order (‘‘ISO’’). ISOs are orders that shall have the meaning provided in proposed Rule 28.100, which relates to intermarket trading. Such orders may be executed at one or multiple price levels in the Trading System without regard to Protected Quotations at other options exchanges (i.e., may trade through such quotations). The Exchange relies on the marking of an order as an ISO order when handling such order, and thus, it is the entering Options Member’s responsibility, not the Exchange’s responsibility, to comply with the requirements relating to ISOs. ISOs are not eligible for routing pursuant to proposed Rule 22.180. A Market order cannot be designated as an Intermarket Sweep Order. Users may not designate bulk messages as ISOs. The Exchange notes that each of the proposed Order Types and Handling Instructions available on IEX Options are based upon and substantially similar to those of MEMX, with the exception of the Attributable Orders not offered by MEMX. Time-in-Force (‘‘TIF’’) Designations. Users entering orders into the Trading System may designate such orders to remain in force and available for display and/or potential execution for varying periods of time. Unless cancelled earlier, once these time periods expire, the order (or the unexecuted portion thereof) is returned to the entering party. A TIF applied to a bulk message applies to each bid and offer within that bulk message. Unless otherwise specified in the Exchange Rules or the context indicates otherwise, the Exchange determines which of the following TIFs are available on a class or system basis. The TIF designations available on IEX Options are described in proposed Rule 22.100(g) and will include the following: • Immediate Or Cancel (‘‘IOC’’). IOC means, for an order so designated, an order that is to be executed in whole or in part as soon as such order is received. The portion not so executed immediately on the Exchange or another options exchange is cancelled and is not posted to the IEX Options Book. IOC orders that are not designated as Book Only and that cannot be executed in accordance with proposed Rule 22.170 on the Trading System when reaching the Exchange will be eligible for routing away pursuant to proposed Rule 22.180. • Day. Day means, for an order so designated, an order to buy or sell which, if not executed expires at market PO 00000 Frm 00203 Fmt 4703 Sfmt 4703 close. Market Makers may designate bulk messages as Day. The Exchange notes that each of the proposed TIF designations available on IEX Options is identical to the same TIF designations available on MEMX Options, except that they are applied differently in one respect. Specifically, MEMX Options allows bulk messages to have a TIF of IOC. IEX is proposing to only allow bulk messages to have a TIF of DAY so that Market Makers do not take liquidity with quotes submitted via bulk messages, and which are meant for liquidity provision by Market Makers, which by definition the Exchange believes constitutes orders resting on the Order Book. Anti-Internalization Qualifier (‘‘AIQ’’) Modifiers. As with its equities market, the Exchange will allow Users to use certain AIQ modifiers, which are described in proposed Rule 22.100(h). Any incoming order designated with an AIQ modifier will be prevented from executing against a resting opposite side order also designated with an AIQ modifier and originating from the same MPID, Options Member identifier, trading group identifier, or Sponsored Participant identifier. The Exchange will offer the following AIQ modifiers: AIQ Cancel Newest, described in proposed Rule 22.100(h)(1); AIQ Cancel Oldest, described in proposed Rule 22.100(h)(2); AIQ Cancel Both, described in proposed Rule 22.100(h)(3); and AIQ Cancel Smallest, described in proposed Rule 22.100(h)(4). The Exchange notes that each of the proposed AIQ modifiers available on IEX Options is substantially similar to the same modifiers available on MEMX Options,74 with the distinction that on MEMX a market maker may include the AIQ modifier on bulk messages, while IEX is proposing to not allow AIQ modifiers to be included on bulk messages because it would be meaningless on IEX where bulk messages will only be for liquidity adding quotes, and the AIQ modifier that dictates the AIQ interaction is determined by the liquidity removing order.75 Re-Pricing Mechanism. Like other options exchanges, the Exchange proposes to offer a re-pricing mechanism to Users to comply with the order protection and trade through restrictions of the Options Order Protection and Locked/Crossed Market 74 MEMX does not offer an AIQ Cancel Smallest modifier, but it is offered by other exchanges such as C1. See C1 Rule 5.6 (Match Trade Prevention Modifier—MTP Cancel Smallest). 75 MEMX calls them ‘‘Match Trade Prevention’’ modifiers. See MEMX Rule 21.1(h). E:\FR\FM\19MRN1.SGM 19MRN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices Plan.76 This re-pricing mechanism, described in proposed Rule 22.100(i), is referred to by the Exchange as Price Adjust and is substantially similar to the Price Adjust mechanism offered by MEMX Options pursuant to MEMX Rule 21.1(i), with the exception that IEX will only allow the ranked price and displayed price of an order that has been repriced to be adjusted to a more aggressive price one additional time (unlike MEMX, which allows multiple adjustments).77 MPIDs. As proposed in Rule 22.100(j), the term ‘‘MPID’’ means the unique market participant identifier assigned to a User and shall refer to what the Trading System uses to identify the User and the clearing number for the execution of orders and quotes submitted to the Trading System with that MPID. Each MPID corresponds to a single User and a single clearing number of a Clearing Member with the Clearing Corporation. A User may obtain multiple MPIDs, which may be for the same or different clearing numbers. A User is able (in a form and manner determined by the Exchange) to designate which of its MPIDs may be used for each of its ports. If a User submits an order or quote through a port with an MPID not enabled for that port, the Trading System cancels or rejects the order or quote. The Exchange notes that its proposed Rule 22.100(j) is identical to MEMX Rule 21.1(j) except that MEMX uses the term EFID rather than MPID. Ports and Bulk Messages. Proposed Rule 22.100(k) defines two types of ports: (1) a ‘‘physical port,’’ which provides a physical connection to the Trading System and may provide access to multiple logical ports; and (2) a ‘‘logical port’’ or ‘‘application session,’’ which provides Users with the ability within the Trading System to accomplish a specific function through a connection, such as order entry, data receipt, or access to information. The Exchange notes that each of the proposed types of ports available on IEX Options is identical to the same types of ports on MEMX Options. The term ‘‘bulk message’’ is proposed to mean a single electronic message a User submits with a Market Maker Capacity to the Exchange in which the User may enter, modify, or cancel up to an Exchange-specified number of bids and offers (which number the Exchange will announce via Exchange notice and 76 See Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (Aug. 6, 2009) (File No. 4–546). 77 The Exchange notes that this behavior is substantially similar to the ‘‘single price adjust’’ behavior in C1 Rule 5.32(b)(2)(A). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 publicly available technical specifications). The Trading System handles a bulk message in the same manner as it handles an order or quote, unless the Exchange Rules specify otherwise. Only Market Makers may submit bulk messages through a logical port in a class in which the Market Maker has an appointment. In addition, bulk messages have a default TIF of Day and a default designation of Post Only. As proposed, the Trading System will cancel, reject, or reprice a Post Only bulk message bid (offer) with a price that locks or crosses the Exchange best offer (bid) or ABO (ABB).78 These provisions are similar to the manner in which market maker bulk messages are handled by MEMX, which allows bulk messages to also have a TIF of IOC, a designation as book only, and post only bulk messages in unassigned classes.79 Cancel Back. The term ‘‘Cancel Back’’ is proposed to mean an instruction a User designates on an order (including bulk messages) to not be subject to the Price Adjust process pursuant to proposed Rule 22.100(i). The Trading System cancels or rejects an order with a Cancel Back instruction (immediately at the time the Trading System receives the order or upon return to the Trading System after being routed away) if displaying the order on the Book would create a violation of proposed Rule 28.120, or if the order cannot otherwise be executed or displayed in the Book at its limit price. The Trading System executes a Book Only—Cancel Back order against resting orders. The proposed definition of Cancel Back in proposed Rule 22.100(m) is substantively identical to a Cancel Back Order defined in MEMX Rule 21.1(m). Market Opening Procedures. As proposed, the Trading System will accept quotes, Limit orders with a TIF of DAY and Market orders for inclusion in the opening process (‘‘Opening Process’’) beginning at 8:00 a.m. or immediately upon trading being halted in an options series due to the primary listing market for the applicable underlying security declaring a regulatory trading halt, suspension, or pause with respect to such security (a ‘‘Regulatory Halt’’), and will continue to 78 See proposed IEX Rule 22.100. MEMX Rule 21.1(l). IEX notes that the ability of the Trading System to cancel or reject a post only order submitted on a bulk port with a price that locks or crosses the Exchange best offer (bid) or ABO (ABB) is substantively identical to MEMX Rule 21.1(l)(3); IEX will also allow the Trading System to reprice a post only order submitted on a bulk port with a price that locks or crosses the Exchange best offer (bid) or ABO (ABB), which is substantively identical to the functionality in C1 Rule 5.32(b)(1)(B). 79 See PO 00000 Frm 00204 Fmt 4703 Sfmt 4703 12899 accept Market and Limit orders and quotes until such time as the Opening Process is initiated in that options series (the ‘‘Pre-open state’’).80 After the first transaction on the primary listing market after 9:30 a.m. in the securities underlying the options as reported on the first print disseminated pursuant to an effective national market system plan or the Regulatory Halt has been lifted, the related options series will be opened automatically as described below. The Exchange will conduct its ‘‘Core Open Auction’’ for each series of options contracts upon receipt of an ‘‘Auction Trigger’’, i.e., the moment that the Primary Market for the underlying security first disseminates both a two-sided quote and a trade of any size that is at or within the quote (in the case of reopening after a Regulatory Halt, the Auction Trigger also includes notification that the underlying stock is no longer halted).81 The Exchange will disseminate a message to market participants indicating the initiation of the opening process, conduct the opening auction, and then transition to continuous trading for each series of options contracts.82 The proposed market opening procedures are substantially similar to the market opening procedures specified in NYSE Arca Options Rule 6.64P–O, subject to several differences, most notably that any imbalance would be allocated on a pro rata basis.83 Order Display/Matching System. The Trading System will be based upon functionality currently approved for use in the Exchange’s equities trading system. Specifically, the Trading System will allow Users to enter Market orders and priced Limit orders to buy (bids) and sell (offers). All bids or offers made and accepted on IEX Options in accordance with the Exchange Rules shall constitute binding contracts, subject to applicable requirements of the 80 See proposed Rule 22.160(a)(13). proposed Rule 22.160(a)(5) and (7). 82 See proposed Rule 22.160. IEX notes that pursuant to proposed Rule 22.160(b)(3), the priority overlays specified in proposed Rule 22.170(f)(2) and (3) will not be available during an Auction, but will resume once the Exchange has transitioned to continuous trading. 83 See proposed Rule 22.160(b). Other differences include: IEX will begin accepting orders for the opening auction at 8:00 a.m., while NYSE Arca begins accepting orders for their opening auction at 6:00 a.m. See proposed Rule 22.160(a)(13)(A) versus NYSE Arca Options Rule 6.64P–O(a)(12)(A). Additionally, IEX will begin disseminating Auction Imbalance Information at 8:30 a.m., while NYSE Arca begins disseminating imbalance information at 8:00 a.m. See proposed Rule 22.160(c)(1) versus NYSE Arca Options Rule 6.64P–O(c)(1). Further, IEX does not define Far Clearing Price, because IEX does not propose to have Auction Only orders, to which the Far Clearing Price relates. 81 See E:\FR\FM\19MRN1.SGM 19MRN1 12900 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices Exchange Rules and the Rules of the Clearing Corporation. Such orders are executable against marketable contraside orders in the Trading System.84 Resting quotes and orders on the IEX Options Book will be prioritized according to price. If there are two or more quotes or orders at the best price, then the options contracts will be allocated proportionally according to size (in a pro-rata fashion), rounded down to the nearest contract. If there are residual options contracts to be filled, the quote or order with the largest remaining size (based on the pro rata calculation) will receive the first contract, and each successive contract (if any) will be allocated to each subsequent quote or order based on size (largest to smallest). If there are two or more quotes or orders with the same remaining size, then the quote or order with the first time priority will be allocated the next options contract. Each successive options contract (if any) will be allocated in the same manner.85 Routing. IEX Options will offer a simple optional routing functionality to facilitate compliance with applicable regulations and will not offer other complex routing strategies. Options Members can designate orders that have not been executed in full by the Trading System pursuant to Rule 22.170 above as either available for routing or not available for routing.86 IEX Options will support orders that are designated to be routed to the NBBO as well as orders that will execute only within IEX Options. Orders that are designated to execute at the NBBO will be routed to other options markets to be executed when the Exchange is not at the NBBO 87 consistent with the Options Order Protection and Locked/Crossed Market Plan.88 Subject to the exceptions contained in proposed Rule 28.110(b), the Trading System will ensure that an order will not be executed at a price that trades through another options exchange. An order that is designated by an Options Member as routable will be routed in compliance with applicable tradethrough restrictions. Any order entered with a price that would lock or cross a Protected Quotation that is not eligible for either routing or the price adjust process as defined in proposed Rule 22.100(i) will be cancelled. Bulk messages are not eligible for routing. IEX Options will route orders in options via IEX Services LLC (‘‘IEX Services’’), which serves as the Outbound Router of the Exchange, as defined in Rule 2.220 (IEX Services LLC as Outbound Router).89 The function of the Outbound Router will be to route orders in options listed and open for trading on IEX Options by transmitting such orders to one or more routing brokers that are not affiliated with the Exchange to other options exchanges (‘‘Routing Services’’) pursuant to the Exchange Rules on behalf of IEX Options.90 The Outbound Router is subject to regulation as a facility of the Exchange, including the requirement to file proposed rule changes under Section 19 of the Exchange Act.91 Parties that do not desire to use the Routing Services provided by the Exchange must designate orders as not available for routing.92 The Exchange notes that the proposed rules relating to the routing of orders on IEX Options to away options markets are substantively identical to the MEMX Back-Up Order Routing Services described in MEMX Rule 21.9(e).93 Priority of Routed Orders. Orders that have been routed by the Trading System to other options exchanges are not ranked and maintained in the IEX Options Book pursuant to Rule 22.170, and therefore are not available to execute against incoming orders. Once routed by the Trading System, an order becomes subject to the rules and procedures of the destination options exchange including, but not limited to, order cancellation. If a routed order is subsequently returned, in whole or in part, that order, or its remainder, shall receive a new time stamp reflecting the time of its return to the Trading System.94 Market Access. In connection with the proposed rules regarding routing to away options exchanges, proposed Rule 22.180(e) provides that IEX Services has, pursuant to Rule 15c3–5 under the Act,95 implemented certain tests designed to mitigate the financial and regulatory risks associated with 89 See proposed Rule 22.180(d). lotter on DSK11XQN23PROD with NOTICES1 90 Id. 84 See 91 Id. 85 See proposed Rule 22.170. proposed Rule 22.170(b). This pro-rata allocation methodology is based upon the substantially similar methodology in MIAX Rule 514(c)(2) and NYSE Amex Rule 964NYP(i)(2). 86 See proposed Rule 22.180(a). 87 As described infra, if the order is eligible for the Step-Up Mechanism (set forth in proposed Rule 22.270), the Trading System will attempt to fill the order before routing it to an away market. 88 See supra note 77. 92 Id. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 93 MEMX also offers the option of using its outbound router, MEMX Execution Services to route directly to other exchanges. See MEMX Rule 21.9(d). IEX is not proposing to adopt this functionality, because it will only provide for routing through IEX Services to third party broker dealers. 94 See proposed Rule 22.180(b). 95 17 CFR 240.15c3–5. PO 00000 Frm 00205 Fmt 4703 Sfmt 4703 providing the Exchange’s Users with access to such away options exchanges. Pursuant to the policies and procedures developed by IEX Services to comply with Rule 15c3–5, if an order or series of orders are deemed to be erroneous or duplicative, would cause the entering User’s credit exposure to exceed a preset credit threshold, or are non-compliant with applicable pre-trade regulatory requirements (as defined in Rule 15c3– 5), IEX Services will reject such orders prior to routing and/or seek to cancel any orders that have been routed. This is consistent with the routing implementation of other options exchanges, and the Exchange notes that proposed Rule 22.180(e) is substantively identical to MEMX Rule 21.9(f). Order Priority. After the opening, trades on the Exchange will occur when a buy order/quote and a sell order/quote match on the Exchange’s order book. The Trading System shall execute trading interest within the Trading System in price priority, meaning it will execute all trading interest at the best price level within the Trading System before executing trading interest at the next best price. Pursuant to proposed Rule 22.170, after considering price priority, all options contracts are allocated proportionally according to size (in a pro-rata fashion). If the executed quantity cannot be evenly allocated, the remaining options contracts will be distributed one at a time based upon price-size-time priority. In addition, the Exchange supports multiple priority overlays that apply ahead of the default pro-rata allocation at a given price level. Pursuant to proposed Rule 22.170(f),96 these priority overlays are made available at the Exchange’s discretion on a class-byclass basis: (1) the Priority Customer overlay,97 which provides resting interest from Priority Customers with priority over all non-Priority Customer interest at the same price, will always take priority over all other priority overlays; (2) the Specialist Participation Entitlement overlay,98 which provides the Specialist with priority over interest 96 Proposed Rule 22.170(f) is based upon and substantially similar to C1 Rule 5.32(a)(2), except is different in one respect. Unlike C1, in the event that a Small-Size order is directed to a Specialist, the IEX Options trading system will apply the SmallSize Order Entitlement to the order and not the Directed Order guarantee, meaning the Specialist will have priority to execute against the entire size of the order that does not execute against any Priority Customer orders at that price. 97 See proposed Rule 22.170(f)(1). 98 See proposed Rule 22.170(f)(2). This overlay may only be in effect if the Priority Customer overlay is also in effect. See proposed Rule 22.170(f). E:\FR\FM\19MRN1.SGM 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 from other non-Priority Customers for a certain percentage of contracts allocated at the same price (entitling the Specialist to 60% of the allocation if there is another non-Priority Customer at the NBBO or 40% if there are two or more other non-Priority Customers at the NBBO) 99 when quoting at the NBBO, inclusive of the case in which the order is directed to the Specialist; (3) the Directed Market Maker Participation Entitlement overlay,100 which provides a Directed Market Maker with priority over interest from other non-Priority Customers for a certain percentage of contracts allocated at the same price (entitling the DMM to 60% of the allocation if there is another non-Priority Customer at the NBBO or 40% if there are two or more other nonPriority Customers at the NBBO) 101 when quoting at the NBBO and always applies in place of the Specialist Participation Entitlement overlay when both are in effect and the order is directed to a Directed Market Maker other than the Specialist; 102 and (4) the Small-Size Order Entitlement overlay,103 which provides a Specialist quoting at the NBBO the priority to execute against the entire size of an order or quote of five or fewer contracts that does not first execute against any Priority Customer orders at that price, provided that if an order subject to the Small-Size Order Entitlement is directed to a Directed Market Maker who is not the Specialist quoting at the NBBO, and the Directed Market Maker priority overlay is enabled in the series, then the Directed Market Maker Participation Entitlement priority overlay will apply instead of the Small-Size Order Entitlement priority overlay,104 and in the case that an order subject to the Small-Size Order Entitlement is directed to the Specialist, the Small-Size Order Entitlement priority overlay will apply while the Specialist Participation 99 These allocation entitlements are based on MIAX Rule 514(h)(1), after accounting for the additional priorities afforded market makers on MIAX, as set forth in MIAX Rule 514(e). See supra note 86 and accompanying text. 100 See proposed Rule 22.170(f)(2). This overlay may only be in effect if the Priority Customer overlay is also in effect. See proposed Rule 22.170(f). 101 These allocation entitlements are based on MIAX Rule 514(h)(1), after accounting for the additional priorities afforded market makers on MIAX, as set forth in MIAX Rule 514(e). See supra note 86 and accompanying text. 102 Prioritizing the DMM entitlement over the Specialist entitlement in these circumstances is the same functionality offered by several other exchanges. See, e.g., NYSE Amex Options Rule 964NYP(h)(1). 103 See proposed Rule 22.170(f)(3). 104 See proposed Rule 22.170(f)(3)(A). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 Entitlement and Directed Market Maker Entitlement overlays will not.105 After executions resulting from the Priority Overlays described above, orders and quotes within the Trading System for the accounts of non-Priority Customers, including Professional Customers, have next priority. If there is more than one highest bid or more than one lowest offer on the Options Order Book for the account of a non-Priority Customer, then such bids or offers will be afforded priority on a size pro-rata basis, as described above. Step Up Mechanism. IEX proposes to offer Options Members an optional Step Up Mechanism (‘‘SUM’’), which is a feature within the Trading System that provides automated order handling in designated classes trading for qualifying orders that are not automatically executed by the Trading System.106 The Exchange will determine eligibility of an order for the SUM (including order size, type, capacity, handling instructions, as well as which classes of options contracts). The Exchange will not initiate the SUM process if the NBBO is crossed.107 SUM automatically processes upon receipt of an eligible order that is marketable against the BBO that is not the NBBO; or an eligible order that would improve the Exchange’s BBO and that is marketable against the ABBO. This proposed functionality is substantively identical to the Step-Up Mechanism offered by C1, with the exception that IEX is not proposing to offer All or None orders.108 IEX notes that the optional SUM mechanism is designed to benefit a routable order that is not immediately eligible for execution on the Exchange, but if routed to an away exchange might miss a potential execution on that exchange. And, because SUM is optional, a Member can choose not to have its order subject to the SUM mechanism if it determines that the functionality is not consistent with its objectives. Given the multitude of tradeable listed options securities (compared to listed equities) not all available liquidity is always reflected in an exchange’s order book, and the SUM mechanism provides an opportunity to source such additional liquidity to the benefit of the order in question. Moreover, IEX notes as well that other 105 See proposed Rule 22.170(f)(3)(B). This is functionally identical to how NYSE Amex Options allocates small-size Directed Orders that are directed to a Specialist. See NYSE Amex Options Rule 965NYP(h)(2)(B). 106 See proposed Rule 22.270. IEX’s proposed Step-Up Mechanism is substantively identical to C1 Rule 5.35. 107 See proposed Rule 22.270(a). 108 See C1 Rule 5.35. PO 00000 Frm 00206 Fmt 4703 Sfmt 4703 12901 options exchanges offer similar mechanisms, and order flow might be directed to such exchanges if IEX did not offer such a mechanism. Upon receipt of a SUM eligible order, the Trading System will expose the order at the NBBO upon receipt for a period of time determined by the Exchange on a class-by-class basis, which period of time may not exceed one second. All Users may submit responses to the exposure message, which must be limited to the size of the order being exposed, may be modified, cancelled or replaced any time during the exposure period, and are cancelled back at the end of the exposure period if unexecuted. Responses priced at the prevailing NBBO or better will immediately trade against the order in time priority. If during the exposure period the Exchange receives an unrelated order (or quote) on the opposite side of the market from the exposed order that could trade against the exposed order at the prevailing NBBO price or better, then the orders will trade at the prevailing NBBO price. The exposure period will not terminate if a quantity remains on the exposed order after such trade. Responses that are not immediately executable based on the prevailing NBBO may become executable during the exposure period based on changes to the NBBO. In the event of a change to the NBBO and at the conclusion of the exposure period, the Exchange will evaluate remaining responses as well as the ABBO and execute any remaining portion of the exposed order to the fullest extent possible at the best price(s) by executing against responses and unrelated orders. Following the exposure period, the Exchange will route the remaining portion of the exposed order to other exchanges, unless otherwise instructed by the User. Any portion of a routed order that returns unfilled shall trade against the Exchange’s best bid/offer unless another exchange is quoting at a better price in which case new orders shall be generated and routed to trade against such better prices. Data Dissemination. The Exchange will disseminate to OPRA the highest bid and the lowest offer, and the aggregate quotation size associated therewith that is available, in accordance with the requirements of Rule 602 of Regulation NMS under the Act.109 The Exchange will also offer three data products: (1) IEX Options DEEP: an uncompressed data feed that offers depth of book quotations and execution information based on options 109 See E:\FR\FM\19MRN1.SGM proposed Rule 22.240(a). 19MRN1 12902 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices orders entered into the Trading System; (2) IEX Options TOPS: an uncompressed data feed that offers top of book quotations and execution information based on options orders entered into the Trading System; and (3) DROP: an uncompressed data feed that offers information regarding the options trading activity of a specific User.110 DROP is only available to the User to whom the specific data relates and those recipients expressly authorized by the User.111 Risk Controls. The Exchange also proposes to offer to all Users of IEX Options the ability to establish certain risk control parameters and limits that are intended to assist Users in managing their market risk. The proposed risk controls are based, in part, on those of the NYSE Arca and C1 options exchanges, with certain additions and differences described below. The proposed risk controls are designed to offer Users protection from entering orders outside of certain size and price parameters, as well as certain standard or Exchange-established parameters based on order type and market conditions. The proposed risk controls include: (i) pre-trade risk controls; (ii) activitybased risk controls; and (iii) global risk controls, as set forth in proposed Rule 22.250.112 Pre-trade, activity-based, and global risk controls may be set before the beginning of a trading day.113 Pretrade, activity-based, and global risk controls can be set at the MPID or MPID Group level,114 or both, depending on the risk control.115 Additionally, pretrade risk controls to restrict the options class(es) transacted must be set per options class.116 The following describes each category of risk protection mechanism: Pre-Trade Risk Controls.117 The pretrade risk controls mechanism is a set of 110 See proposed Rule 22.240(b). products will be subject to fees as specified in an effective Commission rule filing. 112 Proposed Rule 22.250 is based upon and substantially similar to NYSE Arca Rule 6.40P–O. 113 See proposed Rule 22.250(b)(1). 114 MPID Groups, defined in proposed Rule 22.250(a)(5), are based upon C1 Rule 5.34(c)(4)(A), which allows for the setting of risk control limits for EFID Groups, which are equivalent to MPID Groups. IEX notes that it proposes to retain the right to limit the number of MPID Groups an Options Member can configure based upon potential technical limitations. 115 See proposed Rule 22.250(b)(2). IEX notes that while it allows these risk controls to be set at MPID or MPID Group levels, NYSE Arca allows the equivalent controls to be set at either the MPID or the MPID Sub-ID level (a more granular level than the MPID). 116 See proposed Rule 22.250(b)(2). 117 See proposed Rule 22.250(a)(1), which is substantively identical to NYSE Arca Rule 6.40P– O(a)(2). lotter on DSK11XQN23PROD with NOTICES1 111 Data VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 optional limits, each of which an Options Member may utilize with respect to its trading activity on the Exchange. These controls include controls related to the maximum dollar amount for a single order to be applied one time and the maximum number of contracts that may be included in a single order before it can be traded. Additionally, there are optional controls related to the price of an order or quote (including percentage-based and dollarbased controls), controls related to the order types or modifiers that can be utilized, controls to restrict the options classes transacted, and controls to prohibit duplicative orders. Activity-Based Risk Controls.118 The Exchange also proposes to offer activitybased risk limits that may be applied to orders and quotes in an options class (when acting as a Market Maker, an Options Member is required to select at least one of the following controls) 119 based on specified thresholds measured over the course of a configurable time period (‘‘Interval’’). The Exchange will offer the following activity-based risk controls: (i) transaction-based risk limits, which are pre-established limits on the number of an Options Member’s orders and quotes executed in a specified class of options per Interval; (ii) volume-based risk limits, which are pre-established limits on the number of contracts of an Options Member’s orders and quotes that can be executed in a specified class of options per Interval; and (iii) percentage-based risk limits, which are pre-established limits on the percentage of contracts executed in a specified class of options as measured against the full size of an Options Member’s orders and quotes executed per Interval. To determine whether an Options Member has breached the specified percentage limit, the Exchange calculates the percent of each order or quote in a specified class of options that is executed during an Interval (each, a ‘‘percentage’’), and sums up those percentages. This risk limit will be breached if the sum of the percentages exceeds the pre-established limit. Global Risk Control.120 The Exchange also proposes to offer a global risk control, which is a pre-established limit on the number of times an Options Member may breach its activity-based risk controls per Interval. 118 See proposed Rule 22.250(a)(2), which is substantively identical to NYSE Arca Rule 6.40P– O(a)(3). 119 See proposed Rule 22.250(c)(2)(A). 120 See proposed Rule 22.250(a)(3), which is substantively identical to NYSE Arca Options Rule 6.40P–O(a)(4). PO 00000 Frm 00207 Fmt 4703 Sfmt 4703 Automated Breach Actions.121 Proposed Rule 22.250(c) details the ‘‘automated breach actions’’ the Exchange will take if any of the three above-described risk controls are breached. Based on User preference, these actions can include blocking new orders and quotes, canceling orders and quotes on the Order Book, or notifying the Options Member of the breach. With respect to the activity-based and global risk controls (as well as Kill Switch Actions described below), in order to remain consistent with the firm quote obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS, any marketable interest that is executable against an order or quote that is received 122 prior to the time the applicable threshold is triggered and processed by the Trading System will be automatically executed up to the size of the resting order or quote, regardless of whether the execution would cause the Member to exceed their pre-set risk threshold(s).123 Kill Switch Actions.124 Additionally, Options Members may direct the Exchange to operate a ‘‘kill switch’’ to either cancel all unexecuted orders and quotes on the Order Book, block the entry of any new order and quote messages, or both. Limit Order Price Protection.125 The Exchange also proposes to offer price protection mechanisms, as set forth in proposed Rule 22.260.126 These protections include Limit Order Price Protection, in which the Trading System will reject an order or quote upon entry, or cancel at the conclusion of an auction, if its price exceeds a preestablished, Exchange-defined ‘‘specified threshold’’ amount above or below the reference price. The Reference Price for calculating Limit Order Price Protection for an order or quote to buy (sell) will be the NBO (NBB), provided that, immediately 121 See proposed Rule 22.250(c), which is substantively identical to NYSE Arca Options Rule 6.40P–O(c). 122 The time of receipt for an order or quote is the time such message is processed by the Exchange’s order book. 123 Pre-trade risk controls are implemented prior to an order or quote resting on the order book (or being placed on the book again following an auction) and therefore do not implicate firm quote obligations. 124 See proposed Rule 22.250(e), which is substantively identical to NYSE Arca Options Rule 6.40P–O(e). 125 See proposed Rule 22.260(a), which is substantively identical to NYSE Arca Options Rule 6.62P–O(a)(3). 126 IEX notes that these proposed risk control mechanisms are based on similar rules of other options exchanges, in particular: NYSE Arca Options Rules 6.62P–O(a)(3) and 6.41P–O and C1 Rules 5.34(a)(1), (2) and (4). E:\FR\FM\19MRN1.SGM 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 following an auction, the reference price will be the price at which the auction match occurred, or, if none, the upper (lower) auction collar price, or, if none, the NBO (NBB). Market Orders in No-Bid (Offer) Series.127 If the Trading System receives a sell Market order in a series after it is open for trading with an NBB of zero and an NBO less than or equal to $0.50, then the Trading System converts the Market order to a Limit order with a limit price equal to the minimum trading increment applicable to the series and enters the order into the IEX Options. If the Trading System receives a sell Market order in a series after it is open for trading with an NBB of zero and an NBO greater than $0.50, then the Trading System cancels or rejects the Market order, except if the sell Market order would be subject to the drillthrough protection (as discussed below), in which case the order joins the ongoing drill-through process. If the Trading System receives a buy Market order in a series after it is open for trading with an NBO of zero, the Trading System cancels or rejects the Market order. Market Order NBBO Width Protection.128 If a User submits a Market order to the Trading System when the NBBO width is greater than x% of the midpoint of the NBBO, subject to a minimum and maximum dollar value (the Exchange determines ‘‘x’’ and the minimum and maximum dollar values on a class-by-class basis), the Trading System cancels or rejects the Market order. Price Reasonability Checks.129 Additionally, the Exchange will apply price reasonability checks to most Limit orders and quotes during continuous trading on each trading day. One price reasonability check, the ‘‘arbitrage check’’, will reject order or quote messages to buy put options if the price of the order is equal to or greater than the strike price of the option and will reject (or cancel, if resting) order or quote messages to buy call options if the price of the order is equal to or greater than the price of the last trade in the underlying security plus an Exchangedefined specified threshold.130 Another price reasonability check, the ‘‘intrinsic value check’’, will assess the intrinsic 127 See proposed Rule 22.260(b), which is substantively identical to C1 Rule 5.34(a)(1). 128 See proposed Rule 22.260(c), which is substantively identical to C1 Rule 5.34(a)(2). 129 See proposed Rule 22.260(d), which is substantively identical to NYSE Arca Options Rule 6.41P–O. 130 See proposed Rule 22.260(d)(2), which is substantively identical to NYSE Arca Options Rule 6.41P–O(b). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 value of an option based on the last sale price of the underlying security (for calls) or the strike price of the option (for puts), and reject or cancel certain orders or quotes if the price of the order is dislocated from the intrinsic value of the option by a certain Exchangedefined specified threshold.131 Drill-Through Protection. Another proposed price protection mechanism is drill-through protection, which will prevent an order from executing beyond a ‘‘buffer amount’’ determined based on a drill-through price.132 This rule is based upon and substantially similar to C1 Rule 5.34(a)(4), with the distinction that IEX’s Drill-Through Protection will have a finite, Exchange-defined number of iterations, that are communicated by a Trading Alert with at least 30 days prior notice.133 IEX notes that other exchanges have also set a finite number of iterations for their Drill-Through Protection.134 Options Risk Parameter. In order to provide additional protection to Market Makers to address structural challenges 135 they face in the listed options market, IEX proposes to offer an optional quote parameter that would augment the standard risk tools that will be available to Options Market Makers referred to as the Options Risk Parameter (‘‘ORP’’). As proposed, the ORP will be a parameter that can be applied to a quotation that rests on the Order Book at the price designated by the Market Maker that entered the quotation. When the ORP is triggered based on pre-defined criteria, the relevant quotation(s) will be adjusted in a manner specified transparently in IEX’s rules and related Trading Alerts, as described below.136 The ORP would leverage IEX’s proprietary mathematical formula—the Options Quote Indicator (the ‘‘Indicator’’)—which is based on the preeminent Black-Scholes options 131 See proposed Rule 22.260(d)(3), which is substantively identical to NYSE Arca Options Rule 6.41P–O(c). IEX notes that like NYSE Arca Options, the term ‘‘Automated Breach Action’’ is used in two of its risk controls with different meanings: first with respect to the intrinsic value risk checks for market makers, see NYSE Arca Options Rule 6.40P– O(d) and proposed Rule 22.260(d)(3)(E); and also with respect to activity based risk controls. See NYSE Arca Options Rule 6.41P–O(d) and proposed Rule 22.250(c). 132 See proposed Rule 22.260(e). 133 IEX notes that other exchanges also have the ability to change any exchange-determined parameters with a trading alert. See, e.g., C1 Rule 1.5. 134 See, e.g., Securities Exchange Act Release No. 86923 (September 10, 2019), 84 FR 48664 (September 16, 2019) (SR–CBOE–2019–057) with respect to C1 prior functionality. 135 See infra note 150. 136 See proposed IEX Rule 23.150(h). PO 00000 Frm 00208 Fmt 4703 Sfmt 4703 12903 pricing model. This Nobel-Prizewinning approach for evaluating the price of an options contract has been studied extensively, and is widely considered as a primary starting point for both academic and industrial options pricing applications.137 Proposed Rule 23.150(h) sets forth the application of the Indicator and optional ORP.138 As with the standard risk checks, the ORP is designed to enable Market Makers to provide tighter and deeper quotes on IEX by providing protection from execution against stale quotes by identifying when the best Protected Bid or best Protected Offer of the Away Markets (as defined in Proposed Rule 22.160(a)(8)) in a particular options series is sufficiently dislocated from the price of the underlying security to indicate that the best Protected Bid or best Protected Offer of the Away Markets in the options series is likely in transition. The Exchange will determine on a class-byclass basis whether to make the ORP available, which determination will be communicated by Trading Alert.139 Offering the Indicator on a class-by-class basis would enable the Exchange to utilize the ORP for classes with a high potential for adverse selection, while excluding classes presenting lower risk of adverse selection (such as classes with relatively lower volumes). This flexibility will therefore allow the Exchange to ensure the ORP is available for those classes where its use will achieve its intended purpose, while excluding its use where it would likely provide little additional value and could introduce unnecessary complexity (for example, for classes that are subject to a pending corporate action or other nonstandard characteristic).140 As proposed, the Exchange will utilize the Indicator, which is a fixed formula specified transparently in IEX’s rules and related Trading Alerts, to assess the probability of an imminent change to the current best Protected Bid 141 of the Away Markets to a lower price or of an imminent change to the 137 See Revolutionary Black-Scholes Option Pricing Model is Published by Fischer Black, Later a Partner at Goldman Sachs, available at https:// www.goldmansachs.com/our-firm/history/ moments/1973-black-scholes. 138 The quote instability calculation is set forth in Supplementary Material .04 to proposed Rule 23.150(h); the calculation of implied volatility is set forth in Supplementary Material .05 to proposed Rule 23.150(h). 139 See proposed IEX Rule 23.150(h)(1). 140 The Exchange notes that it is not an equities listing exchange. The Exchange does not believe that making class-by-class determinations in this context or otherwise creates a conflict of interest. 141 See supra note 77 at 39370. E:\FR\FM\19MRN1.SGM 19MRN1 12904 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices current best Protected Offer 142 of the Away Markets to a higher price for a particular listed options series (i.e., an imminent adverse price change).143 As discussed above, the Exchange will periodically determine two aspects of the formula—the frequency of calculation of implied volatility 144 and the quote instability threshold.145 In determining the frequency of the implied volatility calculation and the quote instability threshold, the Exchange will consider the distribution of quote instability determinations, the precision of quote instability determinations, system capacity and performance, and client feedback. The Exchange believes that these factors are relevant to setting the initial values. Once the Options Trading System begins operation (subject to Commission approval of this rule proposal), the Exchange expects to also consider attributes like fill rates (resting and taking) 146 and markout data,147 as well as other factors it determines are relevant based on operational experience in order to optimize how both variables are set. In periodically adjusting each variable, the Exchange will consider each variable with a view towards appropriately balancing the interests of both liquidity takers and makers, as well as the need to optimize system capacity and performance. The Exchange will communicate any changes to the quote instability threshold and the implied volatility calculation frequency by Trading Alert with at least 30 days’ notice. 142 Id. 143 See proposed IEX Rule 23.150(h). proposed IEX Rule 23.150(h)(1) Supplementary Material .05. 145 See proposed IEX Rule 23.150(h)(1) Supplementary Material .04(2)(e). The quote instability threshold will be within a range of 0–1. For example, a quote instability threshold of 1 would indicate that the expected price change in the option resulting from price movement in the underlying would be 100% of the current price of the option. 146 Fill rate data measures the degree to which incoming orders are able to execute against a resting order on a venue and are a measure of the percent of shares of an order that are filled (or executed) by such venue, adjusting for factors such as the size of the order compared to the size of a venue’s displayed quote. The maximum fill rate for an order is 100%. 147 Markouts measure the direction and degree to which the market moved after an execution, and are often measured as the difference between the execution price and the midpoint of the NBBO at various time intervals after a trade. Markouts are typically used as a way to measure the ‘‘quality’’ of a trade. In particular, short-term markouts of several milliseconds after the time of execution, are often used to assess whether an order was subject to ‘‘adverse selection’’ that can occur when a liquidity providing order is executed at a price that was about to become stale as a result of certain speed-based trading strategies. lotter on DSK11XQN23PROD with NOTICES1 144 See VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 The Indicator utilizes real time relative quoting activity of protected quotations from Signal Exchanges (as defined in IEX Rule 11.190(g)) in securities underlying each listed options series and a proprietary mathematical calculation (the ‘‘quote instability calculation’’), as described in more detail below, to assess the probability of an adverse price change in a particular options series. When the quote instability calculation identifies an imminent adverse price change to the best Protected Bid and/or best Protected Offer of the Away Markets in a particular listed options series, it will generate a quote instability determination. A quote instability determination may only be generated at least 200 microseconds after a prior quote instability determination for a particular options series on the same side of the market (i.e., affecting resting bids or offers). If a quote instability determination is generated for an options series quoted by a Market Maker and the quote is above (below) the price level of the quote instability determination, the quote will be either cancelled or repriced to the price level of the quote instability determination, as instructed by the Market Maker. IEX believes that offering this optional risk protection for market makers is particularly important in the options markets where market makers are exposed to added risk given their continuous quoting obligations. Although equities and options exchanges share a number of similarities, a meaningful difference is that in the listed options market, liquidity is available only on-exchange and is primarily displayed and derived from market maker quotes, and options markets, when compared to equities markets, have a much higher quote to trade ratio.148 Exchange market makers in the listed options market play an essential role in providing liquidity. Moreover, given the sheer difference in magnitude of tradeable instruments in 148 See Staff Report on Equity and Options Market Structure Conditions in Early 2021, (Oct. 14, 2021) at 4 (explaining that options market structure is broadly similar to equities market structure and noting a key difference that displayed liquidity is primarily derived from market maker quotes), available at https://www.sec.gov/files/staff-reportequity-options-market-struction-conditions-early2021.pdf; see also Lehoczky, Sandor and Woods, Ellen and Russell, Matthew and Nguyen, Mina and Somers, James, Dead Man’s Switch: Making Options Markets Safer with Active Quote Protection (May 2020) at 2 (explaining that options markets ‘‘depend especially on market makers—who account for 99.9% of open orders—to connect buyers and sellers, due to a combinatorial explosion of expirations and strike prices’’), available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=3675849. PO 00000 Frm 00209 Fmt 4703 Sfmt 4703 listed options as compared to equities (approximately 1.5 million listed options series compared to approximately 11,000 listed equity securities), the options exchanges often do not have the same sources of natural liquidity of buyers and sellers for each tradeable instrument as is generally the case for equities exchanges. Thus, options market makers are tasked with affirmative obligations to support the provision of liquidity to options exchanges through continuous twosided quotes in large numbers of listed options series. As a result, IEX understands that options market makers can be subject to excessive risk of one or more quotes being executed at stale prices compared to equities market makers or other liquidity providers.149 Because options market makers maintain hundreds (and sometimes thousands) of quotes on options for a given underlying security at any one time, a sudden market move in the underlying security can leave an options market maker vulnerable to being executed across multiple quotes that are stale and dislocated from the price of the underlying securities. Liquidity takers can target one or more of these stale quotes, with limited risk should they fail to execute (i.e., lost opportunity vs. trading at a stale price), before the Market Makers are able to move their quotes (often hundreds or more for a given underlying) to reflect the price change in the underlying securities, thereby exposing those Market Makers to potentially major losses. Without robust liquidity protection mechanisms to protect against these risks, Market Makers may be forced to widen their spreads, show less liquidity, or simply exit the market. Overall market quality could deteriorate as a result, and investors would suffer when it becomes too expensive to transact, or when there is insufficient liquidity to enable transacting altogether. Accordingly, liquidity protection mechanisms for Market makers, which all options exchanges offer, and IEX proposes to offer, are vital for achieving a healthy balance between market makers and liquidity takers in the listed 149 See, e.g., Protecting Liquidity in Options Markets, Market Structure, Optiver, July 12, 2023 (concluding that ‘‘liquidity protection improves options markets’’ by safeguarding market makers against ‘‘excessive risk’’ that results from ‘‘liquidity providers maintain[ing] hundreds of quotes on a given underlying at any one time [and] a sudden market move can leave them vulnerable to showing stale, or outdated, quotes,’’ thereby ‘‘exposing them to potentially major losses’’ if unable to amend or cancel quotes before executed), available at https:// optiver.com/insights/protecting-liquidity-inoptions-markets/. E:\FR\FM\19MRN1.SGM 19MRN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices options market. These include, but are not limited to, activity-based risk controls, price reasonability checks, and functionality (such as bulk quoting and purge ports) to facilitate timely quoting, quote updates, and quote cancellation. For each options series, the Trading System will maintain a real-time estimate of the sensitivity of the series to changes in the midpoint of the best Protected Bid and best Protected Offer of the Signal Exchanges for the underlying security (based on a BlackScholes assessment). When there is a change in the best Protected Bid or best Protected Offer of the Signal Exchanges for the underlying security, the Trading System will use the quote instability calculation formula set forth in proposed IEX Rule 23.150(h) to calculate whether to generate a quote instability determination for each options series overlying the underlying security. The Trading System independently assesses whether to generate a quote instability determination affecting resting bids or offers for each options series. A quote instability determination is generated by the Trading System when, pursuant to the quote instability calculation, the quote instability factor is greater than the defined quote instability threshold and the delta absolute value is within the delta bound band.150 As proposed, the delta bound band would be uniformly applied across all options in order to more narrowly tailor deployment of the ORP to options series at the greatest risk of adverse selection based on the Exchange’s assessment of relevant factors. If a Market Maker has opted to utilize the ORP and its quote in an options series that was the subject of a quote instability determination is at or above (below) the price level of the quote instability determination the Trading System will either cancel the Market Maker’s quote or reprice it to the price level of the quote instability determination, pursuant to the Market Maker’s instruction.151 Regardless of whether it chooses to use the ORP, a Market Maker will be able to adjust the price of its quote in the same manner as other Market Makers’ quotes that have not opted to use the ORP. One Second Exposure Period. Proposed Rule 23.200 would require Options Members to expose their customers’ orders on the Exchange for at 150 As specified in Supplementary Material .04(1)(q) to proposed Rule 23.150(m), the delta bound band will be set at a value that is periodically determined by the Exchange to be at or within a range of 0–1, which determination will be communicated by Trading Alert. 151 See proposed IEX Rule 23.150(h)(1)(c). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 least one second under certain circumstances before trading against such orders. During this one second exposure period, other Options Members will be able to enter orders to trade against the exposed order. In adopting a one second order exposure period, the Exchange is proposing a requirement that is consistent with the rules of other options exchanges.152 Thus, the exposure period will allow Options Members that are members of other options exchanges to comply with proposed Rule 23.200 without programming separate time parameters into their systems for order entry or compliance purposes. The Exchange believes that market participants are sufficiently automated that a one second exposure period allows an adequate time for market participants to electronically respond to an order. Also, it is possible that market participants might wait until the end of the exposure period, no matter how long, before responding. Thus, the Exchange believes that any longer than one second would not further the protection of investors or market participants, but rather, would potentially increase market risk to investors and other market participants by creating a longer period of time for the exposed order to be subject to market risk. Options Order Protection and Locked/ Crossed Market Plan Rules The Exchange will participate in the Options Order Protection and Locked/ Crossed Market Plan (the ‘‘Plan’’),153 and therefore will be required to comply with the obligations of Participants under the Plan. The Exchange proposes to adopt rules relating to the Plan that are substantially similar to the rules in place on all of the options exchanges that are Participants to the Plan. The Plan essentially applies the Regulation NMS price-protection provisions to the options markets. Similar to Regulation NMS, the Plan requires the Plan Participants to adopt rules ‘‘reasonably designed to prevent Trade-Throughs’’, while exempting ISOs from that prohibition. The Plan’s definition of an ISO is essentially the same as under Regulation NMS. The remaining exceptions to the trade-through prohibition, discussed more specifically below, either track those under Regulation NMS or correspond to unique aspects of the options market, or both. The proposed rules in Chapter 28 (Options Order Protection and Locked 152 See, e.g., MEMX Rule 22.11; C1 Rule 5.9; and MIAX Options Rule 520(b). 153 See supra note 77. PO 00000 Frm 00210 Fmt 4703 Sfmt 4703 12905 and Crossed Markets Rules) conform to the requirements of the Plan. Proposed Rule 28.100 sets forth the defined terms for use under the Plan. Proposed Rule 28.110 prohibits trade-throughs and exempts ISOs from that prohibition. Proposed Rule 28.110 also contains additional exceptions to the tradethrough prohibition that track the exceptions under Regulation NMS or correspond to unique aspects of the options market, or both. Proposed Rule 28.120 sets forth the general prohibition against locking/ crossing other eligible exchanges as well as certain enumerated exceptions that permit locked markets in limited circumstances; such exceptions have been approved by the Commission for inclusion in the rules of other options exchanges. Specifically, the exceptions to the general prohibition on locking and crossing occur when: (1) the locking or crossing quotation was displayed at a time when the Exchange was experiencing a failure, material delay, or malfunction of its systems or equipment; (2) the locking or crossing quotation was displayed at a time when there is a Crossed Market; (3) the Options Member simultaneously routed an ISO to execute against the full displayed size of any locked or crossed Protected Bid or Protected Offer; or (4) with respect to a locking quotation, the order entered on the Exchange that will lock a Protected Bid or Protected Offer, is: (i) not a Customer order, and the Exchange can determine via identification available pursuant to the OPRA Plan that such Protected Bid or Protected Offer does not represent, in whole or in part, a Customer order; or (ii) a Customer order, and the Exchange can determine via identification available pursuant to the OPRA Plan that such Protected Bid or Protected Offer does not represent, in whole or in part, a Customer order, and, on a caseby-case basis, the Customer specifically authorizes the Member to lock such Protected Bid or Protected Offer.154 The Exchange notes that the proposed rules in Chapter 28 (Options Order Protection and Locked and Crossed Markets Rules) are substantively identical to the rules of MEMX Options.155 Securities Traded on IEX Options General Listing Standards. The Exchange proposes to adopt listing standards for options traded on IEX Options as described in Chapter 20 (Securities Traded on IEX Options), which are substantively identical to the 154 See 155 See E:\FR\FM\19MRN1.SGM proposed Rule 28.120(b). MEMX Rule 27.1, 27.2, and 27.3. 19MRN1 12906 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices equivalent MEMX Options rules,156 with the exception of: (i) some language in Supplementary Material .02 to proposed Rule 20.140 concerning the $1 strike price program which is not included in the equivalent MEMX rule, and therefore borrowed from the equivalent MIAX rule; 157 and (ii) the addition of language allowing the Exchange to list for closing transactions an Options series that is listed but restricted to closing transactions on another exchange.158 The Exchange will join the Options Listings Procedures Plan and will list and trade options already listed on other options exchanges. The Exchange will gradually phase-in its trading of options, beginning with a selection of actively traded options. Conduct and Operational Rules for Options Members The Exchange proposes to adopt rules in Chapter 19 for IEX Options that are substantively identical to the rules of MEMX Options regarding: exercises and deliveries as described in Chapter 24 (Exercises and Deliveries); records, reports and audits as described in Chapter 25 (Records, Reports and Audits); minor rule violations as described in Chapter 26 (Discipline and Summary Suspensions); doing business with the public as described in Chapter 27 (Doing Business With the Public); and margin as described in Chapter 29 (Margin Requirements).159 The Exchange also proposes to adopt rules that are substantively similar to most of MEMX’s Chapter 18 (Business Conduct), with the exception of proposed Rules 19.160 (Position Limits), 19.170 (Exemptions from Position Limits), 19.180 (Exercise Limits) that are substantively similar to MIAX Rules 307, 308, and 309, respectively. IEX proposed to adopt MIAX’s versions of these rules because they provided specificity about the types of position limits the Exchange will apply to Options Members (as opposed to the MEMX rules, which rely on position limits set by other exchanges). lotter on DSK11XQN23PROD with NOTICES1 National Market System IEX Options will operate as a full and equal participant in the national market 156 See MEMX Rules, Chapter 19. IEX notes that the MEMX Rules include Chapter 29: Index Rules. IEX is not proposing to adopt similar rules at this time, and any references to index options in MEMX Chapter 19 are not in proposed IEX Chapter 20. 157 See MIAX Rule 404 Interpretation and Policy .01. 158 See Supplementary Material .01 to proposed Rule 20.130, which mirrors MIAX Rule 403 Interpretation and Policy .01. 159 See MEMX Rules, Chapters 23, 24, 25, 26 and 28. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 system for options trading established under Section 11A of the Exchange Act.160 IEX Options will become a member of the Options Price Reporting Authority (‘‘OPRA’’), the Options Linkage Authority (‘‘OLA’’), the Options Regulatory Surveillance Authority (‘‘ORSA’’), and the Options Listing Procedures Plan (‘‘OLPP’’). The Exchange expects to participate in those plans on the same terms currently applicable to current members of those plans. The Exchange is in the process of contacting the leadership of each options-related national market system plan to begin the membership process. Regulation The Exchange will leverage many of the structures it established to operate a national securities exchange trading NMS equities securities, in compliance with Section 6 of the Exchange Act.161 As described in more detail below, there will be three elements of that regulation: (1) the Exchange will join the existing options industry agreements pursuant to Section 17(d) of the Exchange Act prior to commencing operations,162 as it did with respect to equities; (2) the Exchange’s Regulatory Services Agreement (‘‘RSA’’) with FINRA will be amended prior to commencing operations to provide that FINRA will perform regulatory surveillance, investigation, disciplinary and hearing services of options trading on IEX subject to oversight by IEX Regulation, just as it does for equities regulation; and (3) the Exchange will perform options listing regulation, as well as authorize Options Members to trade on IEX Options. Section 17(d) of the Exchange Act and the related Exchange Act rules permit SROs to allocate certain regulatory responsibilities to avoid duplicative oversight and regulation. Under Exchange Act Rule 17d–1,163 the SEC designates one SRO to be the Designated Examining Authority, or DEA, for each brokerdealer that is a member of more than one SRO. The DEA is responsible for the financial aspects of that broker-dealer’s regulatory oversight. Because IEX Options Members also must be members of at least one other SRO, the Exchange would generally not expect to be designated as the DEA for any of its members.164 160 15 U.S.C. 78k–1. U.S.C. 78f. 162 15 U.S.C. 78q(d). 163 17 CFR 240.17d–1. 164 If IEX were to be designated as the DEA for any of its members, FINRA would perform the DEA functions on behalf of IEX pursuant to the RSA. 161 15 PO 00000 Frm 00211 Fmt 4703 Sfmt 4703 Exchange Act Rule 17d–2 165 permits SROs to file with the Commission plans under which the SROs allocate among each other the responsibility to receive regulatory reports from, and examine and enforce compliance with specified provisions of the Exchange Act and rules thereunder and SRO rules by, firms that are members of more than one SRO (‘‘common members’’). If such a plan is declared effective by the Commission, an SRO that is a party to the plan is relieved of regulatory responsibility as to any common member for whom responsibility is allocated under the plan to another SRO. All of the options exchanges, FINRA, and NYSE have entered into the Options Sales Practices Agreement, a Rule 17d– 2 agreement, and the Exchange intends to join this agreement prior to the commencement of operations for IEX Options. Under this Agreement, the examining SROs will examine firms that are common members of the Exchange and the particular examining SRO for compliance with certain provisions of the Exchange Act, certain of the rules and regulations adopted thereunder, certain examining SRO rules, and certain proposed IEX Options rules. In addition, the proposed IEX Options rules contemplate participation in this Agreement by requiring that any Options Member also be a member of at least one of the examining SROs. The Exchange and FINRA are also party to a bilateral Rule 17d–2 agreement that requires minor modifications due to the proposed launch of IEX Options. The Exchange intends to modify and seek Commission approval of the modified bilateral Rule 17d–2 agreement prior to commencing of operations for IEX Options. Additionally, all of the options exchanges and FINRA have entered into the Options-Related Market Surveillance Agreement, a Rule 17d–2 agreement, and the Exchange intends to join this agreement prior to the commencement of operations for IEX Options. For those regulatory responsibilities that fall outside the scope of any Rule 17d–2 agreements, the Exchange will retain full regulatory responsibility under the Exchange Act. However, the Exchange has entered into an RSA with FINRA, as discussed above, pursuant to which FINRA personnel operate as agents for the Exchange in performing certain of these functions. The Exchange and FINRA will continue to operate under the RSA that is currently in place but with modifications as necessary to accommodate the expanded scope of the 165 17 E:\FR\FM\19MRN1.SGM CFR 240.17d–2. 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 relationship. The necessary modifications will be implemented prior to the commencement of operations of IEX Options. As is the case with the Exchange’s equities market, the Exchange will oversee FINRA and continue to bear ultimate regulatory responsibility with respect to regulatory functions not subject to allocation to FINRA or another SRO pursuant to a Rule 17d–2 Agreement for the IEX Options Exchange. Consistent with the Exchange’s existing regulatory structure, the Exchange’s Chief Regulatory Officer, reporting to the Regulatory Oversight Committee of the Exchange’s board of directors, shall have general supervision of the regulatory operations of IEX Options, including responsibility for overseeing the surveillance, examination, and enforcement functions and for administering all regulatory services agreements applicable to IEX Options. Similarly, the Exchange’s existing Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of Exchange’s regulatory and self-regulatory organization responsibilities, including those applicable to IEX Options. As it does with equities, the Exchange will monitor trading on IEX Options, both through internal reports and FINRA surveillances for the purpose of maintaining a fair and orderly market. As it does with its equities trading, the Exchange will monitor IEX Options to identify unusual trading patterns and determine whether particular trading activity requires further regulatory investigation by FINRA. Finally, the Exchange will oversee the process for determining and implementing trade halts, identifying and responding to unusual market conditions, and administering the Exchange’s process for identifying and remediating ‘‘obvious errors’’ by and among its Options Members.166 The proposed rules in Chapter 21 (Regulation of Trading on IEX Options) regarding halts,167 unusual market conditions, extraordinary market volatility, obvious errors, audit trail, and rules regarding prohibited and 166 IEX notes that like MEMX Rule 20.6, proposed Rule 21.150 authorizes the proposed Error Panel to review decisions made under this rule, which includes decisions to classify a transaction as a Catastrophic Error. 167 Proposed Rule 21.120(b) states that during a trading halt, the Exchange shall process new and existing orders and quotes in a series in accordance with proposed Rule 22.160(g). Proposed Rule 22.160(g), which is substantively identical to NYSE Arca Options Rule 6.64P–O(g), states that during a trading halt, the Exchange will cancel all resting Market Maker quotes. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 permissible transfers of options positions off the Exchange are substantively identical to the approved rules of MEMX Options.168 Minor Rule Violation Plan The Exchange’s disciplinary rules, including Exchange Rules applicable to ‘‘minor rule violations,’’ are set forth in Chapter 9 of the Exchange’s current Rules. Such disciplinary rules will apply to Options Members and their associated persons. The Commission approved the Exchange’s Minor Rule Violation Plan (‘‘MRVP’’) in 2016.169 The Exchange’s MRVP specifies the uncontested minor rule violations that are included in the MRVP and have sanctions not exceeding $2,500. Any violations that are resolved under the MRVP would not be subject to the provisions of Rule 19d–1(c)(1) under the Act 170 requiring that an SRO promptly file notice with the Commission of any final disciplinary action taken with respect to any person or organization.171 The Exchange’s MRVP includes the policies and procedures included in Exchange Rule 9.216(b) and the violations included in Rule 9.218. Under Rule 9.216(b), the Exchange may impose a fine (not to exceed $2,500) and/or a censure on any Member or associated person with respect to any rule listed in IEX Rule 9.218. If the Financial Industry Regulatory Authority Department of Enforcement or the Department of Market Regulation, on behalf of the Exchange, has reason to believe a violation has occurred and if the Member or associated person does not dispute the violation, the Department of Enforcement or the Department of Market Regulation may prepare and request that the Member or associated person execute a minor rule violation plan letter accepting a finding of violation, consenting to the imposition 168 See MEMX Rules, Chapter 20. Securities Exchange Act Release No. 78474 (August 3, 2016), 81 FR 52717 (August 9, 2016) (Order Declaring Effective a Minor Rule Violation Plan) (File No. 4–701). 170 17 CFR 240.19d–1(c)(1). 171 The Commission adopted amendments to paragraph (c) of Rule 19d–1 to allow SROs to submit for Commission approval plans for the abbreviated reporting of minor disciplinary infractions. See Release No. 34–21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any disciplinary action taken by an SRO against any person for violation of a rule of the SRO which has been designated as a minor rule violation pursuant to such a plan filed with and declared effective by the Commission will not be considered ‘‘final’’ for purposes of Section 19(d)(1) of the Act if the sanction imposed consists of a fine not exceeding $2,500 and the sanctioned person has not sought an adjudication, including a hearing, or otherwise exhausted his administrative remedies. 169 See PO 00000 Frm 00212 Fmt 4703 Sfmt 4703 12907 of sanctions, and agreeing to waive the Member’s or associated person’s right to a hearing before a Hearing Panel or, if applicable, an Extended Hearing Panel, and any right of appeal to the IEX Appeals Committee, the Board, the Commission, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter must describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed. Unless the letter states otherwise, the effective date of any sanction imposed will be a date to be determined by IEX Regulation staff. In the event the letter is not accepted by the Member or associated person, or is rejected by the Office of Disciplinary Affairs, the matter can proceed in accordance with the Exchange’s disciplinary rules, which include hearing rights for formal disciplinary proceedings. The Exchange proposes to amend its MRVP and Exchange Rule 9.218 to add certain rules relating to Options as set forth in proposed Rule 26.120 (Penalty for Minor Rule Violations) to the list of rules eligible for Minor Rule Violation Plan treatment.172 The rules included in proposed Rule 26.120, as appropriate for disposition under the Exchange’s MRVP, are: (a) position limit and exercise limit violations; (b) violations regarding the failure to accurately report position and account information; (c) Market Maker quoting obligations; (d) violations regarding expiring exercise declarations; (e) violations relating to the failure to respond to the Exchange’s requests for the submission of trade data; and (f) violations relating to noncompliance with the Consolidated Audit Trail Compliance Rule requirements. The rule violations included in proposed Rule 26.120 are the same as the rule violations included in the MRVPs of other options exchanges.173 Upon implementation of this proposal, the Exchange will include violations of the enumerated options trading rules, if any, in an applicable Exchange’s quarterly report of any actions taken on minor rule violations under the MRVP.174 A quarterly report would include: the Exchange’s internal file number for the case, the name of the 172 In its proposal to adopt the MRVP, the Exchange requested that, going forward, to the extent that there are any changes to the rules applicable to the Exchange’s MRVP, the Exchange requests that the Commission deem such changes to be modifications to the Exchange’s MRVP. 173 See, e.g., MEMX Rules, Chapter 25. 174 To date, the Exchange has not taken any minor rule violation actions. E:\FR\FM\19MRN1.SGM 19MRN1 12908 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 individual and/or organization, the nature of the violation, the specific rule provision violated, the sanction imposed, the number of times the rule violation has occurred, and the date of disposition. The Exchange’s MRVP, as proposed to be amended herein, is consistent with Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in part, that an exchange have the capacity to enforce compliance with, and provide appropriate discipline for, violations of the rules of the Commission and of the exchange, 6(b)(6) provides that members and persons and associated members shall be appropriately disciplined for violation of the provisions of the rules of the exchange, by expulsion, suspension, limitation of activities, functions and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction.175 Rule violations listed in proposed Rule 26.120 are minor in nature and will be more appropriately disciplined through the Exchange’s MRVP and therefore proposes to add them to the list of rules eligible for minor rule fine disposition In addition, because Rule 9.216(b) offers procedural rights to a person sanctioned for a violation listed in proposed Rule 26.120, the Exchange will provide a fair procedure for the disciplining of members and associated persons, consistent with Section 6(b)(7) of the Act.176 This proposal to include the rules listed in proposed Rule 26.120 in the Exchange’s MRVP is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act, as required by Rule 19d–1(c)(2) under the Act,177 because it should strengthen the Exchange’s ability to carry out its oversight and enforcement responsibilities as an SRO in cases where full disciplinary proceedings are unsuitable in view of the minor nature of the particular violation. In requesting the proposed change to the MRVP, the Exchange in no way minimizes the importance of compliance with Exchange Rules and all other rules subject to the imposition of fines under the MRVP. Minor rule fines provide a meaningful sanction for minor or technical violations of rules when the conduct at issue does not warrant stronger, immediately reportable 175 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6). 176 15 U.S.C. 78f(b)(7). Rule 9.216(b) does not preclude an Options Member or person associated with an Options Member from contesting an alleged violation and receiving a hearing on the matter with the same procedural rights through a litigated disciplinary proceeding. 177 17 CFR 240.19d–1(c)(2). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 disciplinary sanctions. The inclusion of a rule in the Exchange’s MRVP does not minimize the importance of compliance with the rule, nor does it preclude the Exchange from choosing to pursue violations of eligible rules through the Exchange’s disciplinary rules if the nature of the violation or prior disciplinary history warrants more significant sanctions. However, the MRVP provides a reasonable means of addressing rule violations that do not rise to the level of requiring formal disciplinary proceedings, while providing greater flexibility in handling certain violations.178 The Exchange will continue to conduct surveillance with due diligence and make a determination based on its findings, on a case-by-case basis, whether a fine of more or less than the recommended amount is appropriate for a violation under the MRVP or whether a violation requires a formal disciplinary action. Section 36 Exemption Request The Exchange proposes to incorporate by reference as IEX Options rules certain rules of the Cboe Exchange, Inc. (‘‘CBOE’’), the New York Stock Exchange (‘‘NYSE’’), and FINRA. Specifically, proposed Rule 27.250 proposes to incorporate by reference the applicable rules of FINRA with respect to Communications with Public Customers, and proposed Rule 29.120 proposes to incorporate by reference initial and maintenance margin requirements of either CBOE or NYSE. Thus, for certain IEX Options rules, Exchange members will comply with a IEX Options rule by complying with the CBOE, NYSE, or FINRA rule referenced. Using its authority under Section 36 of the Act, the Commission has previously exempted certain SROs from the requirement to file proposed rule changes under Section 19(b) of the Act when incorporating another SRO’s rules by reference.179 Each such exempt SRO has agreed to be governed by the incorporated rules, as amended from time to time, but, has not been required to file a separate proposed rule change with the Commission each time the SRO whose rules are incorporated by reference seeks to modify its rules. In addition, each SRO incorporated by reference only regulatory rules (e.g., 178 See supra note 176. e.g., Securities Exchange Act Release No. 49260 (February 17, 2004), 69 FR 8500 (February 24, 2004). See also Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 14521, 14539– 40 (March 18, 2008) (order approving SR– NASDAQ–2007–004 and SR–NASDAQ–2007–080) and 53128 (January 13, 2006), 71 FR 3550, 3565– 66 (January 23, 2006) (File No. 10–131) (approving The NASDAQ Stock Market LLC’s exchange application). 179 See, PO 00000 Frm 00213 Fmt 4703 Sfmt 4703 margin, suitability, arbitration), not trading rules, and incorporated by reference whole categories of rules (i.e., did not ‘‘cherry-pick’’ certain individual rules within a category). Last, each exempt SRO had reasonable procedures in place to provide written notice to its members each time a change is proposed to the incorporated rules of another SRO in order to provide its members with notice of a proposed rule change that affects their interests, so that they would have an opportunity to comment on it. In connection with this proposal, the Exchange respectfully requests, pursuant to Rule 240.0–12 under the Act,180 an exemption under Section 36 of the Act from the rule filing requirements of Section 19(b) of the Act for changes to those IEX Options rules that are effected solely by virtue of a change to a cross-referenced CBOE, NYSE, or FINRA rule. The Exchange proposes to incorporate by reference categories of rules (rather than individual rules within a category) that are not trading rules. The Exchange also agrees to provide written notice to Options Members prior to the launch of IEX Options of the specific CBOE, NYSE, and FINRA rules that it will incorporate by reference. In addition, the Exchange will notify Options Members whenever CBOE, NYSE, or FINRA proposes a change to a crossreferenced CBOE, NYSE, or FINRA rule.181 For the foregoing reasons, the Exchange believes that its request for exemptive relief is consistent with prior requests for, and provision of, similar exemptive relief. Amendments to Existing Exchange Rules In addition to the rules of IEX Options proposed above, the Exchange proposes to amend certain of its existing Exchange Rules that currently apply to the Exchange’s equities market in order to reflect the Exchange’s proposed operation of IEX Options. First, the Exchange proposes to amend Rule 2.160(i), which generally requires each Member to register at least two Principals with the Exchange subject to certain exceptions described therein, to provide that such paragraph (i) shall not apply to a Member that solely conducts business on the 180 17 CFR 240.0–12. Exchange will provide such notice through a posting on the same website location where the Exchange will post its own rule filings pursuant to Rule 19b-4(l) under Act, within the time frame required by that rule. The website posting will include a link to the location on the CBOE, NYSE, or FINRA websites where the proposed rule change is posted. 181 The E:\FR\FM\19MRN1.SGM 19MRN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices Exchange as an Options Member, however, Options Members must comply with the registration requirements set forth in proposed Rule 18.110. The Exchange notes that proposed Rule 18.110(h), which provides that every Options Member shall have at least one Options Principal and sets forth the Exchange’s Options Principal registration requirements, is identical to MEMX Rule 17.2(g). In connection with this proposed change, the Exchange also proposes to amend Rule 2.160(n) to include Options Principal as a registration category and to set forth the Exchange’s qualification requirements for an Options Principal, which are the same as those for an Options Principal on MEMX Options. Additionally, the Exchange proposes to amend Rule 2.160(p)(a)(4) to set forth the appropriate regulatory element continuing education module for reregistration as an Options Principal. The Exchange also proposes to make three modifications to Rule 2.220 (IEX Services LLC as Outbound Router). First, IEX proposes to remove the word ‘‘directly’’ from the first sentence of subparagraph (a), because IEX Services will continue to route orders to away markets, but as described above, with respect to options routing, it will not route those order ‘‘directly’’ to the away markets. Second, consistent with the first change, IEX proposes to insert a new second sentence in subparagraph (a) that reads: ‘‘When routing options orders, as set forth in Rule 22.180, IEX Services will transmit such orders to one or more routing brokers that are not affiliated with the Exchange; the routing brokers will in turn route the applicable options orders to other securities exchanges that trade options.’’ IEX proposes to make this change to reflect the different nature of how IEX Services will handle routing options orders from equities orders. And third, IEX proposes to modify subparagraph (a)(8) of this rule, which states that IEX Services shall maintain an error account for the purpose of addressing positions that are the result of an execution or executions that are not clearly erroneous under Rule 11.270 and result from a technical or systems issue at IEX Services, the Exchange, a routing destination, or a non-affiliate third-party routing broker that affects one or more orders (‘‘Error Positions’’). The proposed change to Rule 2.220(a)(8) would add a reference to the comparable provision to that which governs review and resolution of clearly erroneous equities transactions (i.e., Rule 11.270) but for options transactions, namely Rule 21.150, which governs review and resolution of VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 options transactions that may qualify as obvious errors. The Exchange also proposes to adopt Rule 21.220 (Limitation of Liability), which is almost identical to the Rule 11.260, the Limitation of Liability rule in IEX’s equities trading rules. The only difference is to reflect that proposed Rule 21.220 applies to IEX Options and options trading. Lastly, the Exchange proposes to amend Rule 9.218 (Violations Appropriate for Disposition Under Plan Pursuant to Exchange Act Rule 19d1(c)(2)), which contains the list of Exchange Rule violations and recommended fine schedule, to include a new paragraph (k) referencing proposed Rule 26.120 for the recommended fines for minor rule violations of the Exchange Rules appliable to IEX Options, which the Exchange notes are the same as those of MEMX Options. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act 182 in general, and furthers the objectives of Section 6(b)(5) of the Act 183 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. As described above, the Exchange proposes to operate its options market much as it operates its equities market today and in a manner similar to that of other options exchanges, while leveraging IEX’s experience and expertise in understanding the needs of market makers to offer them additional tools designed to better manage risk and drive performance. As discussed in the Purpose section, IEX believes that the proposed enhanced liquidity protection mechanisms will result in market makers providing more competitive quotes which will benefit all market participants and thereby support the protection of investors and the public interest. Also as discussed in the Purpose section, most of the proposed IEX Options rules are based on the rules 182 15 183 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00214 Fmt 4703 of other options exchanges, primarily MEMX, C1, MIAX, NYSE Amex, and NYSE Arca. Therefore, the Exchange does not believe these aspects of the proposed rule change that are substantively identical to other exchanges’ rules raise any new or novel issues that have not been previously considered by the Commission. Moreover, the Exchange believes that the proposed functionality is consistent with Section 6(b)(5) of the Act because the Trading System is designed to be efficient and its operation transparent, thereby facilitating transactions in securities, removing impediments to and perfecting the mechanisms of a free and open national market system. As described above, the Exchange’s proposed rules, including the proposed Order Types and Handling Instructions, opening procedures, routing services, and order matching process are designed to provide a simplified suite of conventional features and to comply with all applicable regulatory requirements, including the obligations of the Options Order Protection and Locked/Crossed Market Plan.184 As discussed in the Purpose section, IEX’s proposal includes a de minimis latency mechanism (or speedbump) on incoming order and quote messages designed to enable IEX to update its view of the market prior to processing orders and quotes, and a robust suite of risk protections, including the ORP, which is designed to protect market makers from excessive risk due to execution of stale quotes. IEX believes that the proposed latency mechanism will protect investors and the public interest in several respects. First, by enabling IEX to update its view of market data prior to executing an order or quote, it thereby would support IEX’s ability to accurately account for contemporaneous market data. IEX notes that this aspect of its functionality is designed to facilitate market participants executing at current (i.e., not ‘‘stale’’) prices. Second, by enabling the Trading System to perform the Indicator calculation with current market data, it supports operation of the ORP (as discussed herein), which is designed to provide Market Makers with an optional tool to avoid excessive risk that can arise from execution of a stale quote. As discussed in detail above, IEX believes that this protection will encourage market makers to post aggressively priced and/or deeper quotes on the Exchange which will benefit all market participants. Thus, from a functional perspective, IEX believes that the operation of the latency 184 See Sfmt 4703 12909 E:\FR\FM\19MRN1.SGM supra note 77. 19MRN1 12910 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 mechanism is consistent with the Act. Further, and as explained below, the proposed latency mechanism of 350 microseconds is well within the geographic delays that exist among and between the data centers that IEX Options Members and other options exchanges use 185 and is consistent with the naturally occurring time indeterminism that exists in order processing.186 IEX also believes that the latency mechanism is consistent with the Commission Interpretation Regarding Automated Quotations Under Regulation NMS (‘‘de minimis delay interpretation’’).187 Although options markets do not have the same automated quotation requirements as in equities, even if they were to apply, the Commission’s reasoning in the de minimis delay interpretation in the context of NMS automated quotations is instructive, as the latency mechanism IEX is proposing for the options exchange is a de minimis delay that does not impair fair and efficient access to an exchange’s quotation. Specifically, the Commission stated in issuing its interpretation that intentional delays that are well within the geographic and technological latencies experienced by market participants when routing orders are de minimis to the extent they would not impair a market participant’s ability to access a displayed quotation 185 See https://www.ice.com/publicdocs/ICE_ Global_Network_Factsheet.pdf for a description of latencies between various data centers. 186 Accounting for the latency mechanism or speedbump is no different than accounting for other geographical distances between exchanges. See Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 41142, 41161 (June 23, 2016) (‘‘2016 SEC Approval Order’’) (approving IEX’s 350 microsecond speed bump in the registration of the IEX Exchange as ‘‘well within the range of geographic and technological latencies that market participants experience today’’ such that ‘‘latency to and from IEX will be comparable to—and even less than—delays attributable to other markets that currently are included in the NBBO,’’ and finding the delay to be de minimis, i.e., so short as to not frustrate the purposes of the Exchange Act by impairing fair and efficient access to IEX’s quotation); see also Securities and Exchange Act Release No. 34–89686 (August 26, 2020) (‘‘2020 SEC Approval Order’’) at 15 (determining that IEX’s de minimis speed bump when routing displayed equity orders is ‘‘just like accounting for any other technological or geographic latency’’ and doing so is consistent with applicable rules and regulations); see also Citadel Securities LLC v. Securities and Exchange Commission, 45 F.4th 27, 37 (D.C. Circuit 2022) (July 29, 2022) (ruling in favor of the SEC’s approval of IEX’s displayed equity order that traverses a speedbump and holding that IEX’s displayed equity order’s delay are ‘‘similar to the delay that traders’ communications already experience when traveling between various other exchanges across the country.’’). 187 See Commission Interpretation Regarding Automated Quotations Under Regulation NMS, Exchange Act Release No. 34–78102, 81 FR 40,785, 40,792 (June 23, 2016). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 consistent with the goals of NMS Rule 611.188 The Commission also noted that an intentional delay of any duration must be fully disclosed and codified in a written rule of the exchange, which, as described below, the latency mechanism will be fully disclosed and codified in IEX’s written rules.189 IEX believes that its proposed latency mechanism of 350 microseconds is fully consistent with the reasoning in the Commission’s de minimis delay interpretation.190 First, the delay is less than the existing geographic latencies experienced by market participants when routing orders. For example, latency between and among the data centers located in New Jersey range up to several hundred microseconds, with additional latency introduced by technology processing on both sides of an order or quote route between these data centers.191 Accordingly, the proposed latency mechanism is consistent with this aspect of the Commission’s de minimis interpretation. The proposed latency mechanism also meets the additional prongs of the de minimis interpretation, that it be fully disclosed and codified in a written rule of the exchange that has become effective pursuant to Section 19 of the Act; and that the exchange articulates how the purpose, operation, and application of the delay is consistent with the Act and the rules and regulations thereunder applicable to the exchange. The latency mechanism’s operation, as proposed, would be disclosed and codified in detail in IEX Rules 22.100(n) and 22.170(g). Those provisions specify that the latency mechanism shall mean a delay of 350 microseconds that is added to each incoming order and quote message from a User prior to processing by the Trading System, and that will not apply to other communications between the Exchange and Users, Away Markets, data feeds, order processing and order execution on the IEX Options Book, and 188 Id. 189 Id. 190 IEX notes that the D.C. Circuit Court also agreed with the Commission’s interpretation. The Court ruled entirely in favor of the SEC’s approval of IEX’s system that includes applying a speedbump and quote indicator to displayed equity orders. See Citadel Securities, 45 F.4th at 36 (concluding the SEC’s approval of a 350 microseconds intentional access delay for displayed orders to be ‘‘de minimis—i.e., a delay so short as to not frustrate the purposes of Rule 611 by impairing fair and efficient access to an exchange’s quotations’’); see also id. (‘‘The SEC’s conclusion that mere de minimis delays do not cause an order to violate Regulation NMS’s immediacy requirement was therefore reasonable.’’) 191 See https://www.ice.com/publicdocs/ICE_ Global_Network_Factsheet.pdf. PO 00000 Frm 00215 Fmt 4703 Sfmt 4703 outbound communications to the Exchange’s proprietary data feeds and OPRA. As discussed above, the purpose of the latency mechanism is to provide adequate time for the IEX Trading System to update its view of market data to enable it to accurately price orders as well as to perform the Indicator calculation with current market data. Consequently, based on the foregoing, the Exchange believes that the latency mechanism is both de minimis and otherwise consistent with the Act. The Exchange believes that the proposed ORP is consistent with Section 6(b) of the Act 192 in general, including furthering the objectives of Section 6(b)(5) of the Act,193 as the proposed optional risk protection mechanism would remove impediments to and perfect the mechanism of a free and open market and a national market system and promote just and equitable principles of trade by providing an optional quote parameter, available to all IEX Options Market Makers, that is designed to assess the probability of an adverse price change in a particular options series so that the Trading System can effectuate the advance trading instructions provided by the Market Maker to cancel or reprice its quote to the price level of the quote instability determination, as selected by the Market Maker. The ORP is an optional, narrowly tailored approach designed to provide protection from excessive risk of execution of stale quotes and thereby enable market makers to make tighter and larger quotes (i.e., quotes at narrower spreads with greater size) thus enhancing the quality of the IEX Options market, to the benefit of all market participants. The Exchange believes it is appropriate to provide market makers with the choice to utilize this reasonable quote protection, particularly given the continuous quoting obligations specific to market makers and their importance in providing liquidity in the listed options market. The Exchange further believes this risk functionality will encourage market makers to provide additional depth and liquidity to the Exchange’s markets, thereby removing impediments to and perfecting the mechanisms of a free and open market and a national market system and, in general, protecting investors and the public interest. The Exchange believes that the ORP supports the protection of investors and public interest goals of the Act. As described in the Purpose section, based on the structural differences between 192 15 193 15 E:\FR\FM\19MRN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 equities and listed options markets, the options exchanges often do not have the same natural liquidity of buyers and sellers for each tradeable instrument (i.e., options series) as is generally the case in equities. As a result, market makers with affirmative obligations play a central role in providing liquidity to options exchanges through continuous two-sided quotes in large numbers of listed options series, thereby enabling investors to transact in listed options in accordance with their investment objectives. Because options market makers are required to maintain hundreds (and sometimes thousands) of quotes on options overlying underlying securities at any one time, a sudden market move in the underlying security can leave them vulnerable to being executed on quotes that are stale and dislocated from the price of the underlying security.194 Liquidity takers can target these stale quotes, with limited risk should they fail, before the market maker has time to move its quotes to reflect the price change in the underlying security exposing them to potentially major losses. The ORP is designed to supplement the standard proposed risk checks to provide augmented protection to address the inherent risks faced by market makers. IEX believes that the operation of the ORP is similar to activity-based and price reasonability risk checks offered by other options exchanges (and proposed by IEX herein), in terms of its objective and impact on a resting quote.195 Each of 194 See, e.g., Lehoczky, Sandor and Woods, Ellen and Russell, Matthew and Nguyen, Mina and Somers, James, Dead Man’s Switch: Making Options Markets Safer with Active Quote Protection (May 2020) at 2–3, 6, available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=3675849 (discussing the need for quote protection for market makers to allow for a deep and liquid listed options market and explaining that ‘‘race conditions’’ negatively impact pricing efficiency, ‘‘as market makers have been shown to quote wider spreads or step back instead of continually updating with price moves for fear of being ‘‘picked off.’’); see also Citadel Securities, Market Lens, July 2020, available at https:// www.citadel.com/securities/wp-content/uploads/ sites/2/2020/07/Market-Lens-Order-CancellationWhite-Paper_FINAL.pdf (explaining the need for risk management in electronic trading given that ‘‘traders who place limit orders—the foundation of public price discovery—are exposed to the risk that their quotations will be executed at an inopportune time, leading to potential losses’’ and that the ‘‘greater the risk of an inopportune execution, the more compensation is required, which leads to wider bid-ask spreads. Conversely, anything the trader can do to lower the risk of an inopportune execution will lower the compensation required, which leads to narrower bid-ask spreads.’’). 195 See, e.g., Market-Maker Protections, Market Structure, Optiver, July 17, 2023, available at https://optiver.com/insights/market-makerprotections/ (explaining that exchanges implement robust market-maker protections to ‘‘assist market VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 these risk controls will cancel an order when the control is triggered based on a determination that the price of the market maker’s quote is ‘‘unreasonable’’ because it is no longer reflective of the price of the underlying security and therefore likely stale (price reasonability check) or that the execution activity of a market maker’s quotes exceeds the market maker’s risk tolerance (activitybased controls). Additionally, the trading collar and limit order protection rules of other options exchanges and those similarly proposed by IEX provide for orders to be repriced. However, IEX notes that the proposed ORP would be more transparent than the activity-based controls in determining when a market maker quote is potentially subject to cancelation (or adjustment) because it is based on a transparent formula specified in IEX’s rules and related Trading Alerts. In contrast, those triggers for an activitybased control are nonpublic and set by each exchange member. As discussed above, because of the lack of natural sources of liquidity across the multitude of listed options series, market makers are subject to affirmative obligations to maintain continuous two-sided quotes on hundreds or thousands of individual options series. While IEX proposes to offer bulk quoting and purge port functionality to market makers (in the same manner as other options exchanges), in a fast-moving market, their quotes can nonetheless become stale almost instantaneously. In those times, a sophisticated liquidity taker can target one or more stale market maker quotes before the market maker can update its quotes, thereby exposing the market maker to potentially major losses. The ORP is designed to assist market makers with an option to manage this risk, similar to the other risk controls. While some overlap is expected, IEX believes that the Indicator would potentially identify additional instances of stale quotes beyond those identified by the other price reasonability checks. Further, IEX notes that the operation of the Indicator is similar to the manner in which IEX’s equities market (the ‘‘Equities System’’) utilizes a ‘‘crumbling quote indicator’’ to encourage the provision of displayed liquidity by providing reasonably tailored protections against adverse makers in coping with the risks of posting continuous, two-sided quotes in thousands of financial instruments’’ and to provide the ability to automatically pull or amend their quotes so that ‘‘all quotes falling within the scope of protection still resting on the book are prohibited from further execution’’). PO 00000 Frm 00216 Fmt 4703 Sfmt 4703 12911 executions.196 As with the crumbling quote indicator, the Indicator will be a transparent formula based on a predetermined objective set of circumstances that will be specified in IEX’s rules to identify when the Protected Bid and/or Protected Offer in a particular options series is likely to move to a less aggressive price. Moreover, the Options Trading System will use the ORP in a manner similar to the way in which the Equities System applies the crumbling quote indicator to resting displayed liquidity, which reprices the applicable order or quote. The functional differences between the crumbling quote indicator and the Indicator reflect that options pricing is derivative.197 Thus, the Indicator will trigger when it identifies that a Protected Bid or Protected Offer is likely to move to a less aggressive price, based on a price change in the underlying security, thereby exposing the market maker to excessive risk, but, unlike the crumbling quote indicator, would reprice the quote to the price level of the quote instability determination or cancel the impacted quote and not remain ‘‘on’’ for a period of time after triggering. IEX believes that this approach is appropriate in view of the derivative pricing of options and that it will contribute to more displayed liquidity through improved execution quality, enhance the public price discovery process, and promote just and equitable principles of trade.198 196 In 2016, IEX received SEC approval of the IEX’s exchange system that provides a similar quote indicator for equities. See 2016 SEC Approval Order (approving IEX’s exchange system in its registration as a national securities exchange, which included the approval of IEX’s crumbling quote indicator that assesses quote instability by utilizing a real-time, based on pre-determined, objective set of conditions that protects orders from unfavorable executions when the market is moving against them). In 2020, IEX received SEC approval to apply the quote indicator to displayed orders in equities. See 2020 SEC Approval Order, supra note 189, at 6–7 (receiving unanimous support and concluding that the Exchange’s displayed order proposal that included a similar quote indicator is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange and that is designed to improve market quality, enhance price discovery, and promote just and equitable principles of trade). 197 Because of this difference, the Indicator is designed to identify when the Protected Bid and/ or Protected Offer in an option series is dislocated from the price of the underlying based on a price change in the underlying and therefore likely to be in transition to a less aggressive price, while the crumbling quote indicator utilizes changes in the protected quote in the security itself to make such a prediction. 198 See, e.g., 2020 SEC Approval Order, supra note 189, at 19 (concluding that IEX’s exchange functionality protects against adverse selection and incentivizes more displayed liquidity through improved execution quality for liquidity providers, which contributes ‘‘to fair and orderly markets’’ and E:\FR\FM\19MRN1.SGM Continued 19MRN1 12912 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices lotter on DSK11XQN23PROD with NOTICES1 Further, the ORP would be available, as a quote parameter, only to market makers and on an optional basis, because the Exchange believes that it is most appropriate as a tool to address market maker risk. IEX believes that this approach is appropriate because market makers are subject to affirmative obligations to provide continuous twosided quotes and cannot back away or unduly widen their quotes during periods of price volatility, as can other liquidity providers.199 By offering market makers this narrowly-tailored, optional tool, IEX believes it will attract additional displayed liquidity that will be available to all market participants. IEX also believes that use of the Indicator in determining when to trigger the ORP is consistent with the protection of investors and the public interest because the Indicator is based on the well-recognized Black-Scholes options pricing model, which IEX believes is an appropriate methodology to identify when a Market Maker’s quote in an option is dislocated from the price of the underlying security based on the mathematical relationship between the price of the underlying security and the overlying options. Moreover, IEX believes that the latency mechanism 200 (as discussed above) will serve to enhance the accuracy of the Indicator by providing adequate time for the IEX Trading System to update its Indicator calculation with current market data. In this regard, as discussed earlier, IEX notes that the proposed latency of 350 microseconds is well within the geographic delays that exist among and between the data centers that IEX Options Members, and other options exchanges, use and is consistent with the naturally occurring time supports ‘‘the public price discovery process’’); at 26 (finding that the Exchange’s speedbump and crumbling quote indicator promotes the interest of long term investors and inures to the ‘‘benefit of displayed markets, leading to increased displayed liquidity from which all market participants ultimately will benefit’’); at 52 (concluding that the Exchange’s order protection functionality ‘‘is designed to encourage market participants to post more priced limit orders, including displayed orders, on IEX, and thereby promotes just and equitable principles of trade, removes impediments to and perfects the mechanism of a free and open market and a national market, and, in general, protects investors and the public interest.’’). 199 See, e.g., Protecting Liquidity in Options Markets, Market Structure, Optiver, July 12, 2023, available at https://optiver.com/insights/protectingliquidity-in-options-markets/ (explaining that without robust liquidity protection mechanisms for market makers to protect against the risks of displaying stale or outdated quotes, ‘‘market makers may be forced to widen their spreads, show less liquidity or simply exit the market’’ and overall ‘‘market quality can deteriorate’’ with the result of investors suffering). 200 See proposed IEX Rule 22.170(g). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 indeterminism that exists in order processing. Further, IEX believes that limiting the availability of the ORP to resting market maker quotes is consistent with the Act for several reasons. As discussed in depth above, market makers are integral to providing liquidity on options exchanges, and at the same time subject to a potentially excessive level of risk from execution of one or more stale quotes. Additionally, Market Makers’ obligations apply across all series in their appointed class. Other liquidity providers are free to concentrate their efforts in a select number of series. Thus, Market Makers have greater exposure to latency arbitrage, take on greater risk, and incur more related capital charges than other liquidity providers. IEX determined to apply the functionality to resting quotes only as this approach will best achieve the purpose of protecting market markets from the excessive risk of executions at stale prices without disrupting market makers’ ability to update their quotations. The Exchange also believes that applying the Indicator on a class-byclass basis would remove impediments to, and perfect the mechanism of, a free and open market and a national market system and promote just and equitable principles of trade. As discussed in the Purpose section, applying the Indicator on a class-by-class basis would enable the Exchange to appropriately utilize the ORP for classes with a high potential for adverse selection, while excluding classes presenting lower risk of adverse selection (such as classes with relatively lower volumes). This flexibility will therefore allow the Exchange to ensure the ORP is available for those classes with a high potential for adverse selection and where its use will achieve its intended purpose, while excluding its use where it would likely provide little additional value and could introduce unnecessary complexity (for example, for classes that are subject to a pending corporate action or other nonstandard characteristic). Moreover, IEX notes that the Commission has previously recognized the utility of IEX providing protection to liquidity providers through order types that leverage its crumbling quote indicator to appropriately protect market participants from the risks of transacting when the market is in transition and thereby incentivize the entry of liquidity providing orders. The Exchange believes that the proposed ORP is consistent with this history and is in furtherance of driving tighter and PO 00000 Frm 00217 Fmt 4703 Sfmt 4703 deeper displayed markets to the benefit of investors.201 IEX also believes that the proposal is consistent with the firm quote obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS.202 Specifically, any marketable interest that is executable against a market maker’s quote that has been received by the Trading System prior to the time that a quote instability determination is received by Trading System will be automatically executed, subject to processing of any prior messages, at the price and up to the size of the market maker’s quote. IEX believes that the proposed ORP is consistent with the protection of investors and the public interest, and is consistent with the Exchange Act, including furthering the objectives of Section 6(b)(5) of the Act,203 because it is a narrowly-tailored approach designed to appropriately balance the risks faced by market makers with the legitimate objectives of liquidity takers by providing additional optional risk protection to market makers and thereby encourage aggressive quoting. The Exchange further believes that offering more risk management protections to Market Makers would mitigate their exposure to excessive risk. As discussed in detail above, Market Makers are required to continuously provide twosided quotes in substantial numbers of listed options series that can create large, unintended positions exposing market makers to excessive risk. Market Maker quotes are critical to provide liquidity to the market and contribute to price discovery for investors. Without robust liquidity protection, market makers may be forced to widen their spreads, show less liquidity or simply exit the market, which can result in deterioration of market quality and adversely impact investors’ and other liquidity takers’ ability to transact in the options markets. In sum, liquidity protection for options market makers is vital for achieving a healthy balance between liquidity providers and liquidity takers in the options market that will promote more displayed liquidity from which all market participants ultimately will benefit. The Exchange believes that the notice requirements specified for the variable values related to operation of the ORP and the Indicator formula appropriately differentiate those values that require the Exchange to respond to rapidly changing market conditions or system 201 See supra notes 201 and 203 and accompanying text. 202 See proposed IEX Rule 23.140(d). 203 15 U.S.C. 78f(b)(5). E:\FR\FM\19MRN1.SGM 19MRN1 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices issues (i.e., determination of delta bound bands and class-by-class determinations) from those for which rapid Exchange decision-making is not necessary and for which more advance notice can be provided (i.e., quote instability threshold and frequency of calculation of implied volatility), thereby removing impediments to and perfecting the mechanisms of a free and open market and a national market system and, in general, protecting investors and the public interest.204 The Exchange believes that the proposed rules of IEX Options, as well as the proposed method of monitoring for compliance with and enforcing such rules is also consistent with the Act, particularly Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in part, that an exchange have the capacity to enforce compliance with, and provide appropriate discipline for, violations of the rules of the Commission and of the exchange. The Exchange has proposed to adopt rules necessary to regulate Options Members that are nearly identical to the approved rules of other options exchanges, as described above. The Exchange proposes to regulate activity on IEX Options in the same way it regulates activity on its equities market (and comparable to other options exchanges), through various Exchange specific functions, an RSA with FINRA, as well as participation in industry plans, including plans pursuant to Rule 17d–2 under the Exchange Act. In conclusion, for the reasons discussed above, IEX believes that the proposed rule change is consistent with the investor protection and public interest purposes of Section 6 of the Act. Additionally, IEX believes that establishing a new options market that participates in all the current (and any future) national market system plans governing options trading is consistent with Section 11A of the Act relating to the establishment of the national market system for securities.205 As proposed, IEX Options will offer a simple alternative to existing options exchanges that is designed to support competitive lotter on DSK11XQN23PROD with NOTICES1 204 The Exchange further notes that other options exchanges specify various rule-based values by similar publication approaches, see, e.g., NYSE Amex Rule 994NY (providing that the exposure period for its Broadcast Order Liquidity Delivery Mechanism is determined and released by the exchange); see also MIAX Rule 515(c)(1) (providing price protections where certain minimum price variations are determined by MIAX within a specified range and announced through regulatory circulars); see also Nasdaq Stock Market LLC Dynamic M–ELO algorithm (providing updates that include determining the holding period for impacted orders that are announced by trading alerts). 205 15 U.S.C. 78k–1. VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 quoting to the benefit of all market participants. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, the proposed rule change is designed to enhance competition by providing for an additional exchange market for the trading of listed options. IEX believes that this proposal will enhance competition by allowing the Exchange to leverage its existing robust technology platform to provide a resilient, deterministic, and transparent execution platform for options. The proposed rule change will insert an additional competitive dynamic to the options landscape by allowing the Exchange to compete with existing options exchanges and will promote further initiative and innovation among market centers and market participants. Further, the Exchange does not believe that the latency mechanism or optional Market Maker quote parameter aspect of the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, these features are designed to enhance IEX Option’s competitiveness by incentivizing the entry of increased Market Maker liquidity. The Exchange does not believe that the proposed rule change will impose any burden on intra-market competition because it will apply to all Options Members in the same manner and any Options Member can perform any specified function subject to meeting applicable requirements. The Exchange also does not believe that the proposed latency mechanism will impose any burden on intra-market competition that is not necessary or appropriate because it will apply in the same manner to all incoming orders and quotes. Further, as noted in the Purpose section, the Exchange will determine the length of the latency mechanism with a view towards achieving a healthy balance between liquidity providers and liquidity takers. The Exchange also does not believe that the proposed ORP will impose any burden on intra-market competition that is not necessary or appropriate because it will be available in the same manner to all Market Makers and any Options Member could become a Market Maker, subject to meeting applicable requirements. The ORP is designed to mitigate Market Makers’ exposure to excessive risk and thereby enable them PO 00000 Frm 00218 Fmt 4703 Sfmt 4703 12913 to provide more competitive quotes to the benefit of all market participants. The Exchange also believes that limiting the ORP functionality to Market Makers will not impose any burden on intramarket competition that is not necessary and appropriate because Market Makers are subject to robust affirmative quoting obligations and thus can uniquely benefit from the protections to be provided by the ORP. The Exchange thus believes it is reasonable to provide Market Makers with an additional tool to manage their risk parameters, particularly given their unique and critical role in the listed options market and the obligations that Market Makers must satisfy. As discussed in the Purpose and Statutory Basis sections, the proposed ORP will protect resting market-maker quotes (which are subject to quoting obligations) from executions at potentially stale prices, which the Exchange believes will reduce their risk and encourage Market Makers to provide more competitive markets on the Exchange, thereby benefitting all market participants through additional execution opportunities at prices that reflect the then-current market conditions. The Exchange expects the proposed rule change to increase liquidity and enhance competition in the market because Market Makers may be able to quote more aggressively with added productions from exposure to execution risk, thereby remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange also does not believe that the proposal will impose any burden on inter-market competition that is not necessary or appropriate. Competing exchanges are free to adopt similar functionality, subject to the Commission rule filing process. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of the original notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory E:\FR\FM\19MRN1.SGM 19MRN1 12914 Federal Register / Vol. 90, No. 52 / Wednesday, March 19, 2025 / Notices organization consents, the Commission will: (A) by order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved.206 publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–IEX–2025–02 and should be submitted on or before April 9, 2025. IV. Solicitation of Comments For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.207 Vanessa A. Countryman, Secretary. Interested persons are invited to submit written data, views and arguments concerning Amendment No. 1, including whether the proposed rule change as modified by Amendment No. 1 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– IEX–2025–02 on the subject line. lotter on DSK11XQN23PROD with NOTICES1 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–IEX–2025–02. 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 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available 206 See supra note 4 (designating April 21, 2025 as the date by which it should either approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change). VerDate Sep<11>2014 18:11 Mar 18, 2025 Jkt 265001 [FR Doc. 2025–04515 Filed 3–18–25; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–102648; File No. SR– CboeBZX–2025–034] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 19.3 To Permit the Listing of Options on Commodity-Based Trust Shares March 13, 2025. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 5, 2025, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX Options’’) proposes to amend Rule 19.3 to permit the listing of options on CommodityBased Trust Shares. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 207 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00219 Fmt 4703 Sfmt 4703 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Rules 19.3 regarding the criteria for underlying securities. Specifically, the Exchange proposes to amend Rule 19.3(i) to allow the Exchange to list and trade options on Fund Shares 3 that 3 Rule 19.3(i) states that securities deemed appropriate for options trading shall include shares or other securities (‘‘Fund Shares’’), including but not limited to Partnership Units as defined in this Rule, that are principally traded on a national securities exchange and are defined as an ‘‘NMS stock’’ under Rule 600 of Regulation NMS, and that (1) represent interests in registered investment companies (or series thereof) organized as open-end management investment companies, unit investment trusts or similar entities, and that hold portfolios of securities comprising or otherwise based on or representing investments in indexes or portfolios of securities (or that hold securities in one or more other registered investment companies that themselves hold such portfolios of securities) (‘‘Funds ’’) and/or financial instruments including, but not limited to, stock index futures contracts, options on futures, options on securities and indexes, equity caps, collars and floors, swap agreements, forward contracts, repurchase agreements and reverse repurchase agreements (the ‘‘Financial Instruments’’), and money market instruments, including, but not limited to, U.S. government securities and repurchase agreements (the ‘‘Money Market Instruments’’) constituting or otherwise based on or representing an investment in an index or portfolio of securities and/or Financial Instruments and Money Market Instruments, or (2) represent commodity pool interests principally engaged, directly or indirectly, in holding and/or managing portfolios or baskets of securities, commodity futures contracts, options on commodity futures contracts, swaps, forward contracts and/or options on physical commodities and/or non-U.S. currency (‘‘Commodity Pool ETFs’’) or (3) represent interests in a trust or similar entity that holds a specified non-U.S. currency or currencies deposited with the trust or similar entity when aggregated in some specified minimum number may be surrendered to the trust by the beneficial owner to receive the specified non-U.S. currency or currencies and pays the beneficial owner interest and other distributions on the deposited non-U.S. currency or currencies, if any, declared and paid by the trust (‘‘Currency Trust Shares’’), or (4) represent interests in the SPDR Gold Trust or are issued by the iShares COMEX Gold E:\FR\FM\19MRN1.SGM 19MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 90, Number 52 (Wednesday, March 19, 2025)]
[Notices]
[Pages 12890-12914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-04515]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102663; File No. SR-IEX-2025-02]


Self-Regulatory Organizations: Investors Exchange LLC; Notice of 
Filing of Amendment No. 1 to a Proposed Rule Change To Adopt Rules To 
Govern the Trading of Options on the Exchange for a New Facility Called 
IEX Options

March 13, 2025.
    On January 10, 2025, the Investors Exchange LLC (``IEX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt rules to govern the trading of options on 
IEX Options LLC, a facility of the Exchange that will be established in 
a separate rule filing. The proposed rule change was published for 
comment in the Federal Register on January 21, 2025.\3\ On March 6, 
2025, the Commission designated a longer period within which to take 
action on the proposed rule change.\4\ On March 12, 2025, the Exchange 
filed Amendment No. 1 to the proposed rule change.\5\ The Commission 
has received comments on the proposed rule change.\6\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended by Amendment No. 1, from interested persons. Items I and II 
below have been prepared by the Exchange.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 102190 (Jan. 14, 
2025), 90 FR 7205.
    \4\ See Securities Exchange Act Release No. 102536, 90 FR 11866 
(Mar. 12, 2025). The Commission designated April 21, 2025 as the 
date by which it should either approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change. See id.
    \5\ Amendment No. 1 is publicly available on the Commission's 
website at: sriex202502-580115-1667463.pdf. See infra, notes 9--12 
and accompanying text for a further explanation of the proposed 
revisions to the proposed rule change set forth in Amendment No. 1.
    \6\ Comments on the proposed rule change are available at 
https://www.sec.gov/comments/sr-iex-2025-02/sriex202502.htm.

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[[Page 12891]]

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

    On January 10, 2025, IEX, pursuant to the provisions of Section 
19(b)(1) under the Act and Rule 19b-4 thereunder, filed with the 
Commission proposed rule change SR-IEX-2025-02 (the ``Initial 
Proposal'').\7\ As described in the Initial Proposal, IEX is proposing 
to adopt rules to govern the trading of options on IEX Options LLC, a 
facility of the Exchange that will be established in a separate rule 
filing (referred to herein as ``IEX Options''). The Exchange is filing 
this proposal (``Amendment No. 1'') to amend the Initial Proposal as 
described herein. Amendment No. 1 replaces and supersedes the Initial 
Proposal in its entirety.
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    \7\ See Securities Exchange Act Release No. 102190 (January 14, 
2025), 90 FR 7205 (January 21, 2025) (``Initial Filing''), available 
at https://www.iexexchange.io/resources/regulation/rule-filings.
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    As proposed, the Exchange will operate IEX Options as a fully 
automated trading system built on the core functionality of the 
Exchange's approved equities platform, and in a manner similar to that 
of other options exchanges. In addition, IEX Options will utilize a de 
minimis delay on incoming order and quote messages designed to enable 
IEX to update its view of the market prior to processing orders and 
quotes, and an optional Market Maker quote parameter designed to 
protect Market Makers from excessive risk due to execution of stale 
quotes, in addition to other risk protections substantially similar to 
those offered by other options exchanges.
    The text of the proposed rule change is available at the Exchange's 
website at https://www.iexexchange.io/resources/regulation/rule-filings, 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 the 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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
Overview
    The Commission published the proposed rule change for comment in 
the Federal Register on January 21, 2025,\8\ and on March 6, 2025, 
extended the review period to April 21, 2025.\9\
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    \8\ Id.
    \9\ See Securities Exchange Act Release No. 102536 (March 6, 
2025), 90 FR 11866 (March 12, 2025).
---------------------------------------------------------------------------

    The Exchange is filing this Amendment No. 1 to the Initial Proposal 
in order to provide increased clarity and modify certain aspects of the 
Initial Filing. First, IEX proposes that the duration of the latency 
mechanism (i.e., the de minimis delay on incoming order and quote 
messages) set forth in proposed Rule 22.100(n) would be a fixed 
duration of 350 microseconds rather than being configurable by the 
Exchange. Second, as described herein, IEX proposes changes to more 
narrowly tailor the application of the proposed Options Risk Parameter 
(``ORP''),\10\ the optional Market Maker quote parameter designed to 
protect Market Makers from excessive risk due to execution of stale 
quotes. Specifically, IEX proposes to amend language pertaining to the 
ORP to refine and clarify its function, as follows: (i) revise proposed 
Rule 23.150(h)(1) to provide that the Exchange will determine on a 
class-by-class basis whether to apply the ORP, which determination will 
be communicated by Trading Alert; (ii) revise proposed Rule 
23.150(h)(1)(C) to specify that if a quote instability determination is 
generated for an options series being quoted by a Market Maker and the 
quote is above (below) the price level of the quote instability 
determination, the quote will be cancelled or repriced to the price 
level of the quote instability determination, as selected by the Market 
Maker; (iii) revise the Indicator formula specified in Supplementary 
Material .04 to proposed Rule 23.150 (``quote instability 
calculation'') to provide that the formula will assess price changes in 
the underlying security in the context of the value of the options 
series (rather than the value of the underlying) when determining 
whether to issue a quote instability determination; and (iv) provide 
that the Exchange would introduce a new variable to the quote 
instability determination formula, a delta \11\ bound band, that would 
prevent quote instability determinations for those options series with 
deltas outside of the band, in order to more narrowly tailor 
application of the ORP to those options series that present the 
greatest risk of adverse selection to Market Makers.
---------------------------------------------------------------------------

    \10\ See proposed Rule 23.150(h)(1).
    \11\ Delta is a measure of how sensitive an options series price 
is to changes in the price of the underlying security.
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    In addition, as described herein, this Amendment 1 clarifies that 
the quote instability threshold range of 0-1, set forth in subsection 
(2)(e) of the quote instability calculation, reflects a scale from 0% 
to 100%, referencing the extent of the anticipated change in the quoted 
option price compared to the then-current price of the option. The 
quote instability threshold thus operates as a measure of whether the 
value of the quote instability determination price change is 
sufficiently meaningful enough to warrant generation of a quote 
instability determination. Additionally, the Exchange proposes several 
minor non-substantive stylistic edits and corrections to typographical 
errors in the Exhibit 5 to the Initial Proposal.\12\
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    \12\ See proposed Rule 23.120, Supplementary Material .01 (text 
corrected to be formatted in italics), proposed Rule 23.130(g)(2)(B) 
(was denoted as (A) incorrectly), proposed Rule 23.150(h) (intro 
language misspelled ``cancellation''), proposed Rule 23.150(h)(1)(C) 
(misspelled ``cancelled''). In addition, in proposed Supplementary 
Material .04 to Rule 23.150, IEX replaced brackets around several 
formula inputs with parentheses to avoid confusion with the use of 
brackets to indicate deleted text. Further, IEX confirmed the 
capitalization of the word ``proposed'' in several places.
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    The Exchange proposes to adopt a series of rules in connection with 
IEX Options, which will be a facility of the Exchange.\13\ As proposed, 
the Exchange will operate IEX Options as a fully automated trading 
system built on the core functionality of the Exchange's approved 
equities platform, and in a manner similar to that of other options 
exchanges.\14\
---------------------------------------------------------------------------

    \13\ IEX will file a separate proposed rule change with the 
Commission pursuant to Section 19 of the Act to provide that IEX 
Options will be operated by IEX Options LLC, a Delaware limited 
liability company wholly owned by the Exchange, as a facility of the 
Exchange as that term is defined in Section 3(a)(2) of the Act.
    \14\ The IEX Options proposed rules are largely based on the 
rules of other options exchanges, as described herein. When a 
particular proposed rule is described as ``substantively identical'' 
to a rule(s) of another exchanges that means that the substance of 
the proposed IEX Options rule is identical to the referenced rule of 
the other exchange, with differences only to reflect terminology and 
numbering. When a particular proposed rule is described as 
``substantially similar'' to a rule(s) of another exchange this rule 
filing describes the relevant differences.
---------------------------------------------------------------------------

    As proposed, IEX Options will operate an electronic trading system 
to

[[Page 12892]]

list and trade options issued by the Options Clearing Corporation 
(``Clearing Corporation'' or ``OCC''). Specifically, IEX proposes to 
operate a fully automated, pro-rata priority options market in a manner 
similar to that of other options exchanges. In addition, IEX Options 
will utilize a de minimis delay on incoming order and quote messages 
designed to enable IEX to update its view of the market prior to 
processing orders and quotes, and an optional Market Maker quote 
parameter designed to protect Market Makers from excessive risk due to 
execution of stale quotes, in addition to other risk protections 
substantially similar to those offered by other options exchanges.
    The Exchange proposes to adopt rules applicable to IEX Options that 
are substantially similar to the approved rules of the MEMX, C1, MIAX, 
and NYSE Amex and Arca options exchanges, with the material proposed 
differences described herein.\15\
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    \15\ See rulebooks of MEMX LLC (``MEMX''), Cboe Exchange, Inc. 
(``C1''), Miami International Securities Exchange, LLC (``MIAX''), 
NYSE Arca, Inc. (``NYSE Arca Options''), and NYSE American LLC 
(``NYSE Amex Options''). However, IEX is not proposing to trade 
index options at this time and therefore is not proposing rules for 
the listing and trading of index options.
---------------------------------------------------------------------------

    As provided in proposed Rule 17.110 (Applicability), existing 
Exchange Rules \16\ applicable to the IEX equities market contained in 
Chapters 1 through 16 of the Exchange Rules will apply to Options 
Members unless a specific Exchange Rule applicable to the IEX Options 
market (in proposed Chapters 17 through 29 of the Exchange Rules) 
governs or unless the context otherwise requires.
---------------------------------------------------------------------------

    \16\ See IEX Rule 1.160(jj).
---------------------------------------------------------------------------

    The IEX Options Trading System \17\ will provide for the electronic 
display and execution of orders on a pro-rata basis. All Exchange 
Members will be eligible to participate in IEX Options by qualifying as 
Options Members \18\ and obtaining one or more trading permits for 
their activity on IEX Options, in accordance with applicable IEX 
Options rules. The IEX Options Trading System will provide an optional 
routing service for orders when trading interest is not present on IEX 
Options and will comply with all applicable securities laws and 
regulations and the obligations of the Options Order Protection and 
Locked/Crossed Market Plan.
---------------------------------------------------------------------------

    \17\ See proposed Rule 22.100(a).
    \18\ See proposed Rule 17.100.
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IEX Options Members
    Pursuant to the proposed rules in Chapter 18 (Participation on IEX 
Options), the Exchange will authorize any Exchange Member that meets 
certain enumerated qualification requirements (any such Member, an 
``Options Member'') and any Options Member's Sponsored Participants to 
obtain access to, and transact business on, IEX Options.\19\
---------------------------------------------------------------------------

    \19\ See proposed Rules 18.100, 18.110, 18.120, and 18.130.
---------------------------------------------------------------------------

    There will be three types of Options Members--Options Order Entry 
Firms (``OEFs''), Options Market Makers, and Options Clearing Members. 
Options Members may act in one, two, or all such capacities. OEFs will 
be those Options Members representing Customer Orders as agent on IEX 
Options or trading as principal on IEX Options. Options Market Makers, 
in turn, will be eligible to participate as Registered Market Makers or 
Specialists, as set forth in Rule 23.100. Additionally, all Options 
Market Makers may participate as Directed Marker Makers.\20\ Clearing 
Members will be those Options Members that have been admitted to 
membership in the Clearing Corporation pursuant to the provisions of 
the Rules of the Clearing Corporation and are self-clearing or that 
clear IEX Options Transactions for other Options Members.
---------------------------------------------------------------------------

    \20\ Directed Market Makers are subject to enhanced quoting 
obligations (as compared to Registered Market Markers) as set forth 
in proposed Rule 23.150(e)(3), which is substantively identical to 
NYSE Amex Options Rule 964.1NYP.
---------------------------------------------------------------------------

    IEX proposes to issue different types of Trading Permits to Options 
Members that allow the Trading Permit Holders to: (i) trade one or more 
products authorized for trading on the Exchange; (ii) act in one or 
more trading functions authorized by the Rules of IEX Options; and/or 
(iii) act as a Clearing Member.\21\ Trading Permits shall be for the 
types and terms as shall be determined by the Exchange from time to 
time, and subject to effectiveness of one or more rule filings pursuant 
to Section 19(b) of the Act. The proposed rule governing IEX's Trading 
Permits, 18.140, is based on C1 Rule 3.1.\22\
---------------------------------------------------------------------------

    \21\ See proposed Rule 18.140.
    \22\ On C1, part of the process of applying to be a Trading 
Permit Holder is for a broker-dealer to qualify as a participant or 
member of the exchange. IEX's proposed rule therefore differs from 
C1 Rule 3.1 because it does not include the membership 
qualification-related provisions that are addressed elsewhere in 
IEX's proposed Chapter 18. In particular, IEX is not proposing to 
incorporate C1 Rule 3.1(a)(3)'s language regarding jurisdiction over 
Trading Permit Holders because it is covered by Rule 2.120 
(requiring all IEX Members to consent to the Exchange's 
jurisdiction) and proposed Rule 18.140(e) (applying the Exchange's 
jurisdictional authority to all Options Members). In addition, C1's 
rule includes limitations on the number of trading permits the 
exchange may issue. IEX is not proposing such limitations.
---------------------------------------------------------------------------

    The rules governing Registered Market Makers and Specialists are 
substantially based on MIAX and C1 rules.\23\ To become an Options 
Market Maker, an Options Member will be required to register by filing 
a written application and obtain any required trading permits.\24\ The 
Exchange will not place any limit on the number of entities that may 
become Options Market Makers, the number of appointments an Options 
Market Maker may have, or the number of Options Market Makers that may 
have appointments in a class unless the Exchange determines to impose 
any such limit based on system constraints, capacity restrictions, or 
other factors relevant to protecting the integrity of the Trading 
System. The Exchange will not impose any such limitations until it has 
submitted objective standards for imposing the limits to the Commission 
for its review and approval.\25\
---------------------------------------------------------------------------

    \23\ See MIAX Rules 600-609 (regarding market maker 
qualifications and obligations) and MIAX Rules 514(d), (e), and (g) 
(regarding market maker quoting and priority). The primary 
differences between these MIAX rules and IEX's proposed Market Maker 
rules are: (1) MIAX has three tiers of market makers, while IEX 
proposes to have two tiers; (2) MIAX puts Market Makers at a 
priority level above other non-Priority Customer interest, while IEX 
will not (IEX's proposed rules are substantively identical to the 
priority rules in C1 Rule 5.32 as it pertains to C1's Preferred 
Market Makers); (3) IEX proposes to allocate participation 
entitlements for Specialists with a priority quote based on the 
amount of non-Priority customer interest (which is how C1 Rule 
5.32(a)(2)(B) allocates priority overlays), while MIAX only looks at 
the amount of other market marker interest; and (4) MIAX offers a 
Market Turner priority overlay which IEX is not proposing to adopt.
    \24\ See proposed Rules 23.100 and 18.140.
    \25\ This provision is substantively identical to MEMX Rule 
22.2(c) and MIAX Rule 600(d).
---------------------------------------------------------------------------

    As proposed, the Exchange shall appoint Registered Market Makers to 
one or more classes of options contracts traded on the Exchange. In 
making such appointments the Exchange shall consider the financial 
resources available to the Registered Market Maker, the Registered 
Market Maker's experience and expertise in market making or options 
trading, the preferences of the Registered Market Maker to receive 
appointments in specific options classes, and the maintenance and 
enhancement of competition among Registered Market Makers in each class 
of options contracts to which they are appointed.\26\
---------------------------------------------------------------------------

    \26\ See proposed Rule 23.120(a)(1).
---------------------------------------------------------------------------

    While there may be several Registered Market Makers appointed to a 
particular class of options contracts, the Exchange may appoint only 
one Specialist to each options class traded on the Exchange.\27\

[[Page 12893]]

To be appointed as a Specialist, an Options Member must first satisfy 
the criteria for appointment as a Registered Market Maker set forth in 
Rule 23.120(a)(1) and then must participate in the Specialist 
Qualification Process conducted by the Exchange and detailed in 
proposed Rule 23.130(b).\28\ Factors to be considered for selection as 
a Specialist include, but are not limited to, representations regarding 
capital operations, personnel or technical resources.\29\ After 
designating certain Market Makers as Specialists, the Exchange will 
conduct a process to determine which options classes to allocate to 
which Specialist, based upon which candidate appears best able to 
perform the functions of a Specialist in the designated options 
classes. Factors to be considered in the allocation of options classes 
to Specialists by the Exchange include, but are not limited to the 
following: experience with trading the options issue; adequacy of 
capital; willingness to promote the Exchange as a marketplace; 
operational capacity; support personnel; history of adherence to 
Exchange rules and securities laws; and evaluations made pursuant to 
Rule 23.130(f).\30\ The Exchange will also consider the number and 
quality of issues that have been allocated, reallocated or transferred 
to a Specialist and the Specialist's willingness to promote the 
Exchange as a marketplace.\31\
---------------------------------------------------------------------------

    \27\ See proposed Rule 23.130(g)(1)(A), which is substantively 
identical to NYSE Amex Options Rule 923NY(b). The language providing 
that the Exchange ``may'' appoint only one Specialist to each 
options class is based upon and substantively identical to NYSE Amex 
Options Rule 923NY(b).
    \28\ IEX based the proposed Specialist rule (23.130) on NYSE 
Amex Options Rules 927NY, 927.1NY, and 927.2NY because these rules 
provide clear instructions to prospective Specialist candidates 
about the manner in which the Exchange selects and evaluates 
Specialists, and detailed rules about Specialist rights and 
obligations.
    \29\ See proposed Rule 23.130(b)(1). This rule is substantively 
identical to NYSE Amex Options Rule 927NY, with the exception that 
IEX is not proposing to obligate Specialists to make FLEX quotes, 
because those are not offered by the Exchange.
    \30\ See proposed Rule 23.130(g). This rule is substantively 
identical to NYSE Amex Options Rule 927.2NY
    \31\ Id.
---------------------------------------------------------------------------

    The Exchange will also evaluate the performance of Specialists, and 
upon a finding that a Specialist failed to meet minimum performance 
standards, may take adverse action against the Specialist; Specialists 
shall have the right to appeal any adverse actions against them 
pursuant to IEX Rule Series 9.500, which governs adverse actions.\32\
---------------------------------------------------------------------------

    \32\ See proposed Rule 23.130(b)(2), and (f). These rules are 
substantively identical to NYSE Amex Options Rules 927NY(b)(2) and 
927.1NY, respectively.
---------------------------------------------------------------------------

    Quotations may only be entered by a Market Maker and only in 
classes of options contracts to which the Market Maker is 
appointed.\33\ Market Makers may also submit orders in classes of 
options contracts to which the Market Maker is appointed, which shall 
constitute a quote, and thus would help to satisfy the Market Maker's 
quoting obligation.\34\ In addition, an Options Market Maker with an 
OEF trading permit may submit orders in classes of options in which the 
Market Maker has no appointment, provided that the total number of such 
orders executed by the Market Maker do not exceed 25% of all contracts 
the Market Maker executes on the Exchange in any calendar quarter.\35\
---------------------------------------------------------------------------

    \33\ See proposed Rule 23.150(a).
    \34\ See proposed Rule 17.100 (defining ``Quote'' to include 
orders entered by a Market Maker in the option series to which such 
Market Maker is registered).
    \35\ See proposed Rule 23.150(g).
---------------------------------------------------------------------------

    Options Market Makers will be required to electronically engage in 
a course of dealing reasonably calculated to contribute to the 
maintenance of fair and orderly markets.\36\ IEX does not propose to 
incorporate MIAX's requirement that Market Makers refrain from 
purchasing an option at a price more than $0.25 below parity,\37\ 
because IEX does not believe the restriction is necessary to the 
maintenance of fair and orderly markets requirement, and notes that 
other exchanges do not include this restriction.\38\ Market Makers will 
be required to maintain a two-sided market on a continuous basis \39\ 
in at least 60% of the non-adjusted options series to which they are 
appointed as Registered Market Makers and at least 90% of the non-
adjusted options series to which they are appointed as Specialists, 
provided the options classes have a time to expiration of less than 
nine months.\40\ And, as noted above, Directed Market Makers are 
subject to enhanced quoting obligations compared to Registered Market 
Makers.\41\ Market Makers and Specialists may use quotes and orders to 
meet the applicable quoting requirements. These obligations will not 
apply to an intra-day add-on series on the day during which such series 
was added for trading. Market Maker quotes must be firm quotes that 
comply with enumerated price and size rules.\42\ These obligations also 
will not apply when an Options series is halted because the underlying 
security has entered a Limit or Straddle state.\43\ Registered Market 
Makers and Specialists also must maintain minimum net capital in 
accordance with Commission and Exchange rules.\44\ Substantial or 
continued failure by an Options Market Maker to meet any of its 
obligations and duties will subject the Options Market Maker to 
disciplinary action, suspension, or revocation of the Market Maker's 
registration as such or its appointment in one or more of its appointed 
options classes.\45\
---------------------------------------------------------------------------

    \36\ See proposed Rule 23.140(a).
    \37\ See MIAX rule 603(a).
    \38\ See, e.g., NYSE Arca Options Rule 6.37-O.
    \39\ ``Continuous quoting'' is defined as 90% of the time. See 
proposed Rule 23.150(e).
    \40\ See proposed Rule 23.150(e)(2) and (e)(1). Proposed Rule 
23.150(e)(1) is based upon and substantively identical to NYSE Amex 
Options Rule 925.1NYP(b) and proposed Rule 23.150(e)(2) is based 
upon and substantively identical to NYSE Amex Options Rule 
925.1NYP(c).
    \41\ See supra note 20.
    \42\ See proposed Rule 23.150(b) and (d).
    \43\ See Supplementary Material .01 to proposed Rule 23.150(h), 
which is substantively identical to MIAX Rule 530(f)(1).
    \44\ See proposed Rule 23.180 ($200,000 net capital requirement 
for Registered Market Makers), which is substantively identical to 
MEMX Rule 22.9 and proposed Rule 23.130(c)(1)(H) ($1,000,000 net 
capital requirement for Specialists), which is substantively 
identical to Amex Options Rule 927NY(c)(10).
    \45\ See proposed Rule 23.120(f). NYSE Amex Options Rule 
927.1NY(1)(B) specifies that NYSE Amex Options provides its 
specialists information related to their market share in allocated 
issues on a monthly basis as part of the evaluation process. IEX is 
not proposing to include this provision because it understands that 
Specialist firms are well-equipped to monitor their market share and 
performance on IEX and other markets.
---------------------------------------------------------------------------

    As on other exchanges, Options Market Makers receive certain 
benefits for carrying out their duties. For example, a lender may 
extend credit to a broker-dealer without regard to the restrictions in 
Regulation T of the Board of Governors of the Federal Reserve System if 
the credit is to be used to finance the broker-dealer's activities as a 
specialist or market maker on a national securities exchange. Thus, an 
Options Market Maker has a corresponding obligation to hold itself out 
as willing to buy and sell options for its own account on a regular or 
continuous basis to justify this favorable treatment.
    Every Options Member shall at all times maintain membership in 
another registered options exchange that is not registered solely under 
Section 6(g) of the Exchange Act or in FINRA.\46\ OEFs and other 
Options Members that transact business with Public Customers must at 
all times be members of FINRA. Pursuant to proposed Rule 18.110(h), 
every Options Member will be required to have at least one registered 
Options Principal who satisfies the criteria of that rule, including 
the satisfaction of a proper qualification examination. An OEF may only 
transact business with Public Customers if such Options Member also is 
an Options Member of another registered national securities

[[Page 12894]]

exchange or association with which the Exchange has entered into an 
agreement under Rule 17d-2 under the Exchange Act \47\ pursuant to 
which such other exchange or association shall be the designated 
options examining authority for the OEF.\48\
---------------------------------------------------------------------------

    \46\ See proposed Rule 18.110(g).
    \47\ 17 CFR 240.17d-2.
    \48\ See Rule 27.100.
---------------------------------------------------------------------------

    The proposed rules relating to qualification and participation on 
IEX Options as an Options Member (including as an OEF, Options Market 
Maker, or Clearing Member) are substantively identical to the relevant 
rules of MEMX Options.\49\
---------------------------------------------------------------------------

    \49\ See MEMX Rulebook Chapters 17 and 22.
---------------------------------------------------------------------------

    As provided in proposed Rule 17.110, existing Exchange Rules 
applicable to the IEX equities market contained in Chapters 1 through 
16 of the Exchange Rules will apply to Options Members unless a 
specific Exchange Rule applicable to the IEX Options market (proposed 
Chapters 17 through 29 of the Exchange Rules) governs or unless the 
context otherwise requires. Options Members can therefore provide 
sponsored access to the IEX Options Exchange to a non-Member (i.e., a 
Sponsored Participant) pursuant to Rule 11.130 of the Exchange Rules.
Definitions
    The Exchange proposes to define a series of terms under proposed 
Rule 17.100 (Definitions), which are to be used in proposed Chapters 17 
to 29 relating to the trading of options contracts on the Exchange. 
Unless otherwise indicated, all of the terms defined in proposed Rule 
17.100 are either identical or substantially similar to definitions 
included in MEMX Rule 16.1. Any modifications to the MEMX definitions, 
or definitions based upon the rules of other exchanges are specifically 
indicated below.
    The definitions under proposed Rule 17.100 are as follows:
     ABBO. The term ``ABBO'' or ``Away Best Bid or Offer'' 
means the best bid(s) or offer(s) disseminated by other Eligible 
Exchanges (as defined in Rule 28.100) and calculated by the Exchange 
based on market information the Exchange receives from OPRA.\50\
---------------------------------------------------------------------------

    \50\ IEX notes that this definition differs from the MEMX 
definition of ABBO by spelling out the phrase ``Away Best Bid or 
Offer'' that ABBO refers to for added clarity.
---------------------------------------------------------------------------

     Aggregate Exercise Price. The term ``Aggregate Exercise 
Price'' means the exercise price of an options contract multiplied by 
the number of units of the underlying security covered by the options 
contract.
     American-Style Option. The term ``American-Style'' option 
means an options contract that, subject to the provisions of Rule 
24.100 (relating to the cutoff time for exercise instructions) and to 
the Rules of the Clearing Corporation, may be exercised at any time 
from its commencement time until its expiration.
     Associated Person and Person Associated with an Options 
Member. The terms ``associated person'' and ``person associated with an 
Options Member'' mean any partner, officer, director, or branch manager 
of an Options Member (or any person occupying a similar status or 
performing similar functions), any person directly or indirectly 
controlling, controlled by, or under common control with an Options 
Member or any employee of an Options Member, except that any person 
associated with an Options Member whose functions are solely clerical 
or ministerial shall not be included in the meaning of such term for 
purposes of these Rules.
     Bid. The term ``bid'' means a Limit order to buy one or 
more options contracts.
     Board. The term ``Board'' means the Board of Directors of 
Investors' Exchange LLC.
     Call. The term ``call'' means an options contract under 
which the holder of the option has the right, in accordance with the 
terms of the option, to purchase from the Clearing Corporation the 
number of shares of the underlying security covered by the options 
contract.
     Capacity. The term ``capacity'' means the capacity in 
which a User submits an order, which the User specifies by applying the 
corresponding code to the order. The capacity codes available on IEX 
Options will be listed in publicly available specifications and 
published in a Regulatory Circular.
     Class of Options. The terms ``class'' or ``class of 
options'' mean all options contracts with the same unit of trading 
covering the same underlying security.
     Clearing Corporation and OCC. The terms ``Clearing 
Corporation'' and ``OCC'' mean The Options Clearing Corporation.
     Clearing Member. The term ``Clearing Member'' means an 
Options Member that is self-clearing or an Options Member that clears 
IEX Options Transactions for other Options Members.
     Closing Purchase Transaction. The term ``closing purchase 
transaction'' means an IEX Options Transaction that reduces or 
eliminates a short position in an options contract.
     Closing Writing Transaction. The term ``closing writing 
transaction'' means an IEX Options Transaction that reduces or 
eliminates a long position in an options contract.
     Control. The term ``control'' means the power to exercise 
a controlling influence over the management or policies of a person, 
unless such power is solely the result of an official position with 
such person. Any person who owns beneficially, directly or indirectly, 
more than 20% of the voting power in the election of directors of a 
corporation, or more than 25% of the voting power in the election of 
directors of any other corporation which directly or through one or 
more affiliates owns beneficially more than 25% of the voting power in 
the election of directors of such corporation, shall be presumed to 
control such corporation.\51\
---------------------------------------------------------------------------

    \51\ This definition is substantively identical to the 
definition in C1 Rule 1.1. IEX proposes to incorporate this 
definition, because the term is not specifically defined in the MEMX 
rulebook and IEX believes that term would provide helpful context to 
Options Members with respect to other rules that use the term, e.g., 
proposed IEX Rule 19.200.
---------------------------------------------------------------------------

     Covered Short Position. The term ``covered short 
position'' means (i) an options position where the obligation of the 
writer of a call option is secured by a ``specific deposit'' or an 
``escrow deposit'' meeting the conditions of Rules 610(f) or 610(g), 
respectively, of the Rules of the Clearing Corporation, or the writer 
holds in the same account as the short position, on a share-for-share 
basis, a long position either in the underlying security or in an 
options contract of the same class of options where the exercise price 
of the options contract in such long position is equal to or less than 
the exercise price of the options contract in such short position; and 
(ii) an options position where the writer of a put option holds in the 
same account as the short position, on a share-for-share basis, a long 
position in an options contract of the same class of options where the 
exercise price of the options contract in such long position is equal 
to or greater than the exercise price of the options contract in such 
short position.
     Customer. The term ``Customer'' means a Public Customer or 
a broker-dealer.
     Customer Order. The term ``Customer order'' means an 
agency order for the account of a Customer.
     Directed Order. The term ``Directed Order'' is an order 
entered into the Trading System by an Options Member with a designation 
for a Market Maker in that class (referred to as a ``Directed Market 
Maker'' or ``DMM''). To qualify as a Directed Order, an order must be

[[Page 12895]]

entered on behalf of a Priority Customer.\52\
---------------------------------------------------------------------------

    \52\ This definition is based upon the definition in MIAX 
Options Exchange (``MIAX'') Rule 100, with the distinction that IEX 
proposes to make any Market Maker eligible to receive a Directed 
Order, while MIAX only allows their Lead Market Makers (akin to 
IEX's proposed ``Specialists'') and Primary Lead Market Makers 
eligible; this aspect of IEX's proposed rule change is based upon 
and substantially similar to C1 Rule 5.32. Additionally, IEX 
proposes to include language in the last sentence of this definition 
based on NYSE Amex Rule 900.3NYP(i)(4) to clarify that an order 
submitted on behalf of a non-Priority Customer would be treated as a 
non-Directed Order.
---------------------------------------------------------------------------

     Discretion. The term ``discretion'' means the authority of 
a broker or dealer to determine for a Customer the type of option, the 
class or series of options, the number of contracts, or whether options 
are to be bought or sold.
     European-Style Option. The term ``European-style option'' 
means an options contract that, subject to the provisions of Rule 
24.100 (relating to the cutoff time for exercise instructions) and to 
the Rules of the Clearing Corporation, can be exercised only on its 
expiration date.
     Exchange Act. The term ``Exchange Act'' or ``Act'' means 
the Securities Exchange Act of 1934, as amended, or Rules thereunder.
     Exercise Price. The term ``exercise price'' means the 
specified price per unit at which the underlying security may be 
purchased or sold upon the exercise of an options contract.
     He, Him, and His. The terms ``he,'' ``him'' and ``his'' 
are deemed to refer to persons of female as well as male gender, and to 
include organizations, as well as individuals, when the context so 
requires.
     IEX Exchange and Exchange. The terms ``IEX Exchange'' and 
``Exchange'' mean Investors' Exchange LLC, a registered national 
securities exchange.
     IEX Options. The term ``IEX Options'' means IEX Options 
LLC, a Delaware limited liability company wholly owned by the Exchange, 
which operates as an options trading facility of the Exchange under 
Section 3(a)(2) of the Exchange Act.
     IEX Options Book. The term ``IEX Options Book'' means the 
electronic book of options orders maintained by the Trading System.\53\
---------------------------------------------------------------------------

    \53\ This definition is substantively identical to the 
equivalent definition in the MEMX rulebook, except that it refers to 
IEX, not MEMX.
---------------------------------------------------------------------------

     IEX Options Transaction. The term ``IEX Options 
Transaction'' means a transaction involving an options contract that is 
effected on or through IEX Options or its facilities or systems.\54\
---------------------------------------------------------------------------

    \54\ This definition is substantively identical to the 
equivalent definition in the MEMX rulebook, except that it refers to 
IEX, not MEMX.
---------------------------------------------------------------------------

     Individual Equity Option. The term ``individual equity 
option'' means an options contract which is an option on an equity 
security.
     Long Position. The term ``long position'' means a person's 
interest as the holder of one or more options contracts.
     Market Makers (and Options Market Makers). The terms 
``Market Makers'' or ``Options Market Makers'' refer collectively to 
Options Members registered, pursuant to Rule 23.100, as either a 
``Registered Market Maker'' or a ``Specialist''.\55\
---------------------------------------------------------------------------

    \55\ This definition is substantively identical to the 
definition in the MIAX rulebook, except that MIAX has three classes 
of Market Makers (Registered Market Makers, Lead Market Makers, and 
Primary Lead Market Makers) while IEX proposes to have two classes 
of Market Makers: Registered Market Makers (equivalent to MIAX 
Registered Market Maker) and Specialists (which is based on MIAX's 
Lead Market Maker and Primary Lead Market Maker rules). IEX proposes 
to incorporate this definition, because the Market Maker rules 
proposed herein are substantially based upon the rules of MIAX.
---------------------------------------------------------------------------

     MPID. The term ``MPID'' means unique market participant 
identifier assigned to an Options Member.
     NBB, NBO, and NBBO. The term ``NBB'' means the national 
best bid, the term ``NBO'' means the national best offer, and the term 
``NBBO'' means the national best bid or offer as calculated by IEX 
Options based on market information received by IEX Options from OPRA.
     Offer. The term ``offer'' means a Limit order to sell one 
or more options contracts.
     OPRA. The term ``OPRA'' means the Options Price Reporting 
Authority.
     Opening Purchase Transaction. The term ``opening purchase 
transaction'' means a IEX Options Transaction that creates or increases 
a long position in an options contract.
     Opening Writing Transaction. The term ``opening writing 
transaction'' means a IEX Options Transaction that creates or increases 
a short position in an options contract.
     Options Contracts. The term ``options contract'' means a 
put or a call issued, or subject to issuance by the Clearing 
Corporation pursuant to the Rules of the Clearing Corporation.
     Options Market Close and Market Close. The terms ``options 
market close'' and ``market close'' mean the time the Exchange 
specifies for the end of a trading session on the Exchange on that 
trading day.
     Options Market Open and Market Open. The terms ``options 
market open'' and ``market open'' mean the time the Exchange specifies 
for the beginning of a trading session on the Exchange on that trading 
day.
     Options Member. The term ``Options Member'' means a firm, 
or organization that is registered with the Exchange pursuant to 
Chapter 18 of these Rules for purposes of participating in options 
trading on IEX Options as an ``Options Order Entry Firm'', ``Options 
Market Maker'', or ``Clearing Member.''
     Options Member Agreement. The term ``Options Member 
Agreement'' means the agreement to be executed by Options Members to 
qualify to participate on IEX Options.
     Options Order Entry Firm, Order Entry Firm, and OEF. The 
terms ``Options Order Entry Firm'' and ``Order Entry Firm'' or ``OEF'' 
mean those Options Members representing as agent Customer Orders on IEX 
Options and those non-Market Maker Members conducting proprietary 
trading.
     Options Principal. The term ``Options Principal'' means a 
person engaged in the management and supervision of the Options 
Member's business pertaining to options contracts that has 
responsibility for the overall oversight of the Options Member's 
options related activities on the Exchange.
     Order. The term ``order'' means a firm commitment to buy 
or sell options contracts as defined in Rule 22.100.
     Outstanding. The term ``outstanding'' means an options 
contract which has been issued by the Clearing Corporation and has 
neither been the subject of a closing writing transaction nor has 
reached its expiration date.
     Primary Market. The term ``primary market'' means the 
primary exchange on which an underlying security is listed.\56\
---------------------------------------------------------------------------

    \56\ This definition is based on the definition in C1 Rule 1.1, 
because IEX believed the definition was easier to understand than 
the equivalent definition in the MEMX rulebook.
---------------------------------------------------------------------------

     Priority Customer and Priority Customer Order. The term 
``Priority Customer'' means any person or entity that is not: (A) a 
broker or dealer in securities; or (B) a Professional. The term 
``Priority Customer Order'' means an order for the account of a 
Priority Customer.
     Professional. The term ``Professional'' means any person 
or entity that (A) is not a broker or dealer in securities; and (B) 
places more than 390 orders in listed options per day on average during 
a calendar month for its own beneficial account(s). All Professional 
orders shall be appropriately marked by Options Members.\57\
---------------------------------------------------------------------------

    \57\ See Proposed Supplementary Material .01 to Rule 17.100, 
which sets forth the methodology for calculation of Professional 
orders.

---------------------------------------------------------------------------

[[Page 12896]]

     Protected Quotation. The term ``Protected Quotation'' has 
the meaning provided in Rule 28.100.
     Public Customer and Public Customer Order. The term 
``Public Customer'' means a person that is not a broker or dealer in 
securities. The term ``Public Customer Order'' means an order for the 
account of a Public Customer.
     Put. The term ``put'' means an options contract under 
which the holder of the option has the right, in accordance with the 
terms and provisions of the option and the Rules of the OCC, to sell to 
the Clearing Corporation the number of units of the underlying security 
covered by the options contract, at a price per unit equal to the 
exercise price, upon the timely exercise of such option.
     Quarterly Options Series. The term ``Quarterly Options 
Series'' means a series in an options class that is approved for 
listing and trading on the Exchange in which the series is opened for 
trading on any business day and expires at the close of business on the 
last business day of a calendar quarter.
     Quote or Quotation. The terms ``quote'' or ``quotation'' 
means a bid or offer entered by a Market Maker as a firm order that 
updates the Market Maker's previous bid or offer, if any. When the term 
order is used in these Rules and a bid or offer is entered by the 
Market Maker in the options series to which such Market Maker is 
registered, such order shall, as applicable, constitute a quote or 
quotation for purposes of these Rules. A quote or quotation may be 
canceled or repriced in accordance with Rules 22.250, 22.260, or 
23.150, if so designated by the Market Maker to assist in its risk 
management.
     Registered Market Maker. The term ``Registered Market 
Maker'' means an Options Member registered with the Exchange for the 
purpose of making markets in securities traded on the Exchange, who is 
vested with the rights and responsibilities specified in Chapter 23 of 
these Rules with respect to Registered Market Makers.\58\
---------------------------------------------------------------------------

    \58\ This definition is substantively identical to the 
definition in MIAX Rule 100. IEX proposes to incorporate this 
definition, because the Market Maker rules proposed herein are 
substantially based upon the rules of MIAX.
---------------------------------------------------------------------------

     Responsible Person. The term ``Responsible Person'' means 
a U.S.-based officer, director, or management-level employee of an 
Options Member, who is registered with the Exchange as an Options 
Principal, responsible for the direct supervision and control of 
associated persons of that Options Member.
     Rules of IEX Options. The term ``Rules of IEX Options'' 
mean the rules contained in Chapters 17 to 29 of the Investors Exchange 
Rules governing the trading of options on the Exchange.
     Rules of the Clearing Corporation and Rules of the OCC. 
The terms ``Rules of the Clearing Corporation'' and ``Rules of the 
OCC'' mean the Certificate of Incorporation, the By-Laws and the Rules 
of the Clearing Corporation, and all written interpretations thereof, 
as may be in effect from time to time.
     SEC or Commission. The terms ``SEC'' or ``Commission'' 
mean the United States Securities and Exchange Commission.
     Series of Options. The terms ``series'' or ``series of 
options'' mean all options contracts of the same class that are the 
same type of options and have the same exercise price and expiration 
date.
     Short Position. The term ``short position'' means a 
person's interest as the writer of one or more options contracts.
     Short Term Options Series. The term ``Short Term Options 
Series'' means a series in an options class that is approved for 
listing and trading on the Exchange in which the series is opened for 
trading on any Monday, Tuesday, Wednesday, Thursday or Friday that is a 
business day and that expires on the Monday, Tuesday, Wednesday, 
Thursday or Friday of the next business week, or, in the case of a 
series that is listed on a Friday and expires on a Monday, is listed 
one business week and one business day prior to that expiration. If a 
Tuesday, Wednesday, Thursday or Friday is not a business day, the 
series may be opened (or shall expire) on the first business day 
immediately prior to that Tuesday, Wednesday, Thursday or Friday, 
respectively. For a series listed pursuant to this section for Monday 
expiration, if a Monday is not a business day, the series shall expire 
on the first business day immediately following that Monday.
     Specialist. The term ``Specialist'' means a Market Maker 
appointed by the Exchange to act as the primary lead Market Maker for 
the purpose of making markets in securities traded on the Exchange. The 
Specialist is vested with the rights and responsibilities specified in 
Chapter 23 of these Rules with respect to Specialists.\59\
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    \59\ This definition is substantively identical to the 
definition of Lead Market Makers and Primary Lead Market Makers in 
MIAX Rule 100. As discussed above, IEX proposes to incorporate the 
MIAX definitions for both Lead Market Makers and Primary Lead Market 
Makers into its definition for Specialists, because the Market Maker 
rules proposed herein are substantially based upon the rules of 
MIAX.
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     SRO. The term ``SRO'' means a self-regulatory organization 
as defined in Section 3(a)(26) of the Exchange Act.
     Timestamp. The term ``timestamp'' means the effective time 
sequence assigned to an order for purposes of determining its priority 
ranking.
     Trading Permit. The term ``Trading Permit'' means a 
license issued by the Exchange to an Options Member that grants the 
Trading Permit Holder (``TPH'') the right to access one or more of the 
facilities of the Exchange for the purpose of effecting transactions in 
options traded on the Exchange without the services of another person 
acting as broker, and otherwise to access the facilities of the 
Exchange for purposes of trading or reporting transactions or 
transmitting orders or quotations in options traded on the Exchange, or 
to engage in other activities that, under the Rules of IEX Options, may 
only be engaged in by the TPH that satisfies any applicable 
qualification requirements to exercise those rights. A Trading Permit 
conveys no ownership interest in the Exchange, is only available 
through the Exchange, and is subject to the terms and conditions set 
forth in Rule 18.140.\60\
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    \60\ This definition is substantively identical to the 
definition in C1 Rule 1.1. IEX proposes to incorporate this 
definition, because its proposed Trading Permit rule (Rule 18.140), 
is substantively similar to the equivalent C1 Rule (C1 Rule 3.1).
---------------------------------------------------------------------------

     Trading Permit Holder. The term ``Trading Permit Holder'' 
or ``TPH'' means the holder of a Trading Permit, as described in IEX 
Rule 18.140.\61\
---------------------------------------------------------------------------

    \61\ This definition is substantively identical to the 
definition in C1 Rule 1.1. IEX proposes to incorporate this 
definition, because its proposed Trading Permit rule (Rule 18.140), 
is substantively similar to the equivalent C1 Rule (C1 Rule 3.1).
---------------------------------------------------------------------------

     Trading System. The term ``Trading System'' means the 
automated trading system used by IEX Options for the trading of options 
contracts.
     Type of Option. The term ``type of option'' means the 
classification of an options contract as either a put or a call.
     Uncovered. The term ``uncovered'' means a short position 
in an options contract that is not covered.
     Underlying Security. The term ``underlying security'' 
means the security that the Clearing Corporation shall be obligated to 
sell (in the case of a call option) or purchase (in the case of a put 
option) upon the valid exercise of an options contract.
     User. The term ``User'' means any Options Member or 
Sponsored Participant who is authorized to obtain access to the Trading 
System pursuant to Rule 11.130 (Access).

[[Page 12897]]

Execution System
    IEX Options will utilize a pro-rata allocation model with execution 
priority dependent on the size and capacity of an order; specifically, 
Priority Customer or non-Priority Customer, as well as status as a 
Registered Market Maker or Specialist, as applicable. The proposed pro-
rata allocation model is similar to the MIAX and NYSE Amex options 
exchanges.\62\
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    \62\ See infra note 86.
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    The Exchange will become an exchange member of the OCC. The Trading 
System will be linked to OCC for the Exchange to transmit locked-in 
trades for clearance and settlement.\63\
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    \63\ Proposed Rule 22.220(a) notes that all Options transactions 
shall be submitted for clearance to the Clearing Corporation, and 
the Exchange shall assume no responsibility with respect to any 
unmatched trade or for any delays or errors in the reporting to it 
of trade information. This provision is based upon and substantively 
identical to MIAX Rule 524.
---------------------------------------------------------------------------

    IEX Options will include a de minimis delay on incoming order and 
quote messages designed to enable IEX to update its view of the market 
prior to processing orders and quotes, and an optional Market Maker 
quote parameter designed to protect Market Makers from excessive risk 
due to execution of stale quotes, in addition to other risk protections 
substantially similar to those offered by other options exchanges.
    Anonymity. As set forth in proposed Rule 22.190, aggregated and 
individual transaction reports produced by the Trading System will 
indicate the details of a User's transactions, including the contra 
party's unique market participant identifier (``MPID''), capacity, and 
clearing firm account number.\64\
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    \64\ The Exchange shall also reveal a User's identity: (i) when 
a registered clearing agency ceases to act for a participant, or the 
User's clearing firm, and the registered clearing agency determines 
not to guarantee the settlement of the User's trades; and (ii) for 
regulatory purposes or to comply with an order of an arbitrator or 
court. See proposed Rule 22.190. The Exchange notes that proposed 
Rule 22.190 is identical to MEMX Rule 21.10.
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    Latency Mechanism.\65\ IEX's proposal includes a de minimis 
hardware based latency mechanism (or speedbump) of 350 microseconds 
added to each incoming order and quote message \66\ designed to enable 
IEX to update its view of the market prior to processing orders and 
quotes as well as to perform the Options Quote Indicator 
(``Indicator'') calculation with current market data.\67\ If the 
Exchange determines to change the duration of the delay, it will do so 
only pursuant to an effective rule filing submitted to the Commission 
pursuant to Section 19 of the Exchange Act.\68\
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    \65\ See proposed Rule 22.100(n).
    \66\ As it does for with equities trading (which also applies an 
inbound latency of 350 microseconds), IEX will subject incoming 
order and quote messages to a de minimis delay using coiled optical 
fiber. See Rule 11.510(a). Due to force majeure events and acts of 
third parties, the Exchange does not guarantee that the delay will 
always be consistent. The Exchange will periodically monitor such 
latency and will make adjustments to the latency as reasonably 
necessary to achieve consistency with the latency targets as soon as 
commercially practicable.
    \67\ See infra for more information about the Indicator.
    \68\ The latency mechanism will not apply to outbound 
communications from the Exchange to a User, inbound and outbound 
communications between the Exchange and an Away Market regarding a 
routed order, inbound communications from data feeds, order 
processing and order execution on the IEX Options Order Book, 
outbound communications to the Exchange's proprietary data feeds or 
OPRA.
---------------------------------------------------------------------------

    Hours of Operation. As provided in proposed Rule 22.110(a), the IEX 
Options Trading System will begin accepting orders and quotes beginning 
at 8:00 a.m.\69\ pursuant to the market opening procedures described in 
proposed Rule 22.160. Orders and bids and offers shall be open and 
available until 4:00 p.m. except for options contracts on Fund Shares, 
as defined in proposed Rule 20.120(i), which may close as of 4:15 p.m. 
The Proposed Hours of Operation rule is based on MEMX Rule 21.2, except 
that MEMX does not allow for submission of quotes before the market 
opens for trading; IEX notes that other exchanges begin accepting 
orders and quotes before the market opens, for example C1 begins 
accepting quotes at 7:30 a.m.\70\ Except as set forth above, IEX 
Options shall operate during the normal business days and hours set 
forth in the rules of the primary market trading the securities 
underlying options traded on IEX Options, absent unusual conditions as 
may be determined by the Exchange.\71\ IEX Options will not be open for 
business on any holiday observed by the Exchange.\72\
---------------------------------------------------------------------------

    \69\ All times in this filing refer to the Eastern time zone.
    \70\ See C1 Rule 5.7.
    \71\ See proposed IEX Rule 22.110(b).
    \72\ See proposed IEX Rule 22.110(c).
---------------------------------------------------------------------------

    Units of Trading. As stated in proposed Rule 22.120, the unit of 
trading in each series of options traded on IEX Options will be the 
unit of trading established for that series by the OCC pursuant to the 
rules of the OCC and the agreements of the Exchange with the OCC. The 
proposed determination of the unit of trading for a series of options 
traded on IEX Options is the same as on MEMX Options pursuant to MEMX 
Rule 21.3.
    Minimum Quotation and Trading Increments. As stated in proposed 
Rule 22.140(a), the Exchange is proposing to apply the following 
quotation increments: (1) if the options series is trading at less than 
$3.00, five (5) cents; (2) if the options series is trading at $3.00 or 
higher, ten (10) cents; and (3) if the options series is trading 
pursuant to the Penny Interval Program one (1) cent if the options 
series is trading at less than $3.00, five (5) cents if the options 
series is trading at $3.00 or higher, except for QQQ, SPY, or IWM where 
the minimum quoting increment will be one (1) cent for all series. In 
addition, as stated in proposed Rule 22.140(b), the Exchange is 
proposing that the minimum trading increment for options contracts 
traded on IEX Options will be one (1) cent for all series. Such 
proposed minimum quotation and trading increments are the same as on 
MEMX Options pursuant to MEMX Rules 21.5(a) and (b).
    Penny Interval Program. As set forth in proposed Rule 22.140(c), 
the Exchange is proposing to adopt a Penny Interval Program that is 
substantially similar to the penny programs of other exchanges, 
including MEMX Options pursuant to MEMX Rule 21.5(d), which includes 
minimum quoting requirements for options classes listed under the Penny 
Interval Program. However, eligibility for inclusion in the Penny 
Interval Program will be limited to those classes already operating 
under penny programs of other options exchanges at the time IEX Options 
is launched. The list of options classes included in the Penny Interval 
Program will be announced by the Exchange via circular distributed to 
Options Members and published by the Exchange on its website.
    Order Types and Handling Instructions. The Trading System will make 
available to Users two Order Types (as defined in proposed Rule 
22.100(d))--Limit orders and Market orders--as well as various order 
instructions and modifiers that can be appended to such orders. The 
characteristics and functionality of each Order Type is substantially 
similar to what is currently approved for use in the Exchange's 
equities trading facility or on other options exchanges, including MEMX 
Options, except where described below.
    IEX Options will support bulk messages for Options Market Makers as 
specified in the description of each Order Type or other instruction. 
Proposed Rule 22.100(d) includes the following details with respect to 
Limit orders and Market orders:
     Limit order. Limit orders are orders (including bulk 
messages) to buy or sell an option at a specified price or better.

[[Page 12898]]

A Limit order is marketable when, for a Limit order to buy, at the time 
it is entered into the Trading System, the order is priced at the 
current inside offer or higher, or for a Limit order to sell, at the 
time it is entered into the Trading System, the order is priced at the 
current inside bid or lower.
     Market order. Market orders are orders to buy or sell at 
the best price available at the time of execution. Market orders to buy 
or sell an option traded on IEX Options will be rejected if they are 
received when the underlying security is subject to a ``Limit State'' 
or ``Straddle State'' as defined in the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act 
(the ``Limit Up-Limit Down Plan''). Bulk messages may not be Market 
orders.
    Pursuant to Rule 22.100(d)(3), Users have the option to designate 
an order as ``attributable'' to that User's MPID. Attributable orders 
are Market or Limit orders which display the User's MPID for purposes 
of trading on the Exchange. Use of attributable orders is voluntary. 
Attributable orders may not be available for all Exchange processes. 
The Exchange will distribute a circular to Options Members specifying 
the processes for which the attributable order-type shall be 
available.\73\
---------------------------------------------------------------------------

    \73\ The proposed definition is substantively identical to the 
definition in MIAX Rule 516(e). IEX proposes to incorporate this 
definition and functionality, because MEMX Options does not have 
Attributable Orders.
---------------------------------------------------------------------------

    The Trading System will also make available to Users several 
additional instructions that can be designated on an order (``Handling 
Instructions''). A Handling Instruction applied to a bulk message 
applies to each bid and offer within that bulk message. The Handling 
Instructions available on IEX Options are described in proposed Rule 
22.100(e) and will include the following:
     Book Only. Book Only is an instruction that an order is to 
be ranked and executed on the Exchange pursuant to proposed Rule 22.170 
(Order Display and Book Processing) or to be repriced or cancelled, as 
appropriate, without routing away to another options exchange.
     Post Only. Post Only is an instruction that an order is to 
be ranked and executed on the Exchange pursuant to proposed Rule 22.170 
(Order Display and Book Processing) or cancelled, as appropriate, 
without routing away to another options exchange except that the order 
will not remove liquidity from the IEX Options Book. The Trading System 
reprices, cancels or rejects a bid (offer) designated as Post Only with 
a price that locks or crosses the Exchange's best offer (bid). A Market 
order cannot be designated as Post Only.
     Intermarket Sweep Order (``ISO''). ISOs are orders that 
shall have the meaning provided in proposed Rule 28.100, which relates 
to intermarket trading. Such orders may be executed at one or multiple 
price levels in the Trading System without regard to Protected 
Quotations at other options exchanges (i.e., may trade through such 
quotations). The Exchange relies on the marking of an order as an ISO 
order when handling such order, and thus, it is the entering Options 
Member's responsibility, not the Exchange's responsibility, to comply 
with the requirements relating to ISOs. ISOs are not eligible for 
routing pursuant to proposed Rule 22.180. A Market order cannot be 
designated as an Intermarket Sweep Order. Users may not designate bulk 
messages as ISOs.
    The Exchange notes that each of the proposed Order Types and 
Handling Instructions available on IEX Options are based upon and 
substantially similar to those of MEMX, with the exception of the 
Attributable Orders not offered by MEMX.
    Time-in-Force (``TIF'') Designations. Users entering orders into 
the Trading System may designate such orders to remain in force and 
available for display and/or potential execution for varying periods of 
time. Unless cancelled earlier, once these time periods expire, the 
order (or the unexecuted portion thereof) is returned to the entering 
party. A TIF applied to a bulk message applies to each bid and offer 
within that bulk message. Unless otherwise specified in the Exchange 
Rules or the context indicates otherwise, the Exchange determines which 
of the following TIFs are available on a class or system basis. The TIF 
designations available on IEX Options are described in proposed Rule 
22.100(g) and will include the following:
     Immediate Or Cancel (``IOC''). IOC means, for an order so 
designated, an order that is to be executed in whole or in part as soon 
as such order is received. The portion not so executed immediately on 
the Exchange or another options exchange is cancelled and is not posted 
to the IEX Options Book. IOC orders that are not designated as Book 
Only and that cannot be executed in accordance with proposed Rule 
22.170 on the Trading System when reaching the Exchange will be 
eligible for routing away pursuant to proposed Rule 22.180.
     Day. Day means, for an order so designated, an order to 
buy or sell which, if not executed expires at market close. Market 
Makers may designate bulk messages as Day.
    The Exchange notes that each of the proposed TIF designations 
available on IEX Options is identical to the same TIF designations 
available on MEMX Options, except that they are applied differently in 
one respect. Specifically, MEMX Options allows bulk messages to have a 
TIF of IOC. IEX is proposing to only allow bulk messages to have a TIF 
of DAY so that Market Makers do not take liquidity with quotes 
submitted via bulk messages, and which are meant for liquidity 
provision by Market Makers, which by definition the Exchange believes 
constitutes orders resting on the Order Book.
    Anti-Internalization Qualifier (``AIQ'') Modifiers. As with its 
equities market, the Exchange will allow Users to use certain AIQ 
modifiers, which are described in proposed Rule 22.100(h). Any incoming 
order designated with an AIQ modifier will be prevented from executing 
against a resting opposite side order also designated with an AIQ 
modifier and originating from the same MPID, Options Member identifier, 
trading group identifier, or Sponsored Participant identifier. The 
Exchange will offer the following AIQ modifiers: AIQ Cancel Newest, 
described in proposed Rule 22.100(h)(1); AIQ Cancel Oldest, described 
in proposed Rule 22.100(h)(2); AIQ Cancel Both, described in proposed 
Rule 22.100(h)(3); and AIQ Cancel Smallest, described in proposed Rule 
22.100(h)(4). The Exchange notes that each of the proposed AIQ 
modifiers available on IEX Options is substantially similar to the same 
modifiers available on MEMX Options,\74\ with the distinction that on 
MEMX a market maker may include the AIQ modifier on bulk messages, 
while IEX is proposing to not allow AIQ modifiers to be included on 
bulk messages because it would be meaningless on IEX where bulk 
messages will only be for liquidity adding quotes, and the AIQ modifier 
that dictates the AIQ interaction is determined by the liquidity 
removing order.\75\
---------------------------------------------------------------------------

    \74\ MEMX does not offer an AIQ Cancel Smallest modifier, but it 
is offered by other exchanges such as C1. See C1 Rule 5.6 (Match 
Trade Prevention Modifier--MTP Cancel Smallest).
    \75\ MEMX calls them ``Match Trade Prevention'' modifiers. See 
MEMX Rule 21.1(h).
---------------------------------------------------------------------------

    Re-Pricing Mechanism. Like other options exchanges, the Exchange 
proposes to offer a re-pricing mechanism to Users to comply with the 
order protection and trade through restrictions of the Options Order 
Protection and Locked/Crossed Market

[[Page 12899]]

Plan.\76\ This re-pricing mechanism, described in proposed Rule 
22.100(i), is referred to by the Exchange as Price Adjust and is 
substantially similar to the Price Adjust mechanism offered by MEMX 
Options pursuant to MEMX Rule 21.1(i), with the exception that IEX will 
only allow the ranked price and displayed price of an order that has 
been repriced to be adjusted to a more aggressive price one additional 
time (unlike MEMX, which allows multiple adjustments).\77\
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    \76\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (Aug. 6, 2009) (File No. 4-546).
    \77\ The Exchange notes that this behavior is substantially 
similar to the ``single price adjust'' behavior in C1 Rule 
5.32(b)(2)(A).
---------------------------------------------------------------------------

    MPIDs. As proposed in Rule 22.100(j), the term ``MPID'' means the 
unique market participant identifier assigned to a User and shall refer 
to what the Trading System uses to identify the User and the clearing 
number for the execution of orders and quotes submitted to the Trading 
System with that MPID. Each MPID corresponds to a single User and a 
single clearing number of a Clearing Member with the Clearing 
Corporation. A User may obtain multiple MPIDs, which may be for the 
same or different clearing numbers. A User is able (in a form and 
manner determined by the Exchange) to designate which of its MPIDs may 
be used for each of its ports. If a User submits an order or quote 
through a port with an MPID not enabled for that port, the Trading 
System cancels or rejects the order or quote. The Exchange notes that 
its proposed Rule 22.100(j) is identical to MEMX Rule 21.1(j) except 
that MEMX uses the term EFID rather than MPID.
    Ports and Bulk Messages. Proposed Rule 22.100(k) defines two types 
of ports: (1) a ``physical port,'' which provides a physical connection 
to the Trading System and may provide access to multiple logical ports; 
and (2) a ``logical port'' or ``application session,'' which provides 
Users with the ability within the Trading System to accomplish a 
specific function through a connection, such as order entry, data 
receipt, or access to information. The Exchange notes that each of the 
proposed types of ports available on IEX Options is identical to the 
same types of ports on MEMX Options.
    The term ``bulk message'' is proposed to mean a single electronic 
message a User submits with a Market Maker Capacity to the Exchange in 
which the User may enter, modify, or cancel up to an Exchange-specified 
number of bids and offers (which number the Exchange will announce via 
Exchange notice and publicly available technical specifications). The 
Trading System handles a bulk message in the same manner as it handles 
an order or quote, unless the Exchange Rules specify otherwise.
    Only Market Makers may submit bulk messages through a logical port 
in a class in which the Market Maker has an appointment. In addition, 
bulk messages have a default TIF of Day and a default designation of 
Post Only. As proposed, the Trading System will cancel, reject, or 
reprice a Post Only bulk message bid (offer) with a price that locks or 
crosses the Exchange best offer (bid) or ABO (ABB).\78\ These 
provisions are similar to the manner in which market maker bulk 
messages are handled by MEMX, which allows bulk messages to also have a 
TIF of IOC, a designation as book only, and post only bulk messages in 
unassigned classes.\79\
---------------------------------------------------------------------------

    \78\ See proposed IEX Rule 22.100.
    \79\ See MEMX Rule 21.1(l). IEX notes that the ability of the 
Trading System to cancel or reject a post only order submitted on a 
bulk port with a price that locks or crosses the Exchange best offer 
(bid) or ABO (ABB) is substantively identical to MEMX Rule 
21.1(l)(3); IEX will also allow the Trading System to reprice a post 
only order submitted on a bulk port with a price that locks or 
crosses the Exchange best offer (bid) or ABO (ABB), which is 
substantively identical to the functionality in C1 Rule 
5.32(b)(1)(B).
---------------------------------------------------------------------------

    Cancel Back. The term ``Cancel Back'' is proposed to mean an 
instruction a User designates on an order (including bulk messages) to 
not be subject to the Price Adjust process pursuant to proposed Rule 
22.100(i). The Trading System cancels or rejects an order with a Cancel 
Back instruction (immediately at the time the Trading System receives 
the order or upon return to the Trading System after being routed away) 
if displaying the order on the Book would create a violation of 
proposed Rule 28.120, or if the order cannot otherwise be executed or 
displayed in the Book at its limit price. The Trading System executes a 
Book Only--Cancel Back order against resting orders. The proposed 
definition of Cancel Back in proposed Rule 22.100(m) is substantively 
identical to a Cancel Back Order defined in MEMX Rule 21.1(m).
    Market Opening Procedures. As proposed, the Trading System will 
accept quotes, Limit orders with a TIF of DAY and Market orders for 
inclusion in the opening process (``Opening Process'') beginning at 
8:00 a.m. or immediately upon trading being halted in an options series 
due to the primary listing market for the applicable underlying 
security declaring a regulatory trading halt, suspension, or pause with 
respect to such security (a ``Regulatory Halt''), and will continue to 
accept Market and Limit orders and quotes until such time as the 
Opening Process is initiated in that options series (the ``Pre-open 
state'').\80\
---------------------------------------------------------------------------

    \80\ See proposed Rule 22.160(a)(13).
---------------------------------------------------------------------------

    After the first transaction on the primary listing market after 
9:30 a.m. in the securities underlying the options as reported on the 
first print disseminated pursuant to an effective national market 
system plan or the Regulatory Halt has been lifted, the related options 
series will be opened automatically as described below. The Exchange 
will conduct its ``Core Open Auction'' for each series of options 
contracts upon receipt of an ``Auction Trigger'', i.e., the moment that 
the Primary Market for the underlying security first disseminates both 
a two-sided quote and a trade of any size that is at or within the 
quote (in the case of reopening after a Regulatory Halt, the Auction 
Trigger also includes notification that the underlying stock is no 
longer halted).\81\ The Exchange will disseminate a message to market 
participants indicating the initiation of the opening process, conduct 
the opening auction, and then transition to continuous trading for each 
series of options contracts.\82\ The proposed market opening procedures 
are substantially similar to the market opening procedures specified in 
NYSE Arca Options Rule 6.64P-O, subject to several differences, most 
notably that any imbalance would be allocated on a pro rata basis.\83\
---------------------------------------------------------------------------

    \81\ See proposed Rule 22.160(a)(5) and (7).
    \82\ See proposed Rule 22.160. IEX notes that pursuant to 
proposed Rule 22.160(b)(3), the priority overlays specified in 
proposed Rule 22.170(f)(2) and (3) will not be available during an 
Auction, but will resume once the Exchange has transitioned to 
continuous trading.
    \83\ See proposed Rule 22.160(b). Other differences include: IEX 
will begin accepting orders for the opening auction at 8:00 a.m., 
while NYSE Arca begins accepting orders for their opening auction at 
6:00 a.m. See proposed Rule 22.160(a)(13)(A) versus NYSE Arca 
Options Rule 6.64P-O(a)(12)(A). Additionally, IEX will begin 
disseminating Auction Imbalance Information at 8:30 a.m., while NYSE 
Arca begins disseminating imbalance information at 8:00 a.m. See 
proposed Rule 22.160(c)(1) versus NYSE Arca Options Rule 6.64P-
O(c)(1). Further, IEX does not define Far Clearing Price, because 
IEX does not propose to have Auction Only orders, to which the Far 
Clearing Price relates.
---------------------------------------------------------------------------

    Order Display/Matching System. The Trading System will be based 
upon functionality currently approved for use in the Exchange's 
equities trading system. Specifically, the Trading System will allow 
Users to enter Market orders and priced Limit orders to buy (bids) and 
sell (offers). All bids or offers made and accepted on IEX Options in 
accordance with the Exchange Rules shall constitute binding contracts, 
subject to applicable requirements of the

[[Page 12900]]

Exchange Rules and the Rules of the Clearing Corporation. Such orders 
are executable against marketable contra-side orders in the Trading 
System.\84\ Resting quotes and orders on the IEX Options Book will be 
prioritized according to price. If there are two or more quotes or 
orders at the best price, then the options contracts will be allocated 
proportionally according to size (in a pro-rata fashion), rounded down 
to the nearest contract. If there are residual options contracts to be 
filled, the quote or order with the largest remaining size (based on 
the pro rata calculation) will receive the first contract, and each 
successive contract (if any) will be allocated to each subsequent quote 
or order based on size (largest to smallest). If there are two or more 
quotes or orders with the same remaining size, then the quote or order 
with the first time priority will be allocated the next options 
contract. Each successive options contract (if any) will be allocated 
in the same manner.\85\
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    \84\ See proposed Rule 22.170.
    \85\ See proposed Rule 22.170(b). This pro-rata allocation 
methodology is based upon the substantially similar methodology in 
MIAX Rule 514(c)(2) and NYSE Amex Rule 964NYP(i)(2).
---------------------------------------------------------------------------

    Routing. IEX Options will offer a simple optional routing 
functionality to facilitate compliance with applicable regulations and 
will not offer other complex routing strategies. Options Members can 
designate orders that have not been executed in full by the Trading 
System pursuant to Rule 22.170 above as either available for routing or 
not available for routing.\86\ IEX Options will support orders that are 
designated to be routed to the NBBO as well as orders that will execute 
only within IEX Options. Orders that are designated to execute at the 
NBBO will be routed to other options markets to be executed when the 
Exchange is not at the NBBO \87\ consistent with the Options Order 
Protection and Locked/Crossed Market Plan.\88\
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    \86\ See proposed Rule 22.180(a).
    \87\ As described infra, if the order is eligible for the Step-
Up Mechanism (set forth in proposed Rule 22.270), the Trading System 
will attempt to fill the order before routing it to an away market.
    \88\ See supra note 77.
---------------------------------------------------------------------------

    Subject to the exceptions contained in proposed Rule 28.110(b), the 
Trading System will ensure that an order will not be executed at a 
price that trades through another options exchange. An order that is 
designated by an Options Member as routable will be routed in 
compliance with applicable trade-through restrictions. Any order 
entered with a price that would lock or cross a Protected Quotation 
that is not eligible for either routing or the price adjust process as 
defined in proposed Rule 22.100(i) will be cancelled. Bulk messages are 
not eligible for routing.
    IEX Options will route orders in options via IEX Services LLC 
(``IEX Services''), which serves as the Outbound Router of the 
Exchange, as defined in Rule 2.220 (IEX Services LLC as Outbound 
Router).\89\ The function of the Outbound Router will be to route 
orders in options listed and open for trading on IEX Options by 
transmitting such orders to one or more routing brokers that are not 
affiliated with the Exchange to other options exchanges (``Routing 
Services'') pursuant to the Exchange Rules on behalf of IEX 
Options.\90\ The Outbound Router is subject to regulation as a facility 
of the Exchange, including the requirement to file proposed rule 
changes under Section 19 of the Exchange Act.\91\ Parties that do not 
desire to use the Routing Services provided by the Exchange must 
designate orders as not available for routing.\92\ The Exchange notes 
that the proposed rules relating to the routing of orders on IEX 
Options to away options markets are substantively identical to the MEMX 
Back-Up Order Routing Services described in MEMX Rule 21.9(e).\93\
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    \89\ See proposed Rule 22.180(d).
    \90\ Id.
    \91\ Id.
    \92\ Id.
    \93\ MEMX also offers the option of using its outbound router, 
MEMX Execution Services to route directly to other exchanges. See 
MEMX Rule 21.9(d). IEX is not proposing to adopt this functionality, 
because it will only provide for routing through IEX Services to 
third party broker dealers.
---------------------------------------------------------------------------

    Priority of Routed Orders. Orders that have been routed by the 
Trading System to other options exchanges are not ranked and maintained 
in the IEX Options Book pursuant to Rule 22.170, and therefore are not 
available to execute against incoming orders. Once routed by the 
Trading System, an order becomes subject to the rules and procedures of 
the destination options exchange including, but not limited to, order 
cancellation. If a routed order is subsequently returned, in whole or 
in part, that order, or its remainder, shall receive a new time stamp 
reflecting the time of its return to the Trading System.\94\
---------------------------------------------------------------------------

    \94\ See proposed Rule 22.180(b).
---------------------------------------------------------------------------

    Market Access. In connection with the proposed rules regarding 
routing to away options exchanges, proposed Rule 22.180(e) provides 
that IEX Services has, pursuant to Rule 15c3-5 under the Act,\95\ 
implemented certain tests designed to mitigate the financial and 
regulatory risks associated with providing the Exchange's Users with 
access to such away options exchanges. Pursuant to the policies and 
procedures developed by IEX Services to comply with Rule 15c3-5, if an 
order or series of orders are deemed to be erroneous or duplicative, 
would cause the entering User's credit exposure to exceed a preset 
credit threshold, or are non-compliant with applicable pre-trade 
regulatory requirements (as defined in Rule 15c3-5), IEX Services will 
reject such orders prior to routing and/or seek to cancel any orders 
that have been routed. This is consistent with the routing 
implementation of other options exchanges, and the Exchange notes that 
proposed Rule 22.180(e) is substantively identical to MEMX Rule 
21.9(f).
---------------------------------------------------------------------------

    \95\ 17 CFR 240.15c3-5.
---------------------------------------------------------------------------

    Order Priority. After the opening, trades on the Exchange will 
occur when a buy order/quote and a sell order/quote match on the 
Exchange's order book. The Trading System shall execute trading 
interest within the Trading System in price priority, meaning it will 
execute all trading interest at the best price level within the Trading 
System before executing trading interest at the next best price. 
Pursuant to proposed Rule 22.170, after considering price priority, all 
options contracts are allocated proportionally according to size (in a 
pro-rata fashion). If the executed quantity cannot be evenly allocated, 
the remaining options contracts will be distributed one at a time based 
upon price-size-time priority.
    In addition, the Exchange supports multiple priority overlays that 
apply ahead of the default pro-rata allocation at a given price level. 
Pursuant to proposed Rule 22.170(f),\96\ these priority overlays are 
made available at the Exchange's discretion on a class-by-class basis: 
(1) the Priority Customer overlay,\97\ which provides resting interest 
from Priority Customers with priority over all non-Priority Customer 
interest at the same price, will always take priority over all other 
priority overlays; (2) the Specialist Participation Entitlement 
overlay,\98\ which provides the Specialist with priority over interest

[[Page 12901]]

from other non-Priority Customers for a certain percentage of contracts 
allocated at the same price (entitling the Specialist to 60% of the 
allocation if there is another non-Priority Customer at the NBBO or 40% 
if there are two or more other non-Priority Customers at the NBBO) \99\ 
when quoting at the NBBO, inclusive of the case in which the order is 
directed to the Specialist; (3) the Directed Market Maker Participation 
Entitlement overlay,\100\ which provides a Directed Market Maker with 
priority over interest from other non-Priority Customers for a certain 
percentage of contracts allocated at the same price (entitling the DMM 
to 60% of the allocation if there is another non-Priority Customer at 
the NBBO or 40% if there are two or more other non-Priority Customers 
at the NBBO) \101\ when quoting at the NBBO and always applies in place 
of the Specialist Participation Entitlement overlay when both are in 
effect and the order is directed to a Directed Market Maker other than 
the Specialist; \102\ and (4) the Small-Size Order Entitlement 
overlay,\103\ which provides a Specialist quoting at the NBBO the 
priority to execute against the entire size of an order or quote of 
five or fewer contracts that does not first execute against any 
Priority Customer orders at that price, provided that if an order 
subject to the Small-Size Order Entitlement is directed to a Directed 
Market Maker who is not the Specialist quoting at the NBBO, and the 
Directed Market Maker priority overlay is enabled in the series, then 
the Directed Market Maker Participation Entitlement priority overlay 
will apply instead of the Small-Size Order Entitlement priority 
overlay,\104\ and in the case that an order subject to the Small-Size 
Order Entitlement is directed to the Specialist, the Small-Size Order 
Entitlement priority overlay will apply while the Specialist 
Participation Entitlement and Directed Market Maker Entitlement 
overlays will not.\105\
---------------------------------------------------------------------------

    \96\ Proposed Rule 22.170(f) is based upon and substantially 
similar to C1 Rule 5.32(a)(2), except is different in one respect. 
Unlike C1, in the event that a Small-Size order is directed to a 
Specialist, the IEX Options trading system will apply the Small-Size 
Order Entitlement to the order and not the Directed Order guarantee, 
meaning the Specialist will have priority to execute against the 
entire size of the order that does not execute against any Priority 
Customer orders at that price.
    \97\ See proposed Rule 22.170(f)(1).
    \98\ See proposed Rule 22.170(f)(2). This overlay may only be in 
effect if the Priority Customer overlay is also in effect. See 
proposed Rule 22.170(f).
    \99\ These allocation entitlements are based on MIAX Rule 
514(h)(1), after accounting for the additional priorities afforded 
market makers on MIAX, as set forth in MIAX Rule 514(e). See supra 
note 86 and accompanying text.
    \100\ See proposed Rule 22.170(f)(2). This overlay may only be 
in effect if the Priority Customer overlay is also in effect. See 
proposed Rule 22.170(f).
    \101\ These allocation entitlements are based on MIAX Rule 
514(h)(1), after accounting for the additional priorities afforded 
market makers on MIAX, as set forth in MIAX Rule 514(e). See supra 
note 86 and accompanying text.
    \102\ Prioritizing the DMM entitlement over the Specialist 
entitlement in these circumstances is the same functionality offered 
by several other exchanges. See, e.g., NYSE Amex Options Rule 
964NYP(h)(1).
    \103\ See proposed Rule 22.170(f)(3).
    \104\ See proposed Rule 22.170(f)(3)(A).
    \105\ See proposed Rule 22.170(f)(3)(B). This is functionally 
identical to how NYSE Amex Options allocates small-size Directed 
Orders that are directed to a Specialist. See NYSE Amex Options Rule 
965NYP(h)(2)(B).
---------------------------------------------------------------------------

    After executions resulting from the Priority Overlays described 
above, orders and quotes within the Trading System for the accounts of 
non-Priority Customers, including Professional Customers, have next 
priority. If there is more than one highest bid or more than one lowest 
offer on the Options Order Book for the account of a non-Priority 
Customer, then such bids or offers will be afforded priority on a size 
pro-rata basis, as described above.
    Step Up Mechanism. IEX proposes to offer Options Members an 
optional Step Up Mechanism (``SUM''), which is a feature within the 
Trading System that provides automated order handling in designated 
classes trading for qualifying orders that are not automatically 
executed by the Trading System.\106\ The Exchange will determine 
eligibility of an order for the SUM (including order size, type, 
capacity, handling instructions, as well as which classes of options 
contracts). The Exchange will not initiate the SUM process if the NBBO 
is crossed.\107\ SUM automatically processes upon receipt of an 
eligible order that is marketable against the BBO that is not the NBBO; 
or an eligible order that would improve the Exchange's BBO and that is 
marketable against the ABBO. This proposed functionality is 
substantively identical to the Step-Up Mechanism offered by C1, with 
the exception that IEX is not proposing to offer All or None 
orders.\108\ IEX notes that the optional SUM mechanism is designed to 
benefit a routable order that is not immediately eligible for execution 
on the Exchange, but if routed to an away exchange might miss a 
potential execution on that exchange. And, because SUM is optional, a 
Member can choose not to have its order subject to the SUM mechanism if 
it determines that the functionality is not consistent with its 
objectives. Given the multitude of tradeable listed options securities 
(compared to listed equities) not all available liquidity is always 
reflected in an exchange's order book, and the SUM mechanism provides 
an opportunity to source such additional liquidity to the benefit of 
the order in question. Moreover, IEX notes as well that other options 
exchanges offer similar mechanisms, and order flow might be directed to 
such exchanges if IEX did not offer such a mechanism.
---------------------------------------------------------------------------

    \106\ See proposed Rule 22.270. IEX's proposed Step-Up Mechanism 
is substantively identical to C1 Rule 5.35.
    \107\ See proposed Rule 22.270(a).
    \108\ See C1 Rule 5.35.
---------------------------------------------------------------------------

    Upon receipt of a SUM eligible order, the Trading System will 
expose the order at the NBBO upon receipt for a period of time 
determined by the Exchange on a class-by-class basis, which period of 
time may not exceed one second. All Users may submit responses to the 
exposure message, which must be limited to the size of the order being 
exposed, may be modified, cancelled or replaced any time during the 
exposure period, and are cancelled back at the end of the exposure 
period if unexecuted. Responses priced at the prevailing NBBO or better 
will immediately trade against the order in time priority. If during 
the exposure period the Exchange receives an unrelated order (or quote) 
on the opposite side of the market from the exposed order that could 
trade against the exposed order at the prevailing NBBO price or better, 
then the orders will trade at the prevailing NBBO price. The exposure 
period will not terminate if a quantity remains on the exposed order 
after such trade.
    Responses that are not immediately executable based on the 
prevailing NBBO may become executable during the exposure period based 
on changes to the NBBO. In the event of a change to the NBBO and at the 
conclusion of the exposure period, the Exchange will evaluate remaining 
responses as well as the ABBO and execute any remaining portion of the 
exposed order to the fullest extent possible at the best price(s) by 
executing against responses and unrelated orders.
    Following the exposure period, the Exchange will route the 
remaining portion of the exposed order to other exchanges, unless 
otherwise instructed by the User. Any portion of a routed order that 
returns unfilled shall trade against the Exchange's best bid/offer 
unless another exchange is quoting at a better price in which case new 
orders shall be generated and routed to trade against such better 
prices.
    Data Dissemination. The Exchange will disseminate to OPRA the 
highest bid and the lowest offer, and the aggregate quotation size 
associated therewith that is available, in accordance with the 
requirements of Rule 602 of Regulation NMS under the Act.\109\ The 
Exchange will also offer three data products: (1) IEX Options DEEP: an 
uncompressed data feed that offers depth of book quotations and 
execution information based on options

[[Page 12902]]

orders entered into the Trading System; (2) IEX Options TOPS: an 
uncompressed data feed that offers top of book quotations and execution 
information based on options orders entered into the Trading System; 
and (3) DROP: an uncompressed data feed that offers information 
regarding the options trading activity of a specific User.\110\ DROP is 
only available to the User to whom the specific data relates and those 
recipients expressly authorized by the User.\111\
---------------------------------------------------------------------------

    \109\ See proposed Rule 22.240(a).
    \110\ See proposed Rule 22.240(b).
    \111\ Data products will be subject to fees as specified in an 
effective Commission rule filing.
---------------------------------------------------------------------------

    Risk Controls. The Exchange also proposes to offer to all Users of 
IEX Options the ability to establish certain risk control parameters 
and limits that are intended to assist Users in managing their market 
risk. The proposed risk controls are based, in part, on those of the 
NYSE Arca and C1 options exchanges, with certain additions and 
differences described below. The proposed risk controls are designed to 
offer Users protection from entering orders outside of certain size and 
price parameters, as well as certain standard or Exchange-established 
parameters based on order type and market conditions.
    The proposed risk controls include: (i) pre-trade risk controls; 
(ii) activity-based risk controls; and (iii) global risk controls, as 
set forth in proposed Rule 22.250.\112\ Pre-trade, activity-based, and 
global risk controls may be set before the beginning of a trading 
day.\113\ Pre-trade, activity-based, and global risk controls can be 
set at the MPID or MPID Group level,\114\ or both, depending on the 
risk control.\115\ Additionally, pre-trade risk controls to restrict 
the options class(es) transacted must be set per options class.\116\ 
The following describes each category of risk protection mechanism:
---------------------------------------------------------------------------

    \112\ Proposed Rule 22.250 is based upon and substantially 
similar to NYSE Arca Rule 6.40P-O.
    \113\ See proposed Rule 22.250(b)(1).
    \114\ MPID Groups, defined in proposed Rule 22.250(a)(5), are 
based upon C1 Rule 5.34(c)(4)(A), which allows for the setting of 
risk control limits for EFID Groups, which are equivalent to MPID 
Groups. IEX notes that it proposes to retain the right to limit the 
number of MPID Groups an Options Member can configure based upon 
potential technical limitations.
    \115\ See proposed Rule 22.250(b)(2). IEX notes that while it 
allows these risk controls to be set at MPID or MPID Group levels, 
NYSE Arca allows the equivalent controls to be set at either the 
MPID or the MPID Sub-ID level (a more granular level than the MPID).
    \116\ See proposed Rule 22.250(b)(2).
---------------------------------------------------------------------------

    Pre-Trade Risk Controls.\117\ The pre-trade risk controls mechanism 
is a set of optional limits, each of which an Options Member may 
utilize with respect to its trading activity on the Exchange. These 
controls include controls related to the maximum dollar amount for a 
single order to be applied one time and the maximum number of contracts 
that may be included in a single order before it can be traded. 
Additionally, there are optional controls related to the price of an 
order or quote (including percentage-based and dollar-based controls), 
controls related to the order types or modifiers that can be utilized, 
controls to restrict the options classes transacted, and controls to 
prohibit duplicative orders.
---------------------------------------------------------------------------

    \117\ See proposed Rule 22.250(a)(1), which is substantively 
identical to NYSE Arca Rule 6.40P-O(a)(2).
---------------------------------------------------------------------------

    Activity-Based Risk Controls.\118\ The Exchange also proposes to 
offer activity-based risk limits that may be applied to orders and 
quotes in an options class (when acting as a Market Maker, an Options 
Member is required to select at least one of the following controls) 
\119\ based on specified thresholds measured over the course of a 
configurable time period (``Interval''). The Exchange will offer the 
following activity-based risk controls: (i) transaction-based risk 
limits, which are pre-established limits on the number of an Options 
Member's orders and quotes executed in a specified class of options per 
Interval; (ii) volume-based risk limits, which are pre-established 
limits on the number of contracts of an Options Member's orders and 
quotes that can be executed in a specified class of options per 
Interval; and (iii) percentage-based risk limits, which are pre-
established limits on the percentage of contracts executed in a 
specified class of options as measured against the full size of an 
Options Member's orders and quotes executed per Interval. To determine 
whether an Options Member has breached the specified percentage limit, 
the Exchange calculates the percent of each order or quote in a 
specified class of options that is executed during an Interval (each, a 
``percentage''), and sums up those percentages. This risk limit will be 
breached if the sum of the percentages exceeds the pre-established 
limit.
---------------------------------------------------------------------------

    \118\ See proposed Rule 22.250(a)(2), which is substantively 
identical to NYSE Arca Rule 6.40P-O(a)(3).
    \119\ See proposed Rule 22.250(c)(2)(A).
---------------------------------------------------------------------------

    Global Risk Control.\120\ The Exchange also proposes to offer a 
global risk control, which is a pre-established limit on the number of 
times an Options Member may breach its activity-based risk controls per 
Interval.
---------------------------------------------------------------------------

    \120\ See proposed Rule 22.250(a)(3), which is substantively 
identical to NYSE Arca Options Rule 6.40P-O(a)(4).
---------------------------------------------------------------------------

    Automated Breach Actions.\121\ Proposed Rule 22.250(c) details the 
``automated breach actions'' the Exchange will take if any of the three 
above-described risk controls are breached. Based on User preference, 
these actions can include blocking new orders and quotes, canceling 
orders and quotes on the Order Book, or notifying the Options Member of 
the breach. With respect to the activity-based and global risk controls 
(as well as Kill Switch Actions described below), in order to remain 
consistent with the firm quote obligations of a broker-dealer pursuant 
to Rule 602 of Regulation NMS, any marketable interest that is 
executable against an order or quote that is received \122\ prior to 
the time the applicable threshold is triggered and processed by the 
Trading System will be automatically executed up to the size of the 
resting order or quote, regardless of whether the execution would cause 
the Member to exceed their pre-set risk threshold(s).\123\
---------------------------------------------------------------------------

    \121\ See proposed Rule 22.250(c), which is substantively 
identical to NYSE Arca Options Rule 6.40P-O(c).
    \122\ The time of receipt for an order or quote is the time such 
message is processed by the Exchange's order book.
    \123\ Pre-trade risk controls are implemented prior to an order 
or quote resting on the order book (or being placed on the book 
again following an auction) and therefore do not implicate firm 
quote obligations.
---------------------------------------------------------------------------

    Kill Switch Actions.\124\ Additionally, Options Members may direct 
the Exchange to operate a ``kill switch'' to either cancel all 
unexecuted orders and quotes on the Order Book, block the entry of any 
new order and quote messages, or both.
---------------------------------------------------------------------------

    \124\ See proposed Rule 22.250(e), which is substantively 
identical to NYSE Arca Options Rule 6.40P-O(e).
---------------------------------------------------------------------------

    Limit Order Price Protection.\125\ The Exchange also proposes to 
offer price protection mechanisms, as set forth in proposed Rule 
22.260.\126\ These protections include Limit Order Price Protection, in 
which the Trading System will reject an order or quote upon entry, or 
cancel at the conclusion of an auction, if its price exceeds a pre-
established, Exchange-defined ``specified threshold'' amount above or 
below the reference price. The Reference Price for calculating Limit 
Order Price Protection for an order or quote to buy (sell) will be the 
NBO (NBB), provided that, immediately

[[Page 12903]]

following an auction, the reference price will be the price at which 
the auction match occurred, or, if none, the upper (lower) auction 
collar price, or, if none, the NBO (NBB).
---------------------------------------------------------------------------

    \125\ See proposed Rule 22.260(a), which is substantively 
identical to NYSE Arca Options Rule 6.62P-O(a)(3).
    \126\ IEX notes that these proposed risk control mechanisms are 
based on similar rules of other options exchanges, in particular: 
NYSE Arca Options Rules 6.62P-O(a)(3) and 6.41P-O and C1 Rules 
5.34(a)(1), (2) and (4).
---------------------------------------------------------------------------

    Market Orders in No-Bid (Offer) Series.\127\ If the Trading System 
receives a sell Market order in a series after it is open for trading 
with an NBB of zero and an NBO less than or equal to $0.50, then the 
Trading System converts the Market order to a Limit order with a limit 
price equal to the minimum trading increment applicable to the series 
and enters the order into the IEX Options. If the Trading System 
receives a sell Market order in a series after it is open for trading 
with an NBB of zero and an NBO greater than $0.50, then the Trading 
System cancels or rejects the Market order, except if the sell Market 
order would be subject to the drill-through protection (as discussed 
below), in which case the order joins the ongoing drill-through 
process. If the Trading System receives a buy Market order in a series 
after it is open for trading with an NBO of zero, the Trading System 
cancels or rejects the Market order.
---------------------------------------------------------------------------

    \127\ See proposed Rule 22.260(b), which is substantively 
identical to C1 Rule 5.34(a)(1).
---------------------------------------------------------------------------

    Market Order NBBO Width Protection.\128\ If a User submits a Market 
order to the Trading System when the NBBO width is greater than x% of 
the midpoint of the NBBO, subject to a minimum and maximum dollar value 
(the Exchange determines ``x'' and the minimum and maximum dollar 
values on a class-by-class basis), the Trading System cancels or 
rejects the Market order.
---------------------------------------------------------------------------

    \128\ See proposed Rule 22.260(c), which is substantively 
identical to C1 Rule 5.34(a)(2).
---------------------------------------------------------------------------

    Price Reasonability Checks.\129\ Additionally, the Exchange will 
apply price reasonability checks to most Limit orders and quotes during 
continuous trading on each trading day. One price reasonability check, 
the ``arbitrage check'', will reject order or quote messages to buy put 
options if the price of the order is equal to or greater than the 
strike price of the option and will reject (or cancel, if resting) 
order or quote messages to buy call options if the price of the order 
is equal to or greater than the price of the last trade in the 
underlying security plus an Exchange-defined specified threshold.\130\ 
Another price reasonability check, the ``intrinsic value check'', will 
assess the intrinsic value of an option based on the last sale price of 
the underlying security (for calls) or the strike price of the option 
(for puts), and reject or cancel certain orders or quotes if the price 
of the order is dislocated from the intrinsic value of the option by a 
certain Exchange-defined specified threshold.\131\
---------------------------------------------------------------------------

    \129\ See proposed Rule 22.260(d), which is substantively 
identical to NYSE Arca Options Rule 6.41P-O.
    \130\ See proposed Rule 22.260(d)(2), which is substantively 
identical to NYSE Arca Options Rule 6.41P-O(b).
    \131\ See proposed Rule 22.260(d)(3), which is substantively 
identical to NYSE Arca Options Rule 6.41P-O(c). IEX notes that like 
NYSE Arca Options, the term ``Automated Breach Action'' is used in 
two of its risk controls with different meanings: first with respect 
to the intrinsic value risk checks for market makers, see NYSE Arca 
Options Rule 6.40P-O(d) and proposed Rule 22.260(d)(3)(E); and also 
with respect to activity based risk controls. See NYSE Arca Options 
Rule 6.41P-O(d) and proposed Rule 22.250(c).
---------------------------------------------------------------------------

    Drill-Through Protection. Another proposed price protection 
mechanism is drill-through protection, which will prevent an order from 
executing beyond a ``buffer amount'' determined based on a drill-
through price.\132\ This rule is based upon and substantially similar 
to C1 Rule 5.34(a)(4), with the distinction that IEX's Drill-Through 
Protection will have a finite, Exchange-defined number of iterations, 
that are communicated by a Trading Alert with at least 30 days prior 
notice.\133\ IEX notes that other exchanges have also set a finite 
number of iterations for their Drill-Through Protection.\134\
---------------------------------------------------------------------------

    \132\ See proposed Rule 22.260(e).
    \133\ IEX notes that other exchanges also have the ability to 
change any exchange-determined parameters with a trading alert. See, 
e.g., C1 Rule 1.5.
    \134\ See, e.g., Securities Exchange Act Release No. 86923 
(September 10, 2019), 84 FR 48664 (September 16, 2019) (SR-CBOE-
2019-057) with respect to C1 prior functionality.
---------------------------------------------------------------------------

    Options Risk Parameter. In order to provide additional protection 
to Market Makers to address structural challenges \135\ they face in 
the listed options market, IEX proposes to offer an optional quote 
parameter that would augment the standard risk tools that will be 
available to Options Market Makers referred to as the Options Risk 
Parameter (``ORP''). As proposed, the ORP will be a parameter that can 
be applied to a quotation that rests on the Order Book at the price 
designated by the Market Maker that entered the quotation. When the ORP 
is triggered based on pre-defined criteria, the relevant quotation(s) 
will be adjusted in a manner specified transparently in IEX's rules and 
related Trading Alerts, as described below.\136\
---------------------------------------------------------------------------

    \135\ See infra note 150.
    \136\ See proposed IEX Rule 23.150(h).
---------------------------------------------------------------------------

    The ORP would leverage IEX's proprietary mathematical formula--the 
Options Quote Indicator (the ``Indicator'')--which is based on the 
preeminent Black-Scholes options pricing model. This Nobel-Prize-
winning approach for evaluating the price of an options contract has 
been studied extensively, and is widely considered as a primary 
starting point for both academic and industrial options pricing 
applications.\137\
---------------------------------------------------------------------------

    \137\ See Revolutionary Black-Scholes Option Pricing Model is 
Published by Fischer Black, Later a Partner at Goldman Sachs, 
available at https://www.goldmansachs.com/our-firm/history/moments/1973-black-scholes.
---------------------------------------------------------------------------

    Proposed Rule 23.150(h) sets forth the application of the Indicator 
and optional ORP.\138\ As with the standard risk checks, the ORP is 
designed to enable Market Makers to provide tighter and deeper quotes 
on IEX by providing protection from execution against stale quotes by 
identifying when the best Protected Bid or best Protected Offer of the 
Away Markets (as defined in Proposed Rule 22.160(a)(8)) in a particular 
options series is sufficiently dislocated from the price of the 
underlying security to indicate that the best Protected Bid or best 
Protected Offer of the Away Markets in the options series is likely in 
transition. The Exchange will determine on a class-by-class basis 
whether to make the ORP available, which determination will be 
communicated by Trading Alert.\139\ Offering the Indicator on a class-
by-class basis would enable the Exchange to utilize the ORP for classes 
with a high potential for adverse selection, while excluding classes 
presenting lower risk of adverse selection (such as classes with 
relatively lower volumes). This flexibility will therefore allow the 
Exchange to ensure the ORP is available for those classes where its use 
will achieve its intended purpose, while excluding its use where it 
would likely provide little additional value and could introduce 
unnecessary complexity (for example, for classes that are subject to a 
pending corporate action or other nonstandard characteristic).\140\
---------------------------------------------------------------------------

    \138\ The quote instability calculation is set forth in 
Supplementary Material .04 to proposed Rule 23.150(h); the 
calculation of implied volatility is set forth in Supplementary 
Material .05 to proposed Rule 23.150(h).
    \139\ See proposed IEX Rule 23.150(h)(1).
    \140\ The Exchange notes that it is not an equities listing 
exchange. The Exchange does not believe that making class-by-class 
determinations in this context or otherwise creates a conflict of 
interest.
---------------------------------------------------------------------------

    As proposed, the Exchange will utilize the Indicator, which is a 
fixed formula specified transparently in IEX's rules and related 
Trading Alerts, to assess the probability of an imminent change to the 
current best Protected Bid \141\ of the Away Markets to a lower price 
or of an imminent change to the

[[Page 12904]]

current best Protected Offer \142\ of the Away Markets to a higher 
price for a particular listed options series (i.e., an imminent adverse 
price change).\143\
---------------------------------------------------------------------------

    \141\ See supra note 77 at 39370.
    \142\ Id.
    \143\ See proposed IEX Rule 23.150(h).
---------------------------------------------------------------------------

    As discussed above, the Exchange will periodically determine two 
aspects of the formula--the frequency of calculation of implied 
volatility \144\ and the quote instability threshold.\145\ In 
determining the frequency of the implied volatility calculation and the 
quote instability threshold, the Exchange will consider the 
distribution of quote instability determinations, the precision of 
quote instability determinations, system capacity and performance, and 
client feedback. The Exchange believes that these factors are relevant 
to setting the initial values. Once the Options Trading System begins 
operation (subject to Commission approval of this rule proposal), the 
Exchange expects to also consider attributes like fill rates (resting 
and taking) \146\ and markout data,\147\ as well as other factors it 
determines are relevant based on operational experience in order to 
optimize how both variables are set. In periodically adjusting each 
variable, the Exchange will consider each variable with a view towards 
appropriately balancing the interests of both liquidity takers and 
makers, as well as the need to optimize system capacity and 
performance. The Exchange will communicate any changes to the quote 
instability threshold and the implied volatility calculation frequency 
by Trading Alert with at least 30 days' notice.
---------------------------------------------------------------------------

    \144\ See proposed IEX Rule 23.150(h)(1) Supplementary Material 
.05.
    \145\ See proposed IEX Rule 23.150(h)(1) Supplementary Material 
.04(2)(e). The quote instability threshold will be within a range of 
0-1. For example, a quote instability threshold of 1 would indicate 
that the expected price change in the option resulting from price 
movement in the underlying would be 100% of the current price of the 
option.
    \146\ Fill rate data measures the degree to which incoming 
orders are able to execute against a resting order on a venue and 
are a measure of the percent of shares of an order that are filled 
(or executed) by such venue, adjusting for factors such as the size 
of the order compared to the size of a venue's displayed quote. The 
maximum fill rate for an order is 100%.
    \147\ Markouts measure the direction and degree to which the 
market moved after an execution, and are often measured as the 
difference between the execution price and the midpoint of the NBBO 
at various time intervals after a trade. Markouts are typically used 
as a way to measure the ``quality'' of a trade. In particular, 
short-term markouts of several milliseconds after the time of 
execution, are often used to assess whether an order was subject to 
``adverse selection'' that can occur when a liquidity providing 
order is executed at a price that was about to become stale as a 
result of certain speed-based trading strategies.
---------------------------------------------------------------------------

    The Indicator utilizes real time relative quoting activity of 
protected quotations from Signal Exchanges (as defined in IEX Rule 
11.190(g)) in securities underlying each listed options series and a 
proprietary mathematical calculation (the ``quote instability 
calculation''), as described in more detail below, to assess the 
probability of an adverse price change in a particular options series. 
When the quote instability calculation identifies an imminent adverse 
price change to the best Protected Bid and/or best Protected Offer of 
the Away Markets in a particular listed options series, it will 
generate a quote instability determination. A quote instability 
determination may only be generated at least 200 microseconds after a 
prior quote instability determination for a particular options series 
on the same side of the market (i.e., affecting resting bids or 
offers). If a quote instability determination is generated for an 
options series quoted by a Market Maker and the quote is above (below) 
the price level of the quote instability determination, the quote will 
be either cancelled or repriced to the price level of the quote 
instability determination, as instructed by the Market Maker.
    IEX believes that offering this optional risk protection for market 
makers is particularly important in the options markets where market 
makers are exposed to added risk given their continuous quoting 
obligations. Although equities and options exchanges share a number of 
similarities, a meaningful difference is that in the listed options 
market, liquidity is available only on-exchange and is primarily 
displayed and derived from market maker quotes, and options markets, 
when compared to equities markets, have a much higher quote to trade 
ratio.\148\ Exchange market makers in the listed options market play an 
essential role in providing liquidity. Moreover, given the sheer 
difference in magnitude of tradeable instruments in listed options as 
compared to equities (approximately 1.5 million listed options series 
compared to approximately 11,000 listed equity securities), the options 
exchanges often do not have the same sources of natural liquidity of 
buyers and sellers for each tradeable instrument as is generally the 
case for equities exchanges. Thus, options market makers are tasked 
with affirmative obligations to support the provision of liquidity to 
options exchanges through continuous two-sided quotes in large numbers 
of listed options series. As a result, IEX understands that options 
market makers can be subject to excessive risk of one or more quotes 
being executed at stale prices compared to equities market makers or 
other liquidity providers.\149\ Because options market makers maintain 
hundreds (and sometimes thousands) of quotes on options for a given 
underlying security at any one time, a sudden market move in the 
underlying security can leave an options market maker vulnerable to 
being executed across multiple quotes that are stale and dislocated 
from the price of the underlying securities. Liquidity takers can 
target one or more of these stale quotes, with limited risk should they 
fail to execute (i.e., lost opportunity vs. trading at a stale price), 
before the Market Makers are able to move their quotes (often hundreds 
or more for a given underlying) to reflect the price change in the 
underlying securities, thereby exposing those Market Makers to 
potentially major losses.
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    \148\ See Staff Report on Equity and Options Market Structure 
Conditions in Early 2021, (Oct. 14, 2021) at 4 (explaining that 
options market structure is broadly similar to equities market 
structure and noting a key difference that displayed liquidity is 
primarily derived from market maker quotes), available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf; see also Lehoczky, Sandor and Woods, 
Ellen and Russell, Matthew and Nguyen, Mina and Somers, James, Dead 
Man's Switch: Making Options Markets Safer with Active Quote 
Protection (May 2020) at 2 (explaining that options markets ``depend 
especially on market makers--who account for 99.9% of open orders--
to connect buyers and sellers, due to a combinatorial explosion of 
expirations and strike prices''), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3675849.
    \149\ See, e.g., Protecting Liquidity in Options Markets, Market 
Structure, Optiver, July 12, 2023 (concluding that ``liquidity 
protection improves options markets'' by safeguarding market makers 
against ``excessive risk'' that results from ``liquidity providers 
maintain[ing] hundreds of quotes on a given underlying at any one 
time [and] a sudden market move can leave them vulnerable to showing 
stale, or outdated, quotes,'' thereby ``exposing them to potentially 
major losses'' if unable to amend or cancel quotes before executed), 
available at https://optiver.com/insights/protecting-liquidity-in-options-markets/.
---------------------------------------------------------------------------

    Without robust liquidity protection mechanisms to protect against 
these risks, Market Makers may be forced to widen their spreads, show 
less liquidity, or simply exit the market. Overall market quality could 
deteriorate as a result, and investors would suffer when it becomes too 
expensive to transact, or when there is insufficient liquidity to 
enable transacting altogether. Accordingly, liquidity protection 
mechanisms for Market makers, which all options exchanges offer, and 
IEX proposes to offer, are vital for achieving a healthy balance 
between market makers and liquidity takers in the listed

[[Page 12905]]

options market. These include, but are not limited to, activity-based 
risk controls, price reasonability checks, and functionality (such as 
bulk quoting and purge ports) to facilitate timely quoting, quote 
updates, and quote cancellation.
    For each options series, the Trading System will maintain a real-
time estimate of the sensitivity of the series to changes in the 
midpoint of the best Protected Bid and best Protected Offer of the 
Signal Exchanges for the underlying security (based on a Black-Scholes 
assessment). When there is a change in the best Protected Bid or best 
Protected Offer of the Signal Exchanges for the underlying security, 
the Trading System will use the quote instability calculation formula 
set forth in proposed IEX Rule 23.150(h) to calculate whether to 
generate a quote instability determination for each options series 
overlying the underlying security. The Trading System independently 
assesses whether to generate a quote instability determination 
affecting resting bids or offers for each options series. A quote 
instability determination is generated by the Trading System when, 
pursuant to the quote instability calculation, the quote instability 
factor is greater than the defined quote instability threshold and the 
delta absolute value is within the delta bound band.\150\ As proposed, 
the delta bound band would be uniformly applied across all options in 
order to more narrowly tailor deployment of the ORP to options series 
at the greatest risk of adverse selection based on the Exchange's 
assessment of relevant factors.
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    \150\ As specified in Supplementary Material .04(1)(q) to 
proposed Rule 23.150(m), the delta bound band will be set at a value 
that is periodically determined by the Exchange to be at or within a 
range of 0-1, which determination will be communicated by Trading 
Alert.
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    If a Market Maker has opted to utilize the ORP and its quote in an 
options series that was the subject of a quote instability 
determination is at or above (below) the price level of the quote 
instability determination the Trading System will either cancel the 
Market Maker's quote or reprice it to the price level of the quote 
instability determination, pursuant to the Market Maker's 
instruction.\151\ Regardless of whether it chooses to use the ORP, a 
Market Maker will be able to adjust the price of its quote in the same 
manner as other Market Makers' quotes that have not opted to use the 
ORP.
---------------------------------------------------------------------------

    \151\ See proposed IEX Rule 23.150(h)(1)(c).
---------------------------------------------------------------------------

    One Second Exposure Period. Proposed Rule 23.200 would require 
Options Members to expose their customers' orders on the Exchange for 
at least one second under certain circumstances before trading against 
such orders. During this one second exposure period, other Options 
Members will be able to enter orders to trade against the exposed 
order. In adopting a one second order exposure period, the Exchange is 
proposing a requirement that is consistent with the rules of other 
options exchanges.\152\ Thus, the exposure period will allow Options 
Members that are members of other options exchanges to comply with 
proposed Rule 23.200 without programming separate time parameters into 
their systems for order entry or compliance purposes. The Exchange 
believes that market participants are sufficiently automated that a one 
second exposure period allows an adequate time for market participants 
to electronically respond to an order. Also, it is possible that market 
participants might wait until the end of the exposure period, no matter 
how long, before responding. Thus, the Exchange believes that any 
longer than one second would not further the protection of investors or 
market participants, but rather, would potentially increase market risk 
to investors and other market participants by creating a longer period 
of time for the exposed order to be subject to market risk.
---------------------------------------------------------------------------

    \152\ See, e.g., MEMX Rule 22.11; C1 Rule 5.9; and MIAX Options 
Rule 520(b).
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Options Order Protection and Locked/Crossed Market Plan Rules
    The Exchange will participate in the Options Order Protection and 
Locked/Crossed Market Plan (the ``Plan''),\153\ and therefore will be 
required to comply with the obligations of Participants under the Plan. 
The Exchange proposes to adopt rules relating to the Plan that are 
substantially similar to the rules in place on all of the options 
exchanges that are Participants to the Plan. The Plan essentially 
applies the Regulation NMS price-protection provisions to the options 
markets. Similar to Regulation NMS, the Plan requires the Plan 
Participants to adopt rules ``reasonably designed to prevent Trade-
Throughs'', while exempting ISOs from that prohibition. The Plan's 
definition of an ISO is essentially the same as under Regulation NMS. 
The remaining exceptions to the trade-through prohibition, discussed 
more specifically below, either track those under Regulation NMS or 
correspond to unique aspects of the options market, or both.
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    \153\ See supra note 77.
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    The proposed rules in Chapter 28 (Options Order Protection and 
Locked and Crossed Markets Rules) conform to the requirements of the 
Plan. Proposed Rule 28.100 sets forth the defined terms for use under 
the Plan. Proposed Rule 28.110 prohibits trade-throughs and exempts 
ISOs from that prohibition. Proposed Rule 28.110 also contains 
additional exceptions to the trade-through prohibition that track the 
exceptions under Regulation NMS or correspond to unique aspects of the 
options market, or both.
    Proposed Rule 28.120 sets forth the general prohibition against 
locking/crossing other eligible exchanges as well as certain enumerated 
exceptions that permit locked markets in limited circumstances; such 
exceptions have been approved by the Commission for inclusion in the 
rules of other options exchanges. Specifically, the exceptions to the 
general prohibition on locking and crossing occur when: (1) the locking 
or crossing quotation was displayed at a time when the Exchange was 
experiencing a failure, material delay, or malfunction of its systems 
or equipment; (2) the locking or crossing quotation was displayed at a 
time when there is a Crossed Market; (3) the Options Member 
simultaneously routed an ISO to execute against the full displayed size 
of any locked or crossed Protected Bid or Protected Offer; or (4) with 
respect to a locking quotation, the order entered on the Exchange that 
will lock a Protected Bid or Protected Offer, is: (i) not a Customer 
order, and the Exchange can determine via identification available 
pursuant to the OPRA Plan that such Protected Bid or Protected Offer 
does not represent, in whole or in part, a Customer order; or (ii) a 
Customer order, and the Exchange can determine via identification 
available pursuant to the OPRA Plan that such Protected Bid or 
Protected Offer does not represent, in whole or in part, a Customer 
order, and, on a case-by-case basis, the Customer specifically 
authorizes the Member to lock such Protected Bid or Protected 
Offer.\154\
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    \154\ See proposed Rule 28.120(b).
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    The Exchange notes that the proposed rules in Chapter 28 (Options 
Order Protection and Locked and Crossed Markets Rules) are 
substantively identical to the rules of MEMX Options.\155\
---------------------------------------------------------------------------

    \155\ See MEMX Rule 27.1, 27.2, and 27.3.
---------------------------------------------------------------------------

Securities Traded on IEX Options
    General Listing Standards. The Exchange proposes to adopt listing 
standards for options traded on IEX Options as described in Chapter 20 
(Securities Traded on IEX Options), which are substantively identical 
to the

[[Page 12906]]

equivalent MEMX Options rules,\156\ with the exception of: (i) some 
language in Supplementary Material .02 to proposed Rule 20.140 
concerning the $1 strike price program which is not included in the 
equivalent MEMX rule, and therefore borrowed from the equivalent MIAX 
rule; \157\ and (ii) the addition of language allowing the Exchange to 
list for closing transactions an Options series that is listed but 
restricted to closing transactions on another exchange.\158\ The 
Exchange will join the Options Listings Procedures Plan and will list 
and trade options already listed on other options exchanges. The 
Exchange will gradually phase-in its trading of options, beginning with 
a selection of actively traded options.
---------------------------------------------------------------------------

    \156\ See MEMX Rules, Chapter 19. IEX notes that the MEMX Rules 
include Chapter 29: Index Rules. IEX is not proposing to adopt 
similar rules at this time, and any references to index options in 
MEMX Chapter 19 are not in proposed IEX Chapter 20.
    \157\ See MIAX Rule 404 Interpretation and Policy .01.
    \158\ See Supplementary Material .01 to proposed Rule 20.130, 
which mirrors MIAX Rule 403 Interpretation and Policy .01.
---------------------------------------------------------------------------

Conduct and Operational Rules for Options Members
    The Exchange proposes to adopt rules in Chapter 19 for IEX Options 
that are substantively identical to the rules of MEMX Options 
regarding: exercises and deliveries as described in Chapter 24 
(Exercises and Deliveries); records, reports and audits as described in 
Chapter 25 (Records, Reports and Audits); minor rule violations as 
described in Chapter 26 (Discipline and Summary Suspensions); doing 
business with the public as described in Chapter 27 (Doing Business 
With the Public); and margin as described in Chapter 29 (Margin 
Requirements).\159\ The Exchange also proposes to adopt rules that are 
substantively similar to most of MEMX's Chapter 18 (Business Conduct), 
with the exception of proposed Rules 19.160 (Position Limits), 19.170 
(Exemptions from Position Limits), 19.180 (Exercise Limits) that are 
substantively similar to MIAX Rules 307, 308, and 309, respectively. 
IEX proposed to adopt MIAX's versions of these rules because they 
provided specificity about the types of position limits the Exchange 
will apply to Options Members (as opposed to the MEMX rules, which rely 
on position limits set by other exchanges).
---------------------------------------------------------------------------

    \159\ See MEMX Rules, Chapters 23, 24, 25, 26 and 28.
---------------------------------------------------------------------------

National Market System
    IEX Options will operate as a full and equal participant in the 
national market system for options trading established under Section 
11A of the Exchange Act.\160\ IEX Options will become a member of the 
Options Price Reporting Authority (``OPRA''), the Options Linkage 
Authority (``OLA''), the Options Regulatory Surveillance Authority 
(``ORSA''), and the Options Listing Procedures Plan (``OLPP''). The 
Exchange expects to participate in those plans on the same terms 
currently applicable to current members of those plans. The Exchange is 
in the process of contacting the leadership of each options-related 
national market system plan to begin the membership process.
---------------------------------------------------------------------------

    \160\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

Regulation
    The Exchange will leverage many of the structures it established to 
operate a national securities exchange trading NMS equities securities, 
in compliance with Section 6 of the Exchange Act.\161\ As described in 
more detail below, there will be three elements of that regulation: (1) 
the Exchange will join the existing options industry agreements 
pursuant to Section 17(d) of the Exchange Act prior to commencing 
operations,\162\ as it did with respect to equities; (2) the Exchange's 
Regulatory Services Agreement (``RSA'') with FINRA will be amended 
prior to commencing operations to provide that FINRA will perform 
regulatory surveillance, investigation, disciplinary and hearing 
services of options trading on IEX subject to oversight by IEX 
Regulation, just as it does for equities regulation; and (3) the 
Exchange will perform options listing regulation, as well as authorize 
Options Members to trade on IEX Options. Section 17(d) of the Exchange 
Act and the related Exchange Act rules permit SROs to allocate certain 
regulatory responsibilities to avoid duplicative oversight and 
regulation. Under Exchange Act Rule 17d-1,\163\ the SEC designates one 
SRO to be the Designated Examining Authority, or DEA, for each broker- 
dealer that is a member of more than one SRO. The DEA is responsible 
for the financial aspects of that broker-dealer's regulatory oversight. 
Because IEX Options Members also must be members of at least one other 
SRO, the Exchange would generally not expect to be designated as the 
DEA for any of its members.\164\
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78f.
    \162\ 15 U.S.C. 78q(d).
    \163\ 17 CFR 240.17d-1.
    \164\ If IEX were to be designated as the DEA for any of its 
members, FINRA would perform the DEA functions on behalf of IEX 
pursuant to the RSA.
---------------------------------------------------------------------------

    Exchange Act Rule 17d-2 \165\ permits SROs to file with the 
Commission plans under which the SROs allocate among each other the 
responsibility to receive regulatory reports from, and examine and 
enforce compliance with specified provisions of the Exchange Act and 
rules thereunder and SRO rules by, firms that are members of more than 
one SRO (``common members''). If such a plan is declared effective by 
the Commission, an SRO that is a party to the plan is relieved of 
regulatory responsibility as to any common member for whom 
responsibility is allocated under the plan to another SRO.
---------------------------------------------------------------------------

    \165\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    All of the options exchanges, FINRA, and NYSE have entered into the 
Options Sales Practices Agreement, a Rule 17d-2 agreement, and the 
Exchange intends to join this agreement prior to the commencement of 
operations for IEX Options. Under this Agreement, the examining SROs 
will examine firms that are common members of the Exchange and the 
particular examining SRO for compliance with certain provisions of the 
Exchange Act, certain of the rules and regulations adopted thereunder, 
certain examining SRO rules, and certain proposed IEX Options rules. In 
addition, the proposed IEX Options rules contemplate participation in 
this Agreement by requiring that any Options Member also be a member of 
at least one of the examining SROs. The Exchange and FINRA are also 
party to a bilateral Rule 17d-2 agreement that requires minor 
modifications due to the proposed launch of IEX Options. The Exchange 
intends to modify and seek Commission approval of the modified 
bilateral Rule 17d-2 agreement prior to commencing of operations for 
IEX Options. Additionally, all of the options exchanges and FINRA have 
entered into the Options-Related Market Surveillance Agreement, a Rule 
17d-2 agreement, and the Exchange intends to join this agreement prior 
to the commencement of operations for IEX Options.
    For those regulatory responsibilities that fall outside the scope 
of any Rule 17d-2 agreements, the Exchange will retain full regulatory 
responsibility under the Exchange Act. However, the Exchange has 
entered into an RSA with FINRA, as discussed above, pursuant to which 
FINRA personnel operate as agents for the Exchange in performing 
certain of these functions. The Exchange and FINRA will continue to 
operate under the RSA that is currently in place but with modifications 
as necessary to accommodate the expanded scope of the

[[Page 12907]]

relationship. The necessary modifications will be implemented prior to 
the commencement of operations of IEX Options. As is the case with the 
Exchange's equities market, the Exchange will oversee FINRA and 
continue to bear ultimate regulatory responsibility with respect to 
regulatory functions not subject to allocation to FINRA or another SRO 
pursuant to a Rule 17d-2 Agreement for the IEX Options Exchange.
    Consistent with the Exchange's existing regulatory structure, the 
Exchange's Chief Regulatory Officer, reporting to the Regulatory 
Oversight Committee of the Exchange's board of directors, shall have 
general supervision of the regulatory operations of IEX Options, 
including responsibility for overseeing the surveillance, examination, 
and enforcement functions and for administering all regulatory services 
agreements applicable to IEX Options. Similarly, the Exchange's 
existing Regulatory Oversight Committee will be responsible for 
overseeing the adequacy and effectiveness of Exchange's regulatory and 
self-regulatory organization responsibilities, including those 
applicable to IEX Options.
    As it does with equities, the Exchange will monitor trading on IEX 
Options, both through internal reports and FINRA surveillances for the 
purpose of maintaining a fair and orderly market. As it does with its 
equities trading, the Exchange will monitor IEX Options to identify 
unusual trading patterns and determine whether particular trading 
activity requires further regulatory investigation by FINRA.
    Finally, the Exchange will oversee the process for determining and 
implementing trade halts, identifying and responding to unusual market 
conditions, and administering the Exchange's process for identifying 
and remediating ``obvious errors'' by and among its Options 
Members.\166\ The proposed rules in Chapter 21 (Regulation of Trading 
on IEX Options) regarding halts,\167\ unusual market conditions, 
extraordinary market volatility, obvious errors, audit trail, and rules 
regarding prohibited and permissible transfers of options positions off 
the Exchange are substantively identical to the approved rules of MEMX 
Options.\168\
---------------------------------------------------------------------------

    \166\ IEX notes that like MEMX Rule 20.6, proposed Rule 21.150 
authorizes the proposed Error Panel to review decisions made under 
this rule, which includes decisions to classify a transaction as a 
Catastrophic Error.
    \167\ Proposed Rule 21.120(b) states that during a trading halt, 
the Exchange shall process new and existing orders and quotes in a 
series in accordance with proposed Rule 22.160(g). Proposed Rule 
22.160(g), which is substantively identical to NYSE Arca Options 
Rule 6.64P-O(g), states that during a trading halt, the Exchange 
will cancel all resting Market Maker quotes.
    \168\ See MEMX Rules, Chapter 20.
---------------------------------------------------------------------------

Minor Rule Violation Plan
    The Exchange's disciplinary rules, including Exchange Rules 
applicable to ``minor rule violations,'' are set forth in Chapter 9 of 
the Exchange's current Rules. Such disciplinary rules will apply to 
Options Members and their associated persons.
    The Commission approved the Exchange's Minor Rule Violation Plan 
(``MRVP'') in 2016.\169\ The Exchange's MRVP specifies the uncontested 
minor rule violations that are included in the MRVP and have sanctions 
not exceeding $2,500. Any violations that are resolved under the MRVP 
would not be subject to the provisions of Rule 19d-1(c)(1) under the 
Act \170\ requiring that an SRO promptly file notice with the 
Commission of any final disciplinary action taken with respect to any 
person or organization.\171\ The Exchange's MRVP includes the policies 
and procedures included in Exchange Rule 9.216(b) and the violations 
included in Rule 9.218.
---------------------------------------------------------------------------

    \169\ See Securities Exchange Act Release No. 78474 (August 3, 
2016), 81 FR 52717 (August 9, 2016) (Order Declaring Effective a 
Minor Rule Violation Plan) (File No. 4-701).
    \170\ 17 CFR 240.19d-1(c)(1).
    \171\ The Commission adopted amendments to paragraph (c) of Rule 
19d-1 to allow SROs to submit for Commission approval plans for the 
abbreviated reporting of minor disciplinary infractions. See Release 
No. 34-21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any 
disciplinary action taken by an SRO against any person for violation 
of a rule of the SRO which has been designated as a minor rule 
violation pursuant to such a plan filed with and declared effective 
by the Commission will not be considered ``final'' for purposes of 
Section 19(d)(1) of the Act if the sanction imposed consists of a 
fine not exceeding $2,500 and the sanctioned person has not sought 
an adjudication, including a hearing, or otherwise exhausted his 
administrative remedies.
---------------------------------------------------------------------------

    Under Rule 9.216(b), the Exchange may impose a fine (not to exceed 
$2,500) and/or a censure on any Member or associated person with 
respect to any rule listed in IEX Rule 9.218. If the Financial Industry 
Regulatory Authority Department of Enforcement or the Department of 
Market Regulation, on behalf of the Exchange, has reason to believe a 
violation has occurred and if the Member or associated person does not 
dispute the violation, the Department of Enforcement or the Department 
of Market Regulation may prepare and request that the Member or 
associated person execute a minor rule violation plan letter accepting 
a finding of violation, consenting to the imposition of sanctions, and 
agreeing to waive the Member's or associated person's right to a 
hearing before a Hearing Panel or, if applicable, an Extended Hearing 
Panel, and any right of appeal to the IEX Appeals Committee, the Board, 
the Commission, and the courts, or to otherwise challenge the validity 
of the letter, if the letter is accepted. The letter must describe the 
act or practice engaged in or omitted, the rule, regulation, or 
statutory provision violated, and the sanction or sanctions to be 
imposed. Unless the letter states otherwise, the effective date of any 
sanction imposed will be a date to be determined by IEX Regulation 
staff. In the event the letter is not accepted by the Member or 
associated person, or is rejected by the Office of Disciplinary 
Affairs, the matter can proceed in accordance with the Exchange's 
disciplinary rules, which include hearing rights for formal 
disciplinary proceedings.
    The Exchange proposes to amend its MRVP and Exchange Rule 9.218 to 
add certain rules relating to Options as set forth in proposed Rule 
26.120 (Penalty for Minor Rule Violations) to the list of rules 
eligible for Minor Rule Violation Plan treatment.\172\ The rules 
included in proposed Rule 26.120, as appropriate for disposition under 
the Exchange's MRVP, are: (a) position limit and exercise limit 
violations; (b) violations regarding the failure to accurately report 
position and account information; (c) Market Maker quoting obligations; 
(d) violations regarding expiring exercise declarations; (e) violations 
relating to the failure to respond to the Exchange's requests for the 
submission of trade data; and (f) violations relating to noncompliance 
with the Consolidated Audit Trail Compliance Rule requirements. The 
rule violations included in proposed Rule 26.120 are the same as the 
rule violations included in the MRVPs of other options exchanges.\173\
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    \172\ In its proposal to adopt the MRVP, the Exchange requested 
that, going forward, to the extent that there are any changes to the 
rules applicable to the Exchange's MRVP, the Exchange requests that 
the Commission deem such changes to be modifications to the 
Exchange's MRVP.
    \173\ See, e.g., MEMX Rules, Chapter 25.
---------------------------------------------------------------------------

    Upon implementation of this proposal, the Exchange will include 
violations of the enumerated options trading rules, if any, in an 
applicable Exchange's quarterly report of any actions taken on minor 
rule violations under the MRVP.\174\ A quarterly report would include: 
the Exchange's internal file number for the case, the name of the

[[Page 12908]]

individual and/or organization, the nature of the violation, the 
specific rule provision violated, the sanction imposed, the number of 
times the rule violation has occurred, and the date of disposition. The 
Exchange's MRVP, as proposed to be amended herein, is consistent with 
Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in 
part, that an exchange have the capacity to enforce compliance with, 
and provide appropriate discipline for, violations of the rules of the 
Commission and of the exchange, 6(b)(6) provides that members and 
persons and associated members shall be appropriately disciplined for 
violation of the provisions of the rules of the exchange, by expulsion, 
suspension, limitation of activities, functions and operations, fine, 
censure, being suspended or barred from being associated with a member, 
or any other fitting sanction.\175\ Rule violations listed in proposed 
Rule 26.120 are minor in nature and will be more appropriately 
disciplined through the Exchange's MRVP and therefore proposes to add 
them to the list of rules eligible for minor rule fine disposition
---------------------------------------------------------------------------

    \174\ To date, the Exchange has not taken any minor rule 
violation actions.
    \175\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
---------------------------------------------------------------------------

    In addition, because Rule 9.216(b) offers procedural rights to a 
person sanctioned for a violation listed in proposed Rule 26.120, the 
Exchange will provide a fair procedure for the disciplining of members 
and associated persons, consistent with Section 6(b)(7) of the 
Act.\176\
---------------------------------------------------------------------------

    \176\ 15 U.S.C. 78f(b)(7). Rule 9.216(b) does not preclude an 
Options Member or person associated with an Options Member from 
contesting an alleged violation and receiving a hearing on the 
matter with the same procedural rights through a litigated 
disciplinary proceeding.
---------------------------------------------------------------------------

    This proposal to include the rules listed in proposed Rule 26.120 
in the Exchange's MRVP is consistent with the public interest, the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act, as required by Rule 19d-1(c)(2) under the Act,\177\ because it 
should strengthen the Exchange's ability to carry out its oversight and 
enforcement responsibilities as an SRO in cases where full disciplinary 
proceedings are unsuitable in view of the minor nature of the 
particular violation. In requesting the proposed change to the MRVP, 
the Exchange in no way minimizes the importance of compliance with 
Exchange Rules and all other rules subject to the imposition of fines 
under the MRVP. Minor rule fines provide a meaningful sanction for 
minor or technical violations of rules when the conduct at issue does 
not warrant stronger, immediately reportable disciplinary sanctions. 
The inclusion of a rule in the Exchange's MRVP does not minimize the 
importance of compliance with the rule, nor does it preclude the 
Exchange from choosing to pursue violations of eligible rules through 
the Exchange's disciplinary rules if the nature of the violation or 
prior disciplinary history warrants more significant sanctions. 
However, the MRVP provides a reasonable means of addressing rule 
violations that do not rise to the level of requiring formal 
disciplinary proceedings, while providing greater flexibility in 
handling certain violations.\178\ The Exchange will continue to conduct 
surveillance with due diligence and make a determination based on its 
findings, on a case-by-case basis, whether a fine of more or less than 
the recommended amount is appropriate for a violation under the MRVP or 
whether a violation requires a formal disciplinary action.
---------------------------------------------------------------------------

    \177\ 17 CFR 240.19d-1(c)(2).
    \178\ See supra note 176.
---------------------------------------------------------------------------

Section 36 Exemption Request
    The Exchange proposes to incorporate by reference as IEX Options 
rules certain rules of the Cboe Exchange, Inc. (``CBOE''), the New York 
Stock Exchange (``NYSE''), and FINRA. Specifically, proposed Rule 
27.250 proposes to incorporate by reference the applicable rules of 
FINRA with respect to Communications with Public Customers, and 
proposed Rule 29.120 proposes to incorporate by reference initial and 
maintenance margin requirements of either CBOE or NYSE. Thus, for 
certain IEX Options rules, Exchange members will comply with a IEX 
Options rule by complying with the CBOE, NYSE, or FINRA rule 
referenced. Using its authority under Section 36 of the Act, the 
Commission has previously exempted certain SROs from the requirement to 
file proposed rule changes under Section 19(b) of the Act when 
incorporating another SRO's rules by reference.\179\ Each such exempt 
SRO has agreed to be governed by the incorporated rules, as amended 
from time to time, but, has not been required to file a separate 
proposed rule change with the Commission each time the SRO whose rules 
are incorporated by reference seeks to modify its rules. In addition, 
each SRO incorporated by reference only regulatory rules (e.g., margin, 
suitability, arbitration), not trading rules, and incorporated by 
reference whole categories of rules (i.e., did not ``cherry-pick'' 
certain individual rules within a category). Last, each exempt SRO had 
reasonable procedures in place to provide written notice to its members 
each time a change is proposed to the incorporated rules of another SRO 
in order to provide its members with notice of a proposed rule change 
that affects their interests, so that they would have an opportunity to 
comment on it.
---------------------------------------------------------------------------

    \179\ See, e.g., Securities Exchange Act Release No. 49260 
(February 17, 2004), 69 FR 8500 (February 24, 2004). See also 
Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 
14521, 14539-40 (March 18, 2008) (order approving SR-NASDAQ-2007-004 
and SR-NASDAQ-2007-080) and 53128 (January 13, 2006), 71 FR 3550, 
3565-66 (January 23, 2006) (File No. 10-131) (approving The NASDAQ 
Stock Market LLC's exchange application).
---------------------------------------------------------------------------

    In connection with this proposal, the Exchange respectfully 
requests, pursuant to Rule 240.0-12 under the Act,\180\ an exemption 
under Section 36 of the Act from the rule filing requirements of 
Section 19(b) of the Act for changes to those IEX Options rules that 
are effected solely by virtue of a change to a cross-referenced CBOE, 
NYSE, or FINRA rule. The Exchange proposes to incorporate by reference 
categories of rules (rather than individual rules within a category) 
that are not trading rules. The Exchange also agrees to provide written 
notice to Options Members prior to the launch of IEX Options of the 
specific CBOE, NYSE, and FINRA rules that it will incorporate by 
reference. In addition, the Exchange will notify Options Members 
whenever CBOE, NYSE, or FINRA proposes a change to a cross-referenced 
CBOE, NYSE, or FINRA rule.\181\ For the foregoing reasons, the Exchange 
believes that its request for exemptive relief is consistent with prior 
requests for, and provision of, similar exemptive relief.
---------------------------------------------------------------------------

    \180\ 17 CFR 240.0-12.
    \181\ The Exchange will provide such notice through a posting on 
the same website location where the Exchange will post its own rule 
filings pursuant to Rule 19b-4(l) under Act, within the time frame 
required by that rule. The website posting will include a link to 
the location on the CBOE, NYSE, or FINRA websites where the proposed 
rule change is posted.
---------------------------------------------------------------------------

Amendments to Existing Exchange Rules
    In addition to the rules of IEX Options proposed above, the 
Exchange proposes to amend certain of its existing Exchange Rules that 
currently apply to the Exchange's equities market in order to reflect 
the Exchange's proposed operation of IEX Options.
    First, the Exchange proposes to amend Rule 2.160(i), which 
generally requires each Member to register at least two Principals with 
the Exchange subject to certain exceptions described therein, to 
provide that such paragraph (i) shall not apply to a Member that solely 
conducts business on the

[[Page 12909]]

Exchange as an Options Member, however, Options Members must comply 
with the registration requirements set forth in proposed Rule 18.110. 
The Exchange notes that proposed Rule 18.110(h), which provides that 
every Options Member shall have at least one Options Principal and sets 
forth the Exchange's Options Principal registration requirements, is 
identical to MEMX Rule 17.2(g). In connection with this proposed 
change, the Exchange also proposes to amend Rule 2.160(n) to include 
Options Principal as a registration category and to set forth the 
Exchange's qualification requirements for an Options Principal, which 
are the same as those for an Options Principal on MEMX Options. 
Additionally, the Exchange proposes to amend Rule 2.160(p)(a)(4) to set 
forth the appropriate regulatory element continuing education module 
for reregistration as an Options Principal.
    The Exchange also proposes to make three modifications to Rule 
2.220 (IEX Services LLC as Outbound Router). First, IEX proposes to 
remove the word ``directly'' from the first sentence of subparagraph 
(a), because IEX Services will continue to route orders to away 
markets, but as described above, with respect to options routing, it 
will not route those order ``directly'' to the away markets. Second, 
consistent with the first change, IEX proposes to insert a new second 
sentence in subparagraph (a) that reads: ``When routing options orders, 
as set forth in Rule 22.180, IEX Services will transmit such orders to 
one or more routing brokers that are not affiliated with the Exchange; 
the routing brokers will in turn route the applicable options orders to 
other securities exchanges that trade options.'' IEX proposes to make 
this change to reflect the different nature of how IEX Services will 
handle routing options orders from equities orders. And third, IEX 
proposes to modify subparagraph (a)(8) of this rule, which states that 
IEX Services shall maintain an error account for the purpose of 
addressing positions that are the result of an execution or executions 
that are not clearly erroneous under Rule 11.270 and result from a 
technical or systems issue at IEX Services, the Exchange, a routing 
destination, or a non-affiliate third-party routing broker that affects 
one or more orders (``Error Positions''). The proposed change to Rule 
2.220(a)(8) would add a reference to the comparable provision to that 
which governs review and resolution of clearly erroneous equities 
transactions (i.e., Rule 11.270) but for options transactions, namely 
Rule 21.150, which governs review and resolution of options 
transactions that may qualify as obvious errors.
    The Exchange also proposes to adopt Rule 21.220 (Limitation of 
Liability), which is almost identical to the Rule 11.260, the 
Limitation of Liability rule in IEX's equities trading rules. The only 
difference is to reflect that proposed Rule 21.220 applies to IEX 
Options and options trading.
    Lastly, the Exchange proposes to amend Rule 9.218 (Violations 
Appropriate for Disposition Under Plan Pursuant to Exchange Act Rule 
19d-1(c)(2)), which contains the list of Exchange Rule violations and 
recommended fine schedule, to include a new paragraph (k) referencing 
proposed Rule 26.120 for the recommended fines for minor rule 
violations of the Exchange Rules appliable to IEX Options, which the 
Exchange notes are the same as those of MEMX Options.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \182\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \183\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest; 
and is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \182\ 15 U.S.C. 78f(b).
    \183\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As described above, the Exchange proposes to operate its options 
market much as it operates its equities market today and in a manner 
similar to that of other options exchanges, while leveraging IEX's 
experience and expertise in understanding the needs of market makers to 
offer them additional tools designed to better manage risk and drive 
performance. As discussed in the Purpose section, IEX believes that the 
proposed enhanced liquidity protection mechanisms will result in market 
makers providing more competitive quotes which will benefit all market 
participants and thereby support the protection of investors and the 
public interest. Also as discussed in the Purpose section, most of the 
proposed IEX Options rules are based on the rules of other options 
exchanges, primarily MEMX, C1, MIAX, NYSE Amex, and NYSE Arca. 
Therefore, the Exchange does not believe these aspects of the proposed 
rule change that are substantively identical to other exchanges' rules 
raise any new or novel issues that have not been previously considered 
by the Commission. Moreover, the Exchange believes that the proposed 
functionality is consistent with Section 6(b)(5) of the Act because the 
Trading System is designed to be efficient and its operation 
transparent, thereby facilitating transactions in securities, removing 
impediments to and perfecting the mechanisms of a free and open 
national market system. As described above, the Exchange's proposed 
rules, including the proposed Order Types and Handling Instructions, 
opening procedures, routing services, and order matching process are 
designed to provide a simplified suite of conventional features and to 
comply with all applicable regulatory requirements, including the 
obligations of the Options Order Protection and Locked/Crossed Market 
Plan.\184\
---------------------------------------------------------------------------

    \184\ See supra note 77.
---------------------------------------------------------------------------

    As discussed in the Purpose section, IEX's proposal includes a de 
minimis latency mechanism (or speedbump) on incoming order and quote 
messages designed to enable IEX to update its view of the market prior 
to processing orders and quotes, and a robust suite of risk 
protections, including the ORP, which is designed to protect market 
makers from excessive risk due to execution of stale quotes. IEX 
believes that the proposed latency mechanism will protect investors and 
the public interest in several respects. First, by enabling IEX to 
update its view of market data prior to executing an order or quote, it 
thereby would support IEX's ability to accurately account for 
contemporaneous market data. IEX notes that this aspect of its 
functionality is designed to facilitate market participants executing 
at current (i.e., not ``stale'') prices. Second, by enabling the 
Trading System to perform the Indicator calculation with current market 
data, it supports operation of the ORP (as discussed herein), which is 
designed to provide Market Makers with an optional tool to avoid 
excessive risk that can arise from execution of a stale quote. As 
discussed in detail above, IEX believes that this protection will 
encourage market makers to post aggressively priced and/or deeper 
quotes on the Exchange which will benefit all market participants. 
Thus, from a functional perspective, IEX believes that the operation of 
the latency

[[Page 12910]]

mechanism is consistent with the Act. Further, and as explained below, 
the proposed latency mechanism of 350 microseconds is well within the 
geographic delays that exist among and between the data centers that 
IEX Options Members and other options exchanges use \185\ and is 
consistent with the naturally occurring time indeterminism that exists 
in order processing.\186\
---------------------------------------------------------------------------

    \185\ See https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf for a description of latencies 
between various data centers.
    \186\ Accounting for the latency mechanism or speedbump is no 
different than accounting for other geographical distances between 
exchanges. See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41142, 41161 (June 23, 2016) (``2016 SEC Approval 
Order'') (approving IEX's 350 microsecond speed bump in the 
registration of the IEX Exchange as ``well within the range of 
geographic and technological latencies that market participants 
experience today'' such that ``latency to and from IEX will be 
comparable to--and even less than--delays attributable to other 
markets that currently are included in the NBBO,'' and finding the 
delay to be de minimis, i.e., so short as to not frustrate the 
purposes of the Exchange Act by impairing fair and efficient access 
to IEX's quotation); see also Securities and Exchange Act Release 
No. 34-89686 (August 26, 2020) (``2020 SEC Approval Order'') at 15 
(determining that IEX's de minimis speed bump when routing displayed 
equity orders is ``just like accounting for any other technological 
or geographic latency'' and doing so is consistent with applicable 
rules and regulations); see also Citadel Securities LLC v. 
Securities and Exchange Commission, 45 F.4th 27, 37 (D.C. Circuit 
2022) (July 29, 2022) (ruling in favor of the SEC's approval of 
IEX's displayed equity order that traverses a speedbump and holding 
that IEX's displayed equity order's delay are ``similar to the delay 
that traders' communications already experience when traveling 
between various other exchanges across the country.'').
---------------------------------------------------------------------------

    IEX also believes that the latency mechanism is consistent with the 
Commission Interpretation Regarding Automated Quotations Under 
Regulation NMS (``de minimis delay interpretation'').\187\ Although 
options markets do not have the same automated quotation requirements 
as in equities, even if they were to apply, the Commission's reasoning 
in the de minimis delay interpretation in the context of NMS automated 
quotations is instructive, as the latency mechanism IEX is proposing 
for the options exchange is a de minimis delay that does not impair 
fair and efficient access to an exchange's quotation. Specifically, the 
Commission stated in issuing its interpretation that intentional delays 
that are well within the geographic and technological latencies 
experienced by market participants when routing orders are de minimis 
to the extent they would not impair a market participant's ability to 
access a displayed quotation consistent with the goals of NMS Rule 
611.\188\ The Commission also noted that an intentional delay of any 
duration must be fully disclosed and codified in a written rule of the 
exchange, which, as described below, the latency mechanism will be 
fully disclosed and codified in IEX's written rules.\189\
---------------------------------------------------------------------------

    \187\ See Commission Interpretation Regarding Automated 
Quotations Under Regulation NMS, Exchange Act Release No. 34-78102, 
81 FR 40,785, 40,792 (June 23, 2016).
    \188\ Id.
    \189\ Id.
---------------------------------------------------------------------------

    IEX believes that its proposed latency mechanism of 350 
microseconds is fully consistent with the reasoning in the Commission's 
de minimis delay interpretation.\190\ First, the delay is less than the 
existing geographic latencies experienced by market participants when 
routing orders. For example, latency between and among the data centers 
located in New Jersey range up to several hundred microseconds, with 
additional latency introduced by technology processing on both sides of 
an order or quote route between these data centers.\191\ Accordingly, 
the proposed latency mechanism is consistent with this aspect of the 
Commission's de minimis interpretation.
---------------------------------------------------------------------------

    \190\ IEX notes that the D.C. Circuit Court also agreed with the 
Commission's interpretation. The Court ruled entirely in favor of 
the SEC's approval of IEX's system that includes applying a 
speedbump and quote indicator to displayed equity orders. See 
Citadel Securities, 45 F.4th at 36 (concluding the SEC's approval of 
a 350 microseconds intentional access delay for displayed orders to 
be ``de minimis--i.e., a delay so short as to not frustrate the 
purposes of Rule 611 by impairing fair and efficient access to an 
exchange's quotations''); see also id. (``The SEC's conclusion that 
mere de minimis delays do not cause an order to violate Regulation 
NMS's immediacy requirement was therefore reasonable.'')
    \191\ See https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf.
---------------------------------------------------------------------------

    The proposed latency mechanism also meets the additional prongs of 
the de minimis interpretation, that it be fully disclosed and codified 
in a written rule of the exchange that has become effective pursuant to 
Section 19 of the Act; and that the exchange articulates how the 
purpose, operation, and application of the delay is consistent with the 
Act and the rules and regulations thereunder applicable to the 
exchange. The latency mechanism's operation, as proposed, would be 
disclosed and codified in detail in IEX Rules 22.100(n) and 22.170(g). 
Those provisions specify that the latency mechanism shall mean a delay 
of 350 microseconds that is added to each incoming order and quote 
message from a User prior to processing by the Trading System, and that 
will not apply to other communications between the Exchange and Users, 
Away Markets, data feeds, order processing and order execution on the 
IEX Options Book, and outbound communications to the Exchange's 
proprietary data feeds and OPRA. As discussed above, the purpose of the 
latency mechanism is to provide adequate time for the IEX Trading 
System to update its view of market data to enable it to accurately 
price orders as well as to perform the Indicator calculation with 
current market data.
    Consequently, based on the foregoing, the Exchange believes that 
the latency mechanism is both de minimis and otherwise consistent with 
the Act.
    The Exchange believes that the proposed ORP is consistent with 
Section 6(b) of the Act \192\ in general, including furthering the 
objectives of Section 6(b)(5) of the Act,\193\ as the proposed optional 
risk protection mechanism would remove impediments to and perfect the 
mechanism of a free and open market and a national market system and 
promote just and equitable principles of trade by providing an optional 
quote parameter, available to all IEX Options Market Makers, that is 
designed to assess the probability of an adverse price change in a 
particular options series so that the Trading System can effectuate the 
advance trading instructions provided by the Market Maker to cancel or 
reprice its quote to the price level of the quote instability 
determination, as selected by the Market Maker. The ORP is an optional, 
narrowly tailored approach designed to provide protection from 
excessive risk of execution of stale quotes and thereby enable market 
makers to make tighter and larger quotes (i.e., quotes at narrower 
spreads with greater size) thus enhancing the quality of the IEX 
Options market, to the benefit of all market participants. The Exchange 
believes it is appropriate to provide market makers with the choice to 
utilize this reasonable quote protection, particularly given the 
continuous quoting obligations specific to market makers and their 
importance in providing liquidity in the listed options market. The 
Exchange further believes this risk functionality will encourage market 
makers to provide additional depth and liquidity to the Exchange's 
markets, thereby removing impediments to and perfecting the mechanisms 
of a free and open market and a national market system and, in general, 
protecting investors and the public interest.
---------------------------------------------------------------------------

    \192\ 15 U.S.C. 78f(b).
    \193\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the ORP supports the protection of 
investors and public interest goals of the Act. As described in the 
Purpose section, based on the structural differences between

[[Page 12911]]

equities and listed options markets, the options exchanges often do not 
have the same natural liquidity of buyers and sellers for each 
tradeable instrument (i.e., options series) as is generally the case in 
equities. As a result, market makers with affirmative obligations play 
a central role in providing liquidity to options exchanges through 
continuous two-sided quotes in large numbers of listed options series, 
thereby enabling investors to transact in listed options in accordance 
with their investment objectives. Because options market makers are 
required to maintain hundreds (and sometimes thousands) of quotes on 
options overlying underlying securities at any one time, a sudden 
market move in the underlying security can leave them vulnerable to 
being executed on quotes that are stale and dislocated from the price 
of the underlying security.\194\ Liquidity takers can target these 
stale quotes, with limited risk should they fail, before the market 
maker has time to move its quotes to reflect the price change in the 
underlying security exposing them to potentially major losses.
---------------------------------------------------------------------------

    \194\ See, e.g., Lehoczky, Sandor and Woods, Ellen and Russell, 
Matthew and Nguyen, Mina and Somers, James, Dead Man's Switch: 
Making Options Markets Safer with Active Quote Protection (May 2020) 
at 2-3, 6, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3675849 (discussing the need for quote 
protection for market makers to allow for a deep and liquid listed 
options market and explaining that ``race conditions'' negatively 
impact pricing efficiency, ``as market makers have been shown to 
quote wider spreads or step back instead of continually updating 
with price moves for fear of being ``picked off.''); see also 
Citadel Securities, Market Lens, July 2020, available at https://www.citadel.com/securities/wp-content/uploads/sites/2/2020/07/Market-Lens-Order-Cancellation-White-Paper_FINAL.pdf (explaining the 
need for risk management in electronic trading given that ``traders 
who place limit orders--the foundation of public price discovery--
are exposed to the risk that their quotations will be executed at an 
inopportune time, leading to potential losses'' and that the 
``greater the risk of an inopportune execution, the more 
compensation is required, which leads to wider bid-ask spreads. 
Conversely, anything the trader can do to lower the risk of an 
inopportune execution will lower the compensation required, which 
leads to narrower bid-ask spreads.'').
---------------------------------------------------------------------------

    The ORP is designed to supplement the standard proposed risk checks 
to provide augmented protection to address the inherent risks faced by 
market makers. IEX believes that the operation of the ORP is similar to 
activity-based and price reasonability risk checks offered by other 
options exchanges (and proposed by IEX herein), in terms of its 
objective and impact on a resting quote.\195\ Each of these risk 
controls will cancel an order when the control is triggered based on a 
determination that the price of the market maker's quote is 
``unreasonable'' because it is no longer reflective of the price of the 
underlying security and therefore likely stale (price reasonability 
check) or that the execution activity of a market maker's quotes 
exceeds the market maker's risk tolerance (activity-based controls). 
Additionally, the trading collar and limit order protection rules of 
other options exchanges and those similarly proposed by IEX provide for 
orders to be repriced.
---------------------------------------------------------------------------

    \195\ See, e.g., Market-Maker Protections, Market Structure, 
Optiver, July 17, 2023, available at https://optiver.com/insights/market-maker-protections/ (explaining that exchanges implement 
robust market-maker protections to ``assist market makers in coping 
with the risks of posting continuous, two-sided quotes in thousands 
of financial instruments'' and to provide the ability to 
automatically pull or amend their quotes so that ``all quotes 
falling within the scope of protection still resting on the book are 
prohibited from further execution'').
---------------------------------------------------------------------------

    However, IEX notes that the proposed ORP would be more transparent 
than the activity-based controls in determining when a market maker 
quote is potentially subject to cancelation (or adjustment) because it 
is based on a transparent formula specified in IEX's rules and related 
Trading Alerts. In contrast, those triggers for an activity-based 
control are nonpublic and set by each exchange member.
    As discussed above, because of the lack of natural sources of 
liquidity across the multitude of listed options series, market makers 
are subject to affirmative obligations to maintain continuous two-sided 
quotes on hundreds or thousands of individual options series. While IEX 
proposes to offer bulk quoting and purge port functionality to market 
makers (in the same manner as other options exchanges), in a fast-
moving market, their quotes can nonetheless become stale almost 
instantaneously. In those times, a sophisticated liquidity taker can 
target one or more stale market maker quotes before the market maker 
can update its quotes, thereby exposing the market maker to potentially 
major losses. The ORP is designed to assist market makers with an 
option to manage this risk, similar to the other risk controls. While 
some overlap is expected, IEX believes that the Indicator would 
potentially identify additional instances of stale quotes beyond those 
identified by the other price reasonability checks.
    Further, IEX notes that the operation of the Indicator is similar 
to the manner in which IEX's equities market (the ``Equities System'') 
utilizes a ``crumbling quote indicator'' to encourage the provision of 
displayed liquidity by providing reasonably tailored protections 
against adverse executions.\196\ As with the crumbling quote indicator, 
the Indicator will be a transparent formula based on a pre-determined 
objective set of circumstances that will be specified in IEX's rules to 
identify when the Protected Bid and/or Protected Offer in a particular 
options series is likely to move to a less aggressive price.
---------------------------------------------------------------------------

    \196\ In 2016, IEX received SEC approval of the IEX's exchange 
system that provides a similar quote indicator for equities. See 
2016 SEC Approval Order (approving IEX's exchange system in its 
registration as a national securities exchange, which included the 
approval of IEX's crumbling quote indicator that assesses quote 
instability by utilizing a real-time, based on pre-determined, 
objective set of conditions that protects orders from unfavorable 
executions when the market is moving against them). In 2020, IEX 
received SEC approval to apply the quote indicator to displayed 
orders in equities. See 2020 SEC Approval Order, supra note 189, at 
6-7 (receiving unanimous support and concluding that the Exchange's 
displayed order proposal that included a similar quote indicator is 
consistent with the requirements of the Exchange Act and the rules 
and regulations thereunder applicable to a national securities 
exchange and that is designed to improve market quality, enhance 
price discovery, and promote just and equitable principles of 
trade).
---------------------------------------------------------------------------

    Moreover, the Options Trading System will use the ORP in a manner 
similar to the way in which the Equities System applies the crumbling 
quote indicator to resting displayed liquidity, which reprices the 
applicable order or quote. The functional differences between the 
crumbling quote indicator and the Indicator reflect that options 
pricing is derivative.\197\ Thus, the Indicator will trigger when it 
identifies that a Protected Bid or Protected Offer is likely to move to 
a less aggressive price, based on a price change in the underlying 
security, thereby exposing the market maker to excessive risk, but, 
unlike the crumbling quote indicator, would reprice the quote to the 
price level of the quote instability determination or cancel the 
impacted quote and not remain ``on'' for a period of time after 
triggering. IEX believes that this approach is appropriate in view of 
the derivative pricing of options and that it will contribute to more 
displayed liquidity through improved execution quality, enhance the 
public price discovery process, and promote just and equitable 
principles of trade.\198\
---------------------------------------------------------------------------

    \197\ Because of this difference, the Indicator is designed to 
identify when the Protected Bid and/or Protected Offer in an option 
series is dislocated from the price of the underlying based on a 
price change in the underlying and therefore likely to be in 
transition to a less aggressive price, while the crumbling quote 
indicator utilizes changes in the protected quote in the security 
itself to make such a prediction.
    \198\ See, e.g., 2020 SEC Approval Order, supra note 189, at 19 
(concluding that IEX's exchange functionality protects against 
adverse selection and incentivizes more displayed liquidity through 
improved execution quality for liquidity providers, which 
contributes ``to fair and orderly markets'' and supports ``the 
public price discovery process''); at 26 (finding that the 
Exchange's speedbump and crumbling quote indicator promotes the 
interest of long term investors and inures to the ``benefit of 
displayed markets, leading to increased displayed liquidity from 
which all market participants ultimately will benefit''); at 52 
(concluding that the Exchange's order protection functionality ``is 
designed to encourage market participants to post more priced limit 
orders, including displayed orders, on IEX, and thereby promotes 
just and equitable principles of trade, removes impediments to and 
perfects the mechanism of a free and open market and a national 
market, and, in general, protects investors and the public 
interest.'').

---------------------------------------------------------------------------

[[Page 12912]]

    Further, the ORP would be available, as a quote parameter, only to 
market makers and on an optional basis, because the Exchange believes 
that it is most appropriate as a tool to address market maker risk. IEX 
believes that this approach is appropriate because market makers are 
subject to affirmative obligations to provide continuous two-sided 
quotes and cannot back away or unduly widen their quotes during periods 
of price volatility, as can other liquidity providers.\199\ By offering 
market makers this narrowly-tailored, optional tool, IEX believes it 
will attract additional displayed liquidity that will be available to 
all market participants.
---------------------------------------------------------------------------

    \199\ See, e.g., Protecting Liquidity in Options Markets, Market 
Structure, Optiver, July 12, 2023, available at https://optiver.com/insights/protecting-liquidity-in-options-markets/ (explaining that 
without robust liquidity protection mechanisms for market makers to 
protect against the risks of displaying stale or outdated quotes, 
``market makers may be forced to widen their spreads, show less 
liquidity or simply exit the market'' and overall ``market quality 
can deteriorate'' with the result of investors suffering).
---------------------------------------------------------------------------

    IEX also believes that use of the Indicator in determining when to 
trigger the ORP is consistent with the protection of investors and the 
public interest because the Indicator is based on the well-recognized 
Black-Scholes options pricing model, which IEX believes is an 
appropriate methodology to identify when a Market Maker's quote in an 
option is dislocated from the price of the underlying security based on 
the mathematical relationship between the price of the underlying 
security and the overlying options. Moreover, IEX believes that the 
latency mechanism \200\ (as discussed above) will serve to enhance the 
accuracy of the Indicator by providing adequate time for the IEX 
Trading System to update its Indicator calculation with current market 
data. In this regard, as discussed earlier, IEX notes that the proposed 
latency of 350 microseconds is well within the geographic delays that 
exist among and between the data centers that IEX Options Members, and 
other options exchanges, use and is consistent with the naturally 
occurring time indeterminism that exists in order processing.
---------------------------------------------------------------------------

    \200\ See proposed IEX Rule 22.170(g).
---------------------------------------------------------------------------

    Further, IEX believes that limiting the availability of the ORP to 
resting market maker quotes is consistent with the Act for several 
reasons. As discussed in depth above, market makers are integral to 
providing liquidity on options exchanges, and at the same time subject 
to a potentially excessive level of risk from execution of one or more 
stale quotes. Additionally, Market Makers' obligations apply across all 
series in their appointed class. Other liquidity providers are free to 
concentrate their efforts in a select number of series. Thus, Market 
Makers have greater exposure to latency arbitrage, take on greater 
risk, and incur more related capital charges than other liquidity 
providers. IEX determined to apply the functionality to resting quotes 
only as this approach will best achieve the purpose of protecting 
market markets from the excessive risk of executions at stale prices 
without disrupting market makers' ability to update their quotations.
    The Exchange also believes that applying the Indicator on a class-
by-class basis would remove impediments to, and perfect the mechanism 
of, a free and open market and a national market system and promote 
just and equitable principles of trade. As discussed in the Purpose 
section, applying the Indicator on a class-by-class basis would enable 
the Exchange to appropriately utilize the ORP for classes with a high 
potential for adverse selection, while excluding classes presenting 
lower risk of adverse selection (such as classes with relatively lower 
volumes). This flexibility will therefore allow the Exchange to ensure 
the ORP is available for those classes with a high potential for 
adverse selection and where its use will achieve its intended purpose, 
while excluding its use where it would likely provide little additional 
value and could introduce unnecessary complexity (for example, for 
classes that are subject to a pending corporate action or other 
nonstandard characteristic).
    Moreover, IEX notes that the Commission has previously recognized 
the utility of IEX providing protection to liquidity providers through 
order types that leverage its crumbling quote indicator to 
appropriately protect market participants from the risks of transacting 
when the market is in transition and thereby incentivize the entry of 
liquidity providing orders. The Exchange believes that the proposed ORP 
is consistent with this history and is in furtherance of driving 
tighter and deeper displayed markets to the benefit of investors.\201\
---------------------------------------------------------------------------

    \201\ See supra notes 201 and 203 and accompanying text.
---------------------------------------------------------------------------

    IEX also believes that the proposal is consistent with the firm 
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation 
NMS.\202\ Specifically, any marketable interest that is executable 
against a market maker's quote that has been received by the Trading 
System prior to the time that a quote instability determination is 
received by Trading System will be automatically executed, subject to 
processing of any prior messages, at the price and up to the size of 
the market maker's quote.
---------------------------------------------------------------------------

    \202\ See proposed IEX Rule 23.140(d).
---------------------------------------------------------------------------

    IEX believes that the proposed ORP is consistent with the 
protection of investors and the public interest, and is consistent with 
the Exchange Act, including furthering the objectives of Section 
6(b)(5) of the Act,\203\ because it is a narrowly-tailored approach 
designed to appropriately balance the risks faced by market makers with 
the legitimate objectives of liquidity takers by providing additional 
optional risk protection to market makers and thereby encourage 
aggressive quoting. The Exchange further believes that offering more 
risk management protections to Market Makers would mitigate their 
exposure to excessive risk. As discussed in detail above, Market Makers 
are required to continuously provide two-sided quotes in substantial 
numbers of listed options series that can create large, unintended 
positions exposing market makers to excessive risk. Market Maker quotes 
are critical to provide liquidity to the market and contribute to price 
discovery for investors. Without robust liquidity protection, market 
makers may be forced to widen their spreads, show less liquidity or 
simply exit the market, which can result in deterioration of market 
quality and adversely impact investors' and other liquidity takers' 
ability to transact in the options markets. In sum, liquidity 
protection for options market makers is vital for achieving a healthy 
balance between liquidity providers and liquidity takers in the options 
market that will promote more displayed liquidity from which all market 
participants ultimately will benefit.
---------------------------------------------------------------------------

    \203\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the notice requirements specified for 
the variable values related to operation of the ORP and the Indicator 
formula appropriately differentiate those values that require the 
Exchange to respond to rapidly changing market conditions or system

[[Page 12913]]

issues (i.e., determination of delta bound bands and class-by-class 
determinations) from those for which rapid Exchange decision-making is 
not necessary and for which more advance notice can be provided (i.e., 
quote instability threshold and frequency of calculation of implied 
volatility), thereby removing impediments to and perfecting the 
mechanisms of a free and open market and a national market system and, 
in general, protecting investors and the public interest.\204\ The 
Exchange believes that the proposed rules of IEX Options, as well as 
the proposed method of monitoring for compliance with and enforcing 
such rules is also consistent with the Act, particularly Sections 
6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in part, that 
an exchange have the capacity to enforce compliance with, and provide 
appropriate discipline for, violations of the rules of the Commission 
and of the exchange. The Exchange has proposed to adopt rules necessary 
to regulate Options Members that are nearly identical to the approved 
rules of other options exchanges, as described above. The Exchange 
proposes to regulate activity on IEX Options in the same way it 
regulates activity on its equities market (and comparable to other 
options exchanges), through various Exchange specific functions, an RSA 
with FINRA, as well as participation in industry plans, including plans 
pursuant to Rule 17d-2 under the Exchange Act.
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    \204\ The Exchange further notes that other options exchanges 
specify various rule-based values by similar publication approaches, 
see, e.g., NYSE Amex Rule 994NY (providing that the exposure period 
for its Broadcast Order Liquidity Delivery Mechanism is determined 
and released by the exchange); see also MIAX Rule 515(c)(1) 
(providing price protections where certain minimum price variations 
are determined by MIAX within a specified range and announced 
through regulatory circulars); see also Nasdaq Stock Market LLC 
Dynamic M-ELO algorithm (providing updates that include determining 
the holding period for impacted orders that are announced by trading 
alerts).
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    In conclusion, for the reasons discussed above, IEX believes that 
the proposed rule change is consistent with the investor protection and 
public interest purposes of Section 6 of the Act. Additionally, IEX 
believes that establishing a new options market that participates in 
all the current (and any future) national market system plans governing 
options trading is consistent with Section 11A of the Act relating to 
the establishment of the national market system for securities.\205\ As 
proposed, IEX Options will offer a simple alternative to existing 
options exchanges that is designed to support competitive quoting to 
the benefit of all market participants.
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    \205\ 15 U.S.C. 78k-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
the proposed rule change is designed to enhance competition by 
providing for an additional exchange market for the trading of listed 
options.
    IEX believes that this proposal will enhance competition by 
allowing the Exchange to leverage its existing robust technology 
platform to provide a resilient, deterministic, and transparent 
execution platform for options. The proposed rule change will insert an 
additional competitive dynamic to the options landscape by allowing the 
Exchange to compete with existing options exchanges and will promote 
further initiative and innovation among market centers and market 
participants.
    Further, the Exchange does not believe that the latency mechanism 
or optional Market Maker quote parameter aspect of the proposed rule 
change will impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
these features are designed to enhance IEX Option's competitiveness by 
incentivizing the entry of increased Market Maker liquidity.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intra-market competition because it will apply to 
all Options Members in the same manner and any Options Member can 
perform any specified function subject to meeting applicable 
requirements.
    The Exchange also does not believe that the proposed latency 
mechanism will impose any burden on intra-market competition that is 
not necessary or appropriate because it will apply in the same manner 
to all incoming orders and quotes. Further, as noted in the Purpose 
section, the Exchange will determine the length of the latency 
mechanism with a view towards achieving a healthy balance between 
liquidity providers and liquidity takers.
    The Exchange also does not believe that the proposed ORP will 
impose any burden on intra-market competition that is not necessary or 
appropriate because it will be available in the same manner to all 
Market Makers and any Options Member could become a Market Maker, 
subject to meeting applicable requirements. The ORP is designed to 
mitigate Market Makers' exposure to excessive risk and thereby enable 
them to provide more competitive quotes to the benefit of all market 
participants. The Exchange also believes that limiting the ORP 
functionality to Market Makers will not impose any burden on intra-
market competition that is not necessary and appropriate because Market 
Makers are subject to robust affirmative quoting obligations and thus 
can uniquely benefit from the protections to be provided by the ORP. 
The Exchange thus believes it is reasonable to provide Market Makers 
with an additional tool to manage their risk parameters, particularly 
given their unique and critical role in the listed options market and 
the obligations that Market Makers must satisfy. As discussed in the 
Purpose and Statutory Basis sections, the proposed ORP will protect 
resting market-maker quotes (which are subject to quoting obligations) 
from executions at potentially stale prices, which the Exchange 
believes will reduce their risk and encourage Market Makers to provide 
more competitive markets on the Exchange, thereby benefitting all 
market participants through additional execution opportunities at 
prices that reflect the then-current market conditions. The Exchange 
expects the proposed rule change to increase liquidity and enhance 
competition in the market because Market Makers may be able to quote 
more aggressively with added productions from exposure to execution 
risk, thereby remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
    The Exchange also does not believe that the proposal will impose 
any burden on inter-market competition that is not necessary or 
appropriate. Competing exchanges are free to adopt similar 
functionality, subject to the Commission rule filing process.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of the original notice in 
the Federal Register or within such longer period up to 90 days (i) as 
the Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory

[[Page 12914]]

organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.\206\
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    \206\ See supra note 4 (designating April 21, 2025 as the date 
by which it should either approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether the proposed 
rule change as modified by Amendment No. 1 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-IEX-2025-02 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-IEX-2025-02. 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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-IEX-2025-02 and should be 
submitted on or before April 9, 2025.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\207\
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    \207\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-04515 Filed 3-18-25; 8:45 am]
BILLING CODE 8011-01-P

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