Notice2022-27786
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Certain Functionality in Connection With a Technology Migration
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 22, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 245 (Thursday, December 22, 2022)</title>
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[Federal Register Volume 87, Number 245 (Thursday, December 22, 2022)]
[Notices]
[Pages 78717-78722]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-27786]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96519; File No. SR-GEMX-2022-13]
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Certain
Functionality in Connection With a Technology Migration
December 16, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 9, 2022, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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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 3, Section 12, Crossing
Orders and Options 3, Section 13, Price Improvement Mechanism for
Crossing Transactions.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/gemx/rules">https://listingcenter.nasdaq.com/rulebook/gemx/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
In connection with a technology migration to an enhanced Nasdaq,
Inc. (``Nasdaq'') functionality which will result in higher
performance, scalability, and more robust architecture, the Exchange
intends to adopt certain trading functionality currently utilized at
Nasdaq affiliate exchanges. Specifically, the Exchange proposes to
amend Options 3, Section 12, Crossing Orders and Options 3, Section 13,
Price Improvement Mechanism for Crossing Transactions. The changes
proposed herein are identical to changes that were recently proposed
for MRX.\3\ Each change will be described below.
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\3\ See Securities Exchange Act Release No. 95854 (September 21,
2022), 87 FR 58571 (September 27, 2022) (Order Approving SR-MRX-
2022-10).
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Changes to the Price Improvement Mechanism for Crossing Transactions
The Price Improvement Mechanism (``PIM'') is a process by which an
Electronic Access Member can provide price improvement opportunities
for a transaction wherein the Electronic Access Member seeks to
facilitate an order it represents as agent, and/or a transaction
wherein the Electronic Access Member solicited interest to execute
against an order it represents as agent (a ``Crossing Transaction'').
The Exchange proposes to amend PIM in Options 3, Section 13(d)(4)
which currently provides,
When a market order or marketable limit order on the opposite
side of the market from the Agency Order ends the exposure period,
it will participate in the execution of the Agency Order at the
price that is mid-way between the best counter-side interest and the
NBBO, so that both the market or marketable limit order and the
Agency Order receive price improvement. Transactions will be
rounded, when necessary, to the $.01 increment that favors the
Agency Order.
Today, unrelated interest in the form of a market order or
marketable limit order, on the opposite side of the market from an
Agency Order,\4\ may end an exposure period \5\ within a PIM and
participate in the execution of the Agency Order. The unrelated order
would participate at the price that is mid-way between the best
counter-side interest and the NBBO, so that both the market order or
marketable limit order
[[Page 78718]]
and the Agency Order receive price improvement.
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\4\ An Agency Order is the part of a Crossing Transaction that
an Electronic Access Member represents as agent. See GEMX Options 3,
Section 13(b).
\5\ Upon entry of a Crossing Transaction into the Price
Improvement Mechanism, a broadcast message that includes the series,
price and size of the Agency Order, and whether it is to buy or
sell, will be sent to all Members. The Exchange designates a time of
no less than 100 milliseconds and no more than 1 second for Members
to indicate the size and price at which they want to participate in
the execution of the Agency Order (``Improvement Orders'').
Improvement Orders may be entered by all Members in one-cent
increments at the same price as the Crossing Transaction or at an
improved price for the Agency Order, and will only be considered up
to the size of the Agency Order. During the exposure period,
Improvement Orders may not be canceled, but may be modified to (i)
increase the size at the same price, or (ii) improve the price of
the Improvement Order for any size up to the size of the Agency
Order. During the exposure period, responses (including the Counter-
Side Order, Improvement Orders, and any changes to either) submitted
by Members shall not be visible to other auction participants. The
exposure period will automatically terminate (i) at the end of the
time period designated by the Exchange pursuant to Options 3,
Section 13(c)(1) above, (ii) upon the receipt of a market or
marketable limit order on the Exchange in the same series, or (iii)
upon the receipt of a non-marketable limit order in the same series
on the same side of the market as the Agency Order that would cause
the price of the Crossing Transaction to be outside of the best bid
or offer on the Exchange. See GEMX Options 3, Section 13(c).
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First, the Exchange proposes to not permit unrelated marketable
interest on the opposite side of the market from the Agency Order,
which is received during a PIM, to early terminate a PIM. The Exchange
proposes to amend GEMX Options 3, Section 13(d)(4) to instead provide,
Unrelated market or marketable interest (against the GEMX BBO)
on the opposite side of the market from the Agency Order received
during the exposure period will not cause the exposure period to end
early and will execute against interest outside of the Crossing
Transaction. If contracts remain from such unrelated order at the
time the auction exposure period ends, they will be considered for
participation in the order allocation process described in sub-
paragraph (3).\6\
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\6\ Subparagraph (3) of Options 3, Section 13(d) describes the
manner in which a Counter-Side Order would be allocated. The Counter
Side Order is one part of a Crossing Transaction and represents the
full size of the Agency Order. The Counter-Side Order may represent
interest for the Member's own account, or interest the Member has
solicited from one or more other parties, or a combination of both.
See GEMX Options 3, Section 13(b).
This amendment is identical to a change recently adopted for
MRX.\7\ Additionally, Nasdaq Phlx LLC (``Phlx'') \8\ and Nasdaq BX,
Inc. (``BX'') \9\ similarly do not permit unrelated interest on the
opposite side of the market from the Agency Order to early terminate
their price improvement auctions. With this proposed change, the PIM
exposure period would continue for the full period despite the receipt
of unrelated marketable interest on the opposite side of the market
from the Agency Order. Allowing the PIM to run its full course would
provide an opportunity for additional price improvement to the Crossing
Transaction. Further, the unrelated interest would participate in the
PIM allocation with any residual contracts remaining after interacting
with the order book pursuant to GEMX Options 3, Section 13(d). The
aforementioned residual contracts are contracts that remain available
for execution after the unrelated order on the opposite side of market
as the Agency Order, which was marketable with bids and offers on the
same side of the market as the Agency Order, executed against bids and
offers on the Exchange's order book.
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\7\ See note 3 above. MRX amended Options 3, Section 13(d)(4).
\8\ Phlx Options 3, Section 13(b)(4) provides that an unrelated
market or marketable Limit Order (against the PBBO) on the opposite
side of the market from the PIXL Order received during the Auction
will not cause the Auction to end early and will execute against
interest outside of the Auction. See Securities Exchange Act
Releases No. 79835 (January 18, 2017), 82 FR 8445 (January 25, 2017)
(SR-Phlx-2016-119) (Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To
Amend the PIXL Price Improvement Auction in Phlx Rule 1080(n) and To
Make Pilot Program Permanent) and 63027 (October 1, 2010), 75 FR
62160 (October 7, 2010) (SR-Phlx-2010-108) (``PIXL Approval
Order''). The Commission noted in SR-Phlx-2016-119 that, ``In
approving this feature on a pilot basis, the Commission found that
`allowing the PIXL auction to continue for the full auction period
despite receipt of unrelated orders outside the Auction would allow
the auction to run its full course and, in so doing, will provide a
full opportunity for price improvement to the PIXL Order. Further,
the unrelated order would be available to participate in the PIXL
order allocation.' The Exchange does not believe that this provision
has had a significant impact on either the unrelated order or the
PIXL Auction process, either for simple or Complex PIXL Orders. The
Exchange therefore has requested that the Commission approve this
aspect of the Pilot on a permanent basis for both simple and Complex
PIXL Orders.''
\9\ BX Options 3, Section 13(ii)(D) provides that unrelated
market or marketable interest (against the BX BBO) on the opposite
side of the market from the PRISM Order received during the Auction
will not cause the Auction to end early and will execute against
interest outside of the Auction.
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Second, the Exchange also proposes to amend current GEMX Options 3,
Section 13(c)(5) which states,
The exposure period will automatically terminate (i) at the end
of the time period designated by the Exchange pursuant to Options 3,
Section 13(c)(1) above, (ii) upon the receipt of a market or
marketable limit order on the Exchange in the same series, or (iii)
upon the receipt of a non-marketable limit order in the same series
on the same side of the market as the Agency Order that would cause
the price of the Crossing Transaction to be outside of the best bid
or offer on the Exchange.
Specifically, the Exchange proposes to remove ``(ii),'' which
provides the exposure period will automatically terminate ``. . . (ii)
upon the receipt of a market or marketable limit order on the Exchange
in the same series. . .''. The Exchange notes that this sentence
applies to the receipt of marketable orders both on the same side and
opposite side of the Agency order. As described above, the Exchange
proposes to not permit unrelated marketable interest on the opposite
side of the market from the Agency Order, which is received during a
PIM, to early terminate a PIM. Therefore, with respect to the opposite
side of the Agency Order, the termination of the auction will no longer
be possible with the proposed change to GEMX Options 3, Section
13(d)(4). With respect to the same side of the Agency Order, today, an
unrelated market or marketable limit order in the same series on the
same side of the Agency Order would cause the PIM to early terminate as
well. At this time the Exchange proposes to not permit an unrelated
market or marketable limit order in the same series on the same side of
the Agency Order to cause the PIM to early terminate. This proposed
change will align the functionality of GEMX's PIM to that of MRX's
PIM,\10\ BX's PRISM and Phlx's PIXL,\11\ which do not permit an
unrelated market or marketable limit order in the same series on the
same side of the Agency Order to cause the PRISM or PIXL to early
terminate, unless the BBO improves beyond the price of the Crossing
Transaction on the same side. The Exchange notes that a market or
marketable limit order in the same series on the same side of the
Agency Order cannot interact with a PIM auction. The market or
marketable limit order may interact with the order book, and if there
are residual contracts that remain from the market or marketable limit
order in the same series on the same side of the Agency Order, they
could rest on the order book and improve the BBO beyond the price of
the Crossing Transaction which would cause early termination pursuant
to proposed Options 3, Section 13(c)(5)(ii) as discussed below. In this
instance, residual contracts are contracts that remain available for
execution after the unrelated order on the same side of market as the
Agency Order, which was marketable with bids and offers on the opposite
side of the market as the Agency Order, executed against bids and
offers on the Exchange's order book. The Exchange believes that this
outcome would allow for the PIM exposure period to continue for the
full period despite the receipt of unrelated marketable interest on the
same side of the market from the Agency Order, provided residual
interest does not go on to rest on the order book, improving the BBO
beyond the price of the Crossing Transaction. Allowing the PIM to run
its full course (unless the BBO improves beyond the price of the
Crossing Transaction on the same side), rather than early terminate,
would provide an opportunity for price improvement to the Agency Order.
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\10\ See MRX Options 3, Section 13(d)(4).
\11\ See BX Options 3, Section 13(ii)(D) and Phlx Options 3,
Section 13(b)(4).
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Third, the Exchange proposes to amend current GEMX Options 3,
Section 13(c)(5)(iii) to align the rule text to a recent change adopted
on MRX.\12\ Additionally, BX Options 3, Section 13(ii)(B)(2) has
similar language.\13\
[[Page 78719]]
Specifically, the Exchange proposes to amend Options 3, Section
13(c)(5) to delete current ``iii'' and renumber as ``ii''. Proposed new
Options 3, Section 13(c)(5)(ii) would state, ``The exposure period will
automatically terminate . . . (ii) any time the Exchange best bid or
offer improves beyond the price of the Crossing Transaction on the same
side of the market as the Agency Order. . .'' The proposed rule is
designed to align to MRX's and BX's rule text to remove any ambiguity
that a market or marketable limit order priced more aggressively than
the Agency Order could ultimately rest on the order book, improving the
BBO beyond the price of the Crossing Transaction and, therefore, cause
the early termination of a PIM auction.
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\12\ See note 3 above. MRX amended Options 3, Section
15(c)(5)(iii).
\13\ BX Options 3, Section 13(ii)(B) provides ``Conclusion of
Auction. The PRISM Auction shall conclude at the earlier to occur of
(1) through (3) below, with the PRISM Order executing pursuant to
paragraph (C)(1) or (C)(2) below if it concludes pursuant to (2) or
(3) of this paragraph. (1) The end of the Auction period; (2) For a
PRISM Auction any time the BX BBO crosses the PRISM Order stop price
on the same side of the market as the PRISM Order; (3) Any time
there is a trading halt on the Exchange in the affected series.''
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By way of example, assume: GEMX 1.00 x 2.00 (10) and a second GEMX
Market Maker's quote is 1.00 x 2.10 (10). If a PIM auction starts with
a buy at 1.50, and subsequently an order to buy for 20 @ 2.00 arrives,
the incoming order would trade with the quote, and the remaining 10
contracts would rest on the order book. Thereafter, the GEMX BBO would
update to 2.00 x 2.10 and trigger the early termination of the PIM
pursuant to Options 3, Section 13(c)(5)(iii), which is being renumbered
to Options 3, Section 13(c)(5)(ii). Early terminating the PIM in this
example is necessary because the price of the PIM is no longer at the
top of book (best price) and would not have execution priority with
respect to responses or unrelated interest that arrive. By early
terminating the PIM auction, GEMX allows responses to the PIM, which
arrived prior to the time the Exchange's best bid and offer improved
beyond the Crossing Transaction, to execute.
The Exchange believes the proposed rule text will provide greater
clarity to the manner in which the System operates today with respect
to early termination of PIMs when the BBO on the same side improves
beyond the price of the Crossing Transaction. The proposed amendment to
the rule text is not intended to amend the current System
functionality, rather it is intended to make clear that a market or
marketable limit order could ultimately rest on the order book with
residual interest and improve the BBO on the same side as the Agency
Order beyond the price of the Crossing Transaction and cause the PIM to
early terminate.
Fourth, the Exchange proposes to add a new GEMX Options 3, Section
13(c)(5)(iii) which states, ``. . . (iii) any time there is a trading
halt on the Exchange in the affected series. . .''. This proposed rule
text is not modifying how the System currently operates.\14\ Today, a
trading halt would cause a PIM to early terminate. Current GEMX Options
3, Section 13(d)(5) notes such an early termination as a result of the
aforementioned trading halt. Adding this circumstance to the list of
events that would terminate the exposure period would make the list
complete and add clarity to the rule. Furthermore, the Exchange notes
that in a separate rule change, SR-GEMX-2022-6P \15\ the Exchange is
proposing to amend Options 3, Section 13(d)(5) to change the System
behavior such that if a trading halt is initiated after an order is
entered into the PIM, such auction will be automatically terminated
with execution solely with the Counter-Side Order. Today, if a trading
halt is initiated after an order is entered into the PIM, such auction
will be automatically terminated without execution.\16\ This amendment
is identical to a change recently adopted for MRX.\17\
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\14\ GEMX Options 3, Section 13(d)(5) currently states that,
``If a trading halt is initiated after an order is entered into the
Price Improvement Mechanism, such auction will be automatically
terminated without execution.'' Of note, the Exchange is proposing
to amend GEMX's PIM within a separate rule change, SR-GEMX-2022-6P.
Among other things, the Exchange proposes to amend the PIM
functionality so that if a trading halt is initiated after an order
is entered into the PIM, the auction will be automatically
terminated with an execution. Specifically, SR-GEMX-2022-6P proposes
to renumber current GEMX Options 3, Section 13(d) to Options 3,
Section 13(d)(6) and proposes to state, ``If a trading halt is
initiated after an order is entered into the Price Improvement
Mechanism, such auction will be automatically terminated with
execution solely with the Counter-Side Order.''
\15\ GEMX has separately filed to amend Options 3, Section
13(d)(5) within SR-GEMX-2022-6P. SR-GEMX-2022-6P amended, among
other things, the rule text in Options 3, Section 13, except that it
does not amend Options 3, Section 13(c)(5).
\16\ See current GEMX Options 3, Section 13(d)(5).
\17\ See note 3 above. MRX amended Options 3, Section
13(c)(5)(iii).
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Re-Pricing
In connection with the technology migration, the Exchange recently
adopted re-pricing functionality for certain quotes and orders that
lock or cross an away market's price.\18\ With the recent change within
SR-GEMX-2022-10, the System will re-price certain quotes and orders
that lock or cross an away market's price. Specifically, quotes and
orders which lock or cross an away market price will be automatically
re-priced to the current national best offer (for bids) or the current
national best bid (for offers) and displayed one minimum price variance
(``MPV'') above (for offers) or below (for bids) the national best
price. The re-priced quotes and orders will be displayed on OPRA at its
displayed price and placed on the Exchange's order book at its re-
priced, non-displayed price, which may be priced better than the NBBO.
The quotes and orders will remain on the Exchange's order book and will
be accessible at their non-displayed price. With this change, a non-
displayed limit order or quote may be available on the Exchange at a
price that is better than the NBBO. The following example illustrates
how the proposed re-pricing mechanism would work:
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\18\ See Securities Exchange Act. No. 96363 (November 18, 2022),
87 FR 72556 (November 25, 2022) (SR-GEMX-2022-10). This rule change
is effective, but not yet operative. SR-GEMX-2022-10 would be
implemented as part of the same technology migration as the changes
proposed herein.
Symbol ABCD in a Non-Penny name
CBOE BBO at 1.00 x 1.20
DNR order to buy ABCD for 1.30 arrives
DNR buy order books at 1.20 (current national best offer) and displays
at 1.15 (one MPV below national best offer) *
CBOE BBO adjusts to 1.00 1.25
DNR buy order adjusts to book at 1.25 (current national best offer) and
displays at 1.20 (one MPV below national best offer) *
* OPRA will show the displayed price, not the booked price
Recently amended Options 3, Section 5(c) provides that the System
automatically executes eligible orders using the Exchange's displayed
best bid and offer (i.e., BBO) or the Exchange's non-displayed order
book (``internal BBO'') if the best bid and/or offer on the Exchange
has been re-priced pursuant to Options 3, Section 5(d).\19\ The
definition of an ``internal BBO'' covers re-priced quotes and orders
that remain on the order book and are available at non-displayed prices
while resting on the order book.\20\
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\19\ A similar change was made for quotes within Options 3,
Section 4(b)(7). The Exchange added the following new rule text to
Options 3, Section 4(b)(7), ``The System automatically executes
eligible quotes using the Exchange's displayed best bid and offer
(``BBO'') or the Exchange's non-displayed order book (``internal
BBO'') if the best bid and/or offer on the Exchange has been
repriced pursuant to Options 3, Section 5(d) below and subsection
(6) above.''
\20\ The Exchange amended the rule text within Options 3,
Section 4 and Options 3, Section 5, within SR-GEMX-2022-10, to
describe the manner in which a non-routable quotes and orders would
be re-priced, respectively. The Exchange added rule text within
Options 3, Section 4(b)(6) to state, ``A quote will not be executed
at a price that trades through another market or displayed at a
price that would lock or cross another market. If, at the time of
entry, a quote would cause a locked or crossed market violation or
would cause a trade-through violation, it will be re-priced to the
current national best offer (for bids) or the current national best
bid (for offers) and displayed at one minimum price variance above
(for offers) or below (for bids) the national best price, or
immediately cancelled, as configured by the Member.'' The Exchange
amended the rule text within Options 3, Section 5(d) to state, ``An
order that is designated by a Member as non-routable will be re-
priced in order to comply with applicable Trade-Through and Locked
and Crossed Markets restrictions. If, at the time of entry, an order
that the entering party has elected not to make eligible for routing
would cause a locked or crossed market violation or would cause a
trade-through violation, it will be re-priced to the current
national best offer (for bids) or the current national best bid (for
offers) and displayed at one minimum price variance above (for
offers) or below (for bids) the national best price.''
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[[Page 78720]]
In connection with the foregoing changes, the Exchange proposes to
add references to ``internal BBO'' within Options 3, Section 12(c)
which describes the Qualified Contingent Cross Orders, to conform with
the concept of re-pricing at an internal BBO as provided in Options 3,
Sections 4(b)(6) and 4(b)(7) and Options 3, Section 5(c) and (d) within
SR-GEMX-2022-10. This amendment is identical to a change recently
adopted for MRX.\21\
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\21\ See note 3 above. MRX amended Options 3, Section 12(c) and
(d).
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As noted above, the internal BBO could be better than the NBBO. The
Exchange believes that adding references to the internal BBO to Options
3, Section 12(c) would continue to require Members to be at or between
the best price, that is not at the same price as a Priority Customer
Order on the Exchange's limit order book, to execute a Qualified
Contingent Cross Order. The Exchange believes that the addition of
``internal BBO'' is consistent with the intent of these order types,
which is to require Members [sic] submit these orders at the best price
and not execute ahead of better-priced quotes or orders.
Specifically, the Exchange proposes to amend Options 3, Section
12(c), which describes the conditions under which a Qualified
Contingent Cross Order may be entered into the System for execution, to
state that a Qualified Contingent Cross Order may be executed upon
entry provided the execution is at or between the better of the
internal BBO or the NBBO.\22\ This amendment is identical to a change
recently adopted for MRX.\23\
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\22\ The Qualified Contingent Cross Order must also not be at
the same price as a Priority Customer Order on the Exchange's limit
order book. See Options 3, Section 12(c).
\23\ See note 3 above. MRX amended Options 3, Section 12(c).
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Implementation
The Exchange intends to begin implementation of the proposed rule
change prior to September 1, 2023. The implementation would commence
with a limited symbol migration and continue to migrate symbols over
several weeks. The Exchange will issue an Options Trader Alert to
Members to provide notification of the symbols that will migrate and
the relevant dates.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\24\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\25\ in particular, in that it is designed to
promote just and equitable principles of trade and to protect investors
and the public interest for the reasons discussed below.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
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Changes to the Price Improvement Mechanism for Crossing Transactions
The Exchange's proposal to amend GEMX Options 3, Section 13(d)(4),
related to PIM, to not permit unrelated marketable interest, on the
opposite side of the market from the Agency Order, which is received
during a PIM to early terminate a PIM is consistent with the Act and
promotes just and equitable principles because allowing the auction to
run its full course would provide a full opportunity for price
improvement to the Crossing Transaction. The unrelated interest would
participate in the PIM allocation pursuant to GEMX Options 3, Section
13(d), if residual contracts remain after executing with interest on
the order book. This amendment is identical to a change recently
adopted for MRX.\26\ Additionally, Phlx \27\ and BX \28\ do not permit
unrelated interest on the same or opposite side of an Agency Order to
early terminate their price improvement auctions.
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\26\ See note 3 above. MRX amended Options 3, Section 13(d)(4).
\27\ See note 17 above.
\28\ See note 18 above.
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The proposed amendment in GEMX Options 3, Section 13(c)(5)(ii),
related to PIM, applies to the receipt of marketable orders both on the
same side and opposite side of the Agency order. With respect to the
same side of the Agency Order, today, an unrelated market or marketable
limit order in the same series on the same side of the Agency Order
would cause the PIM to early terminate as well. The proposal promotes
just and equitable principles of trade because a market or marketable
limit order in the same series on the same side of the Agency Order
cannot interact with a PIM auction. The market or marketable limit
order may interact with the order book, and if there are residual
contracts that remain from the market or marketable order in the same
series on the same side of the Agency Order, they will rest on the
order book and could improve the BBO beyond the price of the Crossing
Transaction which will cause early termination of the PIM pursuant to
proposed GEMX Options 3, Section 13(c)(5)(ii). The Exchange believes
that this outcome would allow for the PIM exposure period to continue
for the full period despite the receipt of unrelated marketable
interest on the same side of the market from the Agency Order, provided
residual interest does not go on to rest on the order book improving
the BBO beyond the price of the Crossing Transaction of the PIM.
Allowing the PIM to run its full course protects investors and the
general public because it would provide an opportunity for price
improvement to the Agency Order. This amendment is identical to a
change recently adopted for MRX.\29\
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\29\ See note 3 above. MRX amended Options 3, Section
13(c)(5)(ii).
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Amending current GEMX Options 3, Section 13(c)(5)(iii) to align the
rule text with MRX \30\ and also more closely with BX Options 3,
Section 13(ii)(B)(2) \31\ is consistent with the Act because it removes
any ambiguity that a market or marketable limit order priced more
aggressively than the Agency Order on the same side could ultimately
rest on the order book, improving the BBO beyond the price of the
Crossing Transaction of the PIM and, therefore, cause the early
termination of a PIM. Continuing to permit a PIM to early terminate any
time the Exchange best bid or offer improves beyond the price of the
Crossing Transaction on the same side of the market as the Agency Order
protects investors and the general public because the Crossing
Transaction Agency Order's price is inferior to the Exchange's best bid
or offer on the same side of the market as the Agency Order. Upon early
termination of the PIM, the Crossing Transaction would execute against
responses that arrived prior to the time the Exchange's best bid or
offer improved beyond the Crossing Transaction. The proposed amendment
to the rule text is not intended to amend the current System
functionality, rather it is intended to make clear that a market or
marketable limit order could ultimately rest on the order book and
[[Page 78721]]
improve the BBO beyond the price of the Crossing Transaction.
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\30\ See MRX Options 3, Section 13(c)(5)(iii).
\31\ See note 13 above.
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Adding proposed new GEMX Options 3, Section 13(c)(5)(iii), which
describes the automatic termination of the exposure period resulting
from a trading halt on the Exchange in the affected series, is
consistent with the Act because a trading halt would cause an option
series to stop trading on GEMX and thereby impact the PIM auction.
Today, if a trading halt is initiated after an order is entered into
the PIM, such auction will be automatically terminated without
execution. Of note, the Exchange is separately proposing to amend GEMX
Options 3, Section 13(d)(5) \32\ to change System behavior such that if
a trading halt is initiated after an order is entered into the PIM,
such auction will be automatically terminated with execution solely
with the Counter-Side Order.\33\ The proposed amendment to GEMX Options
3, Section 13(c)(5)(iii) protects investors and the general public by
making clear that a trading halt would lead to early termination of a
PIM. This amendment is not intended to amend the current System
functionality, rather it is intended to make clear that a trading halt
will cause the PIM to early terminate. This amendment is identical to a
change recently adopted for MRX.\34\
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\32\ See note 14 above.
\33\ SR-GEMX-2022-6P proposes to renumber GEMX Options 3,
Section 13(d)(5) as Options 3, Section 13(d)(6), and proposes to
amend the rule text to state, ``If a trading halt is initiated after
an order is entered into the Price Improvement Mechanism, such
auction will be automatically terminated with execution solely with
the Counter-Side Order.''
\34\ See note 3 above. MRX amended Options 3, Section
13(c)(5)(iii).
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Re-Pricing
The Exchange believes that amending Options 3, Section 12(c) to
account for re-pricing of quotes and orders that would otherwise lock
or cross an away market, as provided in GEMX Options 3, Section 4(b)(6)
and (7) and Options 3, Section 5(c) and (d), is consistent with the
Act.
As discussed above with the implementation of re-pricing as
provided in Options 3, Section 4(b)(6) and (7) and Options 3, Section
5(c) and (d), interest could be available on the Exchange at a price
that is better than the NBBO but is non-displayed (i.e., the Exchange's
non-displayed order book or internal BBO). The proposed addition of
``internal BBO'' to Options 3, Section 12(c) will ensure that Members
continue to submit Qualified Contingent Cross Orders at prices equal to
or better than the best prices available in the market and ensure that
these orders are not executed ahead of better-priced interest. By
including ``internal BBO'' the Exchange ensures that such Qualified
Contingent Cross Orders will continue to be executed at the best price
and would not be executed ahead of better-priced interest. This
amendment is identical to a change recently adopted for MRX.\35\
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\35\ See note 3 above. MRX amended Options 3, Section 12(c) and
(d).
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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. MRX recently made identical
changes to the amendments proposed herein.\36\
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\36\ See note 3.
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Changes to the Price Improvement Mechanism for Crossing Transactions
The Exchange's proposal to amend GEMX Options 3, Section 13(d)(4),
GEMX Options 3, Section 13(c)(5)(ii) and (iii), and add a proposed new
GEMX Options 3, Section 13(c)(5)(iii), related to PIM, does not impose
an undue burden on intra-market competition because the proposed
amendments will apply equally to all Members. All Members may utilize
PIM.
The Exchange's proposal to amend GEMX Options 3, Section 13(d)(4),
GEMX Options 3, Section 13(c)(5)(ii) and (iii), and add a proposed new
GEMX Options 3, Section 13(c)(5)(iii), related to PIM, does not impose
an undue burden on inter-market competition because other options
exchanges may adopt similar rules. In addition to mirroring to MRX
Options 3, Section 13, Phlx \37\ and BX \38\ do not permit unrelated
marketable interest on either the same or opposite side of the market
from an Agency Order to early terminate their price improvement
auctions.
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\37\ See note 8 above.
\38\ See note 9 above.
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Re-Pricing
Adding language consistent with re-pricing within Options 3,
Section 12(c) does not impose an undue burden on competition, rather it
will ensure that the rules conform to the concept of re-pricing at an
internal BBO within Options 3, Section 4(b)(6) and (7) and Options 5(c)
and (d) which recently became effective.\39\ With this recent change,
re-priced quotes and orders are accessible on the Exchange's order book
at the non-displayed price. Amending Options 3, Section 12(c) to
utilize the ``internal BBO'' language would continue to require Members
to submit Qualified Contingent Cross Orders at the best price to
receive an execution. The introduction of ``internal BBO'' will ensure
that Qualified Contingent Cross Orders do not execute if better-priced
interest is available.
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\39\ See Securities Exchange Act. No. 96363 (November 18, 2022),
87 FR 72556 (November 25, 2022) (SR-GEMX-2022-10).
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The re-pricing proposal within Options 3, Section 12(c) does not
impose an undue burden on inter-market competition because this rule
continues to support executions at the best price.
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 \40\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\41\
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\40\ 15 U.S.C. 78s(b)(3)(A)(iii).
\41\ 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 78722]]
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#4133342d246c222e2c2c242f3532013224226f262e37"><span class="__cf_email__" data-cfemail="3f4d4a535a125c5052525a514b4c7f4c5a5c11585049">[email protected]</span></a>. Please include
File Number SR-GEMX-2022-13 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-GEMX-2022-13. 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-GEMX-2022-13, and should be submitted on
or before January 12, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27786 Filed 12-21-22; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.