Notice2022-25358
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 2614(f), Self-Trade Protection Modifiers
Primary source
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Published
November 22, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 224 (Tuesday, November 22, 2022)</title>
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[Federal Register Volume 87, Number 224 (Tuesday, November 22, 2022)]
[Notices]
[Pages 71368-71372]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-25358]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96334; File No. SR-PEARL-2022-48]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Rule
2614(f), Self-Trade Protection Modifiers
November 16, 2022.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on November 7, 2022, MIAX PEARL, LLC (``MIAX
Pearl'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 71369]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposed rule change expand the
availability of the Exchange's existing Self-Trade Protection (``STP'')
modifiers to more Equity Members \3\ on the Exchange's equity trading
platform (referred to herein as ``MIAX Pearl Equities'').
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\3\ The term ``Equity Member'' is a Member authorized by the
Exchange to transact business on MIAX Pearl Equities. See Exchange
Rule 1901.
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The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings/pearl">http://www.miaxoptions.com/rule-filings/pearl</a> at MIAX
Pearl's principal office, 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 Exchange Rule 2614(f) to expand the
availability of the Exchange's existing STP modifiers to more Equity
Members on MIAX Pearl Equities.\4\ Specifically, the Exchange proposes
to allow Equity Members to apply STP to orders submitted by an
Affiliate \5\ that is also an Equity Member (an Equity Member
Affiliate), if they choose.
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\4\ The Exchange notes that provisions of Exchange Rule 2614
that are not subject to this proposed rule change were amended in
separate filings, but those amendments have not yet been
implemented. See, e.g., Securities Exchange Act Release Nos. 95679
(September 6, 2022), 87 FR 55866 (September 12, 2022) (SR-PEARL-
2022-34); and 96205 (November 1, 2022) (SR-PEARL-2022-43).
\5\ The term ``affiliate'' of or person ``affiliated with''
another person means a person who, directly, or indirectly,
controls, is controlled by, or is under common control with, such
other person. See Exchange Rule 100. The term ``person'' refers to a
natural person, corporation, partnership (general or limited),
limited liability company, association, joint stock company, trust,
trustee of a trust fund, or any organized group of persons whether
incorporated or not and a government or agency or political
subdivision thereof. Id.
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The Exchange offers optional anti-internalization functionality to
Users \6\ in the form of STP modifiers that enable a User to prevent
two of its orders from executing against each other. Currently, Users
can set the STP modifier to apply at the market participant identifier
(``MPID''), Exchange Member identifier, or trading group identifier
(any such existing identifier, a ``Unique Identifier'').\7\ The STP
modifier on the order with the most recent time stamp controls the
interaction between two orders marked with STP modifiers. STP
functionality assists market participants in reducing trading costs
from unwanted executions potentially resulting from the interaction of
executable buy and sell trading interest from the same firm.
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\6\ The term ``User'' means any Member or Sponsored Participant
who is authorized to obtain access to the System pursuant to
Exchange Rule 2602. See Exchange Rule 1901.
\7\ See Exchange Rule 2614(f).
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The proposed rule change would permit Equity Members to direct that
orders entered into the System not execute against orders entered
across MPIDs that are Equity Member Affiliates. The Exchange believes
that this enhancement will provide helpful flexibility for Equity
Members that wish to prevent trading against all orders entered by
market participants that are affiliated with each other, instead of
just orders that are entered under the same Unique Identifier (as
currently defined).
The Exchange offers the following four (4) STP modifiers to Equity
Members: Cancel Newest, Cancel Oldest, Decrement and Cancel, and Cancel
Both. An order marked with the Cancel Newest modifier will not execute
against a contra-side order marked with any STP modifier originating
from the same Unique Identifier (as currently defined) and the order
with the most recent time stamp marked with the Cancel Newest modifier
will be cancelled. The contra-side order with the older timestamp
marked with an STP modifier will remain on the MIAX Pearl Equities
Book.\8\ An order marked with the Cancel Oldest modifier will not
execute against a contra-side order marked with any STP modifier
originating from the same Unique Identifier and the order with the
older time stamp marked with the STP modifier will be cancelled. The
contra-side order with the most recent timestamp marked with the STP
modifier will remain on the MIAX Pearl Equities Book. An order marked
with the Decrement and Cancel modifier will not execute against contra-
side interest marked with any STP modifier originating from the same
Unique Identifier. If both orders are equivalent in size, both orders
will be cancelled. If both orders are not equivalent in size, the
equivalent size will be cancelled and the larger order will be
decremented by the size of the smaller order, with the balance
remaining on the MIAX Pearl Equities Book. Finally, an order marked
with the Cancel Both modifier will not execute against contra-side
interest marked with any STP modifier originating from the same Unique
Identifier and the entire size of both orders will be cancelled.
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\8\ Exchange Rule 1901 defines the term ``MIAX Pearl Equities
Book'' as ``the electronic book of orders in equity securities
maintained by the System.''
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The Exchange understands that some Equity Members would like to
apply STP to orders submitted by their Affiliates who are also Equity
Members. For example, if Equity Member A is under common control with
Equity Member B, the two Equity Members would like the option of
applying STP to orders submitted by the two Equity Member Affiliates.
Therefore, the Exchange proposes to expand the availability of the
anti-internalization functionality it offers by allowing STP groups to
be set at the Equity Member Affiliate level in addition to the current
options of settings at the MPID, Exchange Member identifier, or trading
group identifier level. This proposal is designed to offer STP
functionality to Equity Member Affiliates that have divided their
business activities between separate corporate entities without
disadvantaging them when compared to Equity Members that operate those
business activities within a single corporate entity. This proposal
would expand the levels at which STP groups can be set by an Equity
Member, but nothing in this proposal would change the manner in which
two orders in the same STP group interact.
Specifically, the Exchange proposes to amend Exchange Rule 2614(f)
to include ``Equity Member Affiliate'' as one of the possible levels
for STP groupings (in addition to the current options of MPID, Exchange
Member identifier, and trading group identifier). The Exchange also
proposes to amend Exchange Rule 2614(f) to specify that for purposes of
the rule, the term ``Equity Member Affiliate'' shall mean an Equity
Member that is affiliated with another Equity Member pursuant to
Exchange Rule 100.\9\ If Equity Members choose to have STP applied
across Equity Member Affiliates, the anti-internalization
[[Page 71370]]
functionality would prevent orders from such Equity Member Affiliates
from trading against one another.
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\9\ See supra note 5.
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Assume Equity Member A and Equity Member B satisfy the definition
of Equity Member Affiliate and instructed the Exchange to prohibit
their orders that contain STP modifiers from executing against one
another. Under this proposal, if Equity Member A submits an order to
buy 100 shares of security ABC for $10.00 with an Equity Member-
supplied STP modifier, and Equity Member B, an Equity Member Affiliate
of Equity Member A, submits an order to sell 100 shares of security ABC
for $10.00 also with an Equity Member-supplied STP modifier, the two
otherwise executable orders will not execute, but will instead interact
based upon the Equity Member-supplied STP modifier on the newer order.
An Equity Member must inform the Exchange's Membership Department
which other Equity Member(s) it is affiliated with and meet the
definition of Equity Member Affiliate for purposes of using STP. Equity
Members will be responsible for having proper internal documentation in
their books and records substantiating that two or more Equity Members
using STP are Equity Member Affiliates of one another. The Exchange
notes that it already utilizes this grouping of Equity Member
Affiliates in its fee schedule so as not to penalize two affiliated
members when calculating rebate tiers.\10\ The Exchange also notes that
other equity exchanges recently amended their rules to allow affiliate
grouping for their own anti-internalization functionality.\11\
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\10\ See the definition of ADAV in the Exchange's fee schedule
available at <a href="https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_09012022.pdf">https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_09012022.pdf</a>
(dated September 1, 2022).
\11\ See, e.g., Securities Exchange Act Release Nos. 96187
(October 31, 2022), 87 FR 6674 (November 4, 2022) (SR-IEX-2022-08)
(filed for immediate effectiveness on October 24, 2022); 96156
(October 25, 2022), 87 FR 65633 (October 31, 2022) (SR-BX-2022-020)
(filed for immediate effectiveness on October 21, 2022); and 96154
(October 25, 2022), 87 FR 65631 (October 31, 2022) (SR-Phlx-2022-43)
(filed for immediate effectiveness on October 21, 2022).
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This proposed rule change is designed to provide additional
flexibility to Equity Members in how they implement self-trade
prevention provided by the Exchange, and thereby better manage their
order flow and prevent undesirable executions or the potential for
``wash sales'' that may occur as a result of the speed of trading in
today's marketplace. Based on informal discussions with Equity Members,
the Exchange believes that the proposed amendments will be useful to
Equity Members in implementing their own compliance controls.
Furthermore, the additional STP functionality may assist Members in
complying with certain rules and regulations of the Employee Retirement
Income Security Act (``ERISA'') that preclude and/or limit managing
broker-dealers of such accounts from trading as principal with orders
generated for those accounts.
The Exchange notes that, as with the current anti-internalization
functionality offered by the Exchange, use of the proposed new Equity
Member Affiliate STP grouping will not alleviate, or otherwise exempt,
Equity Members from their best execution obligations. As such, Equity
Members and their Affiliates using STP will continue to be obligated to
take appropriate steps to ensure customer orders which were prevented
from execution due to anti-internalization ultimately receive the same
price, or a better price, than they would have received had execution
of the orders not been inhibited by anti-internalization. Further, as
with current rule provisions, Market Makers and other Users may not use
STP functionality to evade the firm quote obligation, as specified in
Exchange Rule 2606(b), and the STP functionality must be used in a
manner consistent with just and equitable principles of trade.\12\ For
these reasons, the Exchange believes the proposed new Equity Member
Affiliate level of STP grouping offers Equity Members enhanced order
processing functionality that may prevent potentially undesirable
executions without negatively impacting broker-dealer best execution
obligations.
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\12\ See Exchange Rule 2100.
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Implementation
Due to the technological changes associated with this proposed
change, the Exchange will issue a trading alert publicly announcing the
implementation date of this proposed rule change to provide Equity
Members with adequate time to prepare for the associated technological
changes. The Exchange anticipates that the implementation date will be
in the fourth quarter of 2022.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\13\ in general, and furthers the objectives of Section
6(b)(5),\14\ in particular, because 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. Specifically, the Exchange
believes that the proposed rule change is consistent with the
protection of investors and the public interest because allowing Equity
Member Affiliates to be part of the same STP group will provide Equity
Members with additional flexibility with respect to how they implement
self-trade protections provided by the Exchange that may better support
their trading strategies and compliance controls. Equity Members that
prefer the current anti-internalization groupings offered by the
Exchange can continue to use them without any modification (i.e., if
two Equity Member Affiliates do not wish to have orders from the two
Equity Members be in the same STP group, the Equity Members will not
have to make any changes to the manner in which they submit orders to
the Exchange).
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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As noted in the Purpose section, the Exchange believes that
providing Equity Members with more flexibility and control over the
interactions of their orders will better prevent undesirable executions
or the potential for ``wash sales'' that may occur as a result of the
speed of trading in today's marketplace. The Equity Member Affiliate
level STP grouping may better assist Equity Members in complying with
certain ERISA rules and regulations that preclude and/or limit managing
broker-dealers of such accounts from trading as principal with orders
generated for those accounts.
Additionally, as discussed in the Purpose section, allowing Equity
Members to apply STP to trades submitted by their Affiliates that are
also Equity Members is intended to avoid disparate treatment of firms
that have divided their various business activities between separate
corporate entities as compared to firms that operate those business
activities within a single corporate entity. Accordingly, the Exchange
believes that this proposed rule change is fair and equitable, and not
unreasonably discriminatory.
Further, the Exchange believes that providing expanded STP grouping
options may streamline certain regulatory functions by reducing false
positive results that may occur on wash trading surveillance reports
when two orders in the same STP group are
[[Page 71371]]
executed, notwithstanding that the transaction may not constitute a
wash trade.
Finally, as discussed in the Purpose section, the Exchange notes
other equity exchanges recently amended their rules to allow affiliate
grouping for their own anti-internalization functionality.\15\
Consequently, the Exchange does not believe that the proposed rule
change raises any new or novel issues not already considered by the
Commission.
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\15\ See supra note 12 [sic].
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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 that is not necessary or appropriate
in furtherance of the purposes of the Act. To the contrary, the
proposal is designed to enhance the Exchange's competitiveness by
providing additional flexibility over the level at which orders are
grouped, thereby incentivizing Equity Members to send orders to the
Exchange and increase the liquidity available on the Exchange.
Additionally, the proposed rule change is designed to assist Equity
Members with compliance with the securities laws that prohibit wash
trading as well as ERISA requirements. The Exchange also notes that the
proposed new STP grouping option, like the Exchange's current anti-
internalization functionality, is completely optional and Equity
Members can determine on an order-by-order, MPID, Exchange Member
identifier, trading group identifier, or Equity Member Affiliate
identifier basis whether to apply anti-internalization protections to
orders submitted to the Exchange. The proposed rule change would also
improve the Exchange's ability to compete with other exchanges that
recently amended their rules to allow affiliate grouping for their own
anti-internalization functionality.\16\
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\16\ See id.
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The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. Moreover, there
is no barrier to other national securities exchanges adopting similar
anti-internalization grouping at the Equity Member Affiliate level.
The Exchange also does not believe that the proposed rule change
will impose any burden on intramarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act. All Equity
Members will continue to be eligible to use the Exchange's anti-
internalization functionality. While not every Equity Member engages in
a business that might involve risks of self-matching against an
Affiliate's orders, for the Equity Members that do face that risk, the
proposed additional anti-internalization grouping is designed to help
such Equity Members with their compliance with the securities laws and
ERISA. Further, implementation of anti-internalization functionality
impacts only an Equity Member's orders (and the orders of the Equity
Member Affiliates), and not the orders of other, unaffiliated Equity
Members. As discussed in the Purpose and Statutory Basis sections,
allowing Equity Members to apply STP to trades submitted by their
Affiliates that are also Equity Members is intended to avoid disparate
treatment of firms that have divided their various business activities
between separate corporate entities as compared to firms that operate
those business activities within a single corporate entity.
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 after the date of the filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-
4(f)(6) \18\ thereunder.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 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, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\20\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become operative upon filing. The Exchange states that
waiver of the operative delay would be consistent with the protection
of investors and the public interest because it would enable the
Exchange to implement the proposed rule change as soon as possible,
which would allow Equity Member Affiliates to be part of the same STP
group during the operative delay period and provide Equity Members with
additional flexibility in the near term with respect to how they
implement self-trade protections that may better support their trading
strategies and compliance controls. The Exchange also states that
waiver of the operative delay would allow the Exchange to avoid
disparate treatment during the operative delay period of firms that
have divided their various business activities between separate
corporate entities as compared to firms that operate those business
activities within a single corporate entity. Further, other equity
exchanges recently amended their rules to allow affiliate grouping for
their anti-internalization functionalities. For these reasons, and
because the proposed rule change does not raise any novel regulatory
issues, the Commission believes that waiving the 30-day operative delay
is consistent with the protection of investors and the public interest.
Therefore, the Commission hereby waives the operative delay and
designates the proposal operative upon filing.\21\
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\19\ 17 CFR 240.19b-4(f)(6).
\20\ 17 CFR 240.19b-4(f)(6)(iii).
\21\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule 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 71372]]
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#2a585f464f07494547474f445e596a594f49044d455c"><span class="__cf_email__" data-cfemail="354740595018565a5858505b4146754650561b525a43">[email protected]</span></a>. Please include
File Number SR-PEARL-2022-48 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-PEARL-2022-48. 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-PEARL-2022-48 and should be submitted on
or before December 13, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-25358 Filed 11-21-22; 8:45 am]
BILLING CODE 8011-01-P
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