Notice2021-13656
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Options 2, Section 4 (Obligations of Market Makers)
Primary source
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Published
June 28, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 121 (Monday, June 28, 2021)</title>
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[Federal Register Volume 86, Number 121 (Monday, June 28, 2021)]
[Notices]
[Pages 34077-34080]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13656]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92229; File No. SR-MRX-2021-07]
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change to Options 2,
Section 4 (Obligations of Market Makers)
June 22, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 15, 2021, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I, II, and III, below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Options 2, Section 4, Obligations of
Market Makers. The Exchange also proposes to add a new Options 4C.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/MRX/rules">https://listingcenter.nasdaq.com/rulebook/MRX/rules</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Options 2, Section 4, Obligations of
Market Makers. The Exchange also proposes to add a new Options 4C.
Options 2, Section 4(a)
The Exchange proposes to remove the following rule text from
Options 2, Section 4(a), which has been in place since MRX's inception:
\3\
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\3\ See Securities Exchange Act Release No. 70050 (July 26,
2013), 78 FR 46622 (August 1, 2013) (Application of Topaz Exchange,
LLC for Registration as a National Securities Exchange; Findings,
Opinion, and Order of the Commission).
. . . Ordinarily, Market Makers are expected to:
(1) Refrain from purchasing a call option or a put option at a
price more than $0.25 below parity, although a larger amount may be
appropriate considering the particular market conditions. In the
case of calls, parity is measured by the bid in the underlying
security, and in the case of puts, parity is measured by the offer
in the underlying security.
(2) The $0.25 amount above may be increased, or the provisions
of this Rule may be waived, by the Exchange on a series-by-series
basis.
This proposed rule text also previously existed on Cboe Exchange,
Inc. within prior Rule 8.7 \4\ and was removed from Cboe's Rulebook in
2019.\5\ The Exchange likewise desires to remove this restriction on
Market Makers which does not exist on Cboe or other Nasdaq affiliated
markets.\6\ The proposed rule text is currently waived on MRX pursuant
to Options 2, Section 4(a)(2). The Exchange proposes to remove this
rule text from Options 2, Section 4 as the Exchange does not desire to
enforce this provision in the future. The Exchange believes that this
market maker provision is no longer necessary. Today, MRX incentivizes
Market Makers through allocation \7\ to quote tightly in their assigned
options series. Primary Market Makers and Competitive Market Makers
also have other obligations with respect to market making \8\ in
addition to other quoting
[[Page 34078]]
obligations \9\ that they must abide by when quoting on MRX. Also,
since the adoption of the rule, the Exchange has adopted the obvious
error rule \10\ which permits the Exchange to review a transaction as
potentially erroneous based on a theoretical price. Also, MRX orders
are subject to trade-through compliance, thereby limiting the prices at
which orders may execute.\11\ Market Makers are relied upon to provide
liquidity on MRX, which benefits other Members who have the opportunity
to interact with the order flow. The Exchange believes that the
obligation to refrain from purchasing a call option or a put option at
a price more than $0.25 below parity places yet another obligation on
MRX Market Makers that is not required on Cboe or other Nasdaq markets.
The Exchange believes that this additional obligation is not necessary
to maintain fair and orderly markets and notes the Exchange has waived
this obligation.
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\4\ Prior Interpretation and Policy .02 to Rule 8.7 provided,
``Market-Makers are expected ordinarily to refrain from purchasing a
call option or a put option at a price more than $0.25 below parity,
although a larger amount may be appropriate considering the
particular market conditions. In the case of calls, parity is
measured by the bid in the underlying security, and in the case of
puts, parity is measured by the offer in the underlying security.
The $0.25 amount above may be increased, or the provisions of this
Interpretation may be waived, by the Exchange on a series-by-series
basis.''
\5\ Cboe's rule change merely noted, with respect to the removal
of Cboe's parity rule, that the filing makes non-substantive changes
to the rule governing a Market-Maker's general obligations (current
Rule 8.7, in part), most of which remove redundant provisions that
are already covered under the umbrella of a Market-Maker's
obligation to engage in dealing to maintain fair and orderly
markets. No specific argument is provided with respect to removing
this provision. See Securities Exchange Act 87024 (September 19,
2019), 84 FR 50545 (September 25, 2019) (SR-CBOE-2019-059) (Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Certain Rules Relating To Market-Makers Upon Migration to the
Trading System Used by Cboe Affiliated Exchanges).
\6\ See Nasdaq Phlx LLC, The Nasdaq Options Market LLC and
Nasdaq BX, Inc. at Options 2, Section 4 (Obligations of Market
Makers).
\7\ See Options 3, Section 10 (Priority of Quotes and Orders).
Primary Market Makers are offered an enhanced allocation provided
the Primary Market Maker is quoting at same price as a non- Priority
Customer Order or Market Maker quote.
\8\ See Options 2, Section 4. MRX Market Makers must for
example: (1) Compete with other Market Makers to improve the market
in all series of options classes to which the Market Maker is
appointed; (2) make markets that, absent changed market conditions,
will be honored for the number of contracts entered into the
Exchange's System in all series of options classes to which the
Market Maker is appointed; (3) update market quotations in response
to changed market conditions in all series of options classes to
which the Market Maker is appointed; and (4) price options contracts
fairly by, among other things, bidding and offering so as to create
differences of no more than $5 between the bid and offer following
the opening rotation in an equity or index options contract. See
Options 2, Section 4(b).
\9\ See Options 2, Section 5 (Electronic Market Maker
Obligations and Quoting Requirements). Further, Options 3, Section
8(c)(3) requires Primary Market Makers to submit a Valid Width Quote
during the Opening Process.
\10\ See Options 3, Section 20 (Nullification and Adjustment of
Options Transactions including Obvious Errors).
\11\ See Options 3, Section 4(b)(6).
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Bid/Ask Differentials
The Exchange proposes to amend Options 2, Section 4(b)(4) and
Options 4A, Section 12(b)(i) to centralize the bid/ask differentials.
Specifically, the Exchange proposes to state within new Options 2,
Section 4(b)(4)(iii) that,
Bid/ask differentials shall not apply to any options series
until the time to expiration is less than nine (9) months for equity
options and exchange-traded products. Bid/ask differentials shall
not apply to any options series until the time to expiration is less
than twelve (12) months for index options.
Currently, MRX Options 4 and Options 4A rules are incorporated by
reference to Nasdaq ISE, LLC (``ISE''). The Exchange recently filed a
rule change \12\ to amend ISE Options 4 and Options 4A rules to
relocate text concerning bid/ask differentials for long-term option
series from ISE Options 4, Section 8(a) \13\ and ISE Options 4A,
Section 12(b)(i).\14\ The ISE Rule Change added citations to Options 2,
Section 4(b)(4)(iii) to ISE Options 4, Section 8(a) and ISE Options 4A,
Section 12(b)(i). The ISE Rule Change indicated that ISE believes
relocating the bid/ask differentials to Options 2, Section 4(b)(4)(iii)
will provide Primary Market Makers and Competitive Market Makers with
centralized information regarding their bid/ask differential
requirements.
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\12\ See SR-ISE-2021-14 (``ISE Rule Change'').
\13\ ISE Options 4, Section 8(a) describes the bid/ask
differentials for long-term options series for equity options and
exchange-traded funds.
\14\ ISE Options 4A, Section 12(b)(i) describes the bid/ask
differentials for long-term options series for indexes.
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Business Continuity and Disaster Recovery Plan
The Exchange proposes to relocate Supplementary Material .02 to
Options 2, Section 4, concerning business continuity and disaster
recovery plans, to General 2, Section 12, which is currently reserved.
The Exchange proposes to title General 2, Section 12 as ``Business
Continuity and Disaster Recovery Plan Testing Requirements for Members
Pursuant to Regulation SCI.'' The rule text is being relocated without
change. The Exchange proposes to relocate this rule text to harmonize
MRX's rules with that of Nasdaq PHLX LLC (``Phlx''), Nasdaq BX, Inc.
and The Nasdaq Stock Market LLC which all have business continuity and
disaster recovery plans located within General 2, Section 12 of their
respective rulebooks.\15\ The Exchange also proposes to reserve
Sections 7-11 and 13-22 within General 2. Harmonizing the rule
locations of the rules of the Nasdaq affiliated markets will make it
easier for market participants to review and compare the rules of each
Nasdaq market.
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\15\ Similar rule changes will also be made for Nasdaq ISE, LLC
and Nasdaq MRX, LLC.
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Technical Amendments
The Exchange proposes to add new Options 4C and mark it as
reserved. Phlx added a 4C to its Rulebook and this rule change will
harmonize MRX's Rulebook structure to Phlx's Rulebook Structure.\16\
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\16\ See Securities Exchange Act Release No. 91488 (April 6,
2021), 86 FR 19037 (April 12, 2021) (SR-Phlx-2021-14) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
the Phlx Options Rules at Options 4 Under the Options 4 Title in the
Exchanges Rulebooks Shell Structure).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\17\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\18\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
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Options 2, Section 4(a)
The Exchange's proposal to remove certain rule text from Options 2,
Section 4(a) that refrains Market Makers from purchasing a call option
or a put option at a price more than $0.25 below parity is consistent
with the Act. The Exchange desires to remove this restriction on Market
Makers which does not exist on Cboe or other Nasdaq affiliated
markets.\19\ The proposed rule text is currently waived on MRX pursuant
to Options 2, Section 4(a)(2). The Exchange believes that this market
maker provision is no longer necessary. Today, MRX incentivizes Market
Makers through allocation \20\ to quote tightly in their assigned
options series. Primary Market Makers and Competitive Market Makers
also have other obligations with respect to market making \21\ in
addition to other quoting obligations \22\ that they must abide by when
quoting on MRX. Also, since the adoption of the rule, the Exchange has
adopted the obvious error rule \23\ which permits the Exchange to
review a transaction as potentially erroneous based on a theoretical
price. Also, MRX orders are subject to trade-through compliance,
thereby limiting the prices at which orders may execute.\24\ Market
Makers are relied upon to provide liquidity on MRX, which benefits
other Members who have the opportunity to interact with the order flow.
The Exchange believes that the obligation to refrain from purchasing a
call option or a put option at a price more than $0.25 below parity
places yet another obligation on MRX Market Makers that is not required
on Cboe or other Nasdaq markets. The Exchange believes that this
additional obligation is not necessary to maintain fair and orderly
markets and notes the Exchange has waived this obligation and the
removal of this provision would remove an impediment to and perfect the
mechanism of a free and open market and a national market system.
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\19\ See supra note 6.
\20\ See supra note 7.
\21\ See supra note 8.
\22\ See supra note 9.
\23\ See supra note 10.
\24\ See supra note 11.
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[[Page 34079]]
Bid/Ask Differentials
The Exchange's proposal to amend Options 2, Section 4(b)(4)(i) and
Options 4A, Section 12(b)(i) to centralize the bid/ask differentials is
consistent with the Act. Currently, MRX Options 4 and Options 4A rules
are incorporated by reference to ISE. The Exchange recently filed a
rule change \25\ to amend ISE Options 4 and Options 4A rules to
relocate text concerning bid/ask differentials for long-term option
series from ISE Options 4, Section 8(a) and ISE Options 4A, Section
12(b)(i). The ISE Rule Change added citations to Options 2, Section
4(b)(4)(i) to ISE Options 4, Section 8(a) and ISE Options 4A, Section
12(b)(i). MRX believes centralizing the bid/ask differentials within
new Options 2, Section 4(b)(4)(i) will provide Primary Market Makers
and Competitive Market Makers with centralized information regarding
their bid/ask differential requirements.
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\25\ See supra note 12.
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Business Continuity and Disaster Recovery Plan
The Exchange's proposal to relocate Supplementary Material .02 to
Options 2, Section 4, concerning business continuity and disaster
recovery plans, to General 2, Section 12, which is currently reserved,
is consistent with the Act. This rule text will harmonize MRX's rules
with that of Phlx, Nasdaq BX, Inc. and The Nasdaq Stock Market LLC
which all have business continuity and disaster recovery plans located
within General 2, Section 12 of their respective rulebooks.\26\
Harmonizing the rule locations of the rules of the Nasdaq affiliated
markets will make it easier for market participants to review and
compare the rules of each Nasdaq market. The Exchange also proposes to
reserve Sections 7-10 and 13-22 within General 2. These changes are
non-substantive as the rule text is not being amended.
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\26\ See supra note 15.
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Technical Amendments
Adding Options 4C and reserving it is a non-substantive amendment
which will harmonize MRX's Rulebook structure to Phlx's Rulebook
Structure.\27\
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\27\ See supra note 16.
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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
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Options 2, Section 4(a)
The Exchange's proposal to remove certain rule text from Options 2,
Section 4(a) that refrains Market Makers from purchasing a call option
or a put option at a price more than $0.25 below parity does not impose
an undue burden on competition. The Exchange desires to remove this
restriction on Market Makers which does not exist on Cboe or other
Nasdaq affiliated markets.\28\ The proposed rule text is currently
waived on MRX pursuant to Options 2, Section 4(a)(2). Market Makers are
relied upon to provide liquidity on MRX, which benefits other Members
who have the opportunity to interact with the order flow. The Exchange
believes that the obligation to refrain from purchasing a call option
or a put option at a price more than $0.25 below parity places yet
another obligation on MRX Market Makers that is not required on Cboe or
other Nasdaq markets. The Exchange believes that this additional
obligation is not necessary to maintain fair and orderly markets and
notes the Exchange has waived this obligation.
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\28\ See supra note 5.
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Bid/Ask Differentials
The Exchange's proposal to amend Options 2, Section 4(b)(4) and
Options 4A, Section 12(b)(i) to relocate text concerning bid/ask
differentials for long-term option series does not impose an undue
burden on competition. The Exchange's proposal will centralize the bid/
ask differentials within new Options 2, Section 4(b)(4)(iii) and add a
sentence to both Options 4, Section 8(a) and Options 4A, Section
12(b)(i) that cites to Options 2, Section 4(b)(4)(iii) for information
on bid/ask differentials for the various products. The Exchange
believes that this relocation will provide Primary Market Makers and
Competitive Market Makers with centralized information regarding their
bid/ask differential requirements.
Business Continuity and Disaster Recovery Plan
The Exchange's proposal to relocate Supplementary Material .02 to
Options 2, Section 4, concerning business continuity and disaster
recovery plans, to General 2, Section 12, which is currently reserved,
does not impose an undue burden on competition. This rule text will
harmonize MRX's rules with that of Phlx, Nasdaq BX, Inc. and The Nasdaq
Stock Market LLC which all have business continuity and disaster
recovery plans located within General 2, Section 12 of their respective
rulebooks.\29\ Harmonizing the rule locations of the rules of the
Nasdaq affiliated markets will make it easier for market participants
to review and compare the rules of each Nasdaq market. This change is
non-substantive as the rule text is not being amended.
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\29\ See supra note 6.
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Technical Amendments
Adding Options 4C and reserving it is a non-substantive amendment
which will harmonize MRX's Rulebook structure to Phlx's Rulebook
Structure.\30\
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\30\ See supra note 16.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \31\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\32\
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\31\ 15 U.S.C. 78s(b)(3)(A)(iii).
\32\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
[[Page 34080]]
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#e597908980c8868a8888808b9196a5968086cb828a93"><span class="__cf_email__" data-cfemail="5022253c357d333f3d3d353e2423102335337e373f26">[email protected]</span></a>. Please include
File Number SR-MRX-2021-07 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-MRX-2021-07. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-MRX-2021-07 and should be submitted on
or before July 19, 2021.
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\33\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13656 Filed 6-25-21; 8:45 am]
BILLING CODE 8011-01-P
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