Notice2023-02820
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Rules in Connection With a Technology Migration to Enhanced Nasdaq, Inc. (“Nasdaq”) Functionality
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
February 10, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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[Federal Register Volume 88, Number 28 (Friday, February 10, 2023)]
[Notices]
[Pages 8950-8975]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-02820]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96818; File No. SR-ISE-2023-06]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Its Rules
in Connection With a Technology Migration to Enhanced Nasdaq, Inc.
(``Nasdaq'') Functionality
February 6, 2023.
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 February 3, 2023, Nasdaq ISE, LLC (``ISE'' 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 its rules in connection with a
technology migration to enhanced Nasdaq, Inc. (``Nasdaq'')
functionality.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/ise/rules">https://listingcenter.nasdaq.com/rulebook/ise/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
[[Page 8951]]
any comments it received on the proposed rule change. The text of these
statements may be examined at the places specified in Item IV below.
The Exchange has prepared summaries, set forth in sections A, B, and C
below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In connection with a technology migration to enhanced Nasdaq
functionality that will result in higher performance, scalability, and
more robust architecture, the Exchange proposes to amend its rules to
adopt certain trading functionality currently utilized at Nasdaq
affiliate options exchanges. As further discussed below, the Exchange
is proposing to adopt such functionality substantially in the same form
as currently on the Nasdaq affiliated options exchanges, while
retaining certain intended differences between it and its affiliates.
The Exchange also proposes a number of changes to memorialize existing
functionality, add more granularity in its rules to describe how
existing functionality operates today, and to harmonize the Exchange's
rules where appropriate with the rules of its affiliated options
exchanges by using consistent language to describe identical
functionality.
The Exchange intends to begin implementation of the proposed rule
change by Q4 2023. The Exchange would commence its implementation with
a limited symbol migration and continue to migrate symbols over several
weeks. The Exchange will issue an Options Trader Alert to Members to
provide notification of the symbols that will migrate and the relevant
dates.
Bulk Message
The Exchange proposes to codify existing functionality that allows
Market Makers to submit their quotes to the Exchange in block
quantities as a single bulk message. In other words, a Market Maker may
submit a single message to the Exchange, which may contain bids and
offers in multiple series. The Exchange does not permit bulk messaging
for orders today. The Exchange has historically provided Market Makers
with information regarding bulk messaging in its publicly available
technical specifications.\3\ To promote greater transparency, the
Exchange is seeking to codify this functionality in its Rulebook.
Specifically, the Exchange proposes to amend Options 3, Section 4(b)(3)
to memorialize that quotes may be submitted as a bulk message. The
Exchange also proposes to add a definition of ``bulk message'' in new
subparagraph (i) of Options 3, Section 4(b)(3), which will provide that
a bulk message means a single electronic message submitted by a Market
Maker to the Exchange which may contain a specified number of
quotations as designated by the Exchange.\4\ The bulk message,
submitted via SQF,\5\ may enter, modify, or cancel quotes. Bulk
messages are handled by the System in the same manner as it handles a
single quote message.
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\3\ See <a href="https://www.nasdaq.com/docs/2022/05/17/SQF_8.2b.pdf">https://www.nasdaq.com/docs/2022/05/17/SQF_8.2b.pdf</a>
(specifying for bulk quoting of up to 200 quotes per quote block
message). The specifications note in other places the manner in
which a Member can send such quote block messages.
\4\ See id. As noted above, quote bulk messages can presently
contain up to 200 quotes per message. This is the maximum amount
that is permitted in a bulk message. The Exchange would announce any
change to these specifications in an Options Technical Update
distributed to all Members.
\5\ ``Specialized Quote Feed'' or ``SQF'' is an interface that
allows Market Makers to connect, send, and receive messages related
to quotes, Immediate-or-Cancel Orders, and auction responses to the
Exchange. Features include the following: (1) options symbol
directory messages (e.g., underlying and complex instruments); (2)
System event messages (e.g., start of trading hours messages and
start of opening); (3) trading action messages (e.g., halts and
resumes); (4) execution messages; (5) quote messages; (6) Immediate-
or-Cancel Order messages; (7) risk protection triggers and purge
notifications; (8) opening imbalance messages; (9) auction
notifications; and (10) auction responses. The SQF Purge Interface
only receives and notifies of purge requests from the Market Maker.
Market Makers may only enter interest into SQF in their assigned
options series. See Supplementary Material .03(c) to Options 3,
Section 7.
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The Exchange notes that other exchanges like Cboe Options Exchange
(``Cboe'') currently offer similar bulk messaging functionality that
allow their market participants to submit block quantity quotes in a
single electronic message.\6\
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\6\ See definition of ``bulk message'' in Cboe Rule 1.1. Unlike
Cboe, which also allows bulk messaging for orders, the Exchange's
bulk message functionality only applies to quotes as discussed
above.
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Order Types
The Exchange proposes to make several enhancements to certain order
types in Options 3, Section 7 in connection with the technology
migration to Nasdaq enhanced functionality. Specifically in connection
with the migration, the Exchange proposes to: (1) introduce an intra-
day cancel timer feature for Market Orders,\7\ (2) eliminate non-
Immediate-or-Cancel (``IOC'') \8\ Intermarket Sweep Orders
(``ISOs''),\9\ (3) introduce BX-like re-pricing to Add Liquidity Orders
(``ALOs''),\10\ and (4) allow Market Orders to be entered as Opening
Only (``OPG'') \11\ orders (currently only allowed for Limit
Orders).\12\ As discussed below, the proposed enhancements are intended
to align with existing BX functionality. The Exchange also proposes to
add more granularity on how certain order types currently operate on
the Exchange today, codify existing order type functionality, and to
relocate related rule text within Options 3, Section 7 for better
readability. Except with respect to the order type enhancements
specified above, none of the proposed order type rule changes will
amend current functionality. Rather, these changes are designed to
bring greater transparency as to the applicability of certain order
types currently available on the Exchange, and to provide greater
consistency between the rules of the Exchange and its affiliates.
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\7\ A market order is an order to buy or sell a stated number of
options contracts that is to be executed at the best price
obtainable when the order reaches the Exchange. See Options 3,
Section 7(a).
\8\ An IOC order must be executed in whole or in part upon
receipt. Any portion not so executed is to be treated as cancelled.
See Options 3, Section 7(b)(3). As discussed later in this filing,
the Exchange will relocate the IOC rule into Supplementary Material
.02 to Options 3, Section 7.
\9\ An ISO is a limit order that meets the requirements of
Options 5, Section 1(h). See Options 3, Section 7(b)(5).
\10\ An Add Liquidity Order is a limit order that is to be
executed in whole or in part on the Exchange (i) only after being
displayed on the Exchange's limit order book; and (ii) without
routing any portion of the order to another market center. Members
may specify whether an Add Liquidity Order shall be cancelled or re-
priced to the minimum price variation above the national best bid
price (for sell orders) or below the national best offer price (for
buy orders) if, at the time of entry, the order (i) is executable on
the Exchange; or (ii) the order is not executable on the Exchange,
but would lock or cross the national best bid or offer. If at the
time of entry, an Add Liquidity Order would lock or cross one or
more non-displayed orders on the Exchange, the Add Liquidity Order
shall be cancelled or re-priced to the minimum price variation above
the best non-displayed bid price (for sell orders) or below the best
non-displayed offer price (for buy orders). An Add Liquidity Order
will only be re-priced once and will be executed at the re-priced
price. An Add Liquidity Order will be ranked in the Exchange's limit
order book in accordance with Options 3, Section 10. See Options 3,
Section 7(n).
\11\ An OPG order is a Limit Order that can be entered for the
opening rotation only. See Options 3, Section 7(o). As discussed
later in this filing, the Exchange will relocate the OPG rule into
Supplementary Material .02 to Options 3, Section 7.
\12\ A Limit Order is an order to buy or sell a stated number of
options contracts at a specified price or better. See Options 3,
Section 7(b).
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[[Page 8952]]
Market Orders
The Exchange proposes to amend the definition of Market Orders in
Options 3, Section 7(a) to introduce a cancel timer feature, which will
allow Members to designate Market Orders that do not execute after a
certain period of time to be cancelled back to the Member.
Specifically, the Exchange proposes to add that Members can designate
their Market Orders not executed after a pre-established period of
time, as established by the Exchange,\13\ will be cancelled back to the
Member, once an options series has opened for trading. BX currently has
an identical timer feature for BX Market Orders.\14\ Similar to BX, the
proposed timer would be available once the intra-day trading session
begins for an options series, as the Exchange already has a separate
opening delay timer that provides protection to the market during the
Opening Process. In particular, the Exchange would cancel or route
orders (consistent with the Member's instructions) if an options series
has not opened before the conclusion of the opening delay timer.\15\ As
such, the Exchange is proposing that the pre-established period of time
for the proposed timer feature would commence once the intra-day
trading session begins for that options series. In other words, while
the opening process is on-going, and the intra-day trading session has
not commenced, the pre-established period of time for the proposed
timer feature would not commence. Further, the Exchange proposes to
note that Market Orders on the order book would be immediately
cancelled if an options series is halted, provided the Member
designated the cancellation of Market Orders.\16\ The proposed changes
are intended to make clear that in the event there is a Market Order in
a zero bid market with the Market Order was resting on the order book,
the Member has an option to designate the cancellation of that Market
Order pursuant to the proposed cancel timer feature. In this case,
those Market Orders to sell, which were resting on the order book,
would immediately cancel upon a trading halt instead of waiting until
the end of the pre-established timer period. BX has identical language
governing its Market Orders today.\17\ Like BX, the Exchange believes
that the proposed intra-day timer feature will provide additional
flexibility for Members that wish to cancel unexecuted Market Orders
after a certain period of time. Lastly, the Exchange proposes a non-
substantive change to capitalize the term ``market orders'' in the
first sentence of Options 3, Section 7(a) for consistency with the
proposed rule text.
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\13\ The Exchange will initially set the pre-established period
of time at 4 seconds, identical to BX. This specification will be
set out in the ISE System settings document on a publicly available
website. The Exchange would issue an Options Trader Alert notifying
all Members if it determined to amend that timeframe.
\14\ See BX Options 3, Section 7(a)(5).
\15\ See Options 3, Section 8(k).
\16\ Members may make the designation to cancel their Market
Orders through their FIX, OTTO, and Precise port settings.
\17\ See BX Options 3, Section 7(a)(5).
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Intermarket Sweep Orders
The Exchange proposes to amend the ISO rule in Options 3, Section
7(b)(5), which currently provides that an ISO is limit order that meets
the requirements of Options 5, Section 1(h).\18\ As amended, the ISO
rule will provide:
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\18\ Options 5, Section 1(h) provides that an ISO is a limit
order for an options series that, simultaneously with the routing of
the ISO, one or more additional ISOs, as necessary, are routed to
execute against the full displayed size of any Protected Bid, in the
case of a limit order to sell, or any Protected Offer, in the case
of a limit order to buy, for the options series with a price that is
superior to the limit price of the ISO. A Member may submit an
Intermarket Sweep Order to the Exchange only if it has
simultaneously routed one or more additional Intermarket Sweep
Orders to execute against the full displayed size of any Protected
Bid, in the case of a limit order to sell, or Protected Offer, in
the case of a limit order to buy, for an options series with a price
that is superior to the limit price of the Intermarket Sweep Order.
An ISO may be either an Immediate-Or-Cancel Order or an order that
expires on the day it is entered.
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An Intermarket Sweep Order (``ISO'') is a limit order that meets
the requirements of Options 5, Section 1(h). Orders submitted to the
Exchange as ISO are not routable and will ignore the ABBO and trade at
allowable prices on the Exchange. ISOs must have a TIF designation of
IOC. ISOs may not be submitted during the Opening Process.
The proposed rule text is substantially similar to BX's ISO rule in
BX Options 3, Section 7(a)(6).\19\ The Exchange is also proposing to
add that ISOs may not be submitted during the Opening Process to
reflect current System handling. The Exchange notes that BX similarly
prohibits the submission of ISOs before the market opens and therefore
proposes to add a similar level of detail in the Exchange's ISO rule.
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\19\ BX's ISO rule also currently states that ``ISOs may be
entered on the Order Book or into the PRISM Mechanism pursuant to
Options 3, Section 13(ii)(K).'' See BX Options 3, Section 7(a)(6).
The Exchange notes that it intends to file a separate rule filing to
add similar language as BX relating to how ISOs may be entered on
the Exchange.
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Other than the stipulation that ISOs must have a TIF \20\
designation of IOC, the proposed language does not amend the current
ISO functionality but rather is intended to add more granularity and
more closely align the ISO rule with BX's ISO rule. The Exchange does
note that in connection with the System migration, the Exchange
proposes to amend the current ISO functionality to only allow ISOs to
be entered as IOC. Today, Options 5, Section 1(h) provides that an ISO
may either be an IOC or an order that expires on the day it is entered.
The Exchange proposes to delete this sentence entirely from Options 5,
Section 1(h) as ISOs may only be IOC with the System migration, and
this will be articulated in proposed Options 3, Section 7(b)(3).
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\20\ As discussed later in this filing, the Exchange is
proposing to codify the definition of ``Time in Force'' or ``TIF''
to mean the period of time that the System will hold an order for
potential execution. See proposed Supplementary Material .02 to
Options 3, Section 7.
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The Exchange is proposing to require ISOs to be entered as IOC,
which would cause an ISO to cancel in whole or in part upon receipt if
the ISO does not execute or does not entirely execute, because an ISO
is generally used when trying to sweep a price level across multiple
exchanges in an effort to post the balance of an order without locking
an away market. The Exchange therefore believes that ISOs have a
limited purpose and should be cancelled if they do not execute or do
not entirely execute. As noted above, the proposal will align to
current BX functionality that similarly only allows ISOs to be entered
as IOC on BX.
All-or-None Orders
The Exchange proposes to amend the All-Or-None (``AON'') Order rule
in Options 3, Section 7(c), which currently provides that an AON Order
is a limit or market order that is to be executed in its entirety or
not at all, and that an AON Order may only be entered as an IOC Order.
As amended, the AON rule will provide:
An All-Or-None (``AON'') Order is a limit or market order that is
to be executed in its entirety or not at all. An AON Order may only be
entered as an Immediate-or-Cancel Order. AON Orders will only execute
against multiple, aggregated orders if the executions would occur
simultaneously. AON Orders may not be submitted during the Opening
Process.
With the proposed changes, the Exchange is not amending current AON
functionality; rather, it is memorializing current System behavior in a
manner consistent with its affiliates. Today, AON Orders have a size
contingency (i.e., executed in its entirety at the entered size or not
at all) and must be
[[Page 8953]]
IOC. The Exchange is specifying that AON Orders will execute against
multiple, aggregated orders only if the executions would occur
simultaneously to ensure that AON Orders are executed at the specified
size while also honoring the priority of all other orders on the order
book. The Exchange is adopting this rule text for AON orders to align
to substantially similar language on BX.\21\
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\21\ See BX Options 3, Section 7(a)(4)(A) (describing Minimum
Quantity Orders and AON Orders as Contingency Orders). Unlike BX,
the Exchange does not currently offer Minimum Quantity Orders.
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The Exchange notes that the handling of AONs as described in the
proposed rule text in Options 3, Section 7(c) is consistent with the
Exchange's allocation methodology in Options 3, Section 10. The
additional detail makes clear that because of the size contingency of
AON Orders, those orders must be satisfied simultaneously to avoid any
priority conflict on the order book, which considers current displayed
NBBO prices to avoid locked and crossed markets as well as trade-
throughs.
The Exchange is also proposing to add that AON orders may not be
submitted during the Opening Process to reflect current System
handling. The Exchange notes that BX similarly prohibits the submission
of AON orders before the market opens and therefore proposes to add a
similar level of detail in the Exchange's AON rule.\22\
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\22\ See BX Options 3, Section 7(a)(7).
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Stop Orders
The Exchange proposes to amend its Stop Order rule in Options 3,
Section 7(d), which presently provides that a stop order is an order
that becomes a market order when the stop price is elected. A stop
order to buy is elected when the option is bid or trades on the Nasdaq
ISE at, or above, the specified stop price. A stop order to sell is
elected when the option is offered or trades on the Nasdaq ISE at, or
below, the specified stop price. The Exchange now proposes to add that
a Stop Order shall be cancelled if it is immediately electable upon
receipt. Stop Orders allow Members increased control and flexibility
over their transactions and the prices at which they are willing to
execute an order. The purpose of a Stop Order is to not execute upon
entry, and instead rest in the System until the market reaches a
certain price level, at which time the order could be executed. A Stop
Order that is immediately electable upon receipt would therefore negate
the purpose of the Stop Order, so the Exchange would cancel such orders
today. The Exchange believes that this ensures Members are able to use
Stop Orders to achieve their intended purpose. The proposed changes
codify current Stop Order handling and are intended to better align the
Exchange's Stop Order rule with that of its affiliate, Phlx.\23\
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\23\ See Phlx Options 3, Section 7(b)(4).
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The Exchange also proposes to specify that Stop Orders may only be
entered through FIX or Precise.\24\ This is how Stop Orders are handled
today. Because the Exchange offers three order entry protocols today
(FIX, Precise, and OTTO),\25\ the Exchange believes that adding this
detail will make clear that Stop Orders are only available to be
entered through two of these order entry protocols and reduce any
potential confusion.
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\24\ ``Nasdaq Precise'' or ``Precise'' is a front-end interface
that allows Electronic Access Members and their Sponsored Customers
to send orders to the Exchange and perform other related functions.
Features include the following: (1) order and execution management:
enter, modify, and cancel orders on the Exchange, and manage
executions (e.g., parent/child orders, inactive orders, and post-
trade allocations); (2) market data: access to real-time market data
(e.g., NBBO and Exchange BBO); (3) risk management: set customizable
risk parameters (e.g., kill switch); and (4) book keeping and
reporting: comprehensive audit trail of orders and trades (e.g.,
order history and done away trade reports). See Supplementary
Material .03(d) to Options 3, Section 7. See General 1, Section
1(a)(6) for the definition of Electronic Access Member and
Supplementary Material .02 to Options 3, Section 21 for the
definition of Sponsored Customer.
\25\ ``Ouch to Trade Options'' or ``OTTO'' is an interface that
allows Members and their Sponsored Customers to connect, send, and
receive messages related to orders, auction orders, and auction
responses to the Exchange. Features include the following: (1)
options symbol directory messages (e.g., underlying and complex
instruments); (2) System event messages (e.g., start of trading
hours messages and start of opening); (3) trading action messages
(e.g., halts and resumes); (4) execution messages; (5) order
messages; (6) risk protection triggers and cancel notifications; (7)
auction notifications; (8) auction responses; and (9) post trade
allocation messages. See Supplementary Material .03(b) to Options 3,
Section 7.
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Stop Limit Orders
The Exchange proposes to amend its Stop Limit Order rule in Options
3, Section 7(e), which presently provides that a stop limit order is an
order that becomes a limit order when the stop price is elected. A stop
limit order to buy is elected when the option is bid or trades on the
Nasdaq ISE at, or above, the specified stop price. A stop limit order
to sell is elected when the option is offered or trades on the Nasdaq
ISE at, or below, the specified stop price. The Exchange now proposes
to add that a Stop Limit Order shall be cancelled if it is immediately
electable upon receipt. The Exchange would cancel these orders today
for the same reasons discussed above for Stop Orders. The proposed
changes codify current Stop Limit Order handling and are intended to
better align the Exchange's Stop Limit Order rule with that of
Phlx.\26\
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\26\ See Phlx Options 3, Section 7(b)(4)(A).
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The Exchange also proposes to specify that Stop Limit Orders may
only be entered through FIX or Precise. This is how Stop Limit Orders
are handled today. For the same reasons discussed above for Stop
Orders, the Exchange believes that adding this detail will make clear
that Stop Limit Orders are only available to be entered through the
specified order entry protocol and reduce any potential confusion.
Lastly, the Exchange proposes a non-substantive change to correct a
punctuation error in the paragraph header.
Cancel and Replace Orders
The Exchange proposes to relocate the rule text governing Cancel
and Replace Orders from Supplementary Material .02 to Options 3,
Section 7 into Options 3, Section 7(f). The Exchange also proposes non-
substantive, clarifying changes to the relocated rule text to update
the incorrect cross-cites therein to the System's price or other
reasonability checks. The Exchange also proposes to amend the following
portion of the rule, which currently provides: ``The replacement order
will retain the priority of the cancelled order, if the order posts to
the Order Book, provided the price is not amended, size is not
increased, or in the case of Reserve Orders,\27\ size is not changed.''
The Exchange proposes to make clear that in the case of Reserve Orders,
a change in price will also result in a change of priority for the
replacement order. The Exchange also proposes to clarify that the
reference to the Reserve Order's size in this Rule is referring to both
displayed and non-displayed size. As amended, the rule will provide:
``The replacement order will retain the priority of the cancelled
order, if the order posts to the Order Book, provided the price is not
amended, or size is not increased. In the case of Reserve Orders, the
replacement order will retain the priority of the cancelled order, if
the order posts to the Order Book, provided the price is not amended or
size (displayed and non-displayed) is not changed.'' The proposed
changes will aid market participants in locating this order type in the
main body of the rule, and add more granularity around how the
[[Page 8954]]
Exchange will treat the cancellation and replacement of Reserve Orders.
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\27\ As discussed later in this filing, a Reserve Order is
defined in Options 3, Section 7(g) as a Limit Order that contains
both a displayed portion and a non-displayed portion.
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Reserve Orders
As described in Options 3, Section 7(g), the Exchange offers
Members a Reserve Order, which is a Limit Order that contains both a
displayed portion and a non-displayed portion. Both the displayed and
non-displayed portions of a Reserve Order are available for potential
execution against incoming marketable orders. A non-marketable Reserve
Order will rest on the order book. The non-displayed portion of a
Reserve Order will be available for execution only after all displayed
interest at that price has been executed. Both the displayed and the
non-displayed portions of a Reserve Order will be ranked initially by
the specified limit price and time of entry, and both the displayed and
non-displayed portions of a Reserve Order will trade in accordance with
the priority and allocation provisions in Options 3, Section 10.
When the displayed portion of a Reserve Order has been decremented,
in whole or in part, it will be refreshed from the non-displayed
portion of the resting Reserve Order. If the displayed portion is
refreshed in part, the new displayed portion will include the
previously displayed portion. Upon any refresh, the entire displayed
portion of the order will be ranked at the specified limit price,
assigned a new entry time (i.e., the time that the newly displayed
portion of the order was refreshed), and given priority in accordance
with Options 3, Section 10. Any remaining non-displayed portion of the
order will receive the same time stamp as the newly displayed portion
of the order.
The Exchange now proposes to enhance the Reserve Order rule by
providing more granularity in how Members may elect to refresh the
display quantity for the Reserve Order. The Exchange is not proposing
to modify the current functionality of Reserve Orders, but rather
proposes to augment the definition to clarify current System behavior.
Specifically, the Exchange proposes to make clear that Reserve Orders
may be entered with an instruction for the displayed portion of the
order to be refreshed: (A) upon full execution of the displayed portion
or upon any partial execution; and (B) up to the initial size of the
displayed portion or with a random refresh quantity within a range
determined by the Member.\28\ The Exchange believes that this refresh
feature for Reserve Orders provides more flexibility and opportunities
for Members to add displayed liquidity to the Exchange. The Exchange
believes that the proposed changes would add transparency to the
operation of Reserve Orders, without altering current functionality.
The Exchange notes that other options exchanges like Cboe currently
offer similar refresh features on their Reserve Order
functionality.\29\
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\28\ See proposed Options 3, Section 7(g)(4). The Exchange will
also renumber the paragraphs within this rule accordingly. As it
relates to the refresh quantity range, Members must designate a
range for the random refresh election when they submit the Reserve
Order if they elect a random refresh, otherwise the Reserve Order
would be refreshed at a quantity equal to the initial size of the
displayed portion. The range must be set at a number between 1 and
the initial displayed quantity.
\29\ See Cboe Rule 5.6(c) (setting forth the random
replenishment and fixed replenishment features for Reserve Orders).
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Finally, the Exchange proposes non-substantive, technical changes
in Options 3, Section 7(g) to reformat the paragraph numbering, make a
corrective change to ``non-displayed portions'' in proposed paragraph
(6), and update a cross-cite in proposed paragraph (6).
Attributable Orders
As described in Options 3, Section 7(h), the Exchange currently
offers Attributable Orders, which allow Members to voluntarily display
their firm IDs on the orders. The rule also provides the Exchange with
flexibility to announce which Exchange Systems and class of securities
for which the Attributable Order would be available.\30\
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\30\ Today, Attributable Orders are not available for the
Facilitation, Solicited Order, and Price Improvement Mechanisms.
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The Exchange now proposes to delete existing text that refers to
class of securities in Options 3, Section 7(h). Attributable Orders are
available for all classes of securities today. The Exchange is
therefore deleting this language as inaccurate. The Exchange also
proposes a corrective change herein to ``an Option Trader Alert.''
Customer Cross Orders
Customer Cross Orders are currently defined in Options 3, Section
7(i). The Exchange proposes to add that such orders will trade in
accordance with Options 3, Section 12(a). This is a non-substantive
amendment to add a cross-reference to Section 12(a), which currently
describes in detail how a Customer Cross Order would execute on the
Exchange.
Qualified Contingent Cross Orders
Qualified Contingent Cross (``QCC'') Orders are currently defined
in Options 3, Section 7(j). The Exchange proposes a non-substantive,
technical change to add a reference to ``QCC'' in the first sentence of
this rule. The Exchange also proposes to add that QCC Orders will trade
in accordance with Options 3, Section 12(c). This is a non-substantive
amendment to add a cross-reference to Section 12(c), which currently
describes in detail how a QCC Order would execute on the Exchange.
The Exchange further proposes to specify that QCC Orders may only
be entered through FIX or Precise. This is how QCC Orders are handled
today. Because the Exchange offers three order entry protocols today
(FIX, Precise, and OTTO), the Exchange believes that adding this detail
will make clear that QCC Orders are only available to be entered
through two of these order entry protocols and reduce any potential
confusion.
Preferenced Orders
The Exchange proposes to include the following definition of a
Preferenced Order in Options 3, Section 7(l) for ease of reference: ``A
Preferenced Order is as described in Options 2, Section 10.'' This is
not a new order type, as Preferenced Orders are currently described in
Options 2, Section 10. While this order type is not currently listed in
the order type rule in Options 3, Section 7, the Exchange believes that
it will be useful to market participants to have order types
centralized within one rule. Phlx similarly lists out Directed Orders
(akin to Preferenced Orders) in its order type rule in Phlx Options 3,
Section 7(b)(11).
Add Liquidity Orders
Add Liquidity Orders (``ALOs'') are currently defined in Options 3,
Section 7(n).
Today, the Exchange offers ALOs to provide market participants with
greater control over the circumstances in which their orders are
executed. ALOs are Limit Orders that will only be executed as a
``maker'' on the Exchange (i.e., when the Member is providing
liquidity). Members can choose whether an ALO that is executable on the
Exchange upon entry (or that is not executable on the Exchange upon
entry, but locks or crosses the NBBO) will be cancelled or re-priced to
one MPV above the national best bid (for sell orders) or below the
national best offer (for buy orders). If at the time of entry, an ALO
would lock or cross one or more non-displayed orders on the Exchange,
the ALO will be cancelled or re-priced to one MPV above the best non-
displayed bid price (for sell orders) or below the best non-displayed
offer price (for buy
[[Page 8955]]
orders).\31\ Today, an ALO will only be re-priced once and will be
executed at the re-priced price. The Exchange notes that without the
ability to re-price an ALO in the foregoing manner, under certain
circumstances, an incoming ALO could execute against a displayed or
non-displayed order resting on the Exchange's limit order book, which
would be in direct contravention with the purpose of an ALO (to provide
liquidity, not take liquidity).
---------------------------------------------------------------------------
\31\ As discussed in more detail below, the Exchange will amend
this sentence to say ``orders or quotes'' to codify existing ALO
behavior.
---------------------------------------------------------------------------
As part of a concurrent rule filing, the Exchange is proposing to
adopt a re-pricing mechanism identical to current BX re-pricing
functionality \32\ to avoid certain orders from locking or crossing an
away market's price.\33\ In connection with the proposed adoption of
the BX-like re-pricing mechanism in Options 3, Section 5(d) in the Re-
Pricing Filing, the Exchange now proposes to make related changes to
the ALO rule in Options 3, Section 7(n). In particular, the Exchange
proposes that if an ALO would not lock or cross an order or quote on
the System but would lock or cross the NBBO, the order will be handled
pursuant to Options 3, Section 5(d), which will set forth the new BX-
like re-pricing mechanism for non-routable orders.\34\ As noted in
Options 3, Section 7(n), ALOs are inherently non-routable. Accordingly,
the Exchange is proposing to handle ALOs in a consistent manner with
the new re-pricing mechanism. Because the new mechanism will allow for
continuous re-pricing as discussed above, the Exchange also proposes to
remove the current limitation in the ALO rule stipulating that these
orders will only be re-priced once and executed at the re-priced price.
The proposed order handling for ALOs will be functionally identical to
ALO handling on BX today.\35\
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\32\ Today, BX re-prices certain orders to avoid locking and
crossing away markets, consistent with its Trade-Through compliance
and Locked or Crossed Markets obligations. See BX Options 3, Section
5(d). See also Securities Exchange Act Release No. 89476 (August 4,
2020), 85 FR 48274 (August 10, 2020) (SR-BX-2020-017) (describing BX
re-pricing mechanism in BX Options 3, Section 5).
\33\ See Securities Exchange Act Release No. 96362 (November 18,
2022) (SR-ISE-2022-25) (``Re-Pricing Filing''). Specifically in the
Re-Pricing Filing, the Exchange is proposing to adopt the following
language in Options 3, Section 5(d), which will be identical to BX
Options 3, Section 5(d): 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.
\34\ Id.
\35\ See BX Options 3, Section 7(a)(12). See also Securities
Exchange Act Release No. 93896 (January 4, 2022), 87 FR 1231
(January 10, 2022) (SR-BX-2021-054), which introduced ALOs on BX.
---------------------------------------------------------------------------
The Exchange further proposes a clarifying change in the ALO rule
that would not amend current System behavior. The Exchange proposes to
add ``or quotes'' to make clear that if at the time of entry, an ALO
would lock or cross one or more non-displayed orders or quotes on the
Exchange, the ALO will be cancelled or re-priced to one MPV above the
best non-displayed bid price (for sell orders) or below the best non-
displayed offer price (for buy orders).
Finally, the Exchange proposes to add that ALOs may only be
submitted when an options series is open for trading to make clear that
an ALO would not be accepted during the Opening Process when the order
book is not available. The proposed rule text is consistent with
current functionality, so the Exchange is codifying current ALO
behavior with this change and adding the same level of detail currently
in BX's ALO rule.\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
As amended, Options 3, Section 7(n) will provide:
An Add Liquidity Order is a limit order that is to be executed
in whole or in part on the Exchange (i) only after being displayed
on the Exchange's limit order book; and (ii) without routing any
portion of the order to another market center. Members may specify
whether an Add Liquidity Order shall be cancelled or re-priced to
the minimum price variation above the national best bid price (for
sell orders) or below the national best offer price (for buy orders)
if, at the time of entry, the order (i) is executable on the
Exchange; or (ii) the order is not executable on the Exchange, but
would lock or cross the national best bid or offer. If at the time
of entry, an Add Liquidity Order would lock or cross one or more
non-displayed orders or quotes on the Exchange, the Add Liquidity
Order shall be cancelled or re-priced to the minimum price variation
above the best non-displayed bid price (for sell orders) or below
the best non-displayed offer price (for buy orders). Notwithstanding
the aforementioned, if an Add Liquidity Order would not lock or
cross an order or quote on the System but would lock or cross the
NBBO, the order will be handled pursuant to Options 3, Section 5(d).
An Add Liquidity Order will be ranked in the Exchange's limit order
book in accordance with Options 3, Section 10. Add Liquidity Orders
may only be submitted when an options series is open for trading.
QCC With Stock Orders
The Exchange proposes a non-substantive change to correct a cross-
cite in the QCC with Stock Order rule in Options 3, Section 7(t). The
current citation to Options 3, Section 12(c) in the description of this
order type should instead be Options 3, Section 12(e).
Opening Sweep
Opening Sweeps are currently defined in Options 3, Section 7(u) as
a Market Maker order submitted for execution against eligible interest
in the System during the Opening Process pursuant to Options 3, Section
8(b)(1). The Exchange proposes to replace the current definition with
the following: ``An Opening Sweep is a one-sided order entered by a
Market Maker through SQF for execution against eligible interest in the
System during the Opening Process. This order type is not subject to
any protections listed in Options 3, Section 15, except for Automated
Quotation Adjustments. The Opening Sweep will only participate in the
Opening Process pursuant to Options 3, Section 8(b)(1) and will be
cancelled upon the open if not executed.''
The proposed rule text is consistent with current functionality, so
the Exchange is providing additional context to the Opening Sweep as
currently described in Options 3, Section 8(b) and codifying current
Opening Sweep behavior with this change. Specifically, because an
Opening Sweep is an IOC order submitted by a Market Maker during the
Opening Process, the Exchange is making clear in the proposed rule text
that this order type is entered through SQF.\37\ The Exchange is also
specifying that Opening Sweeps are not subject to any risk protections
in Options 3, Section 15 (except Automated Quotation Adjustments)
because the Opening Process itself has boundaries (notably, the Quality
Opening Market \38\ and the Opening Quote Range \39\) within
[[Page 8956]]
which orders will be executed. As it relates to the proposed language
relating to Opening Sweep participation in the Opening Process and
cancellation upon the open, the Exchange notes that this concept is not
new as Opening Sweeps are already described in Options 3, Section 8
today and apply only during the Opening Process. The language merely
provides additional context to the order type.
---------------------------------------------------------------------------
\37\ See Supplementary Material .03(c) of Options 3, Section 7,
which notes that SQF is an interface that allows Market Makers to
submit IOC orders.
\38\ A ``Quality Opening Market'' is a bid/ask differential
applicable to the best bid and offer from all Valid Width Quotes
defined in a table to be determined by the Exchange and published on
the Exchange's website. The calculation of Quality Opening Market is
based on the best bid and offer of Valid Width Quotes. The
differential between the best bid and offer are compared to reach
this determination. The allowable differential, as determined by the
Exchange, takes into account the type of security (for example,
Penny versus non-Penny Interval Program issue), volatility, option
premium, and liquidity. The Quality Opening Market differential is
intended to ensure the price at which the Exchange opens reflects
current market conditions. See Options 3, Section 8(a)(7).
\39\ The Opening Quote Range represents the outer boundaries at
which the Exchange may open. See Options 3, Section 8(i).
---------------------------------------------------------------------------
The Exchange notes that the Opening Sweep is functionally identical
to the Opening Sweep on Phlx,\40\ so the proposed language will
harmonize the Exchange's rule with the current Phlx rule.
---------------------------------------------------------------------------
\40\ See Phlx Options 3, Section 7(b)(6).
---------------------------------------------------------------------------
Time in Force
Today, the Exchange notes that certain functionality is described
as an ``order type'' in Options 3, Section 7, but would be more
precisely described as a TIF attribute that may be added to a
particular order type. Accordingly, the Exchange proposes to codify the
term ``TIF'' in proposed Supplementary Material .02 to Options 3,
Section 7. The proposed TIF definition will be identical to the TIF
definition in BX Options 3, Section 7(b). The Exchange also proposes to
relocate various rules into Supplementary Material .02 to centralize
the TIFs that are available on the Exchange today. As proposed, the
rule text will provide:
.02 Time in Force. The term ``Time in Force'' or ``TIF'' shall
mean the period of time that the System will hold an order for
potential execution, and shall include:
(a) Day. An order to buy or sell entered with a TIF of ``DAY,''
which, if not executed, expires at the end of the day on which it
was entered. All orders by their terms are Day orders unless
otherwise specified. Day orders may be entered through FIX, OTTO, or
Precise.
(b) Good-Till-Canceled. An order to buy or sell entered with a
TIF of ``GTC'' that remains in force until the order is filled,
canceled or the option contract expires; provided, however, that GTC
orders will be canceled in the event of a corporate action that
results in an adjustment to the terms of an option contract. GTC
orders may be entered through FIX or Precise.
(c) Good-Till-Date. An order to buy or sell entered with a TIF
of ``GTD,'' which, if not executed, will be cancelled at the sooner
of the end of the expiration date assigned to the order, or the
expiration of the series; provided, however, that GTD orders will be
canceled in the event of a corporate action that results in an
adjustment to the terms of an option contract. GTD orders may be
entered through FIX or Precise.
(d) Immediate-or-Cancel. An order entered with a TIF of ``IOC''
that is to be executed in whole or in part upon receipt. Any portion
not so executed is to be treated as cancelled.
(1) Orders entered with a TIF of IOC are not eligible for
routing.
(2) IOC orders may be entered through FIX, OTTO, Precise, or
SQF, provided that an IOC order entered by a Market Maker through
the SQF protocol will not be subject to the (A) Order Price
Protection, Market Order Spread Protection, and Size Limitation
Protection as defined in Options 3, Section 15(a)(1)(A), (1)(B), and
(2)(B) respectively, for single leg orders, or (B) Complex Order
Price Protection as defined in Options 3, Section 16(c)(1) for
Complex Orders.
(3) Block Orders, Facilitation Orders, Complex Facilitation
Orders, SOM Orders, Complex SOM Orders, PIM Orders, Complex PIM
Orders, QCC Orders, QCC Complex Orders, Customer Cross Orders, and
Customer Cross Complex Orders are considered to have a TIF of IOC.
By their terms, these orders will be: (1) executed either on entry
or after an exposure period, or (2) cancelled.
(e) Opening Only. An Opening Only (``OPG'') order is entered
with a TIF of ``OPG.'' This order can only be executed in the
Opening Process pursuant to Options 3, Section 8. Any portion of the
order that is not executed during the Opening Process is cancelled.
OPG orders may not route. This order type is not subject to any
protections listed in Options 3, Section 15, except Size Limitation.
The Exchange is relocating rule text governing Day orders from
Options 3, Section 7(l) into Supplementary Material .02(a) to specify
that orders may be entered with a TIF of DAY. The Exchange also
proposes to include additional detail that Day orders may be entered
through FIX, OTTO, or Precise. This is how Day orders operate today,
and the proposed rule text merely adds the same level of detail
currently in BX's Day order rule.\41\
---------------------------------------------------------------------------
\41\ See BX Options 3, Section 7(b)(3). BX's rule does not refer
to OTTO or Precise because BX does not offer these order entry ports
today.
---------------------------------------------------------------------------
The Exchange is relocating rule text governing Good-Till-Canceled
(``GTC'') orders from Options 3, Section 7(r) into Supplementary
Material .02(b) to specify that orders may be entered with a TIF of
GTC. The Exchange also proposes to include additional detail that GTC
orders may be entered through FIX or Precise. This articulates current
GTC behavior.
The Exchange is relocating rule text governing Good-Till-Date
(``GTD'') orders from Options 3, Section 7(p) into Supplementary
Material .02(c) to specify that orders may be entered with a TIF of
GTD. The Exchange also proposes a number of changes that do not modify
current GTD functionality, but are intended to align to the GTC rule
described above. Today, GTC and GTD orders are intended to be
functionally similar except GTC generally persists until it is
cancelled by the Member and GTD generally persists until the assigned
date. Accordingly, the Exchange seeks to add a similar level of detail
to the GTD rule as it is proposing in the GTC rule above. First, the
Exchange proposes to remove the word ``limit'' from the relocated GTD
rule text. Similar to GTC orders, GTD orders can also be sent as Market
Orders (in addition to Limit Orders) today. The proposed changes will
therefore align the rule text with current functionality. Second, the
Exchange proposes to add that GTD orders will be canceled in the event
of a corporate action that results in an adjustment to the terms of an
option contract. This language is copied from current GTC rule text and
articulates current GTD behavior. Third, the Exchange proposes to
include additional detail that GTD orders may be entered through FIX or
Precise. This mirrors the proposed changes for GTC orders and
articulates current GTD behavior.
The Exchange is relocating rule text governing IOC orders from
Options 3, Section 7(b)(3) into Supplementary Material .02(d) to
Options 3, Section 7 to specify that orders may be entered with a TIF
of IOC. The Exchange also proposes a number of changes to conform the
Exchange's IOC rule with that of BX. None of the proposed changes
modify current Exchange IOC functionality. First, the Exchange proposes
to remove the word ``limit'' from the relocated IOC rule text in
Supplementary Material .02(d). Today, IOC orders may be sent as either
a Market Order or Limit Order. Eliminating the word ``limit'' from the
proposed IOC rule will therefore align the rule text with current
functionality.\42\ Second, the Exchange proposes to memorialize current
IOC behavior in Supplementary Material .02(d)(1) by stating that orders
entered with a TIF of IOC are not eligible for routing.\43\ Third, the
Exchange proposes to codify current IOC behavior in Supplementary
Material .02(d)(2) by stating that IOC orders may be entered through
FIX, OTTO, Precise, or SQF.\44\
---------------------------------------------------------------------------
\42\ BX similarly allows both Market Orders and Limit Orders to
be entered as IOC. See BX Options 3, Section 7(b)(2). The Exchange
is not specifying Market and Limit Orders in the relocated IOC rule
text for consistency with the other TIFs in proposed Supplementary
Material .02 to Options 3, Section 7.
\43\ See BX Options 3, Section 7(b)(2)(A) for identical
language.
\44\ See BX Options 3, Section 7(b)(2)(B) for substantially
similar language. BX's rule does not refer to OTTO or Precise
because BX does not offer these ports today.
---------------------------------------------------------------------------
Fourth, the Exchange proposes to note in the same section that an
IOC order entered by a Market Maker through SQF
[[Page 8957]]
will not be subject to the (A) Order Price Protection,\45\ Market Order
Spread Protection,\46\ and Size Limitation Protection \47\ as defined
in Options 3, Section 15(a)(1)(A), (1)(B), and (2)(B), respectively,
for single leg orders, or (B) Complex Order Price Protection \48\ as
defined in Options 3, Section 16(c)(1) for Complex Orders.\49\ Today,
the IOC rule explicitly excludes the Limit Order Price Protection (for
single leg and Complex Orders) and Size Limitation Protection from
applying to IOC orders entered through SQF. As discussed later in this
filing, the current Limit Order Price Protection for single leg orders
will be replaced by a similar risk management tool called the Order
Price Protection that will be identical to BX, so the Exchange will
likewise reflect that change in the proposed IOC rule. The proposed
change to exclude the Market Order Spread Protection from applying to
IOC orders entered through SQF is not a change to IOC current
functionality, but rather, a change to align the rule with current
System behavior and with BX IOC rule.\50\
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\45\ The current IOC rule references the Limit Order Price
Protection as set forth in Options 3, Section 15(a)(1)(A). As
discussed later in this filing, the Exchange is proposing to replace
the existing Limit Order Price Protection with a similar risk
management tool called Order Price Protection. See proposed Options
3, Section 15(a)(1)(A).
\46\ Market Orders will be rejected if the NBBO is wider than a
preset threshold at the time the order is received by the System.
Market Order Spread Protection shall not apply to the Opening
Process or during a trading halt. The Exchange may establish
different thresholds for one or more series or classes of options.
See Options 3, Section 15(a)(1)(B).
\47\ There is a limit on the number of contracts an incoming
order or quote may specify. Orders or quotes that exceed the maximum
number of contracts are rejected. The maximum number of contracts,
which shall not be less than 10,000, is established by the Exchange
from time-to-time. See Options 3, Section 15(a)(2)(B).
\48\ This risk protection is currently called the Limit Order
Price Protection in Options 3, Section 16(c)(1). The Exchange will
rename this risk protection in a subsequent filing to the Complex
Order Price Protection.
\49\ See BX Options 3, Section 7(b)(2)(B) for substantially
similar language. BX's rule does not refer to the Complex Order
Price Protection because BX does not offer complex functionality
today.
\50\ See BX Options 3, Section 7(b)(2)(B).
---------------------------------------------------------------------------
The Exchange notes while it generally only permits orders
(including IOC orders) to be entered into its three order entry
protocols, FIX, OTTO, and Precise, it does permit the entry of IOC
orders by Market Makers into its quote protocol, SQF. The Exchange has
elected not to apply the specified risk protections on IOC orders
entered through SQF as it does for IOC orders entered through FIX,
OTTO, and Precise because only Market Makers utilize SQF to enter IOC
orders. Market Makers are professional traders with their own risk
settings. FIX, OTTO, and Precise, on the other hand, are utilized by
all market participants who may not have their own risk settings,
unlike Market Makers. Market Makers utilize IOC orders to trade out of
accumulated positions and manage their risk when providing liquidity on
the Exchange. The Exchange understands that proper risk management,
including using these IOC orders to offload risk, is vital for Market
Makers, and allows them to maintain tight markets and meet their
quoting and other obligations to the market. Market Makers handle a
large amount of risk when quoting and in addition to the risk
protections required by the Exchange, Market Makers utilize their own
risk management parameters when entering orders, minimizing the
likelihood of a Market Maker's erroneous order from being entered. The
Exchange believes that Market Makers, unlike other market participants,
have the ability to manage their risk when submitting IOC orders
through SQF and should be permitted to elect this method of order entry
to obtain efficiency and speed of order entry, particularly in light of
the quoting obligations that the Exchange imposes on these
participants, unlike other market participants.\51\ The Exchange
believes that allowing Market Makers to submit IOC orders through their
preferred protocol increases their efficiency in submitting such orders
and thereby allows them to maintain quality markets to the benefit of
all market participants that trade on the Exchange. For the foregoing
reasons, the Exchange has opted to not offer the Order Price
Protection, Market Order Spread Protection, and Size Limitation (for
single leg orders), or the Complex Order Price Protection (for Complex
Orders), for IOC orders entered through SQF because Market Makers have
more sophisticated infrastructures than other market participants and
are able to manage their risk.
---------------------------------------------------------------------------
\51\ See Options 2, Section 5(e).
---------------------------------------------------------------------------
The Exchange also proposes to add substantially similar language in
Supplementary Material .03(c), which governs the SQF protocol.
Specifically, the Exchange proposes to add: ``Immediate-or-Cancel
Orders entered into SQF are not subject to the (i) Order Price
Protection, Market Order Spread Protection, and Size Limitation
Protection in Options 3, Section 15(a)(1)(A), (1)(B), and (2)(B)
respectively, for single leg orders, or (ii) Complex Order Price
Protection as defined in Options 3, Section 16(c)(1) for Complex
Orders.'' Adding these exceptions to the SQF rule as well as the IOC
rule will make clear that these order protections will not apply to IOC
orders entered through SQF.
The Exchange further proposes to specify in Supplementary Material
.02(d)(3) that Block Orders, Facilitation Orders, Complex Facilitation
Orders, SOM Orders, Complex SOM Orders, PIM Orders, Complex PIM Orders,
QCC Orders, QCC Complex Orders, Customer Cross Orders, and Customer
Cross Complex Orders are considered to have a TIF of IOC. By their
terms, these orders will be: (1) executed either on entry or after an
exposure period, or (2) cancelled.\52\ The proposed changes in
Supplementary Material .02(d)(3) memorialize current System behavior
and are intended to bring greater transparency in how these order types
operate today.
---------------------------------------------------------------------------
\52\ See BX Options 3, Section 7(b)(2)(C) for substantially
similar language for PRISM orders.
---------------------------------------------------------------------------
The Exchange is relocating rule text governing OPG orders from
Options 3, Section 7(o) into Supplementary Material .02(e) to specify
that orders may be entered with a TIF of OPG. The Exchange also
proposes a number of changes to conform the Exchange's OPG rule with
that of BX. Other than as specified below, the proposed changes do not
modify current Exchange OPG functionality. The Exchange proposes to
remove the word ``limit'' from the relocated OPG rule text in
Supplementary Material .02(e) in order to reflect that the Exchange
will now allow both Market and Limit OPG Orders. As noted above, this
is a proposed functionality change to align with current BX OPG
functionality.\53\ The Exchange also proposes non-substantive changes
to replace the current references to the opening rotation with the term
``Opening Process'' as defined in Options 3, Section 8. The Exchange
further proposes to codify current OPG behavior by stating that OPG
orders may not route.\54\ Lastly, the Exchange proposes to memorialize
current OPG behavior by indicating that OPG orders are not subject to
any protections listed in Options 3, Section 15, except Size
Limitation.\55\ Today, the Exchange does not apply any of the risk
protections in Options 3, Section 15 (except Size Limitation) because
the Opening Process itself has boundaries within which orders will be
executed.\56\
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\53\ See BX Options 3, Section 7(b)(1).
\54\ See BX Options 3, Section 7(b)(1) for identical language.
\55\ Id.
\56\ See Options 3, Section 8.
---------------------------------------------------------------------------
[[Page 8958]]
Opening Process
In connection with the technology migration, the Exchange proposes
several enhancements to its Opening Process in Options 3, Section 8.
The Exchange first proposes to remove the current limitation that only
allows routable Public Customer \57\ interest to route during the
Opening Process. Instead, all routable market participant interest will
be allowed to route to align the Exchange's opening functionality with
BX.\58\ Like BX, the Exchange believes that it will be beneficial to
provide all market participants with the opportunity to have their
interest executed on away markets during the Opening Process. To
effectuate the foregoing, the Exchange proposes to amend Options 3,
Section 8(b) to remove the sentence providing that only Public Customer
interest is routable during the Opening Process. The Exchange further
proposes to make a related change in Options 3, Section 8(i)(7), which
currently provides that the System will route routable Public Customer
interest pursuant to Options 3, Section 10(c)(1)(A). Specifically, the
Exchange proposes to remove the reference to Public Customer to
indicate all routable interest will route in accordance with the
Exchange's priority rule. The Exchange will also update the cross-cite
to Options 3, Section 10(c)(1)(A), currently pointing to the Priority
Customer priority overlay, to the more general priority rule in Options
3, Section 10(c). The Exchange further proposes to amend Options 3,
Section 8(j)(6) to remove the references to ``Public Customer.'' As
amended, Section 8(j)(6) will provide: ``The System will execute orders
at the Opening Price that have contingencies (such as, without
limitation, Reserve Orders) and non-routable orders, such as ``Do-Not-
Route'' or ``DNR'' Orders, to the extent possible. The System will only
route non-contingency orders, except that Reserve Orders may route up
to their full volume.''
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\57\ The term ``Public Customer'' means a person or entity that
is not a broker or dealer in securities. See Option 1, Section
1(a)(42).
\58\ See BX Options 3, Section 8. See also Securities Exchange
Act Release No. 89731 (September 1, 2020), 85 FR 55524 (September 8,
2020) (SR-BX-2020-016) (noting throughout that BX permits all market
participants to route during its Opening Process). At the end of the
Opening Process, pursuant to ISE Options 3, Section 8(j)(6) and
subsection (A), the System will execute orders at the Opening Price
that have contingencies (such as, without limitation, Reserve
Orders) and non-routable orders, such as a `Do-Not-Route' or `DNR'
Orders, to the extent possible. The System will only route non-
contingency Public Customer orders, except that Public Customer
Reserve Orders may route up to their full volume. For contracts that
are not routable, pursuant to ISE Options 3, Section 8(j)(6), such
as DNR Orders and orders priced through the Opening Price, the
System will cancel (1) any portion of a Do-Not-Route order that
would otherwise have to be routed to the exchange(s) disseminating
the ABBO for an opening to occur, or (2) any order or quote that is
priced through the Opening Price. All other interest will be
eligible for trading after opening.
---------------------------------------------------------------------------
In addition, the Exchange proposes to amend Options 3, Section
8(g)(1), which currently describes how the Potential Opening Price
would be calculated when there is more than one Potential Opening
Price.\59\ Today, Section 8(g)(1) provides that when two or more
Potential Opening Prices would satisfy the maximum quantity criterion
and leave no contracts unexecuted, the System takes the highest and
lowest of those prices and takes the mid-point; if such mid-point is
not expressed as a permitted minimum price variation, it will be
rounded to the minimum price variation that is closest to the closing
price for the affected series from the immediately prior trading
session. If there is no closing price from the immediately prior
trading session, the System will round up to the minimum price
variation to determine the Opening Price. The Exchange now proposes to
no longer round in the direction of the previous trading day's closing
price and simply round up to the minimum price variation if the mid-
point of the high/low is not expressed as a permitted minimum price
variation. The proposed changes are intended to simplify and bring
greater transparency to the Opening Process, as market participants can
now have a better sense of how the Potential Opening Price will be
calculated without having to account for the closing price of each
options series.
---------------------------------------------------------------------------
\59\ The Potential Opening Price indicates a price where the
System may open once all other Opening Process criteria is met.
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The Exchange further proposes to amend Options 3, Section 8(i)(3),
which currently describes the determination of Opening Quote Range
(``OQR'') boundaries in certain scenarios.\60\ Specifically, the
Exchange proposes to replace ``are marketable against the ABBO'' with
``cross the ABBO'' to more precisely describe the specified scenario
within in this rule. The Exchange notes that this is not a System
change, but rather a clarifying change around the applicability of the
rule text. Lastly, the Exchange proposes a non-substantive change in
paragraph (j)(3)(B) of Options 3, Section 8 to remove the extra
instance of ``which is'' from the second sentence.
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\60\ OQR is an additional type of boundary used in the Opening
Process, and is intended to limit the opening price to a reasonable,
middle ground price, thus reducing the potential for erroneous
trades during the Opening Process.
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Auction Mechanisms
Facilitation and Solicited Order Mechanisms
The Exchange first proposes to make clarifying changes in Options
3, Section 11 (Auction Mechanisms). Today, Supplementary Material .02
to Options 3, Section 11 states that Responses \61\ represent non-firm
interest that can be canceled at any time prior to execution, and that
Responses are not displayed to any market participants. The Exchange
now proposes a non-substantive change to relocate this language into
the introductory paragraph of Options 3, Section 11 after the
definition of ``Response'' for better readability. The Exchange also
proposes to add ``or modified'' after the ``canceled'' to indicate that
auction Responses may be canceled or modified at any time prior to
execution. This is not a change to current System behavior, but rather
a clarification that better aligns the rule text to existing
functionality. The Exchange also notes that the rules for the complex
Facilitation and Solicited Order Mechanisms in Options 3, Sections
11(c)(7) and (e)(4), respectively, already provide for this
concept.\62\
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\61\ For purposes of Options 3, Section 11, a ``Response'' means
an electronic message that is sent by Members in response to a
broadcast message. A ``broadcast message'' is an electronic message
sent by the Exchange to all Members upon entry of an order into one
of the auction mechanisms listed within Options 3, Section 11 (i.e.,
Block, Facilitation, or Solicited Order Mechanisms).
\62\ Specifically, these provisions state that Responses
submitted by Members shall not be visible to other auction
participants during the exposure period and can be modified or
deleted before the exposure period has ended.
---------------------------------------------------------------------------
Price Improvement Mechanism
The Exchange proposes a number of changes to Options 3, Section 13
(Price Improvement Mechanism for Crossing Transactions), some of which
are System changes to align with existing BX Price Improvement
Mechanism (``BX PRISM'') functionality and others that are non-System
changes that add greater clarity to current PIM behavior. The Exchange
proposes to amend Options 3, Section 13(b)(4) to add clarifying rule
text to the current sentence, which states, ``The Crossing Transaction
\63\ may not be canceled, but the price of the Counter-Side Order may
be improved
[[Page 8959]]
during the exposure period.'' The Exchange proposes to add ``or
modified'' after the word ``canceled'' to make clear that the Crossing
Transaction may not be canceled or modified, but the Counter-Side Order
may be improved during the exposure period. This proposed change would
not amend the current System, rather it would bring greater clarity to
the rule text that modifications are not permitted unless the Counter-
Side Order is being improved during the exposure period.
---------------------------------------------------------------------------
\63\ A ``Crossing Transaction'' is comprised of the order the
Electronic Access Member represents as agent (the ``Agency Order'')
and a counter-side order for the full size of the Agency Order (the
``Counter-Side Order''). See Options 3, Section 13(b).
---------------------------------------------------------------------------
The Exchange proposes to add rule text within Options 3, Section
13(b)(5) which states, ``Crossing Transactions submitted at or before
the opening of trading are not eligible to initiate an auction and will
be rejected.'' The Exchange notes that this rule text represents
current System behavior. BX has a similar provision within BX Options
3, Section 13(i)(E). The Exchange notes that this rule text will bring
greater clarity to when a Crossing Transaction would be eligible to
initiate a PIM.
The Exchange proposes to amend the current PIM functionality within
Options 3, Section 13(c)(3). Today, during the exposure period,
Improvement Orders \64\ may not be canceled, however, Improvement
Orders 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. The Exchange proposes to amend this
functionality so that Improvement Orders may be canceled or modified
similar to functionality on BX PRISM today within BX Options 3, Section
13(ii)(A)(8). The modification and cancellation of an Improvement Order
through OTTO will be similar to the manner in which a Cancel and
Replace Order \65\ would be handled outside of the auction process. For
Improvement Orders through SQF, the modification and cancellation of
such orders will be handled by sending new Improvement Orders that
overwrite the existing Improvement Order with updated price/quantity
instructions.
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\64\ Improvement Orders are responses entered by Members to
indicate the size and price at which they want to participate in the
execution of the Agency Order. See Options 3, Section 13(c)(1).
\65\ Cancel and Replace Orders shall mean a single message for
the immediate cancellation of a previously received order and the
replacement of that order with a new order. If the previously placed
order is already filled partially or in its entirety, the
replacement order is automatically canceled or reduced by the number
of contracts that were executed. The replacement order will retain
the priority of the cancelled order, if the order posts to the Order
Book, provided the price is not amended, size is not increased, or
in the case of Reserve Orders, size is not changed. If the
replacement portion of a Cancel and Replace Order does not satisfy
the System's price or other reasonability checks (e.g. Options 3,
Section 15(b)(1)(A) and (b)(1)(B); and Supplementary Material .07
(a)(1)(A), (b) and (c)(1) to Options 8, Section 14) the existing
order shall be cancelled and not replaced. See Supplementary
Material .02 to Options 3, Section 7 (as described above, the
current definition will be moved to proposed Options 3, Section 7(f)
with no substantive changes).
---------------------------------------------------------------------------
Next, the Exchange proposes to amend Options 3, Section 13(d)(5),
which currently states, ``If a trading halt is initiated after an order
is entered into the Price Improvement Mechanism, such auction will be
automatically terminated without execution.'' The Exchange proposes to
instead provide, ``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.'' In the event of a trading halt, since the Counter-Side Order
has guaranteed that an execution will occur at the same price as the
Crossing Transaction or better, and Improvement Orders offer no such
guarantee, the Counter-Side Order is the only valid price at which to
execute the Crossing Transaction. This is similar to functionality on
BX PRISM at BX Options 3, Section 13(ii)(C).\66\
---------------------------------------------------------------------------
\66\ BX Options 3, Section 13(ii)(C) provides that if the
situations described in sub-paragraphs (B)(2) or (3) above occur,
the entire PRISM Order will be executed at: (1) in the case of the
BX BBO crossing the PRISM Order stop price, the best response
price(s) or, if the stop price is the best price in the Auction, at
the stop price, unless the best response price is equal to or better
than the price of a limit order resting on the Order Book on the
same side of the market as the PRISM Order, in which case the PRISM
Order will be executed against that response, but at a price that is
at least $0.01 better than the price of such limit order at the time
of the conclusion of the Auction; or (2) in the case of a trading
halt on the Exchange in the affected series, the stop price, in
which case the PRISM Order will be executed solely against the
Initiating Order. Any unexecuted PAN responses will be cancelled.
---------------------------------------------------------------------------
The Exchange also proposes a System change to adopt a new same side
execution price check for PIM, which will be described in new
subsection (d)(6) of Options 3, Section 13 and will be functionally
identical to BX PRISM. As proposed, Options 3, Section 13(d)(6) will
provide that if the PIM execution price would be the same or better
than an order on the limit order book on the same side of the market as
the Agency Order, the Agency Order may only be executed at a price that
is at least $0.01 better than the resting order's limit price. If such
resting order's limit price is equal to or crosses the initiating
Crossing Transaction price, then the entire Agency Order will trade at
the initiating Crossing Transaction price with all better priced
counter-side interest being considered for execution at the initiating
Crossing Transaction price. As noted above, this price check will be
functionally identical to the same side execution price check on BX
PRISM today.\67\ Like BX, the proposed price check is designed to
ensure that the Exchange would not trade at prices that would lock or
cross interest on the same side of the market as the Agency Order where
limit orders have rested and obtained priority to execute at that
price. In the event where a limit order arrives on the same side of the
market as the Agency Order and is at the same or better price than the
initiating Crossing Transaction price, the Exchange would execute the
entire PIM order at the initiating Crossing Transaction price. The
execution takes place at this price because the PIM is guaranteed an
execution and the PIM agency side instructions would not allow an
execution to take place at a higher (lower) price than submitted for a
buying (selling) agency side PIM order. Considering that the limit
order has arrived either at or better on the same side as the Agency
Order than the agency side price, the initiating Crossing Transaction
price is the only price at which the guaranteed execution can take
place.
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\67\ BX Options 3, Section 13(ii)(I) provides that if the
execution price of the PRISM Auction would be the same or better
than an order on the limit order book on the same side of the market
as the PRISM Order, the PRISM Order may only be executed at a price
that is at least $0.01 better than the resting order's limit price.
If such resting order's limit price is equal to or crosses the stop
price, then the entire PRISM Order will trade at the stop price with
all better priced interest being considered for execution at the
stop price.
---------------------------------------------------------------------------
The following examples illustrate how the proposed PIM execution
price check would work:
Example: PIM executes with Improvement Order at $0.01 better than a
limit order on the same side of the market as the Agency Order
Firm Limit order to buy @ 1.40 arrives prior to the PIM auction
beginning
ISE BBO: 1.40 x 2.00
PIM Agency Order to buy 20 @ 1.50 arrives with an auto-match price of
1.50 indicated
PIM Improvement Order \68\ to sell 20 @ 1.40 arrives
---------------------------------------------------------------------------
\68\ ``Improvement Orders'' are responses sent by Members during
the PIM's exposure period in response to the PIM that indicate the
size and price at which they want to participate in the execution of
the Agency Order. See Options 3, Section 13(c)(1).
---------------------------------------------------------------------------
Auction concludes after timer and PIM Agency Order trades 20 with PIM
[[Page 8960]]
Improvement Order @ 1.41; the Counter-Side Order \69\ cancels
---------------------------------------------------------------------------
\69\ The ``Counter-Side Order'' is the counter-side order for
the full size of the Agency Order that is entered into the PIM by
the initiating Electronic Access Member. See Options 3, Section
13(b).
---------------------------------------------------------------------------
Example: PIM executes at Agency Price with all better priced interest
when limit order on same side equals or crosses the initiating Crossing
Transaction price
Assume ISE BBO: 1.00 x 2.00
PIM Agency Order to buy 20 @ 1.50 arrives with an auto-match price of
1.50 indicated
PIM Improvement Order to sell 20 @ 1.40 arrives
During the exposure period, Firm Limit order to buy @ 1.50 arrives
Auction concludes after timer and PIM Agency Order trades 12 with
PIM Improvement Order @ 1.50 and 8 with the Counter-Side Order @ 1.50
(i.e., the guaranteed execution price) because all better priced
interest must trade at the initiating Crossing Transaction price when
the limit order on the same side equals or crosses the initiating
Crossing Transaction price.\70\ The remainder of the Counter-Side Order
and the remainder of the PIM Improvement Order cancel. The execution
takes place at 1.50 because the PIM is guaranteed an execution, and the
PIM agency side instructions would not allow an execution to take place
at a higher price than the submitted 1.50 buying price for the agency
side PIM order.
---------------------------------------------------------------------------
\70\ The order is allocated pursuant to Options 3, Section
13(d)(3) where the Counter-Side Order will be allocated the greater
of 1 contract or 40%, which, in this case, equates to 8 contracts
out of the 20 contracts. Thus, in this case, the Improvement Order
is allocated 12 contracts to fully execute the 20 contracts of the
original PIM Agency Order.
---------------------------------------------------------------------------
Further, the Exchange proposes amendments to Complex PIM, some of
which are similar to the amendments proposed for simple PIM. Similar to
simple PIM, the Exchange proposes to amend Options 3, Section
13(e)(4)(ii) to state, ``During the exposure period, Improvement
Complex Orders may be canceled or modified.'' \71\ The Exchange
proposes to amend this functionality so that Improvement Orders may be
canceled or modified similar to functionality on BX today within BX
Options 3, Section 13(ii)(A)(8).\72\
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\71\ Options 3, Section 13(e)(4)(ii) currently states, ``During
the exposure period, Improvement Complex Orders may not be canceled,
but may be modified to (1) increase the size at the same price, or
(2) improve the price of the Improvement Complex Order for any
size.''
\72\ BX Options 3, Section 13(ii)(A)(8) provides that a PAN
response must be equal to or better than the displayed NBBO at the
time of receipt of the PAN response. PAN responses may be modified
or cancelled during the Auction. A PAN response submitted with a
price that is outside the NBBO will be rejected.
---------------------------------------------------------------------------
The Exchange also proposes to relocate the last sentence of Options
3, Section 13(e)(3) into Options 3, Section 13(e)(4)(iv) at new
``(E)''. The Exchange proposes similar rule text within simple PIM to
indicate that an exposure period would automatically terminate if a
trading halt is initiated after the order is entered into a Complex
PIM. The relocation would add the rule text to a more logical place
within the Complex PIM rule.
The Exchange further proposes in the same rule to memorialize
another scenario in which the exposure period for a Complex PIM would
early terminate today. Specifically, the Exchange proposes to amend
Options 3, Section 13(e)(4)(iv) at new ``(D)'' to provide that the
exposure period will automatically terminate when a resting Complex
Order in the same complex strategy on either side of the market becomes
marketable against the Complex Order book or bids and offers for the
individual legs. The Exchange believes that the proposed codification
will detail for market participants the situations in which early
termination would occur for Complex PIMs today, and align the
Exchange's rules with current System behavior. The Exchange notes that
the exposure period for a Complex Order Exposure likewise early
terminates today when a resting Complex Order becomes marketable
against the Complex Order book or bids and offers for the individual
legs.\73\ Accordingly, the proposed language closely tracks existing
Complex Order Exposure language. The Exchange believes that it is
appropriate to early terminate Complex PIM under these circumstances
for the following reasons. When the resting Complex Order is on the
same side as the Agency Complex Order, interest that becomes marketable
against the resting Complex Order would also be marketable against the
Complex PIM order. Therefore, early terminating the Complex PIM would
allow the Complex PIM order to interact with this interest given that
the Complex PIM order is at a superior price compared to the resting
Complex Order, thus providing an opportunity for price improvement for
the Agency Complex Order. Additionally, when the resting Complex Order
is on the opposite side of the Agency Complex Order, interest that
arrives marketable against the resting Complex Order is now at a
superior price to the Agency Complex Order. The Exchange would
therefore early terminate in this scenario and execute the Complex PIM
order with its contra side order because it is no longer at top of
book.
---------------------------------------------------------------------------
\73\ Supplementary Material .01(b)(ii) of ISE Options 3, Section
14 provides that the exposure period for a Complex Order will end
immediately: (A) upon the receipt of a Complex Order for the same
complex strategy on either side of the market that is marketable
against the Complex Order book or bids and offers for the individual
legs; (B) upon the receipt of a non-marketable Complex Order for the
same complex strategy on the same side of the market that would
cause the price of the exposed Complex Order to be outside of the
best bid or offer for the same complex strategy on the Complex Order
book; or (C) when a resting Complex Order for the same complex
strategy on either side of the market becomes marketable against
interest on the Complex Order book or bids and offers for same
individual legs of the complex strategy.
---------------------------------------------------------------------------
The Exchange also proposes to codify existing System behavior in
the Complex PIM rule at Options 3, Section 13(e)(5), which currently
provides that when a marketable Complex Order on the opposite side of
the Agency Complex Order ends the exposure period, it will participate
in the execution of the Agency Complex Order at the price that is mid-
way between the best counter-side interest and the same side best bid
or offer on the Complex Order book or net price from ISE best bid or
offer on individual legs, whichever is better, so that both the
marketable Complex Order and the Agency Complex Order receive price
improvement. Specifically, the Exchange proposes to add that
transactions will be rounded, when necessary, to the $0.01 increment
that favors the Agency Complex Order. As noted above, this is not a
functionality change, but rather is intended to better articulate
current System behavior. The Exchange also notes that the simple PIM
rule already articulates that the mid-way price will be rounded to the
$0.01 increment that favors the Agency Order in Options 3, Section
13(d)(4). The rounding for Complex PIM currently operates the same way
as simple PIM in this respect, so the proposed Complex PIM language
closely tracks the simple PIM language.
Finally, the Exchange proposes to amend Supplementary Material .02
to Options 3, Section 13 to add the following sentence: ``It will be
considered a violation of this Rule and will be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of Options 9, Section 1 if an Electronic Access Member
submits a PIM Order (initiating an auction) and also submits its own
Improvement Order in the same auction.'' BX has a similar prohibition
within BX Options 3, Section 13(iii). The proposed new rule is intended
to provide guidance to Members where certain behavior within a PIM will
not be considered a bona fide transaction.
[[Page 8961]]
Order Price Protection
The Exchange currently has a Limit Order Price Protection in
Options 3, Section 15(a)(1)(A), which is a ``fat finger'' check
designed to address risks to market participants of human error in
entering certain orders at unintended prices. Specifically, there is a
limit on the amount by which incoming limit orders to buy may be priced
above the Exchange's best offer and by which incoming limit orders to
sell may be priced below the Exchange's best bid. Limit orders that
exceed the pricing limit are rejected. The limit is established by the
Exchange from time-to-time for orders to buy (sell) as the greater of
the Exchange's best offer (bid) plus (minus): (i) an absolute amount
not to exceed $2.00, or (ii) a percentage of the Exchange's best bid/
offer not to exceed 10%.
The Exchange proposes to replace the existing risk protection with
an Order Price Protection (``OPP'') that would similarly prevent the
execution of limit orders at prices outside pre-set parameters. The
proposed OPP will be functionally similar to the OPP functionality
currently offered by BX.\74\ In particular, proposed Options 3, Section
15(a)(1)(A) will provide that OPP is a feature of the System that
prevents limit orders at prices outside of pre-set standard limits from
being accepted by the System. Further, OPP will reject incoming orders
that exceed certain parameters according to the following algorithm set
forth in proposed Options 3, Section 15(a)(1)(A)(ii):
---------------------------------------------------------------------------
\74\ BX's OPP is currently memorialized in BX Options 3, Section
15(a)(1), which provides that OPP is a feature of the System that
prevents certain day limit, good til cancelled, and immediate or
cancel orders at prices outside of pre-set standard limits from
being accepted by the System. BX's rule also provides that OPP
applies to all options but does not apply to market orders. As
described above, the Exchange is proposing to adopt an OPP rule that
more accurately describes this functionality than BX's current OPP
rule. BX will file a separate rule change to conform its OPP rule
with the Exchange's proposed rule text.
(a) If the better of the NBBO or the internal market BBO (the
``Reference BBO'') on the contra-side of an incoming order is
greater than $1.00, orders with a limit more than the greater of the
below will cause the order to be rejected by the System upon
receipt.
(1) 50% less (greater) than such contra-side Reference Best Bid
(Offer); or
(2) a configurable dollar amount not to exceed $1.00 less
(greater) than such contra-side Reference Best Bid (Offer) as
specified by the Exchange announced via an Options Trader Alert.
(b) If the Reference BBO on the contra-side of an incoming order
is less than or equal to $1.00, orders with a limit more than the
greater of the below will cause the order to be rejected by the
System upon receipt.
(1) 100% less (greater) than such contra-side Reference Best Bid
(Offer); or
(2) a configurable dollar amount not to exceed $1.00 less
(greater) than such contra-side Reference Best Bid (Offer) as
specified by the Exchange announced via an Options Trader Alert.
The proposed OPP will be calculated using the better of the NBBO or
the internal market BBO (i.e., the Reference BBO) instead of the
Exchange BBO as currently used today, which will align to current BX
functionality.\75\ Like BX, the Exchange believes that calculating OPP
on the basis of the better of the NBBO or the internal market BBO
protects investors and the public interest where the internal market
BBO is better than the NBBO. In addition, the proposed OPP parameters
will be the greater of a percentage threshold or fixed dollar amount,
similar to today's limit order price protection that uses the greater
of a percentage or fixed dollar threshold. The proposed parameters are
identical to BX's OPP.\76\ The Exchange believes that the proposed
algorithm for OPP would continue to provide a reasonable limit to the
range where orders will be accepted.
---------------------------------------------------------------------------
\75\ See BX Options 3, Section 15(a)(1)(B).
\76\ Id. The Exchange will initially set the fixed dollar
configuration at $0.05, identical to BX.
---------------------------------------------------------------------------
As set forth in proposed Options 3, Section 15(a)(1)(A)(i), OPP
will be operational each trading day after the opening until the close
of trading, except during trading halts, which will be identical to
current functionality.\77\ The Exchange also proposes in this paragraph
to add identical language as BX, which will provide the Exchange with
discretion to temporarily deactivate OPP from time to time on an intra-
day basis if it is determined that unusual market conditions warranted
deactivation in the interest of a fair and orderly market. Like BX, the
Exchange believes that it will be useful to have the flexibility to
temporarily disable OPP intra-day in response to an unusual market
event (for example, if dissemination of data was delayed and resulted
in unreliable underlying values needed for the Reference BBO). Members
would be notified of intra-day OPP deactivation and any subsequent
reactivation by the Exchange through the issuance of System status
messages. Specifically, the Exchange proposes to add in Options 3,
Section 15(a)(1)(A)(i) that OPP may be temporarily deactivated on an
intra-day basis at the Exchange's discretion.
---------------------------------------------------------------------------
\77\ See Options 3, Section 15(a)(1)(A) (currently providing
that the limit order price protection does not apply to the opening
process or during a trading halt).
---------------------------------------------------------------------------
The following examples illustrate the application of the proposed
OPP thresholds:
Example: An option priced less than or equal to $1.00
For a penny MPV option with a BBO on ISE of $0.01 x $0.02, consider
that the configurable dollar amount is set to $0.05
If the incoming order was less than $1.00, and the Reference BBO is the
internal market BBO, the System will reject buy orders priced higher
than the greater of (i) $0.04 (100% greater than the contra-side
Reference Best Offer of $0.02) or (ii) $0.07 ($0.02 offer + $0.05
configuration)
Example: An option priced greater than $1.00
For a penny MPV option with a BBO on ISE of $1.01 x $1.02, consider
that the configurable dollar amount is set to $0.05
If the incoming order was more than $1.00, and the Reference BBO is the
internal market BBO, the System will reject buy orders priced higher
than the greater of (i) $1.53 (50% greater than the contra-side
Reference Best Offer of $1.02) or (ii) $1.07 ($1.02 offer + $0.05
configuration)
Post-Only Quoting Protection
The Exchange proposes to adopt an optional quoting protection for
Market Makers that will be identical to current BX functionality.\78\
This optional risk protection would allow Market Makers to prevent
their quotes from removing liquidity from the Exchange's order book
upon entry.
---------------------------------------------------------------------------
\78\ See BX Options 3, Section 15(c)(3).
---------------------------------------------------------------------------
Specifically, the Exchange proposes to adopt the new risk
protection in Options 3, Section 15(a)(3)(C). As proposed, Market
Makers may elect to configure their SQF protocols to prevent their
quotes from removing liquidity (``Post-Only Quote Configuration''). A
Post-Only Quote Configuration would re-price or cancel a Market Maker's
quote that would otherwise lock or cross any resting order or quote
\79\ on the order book upon entry. Market Makers may elect whether to
re-price or cancel their quotes with this functionality. When
configured for re-price, quotes would be re-priced and displayed by the
System to one MPV below the current best offer (for bids) or above the
current best bid (for offers). Notwithstanding the
[[Page 8962]]
aforementioned, if a quote with a Post-Only Quote Configuration would
not lock or cross an order or quote on the System but would lock or
cross the NBBO, the quote will be handled pursuant to Options 3,
Section 4(b)(6).\80\ When configured for cancel, Market Makers will
have their quotes cancelled whenever the quote would lock or cross the
NBBO or be placed on the book at a price other than its limit price.
Finally, the Exchange notes that similar to BX, this risk protection
will not apply during an Opening Process because the order book is
established once options series are open for trading.
---------------------------------------------------------------------------
\79\ This would include any re-priced orders as described in the
Re-Pricing Filing as proposed Options 3, Section 5(d), ALOs as
described in proposed Options 3, Section 7(n), and any re-priced
quotes as described in Options 3, Section 4(b)(6). As described
above, ALOs may re-price.
\80\ Options 3, Section 4(b)(6) provides that a quote will not
be executed at a price that trades through another market or
displayed at a price that would lock or cross another market. If, at
the time of entry, a quote would cause a locked or crossed market
violation or would cause a trade-through violation, it will either
be re-priced 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.
---------------------------------------------------------------------------
Below are some examples of the Post-Only Quote Configuration
functionality.
Re-Priced Post-Only Quote Configuration--Penny Interval Program Display
and Execution Example
<bullet> Penny Interval Program MPV in open trading state
<bullet> Market Makers A and C do not have Post-Only Quote
Configuration risk protection configured
<bullet> Market Maker B is configured for Post-Only Quote Configuration
re-price
<bullet> Market Maker A quote $0.98 (10) x $1.00 (10)
<bullet> ABBO $0.96 x $1.03
<bullet> Market Maker B quote $1.00 (10) x $1.01 (10) arrives
[cir] Bid side of quote re-prices onto order book @ 0.99 and sets
displayed NBBO to 10 quantity
[cir] Offer side rests at 1.01 without issue
<bullet> Market Maker C quote $0.97 (20) x $0.98 (20) arrives
Trades 10 with Market Maker B @ $0.99 and 10 with Market Maker A @
$0.98
Market Maker B avoids taking liquidity while Market Maker C, who
chose not to be configured for such, removes liquidity by interacting
with re-priced interest on ISE's order book.
Re-Priced Post-Only Quote Configuration--Non-Penny Interval Program
Display and Execution Example
<bullet> Non-Penny Interval Program MPV in open trading state
<bullet> Market Maker A quote $0.95 (10) x $1.00 (10)
<bullet> ABBO $0.85 x $1.05
<bullet> Market Maker B (configured for Post-Only Quote Configuration
and selection of re-price upon quote) quote arrives $1.00 (5) x $1.05
(5)
[cir] Bid side quote re-prices on order book to $0.95
[cir] Displays on order book @ $0.95 (bid), which now shows (15
quantity)
[cir] Offer side quote books and displays in Depth of Market Feed
at $1.05
<bullet> Order to sell 10 contracts arrives @ $0.95
[cir] 7 contracts execute with Market Maker A @ $0.95
[cir] 3 contracts execute with Market Maker B @ $0.95
In this example, the Market Maker avoided taking liquidity by
deploying the Post-Only Quote Configuration with re-price.
Kill Switch
As set forth in Options 3, Section 17, the Exchange offers an order
cancellation Kill Switch, which is an optional tool that allows Members
to initiate a message to the System to promptly cancel and restrict
their order activity on the Exchange, or across both the Exchange and
its affiliate, Nasdaq GEMX, LLC. Members may submit a Kill Switch
request to the System for certain identifier(s) (``Identifier'') on
either a user or group level.\81\ Today, Members can log in through a
graphical user interface (``GUI'') to send a message to the Exchange to
initiate the order cancellation Kill Switch.\82\ As an alternative to
the GUI Kill Switch, Members may also send a message through one of the
Exchange's order entry ports (i.e., FIX, Precise, and OTTO) to initiate
the order cancellation Kill Switch.\83\ Once a Member initiates the
Kill Switch (either through the GUI or an order entry port), it will
result in the cancellation of all existing orders for the requested
Identifier(s). The Member will be unable to enter any additional orders
for the affected Identifier(s) until the Member sends a re-entry
request to the Exchange.\84\
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\81\ Identifiers include Exchange accounts, ports, and/or
mnemonics. Thus, a Member using Kill Switch may elect to cancel
orders for an individual Identifier (e.g., mnemonic) or any group of
Identifiers (e.g., all mnemonics within one Member firm).
Permissible groups must reside within a single Member firm. See
Options 3, Section 17(a).
\82\ See Options 3, Section 17(a)(2)
\83\ See Options 3, Section 17(a)(1).
\84\ See Options 3, Section 17(a)(3).
---------------------------------------------------------------------------
Due to the lack of demand for the GUI Kill Switch by Members, the
Exchange proposes to decommission this optional tool with the planned
technology migration.\85\ With the proposed changes, the Exchange seeks
to streamline its product offerings and to reallocate Exchange
resources to other business and risk management initiatives. While the
Exchange will no longer offer this optional risk protection to Members
through the GUI, it will continue to offer this functionality through
FIX, Precise, and OTTO.
---------------------------------------------------------------------------
\85\ No Members have used the GUI Kill Switch for order
cancellation in 2022. The Exchange will provide prior notice of the
decommission to Members via Options Trader Alert.
---------------------------------------------------------------------------
In addition, all Members may contact the Exchange's market
operations staff to request that the Exchange cancel any of their
existing bids, offers, or orders in any series of options.\86\
Furthermore, the Exchange will continue to have System-enforced risk
mechanisms that automatically remove orders for the Member once certain
pre-set thresholds or conditions are met. This includes risk
protections such as the market wide risk protection \87\ and cancel on
disconnect.\88\
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\86\ See Options 3, Section 19.
\87\ The market wide risk protection automatically removes
Member orders when certain firm-set thresholds are met. Once the
thresholds are triggered, the Member must send a re-entry indicator
to re-enter the System. See Options 3, Section 15(a)(1)(C).
\88\ When the OTTO or FIX Port detects the loss of communication
with a Member's Client Application because the Exchange's server
does not receive a Heartbeat message for a certain time period
(``nn'' seconds), the Exchange will automatically logoff the
Member's affected Client Application and if the Member has elected
to have its orders cancelled pursuant to Section 18(f) (for OTTO) or
Section 18(g) (for FIX) automatically cancel all orders. See Options
3, Section 18(c) and (d).
---------------------------------------------------------------------------
To effect the proposed decommission of the GUI Kill Switch for
order cancellation, the Exchange proposes to amend Options 3, Section
17 by eliminating paragraph (a)(2) and related cross-cites within this
rule. The Exchange will also renumber the paragraphs in this rule
accordingly.
The Exchange notes that it previously amended its rules to
decommission the quote removal Kill Switch that was available to Market
Makers through the GUI.\89\ The Exchange noted in SR-ISE-2021-19 that
Market Makers did not use the GUI Kill Switch to remove their quotes,
but rather, utilized other means such as the mass purge request through
SQF. In this case, the Exchange similarly notes that no Members use the
GUI Kill Switch to cancel their orders but rather, utilize other means
like the port Kill Switch through FIX, Precise and OTTO to purge their
existing orders from the System. As such, the Exchange believes that
eliminating the GUI Kill Switch all together (including for orders as
proposed herein) will streamline the
[[Page 8963]]
Exchange's risk protection offerings in a manner that reflects Member
use.
---------------------------------------------------------------------------
\89\ See Securities Exchange Act Release No. 93017 (September
16, 2021), 86 FR 52700 (September 22, 2021) (SR-ISE-2021-19).
---------------------------------------------------------------------------
Data Feeds and TradeInfo
In connection with the technology migration, the Exchange proposes
a number of enhancements to its current data feed offerings in Options
3, Section 23(a), many of which are intended to conform with current BX
functionality, as specified below.
As set forth in Options 3, Section 23(a)(1), the Exchange offers
the Nasdaq ISE Depth of Market Data Feed (``Depth of Market Feed''),
which currently provides aggregate quotes and orders at the top five
price levels on ISE, and provides subscribers with a consolidated view
of tradable prices beyond the BBO, showing additional liquidity and
enhancing transparency for ISE traded options. The data provided for
each option series includes the symbols (series and underlying
security), put or call indicator, expiration date, the strike price of
the series, and whether the option series is available for trading on
the Exchange and identifies if the series is available for closing
transactions only. In addition, subscribers are provided with total
aggregate quantity, Public Customer aggregate quantity, Priority
Customer aggregate quantity, price, and side (i.e., bid/ask). This
information is provided for each of the top five price levels on the
Depth Feed. The feed also provides order imbalances on opening/
reopening.
The Exchange now proposes to no longer provide book information for
the top five price levels, and instead provide full depth-of-book
information. As such, the Exchange will delete language that relates to
top five price level information in the rule text. The Exchange also
proposes to add more specificity around what would be provided in the
opening/reopening order imbalance information (namely, the size of
matched contracts and size of the imbalance). The proposed changes will
closely align the information provided on the Exchange's Depth of
Market Feed with that of BX's Depth of Market Feed, except the Exchange
will not offer auction and exposure notifications on its Depth of
Market Feed like BX does today.\90\ The Exchange already offers auction
and exposure notifications on the Nasdaq ISE Order Feed as described
below.\91\ As amended, Options 3, Section 23(a)(1) would provide:
---------------------------------------------------------------------------
\90\ See BX Options 3, Section 23(a)(1). As discussed below, the
Exchange is instead proposing to offer these notifications on the
Nasdaq ISE Order Feed. BX does not have a comparable order feed
today.
\91\ BX does not have a comparable order feed today. However,
the proposed data elements in the ISE Order Feed already exist in
the rules or technical specifications (for the Attributable Order
content) of other options exchanges, as described below.
Nasdaq ISE Depth of Market Data Feed (``Depth of Market Feed'')
is a data feed that provides full order and quote depth information
for individual orders and quotes on the Exchange book and last sale
information for trades executed on the Exchange. The data provided
for each options series includes the symbols (series and underlying
security), put or call indicator, expiration date, the strike price
of the series, and whether the option series is available for
trading on ISE and identifies if the series is available for closing
transactions only. The feed also provides order imbalances on
opening/reopening (size of matched contracts and size of the
---------------------------------------------------------------------------
imbalance).
As set forth in Options 3, Section 23(a)(2), the Exchange offers
the Nasdaq ISE Order Feed (``Order Feed''), which currently provides
information on new orders resting on the book (e.g., price, quantity
and market participant capacity). In addition, the feed also announces
all auctions. The data provided for each option series includes the
symbols (series and underlying security), put or call indicator,
expiration date, the strike price of the series, and whether the option
series is available for trading on ISE and identifies if the series is
available for closing transactions only. The feed also provides order
imbalances on opening/reopening.
The Exchange now proposes to update the information that would be
available on the Order Feed. In particular, the Exchange would include
Attributable Order tags \92\ (as provided by the Member) and related
data content around displayed order types and specified order
attributes (e.g., OCC account number, give-up information, CMTA
information).\93\ The Exchange also proposes to add more specificity
around what would be provided in the opening/reopening order imbalance
information (namely, the size of matched contracts and size of the
imbalance). This specifically aligns to the data elements in both BX's
Depth of Market Feed in BX Options 3, Section 23(a)(1) and the
Exchange's proposed Depth of Market Feed in proposed Options 3, Section
23(a)(1). The Exchange will continue to provide auction notifications
on the Order Feed, but will relocate the existing language to the end
of the rule and adopt new content by providing that the proposed Order
Feed will provide exposure notifications as well.\94\ As amended,
Options 3, Section 23(a)(2) would provide:
---------------------------------------------------------------------------
\92\ As discussed above, an Attributable Order is a market or
limit order which displays the user firm ID for purposes of
electronic trading on the Exchange. See Options 3, Section 7(h).
\93\ The Exchange notes that Cboe has similar attributable order
functionality in Cboe Rule 5.6(c) as an order a user designates for
display (price and size) that includes the user's executing firm ID
or other unique identifier. While Cboe does not have a comparable
data feed rule, Cboe's technical specifications indicate that it
currently has Participant ID and Client ID tags available on its
Multicast PITCH data feed. See Section 4.6 in <a href="https://cdn.cboe.com/resources/membership/US_EQUITIES_OPTIONS_MULTICAST_PITCH_SPECIFICATION.pdf">https://cdn.cboe.com/resources/membership/US_EQUITIES_OPTIONS_MULTICAST_PITCH_SPECIFICATION.pdf</a> (relating to
Participant ID or Client ID as optionally specified values).
\94\ BX's Depth of Market Feed currently has identical content
relating to auction and exposure notifications in BX Options 3,
Section 23(a)(1). Exposure notifications are new with the
introduction of routing and the removal of flash functionality in
SR-ISE-2022-11. See Securities Exchange Act Release No. 94897 (May
12, 2022), 87 FR 30294 (May 18, 2022) (SR-ISE-2022-11) (``Routing
Filing''). An exposure notification informs the market of an order
that has arrived marketable against an ABBO and has a routing timer
pursuant to the changes introduced to Options 5, Section 4 in the
Routing Filing, while an auction notification is the notification of
an auction for a Block, simple/complex Facilitation, simple/complex
Solicited Order, simple/complex PIM auction, or a complex exposure
auction pursuant to Supplementary Material .01 to Options 3, Section
14.
---------------------------------------------------------------------------
Nasdaq ISE Order Feed (``Order Feed'') provides information on new
orders resting on the book (e.g., price, quantity, market participant
capacity and Attributable Order tags when provided by a Member). The
data provided for each option series includes the symbols (series and
underlying security), displayed order types, order attributes (e.g.,
OCC account number, give-up information, CMTA information), put or call
indicator, expiration date, the strike price of the series, and whether
the option series is available for trading on ISE and identifies if the
series is available for closing transactions only. The feed also
provides order imbalances on opening/reopening (size of matched
contracts and size of the imbalance), auction and exposure
notifications.
As set forth in Options 3, Section 23(a)(3), the Exchange offers
the Nasdaq ISE Top Quote Feed, which currently calculates and
disseminates ISE's best bid and offer position, with aggregated size
(including total size in aggregate, for Professional Order size in the
aggregate and Priority Customer Order size in the aggregate), based on
displayable order and quote interest in the System. The feed also
provides last trade information along with opening price, daily trading
volume, high and low prices for the day. The data provided for each
option series includes the symbols (series and underlying
[[Page 8964]]
security), put or call indicator, expiration date, the strike price of
the series, and whether the option series is available for trading on
ISE and identifies if the series is available for closing transactions
only. The feed also provides order imbalances on opening/reopening.
The Exchange now proposes to harmonize certain features of this
feed with BX's Top of Market Feed while retaining certain intended
differences as specified below.\95\ The Exchange first proposes to
rename the Nasdaq ISE Top Quote Feed to the Nasdaq ISE Top of Market
Feed (``Top Feed'') to match the BX feed name. In addition, the
Exchange proposes to make conforming changes to rename the Top Feed in
Options 7, Section 7.C(iii) and Section 10.H. The Exchange will also
make a corrective change in Options 7, Section 7.C(iii) to update an
incorrect cross-reference to the Market Data pricing in Section 10.
---------------------------------------------------------------------------
\95\ See BX Options 3, Section 23(a)(2).
---------------------------------------------------------------------------
The Exchange further proposes to no longer provide information for
opening price, daily trading volume, high and low prices for the day.
These are conforming changes that would align the information provided
on the Exchange's Top Feed with information on BX's Top Feed.\96\ The
Exchange will continue to provide aggregated size information as a
legacy holdover, which will be different than current BX functionality.
Similarly, the Exchange will continue to provide opening/reopening
order imbalance information on its Top Feed unlike BX. As amended,
Options 3, Section 23(a)(3) will provide:
---------------------------------------------------------------------------
\96\ Id.
Nasdaq ISE Top of Market Feed (``Top Feed'') calculates and
disseminates ISE's best bid and offer position, with aggregated size
(including total size in aggregate, for Professional Order size in
the aggregate and Priority Customer Order size in the aggregate),
based on displayable order and quote interest in the System. The
feed also provides last trade information and for each option series
includes the symbols (series and underlying security), put or call
indicator, expiration date, the strike price of the series, and
whether the option series is available for trading on ISE and
identifies if the series is available for closing transactions only.
---------------------------------------------------------------------------
The feed also provides order imbalances on opening/reopening.
As set forth in Options 3, Section 23(a)(4), the Exchange offers
the Nasdaq ISE Trades Feed (``Trades Feed''), which currently displays
last trade information along with opening price, daily trading volume,
high and low prices for the day. The data provided for each option
series includes the symbols (series and underlying security), put or
call indicator, expiration date, the strike price of the series, and
whether the option series is available for trading on ISE and
identifies if the series is available for closing transactions only.
The Exchange proposes to no longer provide information for opening
price, daily trading volume, high and low prices for the day to align
to the changes proposed for the Top Feed described above. As amended,
Options 3, Section 23(a)(4) will provide:
Nasdaq ISE Trades Feed (``Trades Feed'') displays last trade
information. The data provided for each option series includes the
symbols (series and underlying security), put or call indicator,
expiration date, the strike price of the series, and whether the
option series is available for trading on ISE and identifies if the
series is available for closing transactions only.
As set forth in Options 3, Section 23(a)(5), the Exchange offers
the Nasdaq ISE Spread Feed (``Spread Feed''), which currently is a feed
that consists of: (1) options orders for all Complex Orders (i.e.,
spreads, buy-writes, delta neutral strategies, etc.); (2) data
aggregated at the top five price levels (BBO) on both the bid and offer
side of the market; (3) last trades information. The Spread Feed
provides updates, including prices, side, size and capacity, for every
Complex Order placed on the Complex Order book. The Spread Feed shows:
(1) aggregate bid/ask quote size; (2) aggregate bid/ask quote size for
Professional Customer Orders; and (3) aggregate bid/ask quote size for
Priority Customer Orders for ISE traded options. The feed also provides
Complex Order auction notifications.
Similar to the proposed changes to the Depth of Market Feed above,
the Exchange now proposes in the Spread Feed to no longer provide book
information for the top five price levels, and instead provide full
depth-of-book information. As such, the Exchange will delete language
that relates to top five price level information in the rule text, and
replace it with full depth language that is substantively similar to
the language in the current BX Depth of Market Feed in BX Options 3,
Section 23(a)(1) and in the Exchange's proposed Depth of Market Feed in
Options 3, Section 23(a)(1), except the proposed language herein will
be tailored to complex functionality. The Exchange also proposes to add
Attributable Complex Order \97\ tags (when provided by the Member) into
the Spread Feed.\98\ The Exchange also proposes to delete the following
sentence: ``The Spread Feed provides updates, including prices, side,
size and capacity, for every Complex Order placed on the ISE Complex
Order book. The Spread Feed shows: (1) aggregate bid/ask quote size;
(2) aggregate bid/ask quote size for Professional Customer Orders; and
(3) aggregate bid/ask quote size for Priority Customer Orders for ISE
traded options.'' The Exchange proposes instead to incorporate these
concepts into the amended Spread Feed rule in a manner that is more
consistent with the other amended rules in Options 3, Section 23(a).
---------------------------------------------------------------------------
\97\ An Attributable Complex Order is a Market or Limit Complex
Order that is designated as an Attributable Order as provided in
Options 3, Section 7(h). See Options 3, Section 14(b)(4).
\98\ Cboe currently allows complex orders to be designated as
Attributable. See Cboe Rule 5.33(b)(3). While Cboe does not have a
comparable data feed rule, Cboe's technical specifications indicate
that it currently has Participant ID and Client ID tags available on
its Complex Multicast PITCH data feed. See Section 3.8 in <a href="https://cdn.cboe.com/resources/membership/US_OPTIONS_COMPLEX_MULTICAST_PITCH_SPECIFICATION.pdf">https://cdn.cboe.com/resources/membership/US_OPTIONS_COMPLEX_MULTICAST_PITCH_SPECIFICATION.pdf</a> (relating to
Participant ID or Client ID as optionally specified values).
---------------------------------------------------------------------------
As amended, Options 3, Section 23(a)(5) will provide:
Nasdaq ISE Spread Feed (``Spread Feed'') is a feed that consists
of: (1) options orders for all Complex Orders (i.e., spreads, buy-
writes, delta neutral strategies, etc.); (2) full Complex Order
depth information, including prices, side, size, capacity,
Attributable Complex Order tags when provided by a Member, and order
attributes (e.g., OCC account number, give-up information, CMTA
information), for individual Complex Orders on the Exchange book;
(3) last trades information; and (4) calculating and disseminating
ISE's complex best bid and offer position, with aggregated size
(including total size in aggregate, for Professional Order size in
the aggregate and Priority Customer Order size in the aggregate),
based on displayable Complex Order interest in the System. The feed
also provides Complex Order auction notifications.
In addition, the Exchange proposes to no longer offer TradeInfo,
which is a user interface set forth in Options 3, Section 23(b)(2) that
permits Members to: (i) search all orders submitted in a particular
security or all orders of a particular type, regardless of their status
(open, canceled, executed, etc.); (ii) view orders and executions; and
(iii) download orders and executions for recordkeeping purposes.
TradeInfo users may also cancel open orders at the order, port or firm
mnemonic level through TradeInfo. Due to the lack of demand for this
interface by Members,\99\ the Exchange seeks to decommission the
TradeInfo interface when the Exchange migrates over to the enhanced
Nasdaq platform with the technology
[[Page 8965]]
migration.\100\ The Exchange notes that FIX, FIX DROP,\101\ and the
Clearing Trade Interface (``CTI''),\102\ which are available to all
Members, can be used today to obtain order information that is
currently available within TradeInfo, and FIX can be used to cancel
orders today.
---------------------------------------------------------------------------
\99\ No Members logged into TradeInfo in 2022.
\100\ The Exchange will provide prior notice of the decommission
to all Members through an Options Trader Alert.
\101\ FIX DROP is a real-time order and execution update message
that is sent to a Member after an order has been received/modified
or an execution has occurred and contains trade details specific to
that Member. The information includes, among other things, the
following: (i) executions; (ii) cancellations; (iii) modifications
to an existing order; and (iv) busts or post-trade corrections. See
Options 3, Section 23(b)(3).
\102\ CTI is a real-time cleared trade update message that is
sent to a Member after an execution has occurred and contains trade
details specific to that Member. The information includes, among
other things, the following: (i) The Clearing Member Trade Agreement
(``CMTA'') or The Options Clearing Corporation (``OCC'') number;
(ii) badge or mnemonic; (iii) account number; (iv) information which
identifies the transaction type (e.g., auction type) for billing
purposes; and (v) market participant capacity. See Options 3,
Section 23(b)(1).
---------------------------------------------------------------------------
In connection with its proposal to retire TradeInfo, the Exchange
also proposes to eliminate all references to TradeInfo in Options 7
(Pricing Schedule). Today, as set forth in Options 7, Section
7.C(ii)(3), the Exchange does not charge any fees for TradeInfo. With
the proposed changes, the Exchange will amend Options 7 to delete
Section 7.C(ii)(3) in its entirety.
Optional Risk Protections
The Exchange proposes to introduce optional quantity and notional
value checks in new Options 3, Section 28, entitled ``Optional Risk
Protections.'' The proposed optional order risk protections will be
functionally identical to the protections currently offered by BX.\103\
Members may use this voluntary functionality through their FIX or
Precise protocols to limit the quantity and notional value they can
send per order and on aggregate for the day. Specifically, Members may
establish limits for the following parameters, as set forth in proposed
subparagraphs (a)(1)-(4):
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\103\ See BX Options 3, Section 28. While BX's rule does not
contain the level of granularity as proposed in the Exchange's rule,
including how orders are rejected if any of the optional risk
protection values are exceeded, the Exchange understands that BX's
optional risk protections operate in the same manner. In addition,
BX's rule does not include Precise as this order entry port is not
available on BX today.
---------------------------------------------------------------------------
(1) Notional dollar value per order, which will be calculated as
quantity multiplied by limit price multiplied by number of underlying
shares;
(2) Daily aggregate notional dollar value;
(3) Quantity per order; and
(4) Daily aggregate quantity
Proposed paragraph (b) will provide that Members may elect one or
more of the above optional risk protections by contacting Market
Operations and providing a per order value (for (a)(1) and (a)(3)) or
daily aggregate value (for (a)(2) and (a)(4)) for each order
protection. Members may modify their settings through Market
Operations. Proposed paragraph (c) will provide that the System will
reject all incoming aggregated Member orders for any of the (a)(2) and
(a)(4) risk protections after the value configured by the Member is
exceeded. Proposed paragraph (d) will provide that the System will
reject all incoming Member orders for any of the (a)(1) and (a)(3) risk
protections upon arrival if the value configured by the Member is
exceeded by the incoming order. The Exchange notes that the difference
in handling between aggregate and individual order protections is
necessary to allow for complete processing of the final order that puts
a Member's configured value over the aggregate values configured. While
individual orders can be directly measured against the configured
values for (a)(1) and (a)(3), the aggregate values must be calculated
after complete processing of an order and thus the rejection of orders
begins upon the arrival of the next order after the aggregate values in
(a)(2) or (a)(4) have been exceeded.
The following example shows how the System will reject all
subsequent incoming aggregated orders after the (a)(2) or (a)(4) values
configured by the Member have been exceeded:
Aggregate Quantity Limit = 800.
1. Member enters an Order to Buy 500--Accepted
2. Member enters an Order to Buy 400--Accepted (Member did not meet the
configured limit of 800 with the first order of 500 at the time Member
entered the second order)
3. Member enters an Order to Buy 1--Rejected (Member already exceeded
the configured limit of 800 with the second order of 400)
The following example shows how the System will reject all incoming
orders upon arrival if the (a)(1) or (a)(3) values configured by the
Member have been exceeded by the arriving order:
Quantity Per Order Limit = 800.
1. Member enters an Order to Buy 801--Rejected (Member exceeded the
Quantity per order limit upon arrival with the order to buy 801
contracts)
Proposed paragraph (e) will provide that if a Member sets a
notional dollar value, a Market Order would not be accepted from that
Member. This is because notional dollar value is calculated by using an
order's specified limit price, and Market Orders by definition are
priced at the best available price upon execution. Lastly, proposed
paragraph (f) will provide that the proposed risk protections are only
available for orders entered through FIX or Precise. Additionally, all
of the proposed settings will be firm-level.
Corrective Changes
The Exchange proposes a few corrective changes in Options 3. First,
the Exchange proposes to amend Supplementary Material .04 to Options 3,
Section 7.\104\ This rule presently states that orders may be entered
on the Exchange with a routing strategy of FIND or SRCH, or, in the
alternative, an order may be marked as DNR as provided in Options 5,
Section 4 through FIX only. The Exchange now proposes to add ``or
Precise'' after FIX to indicate that Members may also use Precise to
route their orders using FIND or SRCH, or mark orders as DNR. The
Exchange notes that FIX and Precise are the only order entry protocols
on the Exchange that permit routing today. As such, this corrective
change will make clear that the listed routing strategies in
Supplementary Material .04 will be available for orders entered through
FIX or Precise only.
---------------------------------------------------------------------------
\104\ The Exchange notes that it recently added Supplementary
Material .04 to Options 3 Section 7 in the Routing Filing, which is
effective but not yet operative. The proposed changes herein to
Supplementary Material .04 to Options 3, Section 7 therefore assumes
that the rule changes in the Routing Filing are effective prior to
the effectiveness of this filing.
---------------------------------------------------------------------------
Second, the Exchange proposes to fix an incorrect cross-reference
set forth in Options 3, Section 10(b)(1). Specifically, the cross-
reference therein to the minimum trading increment rule will be updated
to Options 3, Section 3.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\105\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\106\ 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. As it relates to the elimination of fees for
TradeInfo, the
[[Page 8966]]
Exchange believes that its proposal is consistent with Section 6(b) of
the Act,\107\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\108\ in particular, in that it provides
for the equitable allocation of reasonable dues, fees, and other
charges among members and issuers and other persons using any facility,
and is not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
---------------------------------------------------------------------------
\105\ 15 U.S.C. 78f(b).
\106\ 15 U.S.C. 78f(b)(5).
\107\ 15 U.S.C. 78f(b).
\108\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
Generally, the Exchange's proposal is intended to add or align
certain System functionality with functionality currently offered on BX
in order to provide a more consistent technology offering across
affiliated Nasdaq options exchanges. A more harmonized technology
offering, in turn, will simplify technology implementation, changes,
and maintenance by market participants of the Exchange that are also
participants on Nasdaq affiliated options exchanges. The Exchange's
proposal also seeks to provide greater harmonization between the rules
of the Exchange and its affiliates, which would result in greater
uniformity, and less burdensome and more efficient regulatory
compliance by market participants. As such, the proposal would foster
cooperation and coordination with persons engaged in facilitating
transactions in securities and would remove impediments to and perfect
the mechanism of a free and open market and a national market system.
The Exchange believes that more consistent rules will increase the
understanding of the Exchange's operations for market participants that
are also participants on the Nasdaq affiliated options exchanges,
thereby contributing to the protection of investors and the public
interest. The proposal also seeks to memorialize existing functionality
and add more granularity in the Exchange's rules to describe how
existing functionality operates today. The Exchange believes that such
changes would remove impediments to and perfect the mechanism of a free
and open market and a national market system because the proposed
changes would promote transparency in Exchange rules and reducing
potential confusion, thereby ensuring that Members, regulators, and the
public can more easily navigate the Exchange's Rulebook and better
understand how options trading is conducted on the Exchange.
Bulk Message
The Exchange believes that its proposal to memorialize its bulk
message functionality is consistent with the Act as it will codify
existing functionality, thereby promoting transparency in the
Exchange's rules and reducing any potential confusion.\109\ This
functionality provides Market Makers with an additional tool to meet
their various quoting obligations in a manner they deem appropriate,
consistent with the purpose of the bulk message functionality to
facilitate Market Makers' provision of liquidity. By providing Market
Makers with additional control over the quotes they use to provide
liquidity to the Exchange, this tool may benefit all investors through
additional execution opportunities at potentially improved prices. As
noted above, other options exchanges like Cboe currently offer similar
bulk messaging functionality that allow their market participants to
submit block quantity quotes in a single electronic message.\110\
---------------------------------------------------------------------------
\109\ As discussed above, this existing functionality is
currently described in the Exchange's publicly available technical
specifications. See supra note 3.
\110\ See supra note 6.
---------------------------------------------------------------------------
The Exchange does not believe that the offering the bulk message
functionality to only Market Makers would permit unfair discrimination.
Market Makers play a unique and critical role in the options market by
providing liquidity and active markets, and are subject to various
quoting obligations (which other market participants are not, including
obligations to maintain active markets, update quotes in response to
changed market conditions, to compete with other Market Makers in its
appointed classes, and to provide intra-day quotes in its appointed
classes.\111\ Bulk message functionality provides Market Makers with a
means to help them satisfy these obligations.
---------------------------------------------------------------------------
\111\ See Options 2, Sections 4 and 5.
---------------------------------------------------------------------------
Order Types
The Exchange believes that the proposed changes to the rules
governing Exchange order types are consistent with the Act. As
discussed above, the proposed changes consist of several functional
enhancements to align the Exchange's order types to existing BX order
types, and rule adjustments that add more specificity and clarity to
existing order types.
Market Orders
The Exchange believes that the proposed changes to the definition
of Market Orders in Options 3, Section 7(a) are consistent with the
Act. The proposed intra-day cancel timer feature mirrors existing BX
functionality in BX Options 3, Section 7(a)(5), and would provide
Members with additional flexibility and control to bring the Market
Order back to the Member so they can get an execution on another venue
by canceling unexecuted Market Orders after a certain period of time.
The Exchange believes it is appropriate to offer this feature intra-day
because the Exchange already has a separate opening delay timer that
provides protection to the market during the Opening Process as
discussed above.
Intermarket Sweep Orders
The Exchange believes that the proposed changes to the definition
of ISOs in Options 3, Section 7(b)(5) are consistent with the Act. As
discussed above, the proposed changes are intended to add more
granularity and more closely align the level of detail in the ISO rule
with BX's ISO rule in BX Options 3, Section 7(a)(6) by specifying how
the Exchange would handle ISOs, including how ISOs may be submitted and
when. As such, the Exchange believes that its proposal will promote
transparency in the Exchange's rules and consistency across the rules
of the Nasdaq affiliated options exchanges.\112\
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\112\ As noted above, BX's ISO rule also currently states that
``ISOs may be entered on the Order Book or into the PRISM Mechanism
pursuant to Options 3, Section 13(ii)(K).'' The Exchange will file a
separate rule change to add similar language as BX relating to how
ISOs may be entered on the Exchange.
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Furthermore, the proposed changes do not amend current ISO
functionality except for the proposed stipulation that ISOs must have a
TIF designation of IOC. Today, Options 5, Section 1(h) provides that
ISOs may be either an IOC or an order that expires on the day it is
entered. The Exchange believes it is appropriate to no longer allow
non-IOC ISOs, as an ISO is generally used when trying to sweep a price
level across multiple exchanges in an effort to post the balance of an
order without locking an away market. The Exchange therefore believes
that ISOs have a limited purpose and should be cancelled if they do not
execute or do not entirely execute. This is also consistent with how BX
currently handles ISOs in that BX only allows ISOs to be entered as
IOC.
All-or-None Orders
The Exchange believes that the proposed changes to the definition
of AON Orders in Options 3, Section 7(c) are consistent with the Act.
As
[[Page 8967]]
discussed above, the Exchange is memorializing current System behavior
by specifying how AON Orders will execute against multiple, aggregated
orders to align with the level of detail in BX Options 3, Section
7(a)(4)(A). The proposed description of the handling of AON Orders is
consistent with the Exchange's allocation methodology in Options 3,
Section 10 by making clear that because of the size contingency of the
AON Order (i.e., executed in its entirety or not at all), those orders
must be satisfied simultaneously to avoid any priority conflict on the
order book, which considers current displayed NBBO prices to avoid
locked and crossed markets as well as trade-throughs. Finally, the
proposed changes to add that AON Orders may not be submitted during the
Opening Process will better articulate current System behavior, and
aligns to the level of detail currently in BX's AON rule at BX Options
3, Section 7(a)(7).
Stop and Stop Limit Orders
The Exchange believes that the proposed changes to the definition
of Stop Orders and Stop Limit Orders in Options 3, Sections 7(d) and
7(e), respectively, are consistent with the Act. The Exchange is
proposing to codify current System behavior by adding that Stop Orders
and Stop Limit Orders will be cancelled if they are immediately
electable upon receipt. As discussed above, the purpose of each of
these order types is to not execute upon entry, and instead rest in the
System until the market reaches a certain price level, at which time
the order could be executed. A Stop Order or Stop Limit Order that is
immediately electable upon receipt would therefore negate the purpose
of this order type, so the Exchange believes it is appropriate to
cancel such orders to ensure that Members are able to use these order
types to achieve their intended purpose. As noted above, the proposed
changes to codify current Stop and Stop Limit Order handling will align
the Exchange's rules with Phlx's Stop and Stop Limit Order rules.\113\
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\113\ See supra notes 23 and 26.
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The Exchange believes that the proposed changes to specify current
System functionality that Stop and Stop Limit Orders may only be
entered into FIX or Precise will make clear that these order types are
only available to be entered through two of the three order entry
protocols offered by the Exchange (i.e., FIX, Precise, and OTTO). As
such, the proposed changes will promote transparency in the Exchange's
rules and reduce any potential confusion.
Cancel and Replace Orders
The Exchange believes that the proposed changes to the rule
governing Cancel and Replace Orders would promote clarity and make the
rules easier to navigate. As discussed above, these are non-substantive
changes to relocate the rule from Supplementary Material .02 to Options
3, Section 7 into the main body of the order types rule at Options 3,
Section 7(f), updating incorrect cross-cites therein, and adding more
granularity around how the Exchange will treat the cancellation and
replacement of Reserve Orders.
Reserve Orders
The Exchange believes that the proposed changes to the Reserve
Order rule at Options 3, Section 7(g) are consistent with the Act. The
Exchange is proposing to add more granularity around how Members may
elect to refresh the display quantity for the Reserve Order. The
Exchange notes that the new rule text does not have any impact on the
priority rules of the displayed or non-displayed portion of the Reserve
Order. This refresh feature for Reserve Orders is intended to provide
more flexibility and opportunities for Members to add displayed
liquidity to the Exchange, which, in turn, benefits all market
participants through more trading opportunities and enhanced price
discovery. As discussed above, the proposed changes do not amend
current functionality, but rather is intended to promote transparency
around the current operation of Reserve Orders. Further, the Exchange
believes that the non-substantive changes in the Reserve Order rule to
renumber and reformat the paragraphs therein, and make corrective
changes as described above, are consistent with the protection of
investors and the public interest because they will simply make the
Exchange's rules easier to navigate, thereby reducing any potential
confusion. As noted above, other options exchanges like Cboe currently
offer Reserve Orders that have similar refresh features.\114\
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\114\ See supra note 29.
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Attributable Orders
The Exchange believes that it is consistent with the Act to delete
existing rule text in Options 3, Section 7(h), which currently
indicates that Attributable Orders may be available for specified
classes of securities, and to make a corrective change to ``an Options
Trader Alert.'' Because Attributable Orders are available for all
classes of securities today, the Exchange is deleting this language as
inaccurate. The Exchange believes that the proposed changes will
promote transparency in the Exchange's rules.
Customer Cross Orders
The Exchange believes that the non-substantive amendment in Options
3, Section 7(i) to add that Customer Cross Orders may trade in
accordance with Options 3, Section 12(a) is consistent with the
protection of investors and the public interest because the proposal
will simply add a cross reference in the Customer Cross Order rule to
Section 12(a), which currently describes in detail how this order type
would execute on the Exchange, thereby adding clarity to how Customer
Cross Orders function today.
Qualified Contingent Cross Orders
The Exchange believes that the proposed changes to the QCC Order
rule in Options 3, Section 7(j) to add a reference to ``QCC'' and to
provide that QCC Orders will trade in accordance with Options 3,
Section 12(c) are consistent with the Act because the changes are
merely intended to add greater clarity to how QCC Orders function
today. The Exchange further believes that specifying that QCC Orders
may only be entered through FIX or Precise will better articulate
current System behavior, and will make clear that QCC Orders are
available to be entered through only two of the three order entry
protocols currently offered by the Exchange (i.e., FIX, Precise, and
OTTO), thereby reducing any potential confusion.
Preferenced Orders
The Exchange believes that its proposal to add a definition of
Preferenced Orders in Options 3, Section 7(l) is consistent with the
Act. While Preferenced Orders are currently described in Options 2,
Section 10, the Exchange believes that it would be useful to have order
types centralized within one rule to make the Rulebook easier to
navigate for market participants. As noted above, Phlx similarly lists
out Directed Orders (akin to Preferenced Orders) in its order types
rule at Phlx Options 3, Section 7(b)(11).
Add Liquidity Orders
The Exchange believes that the proposed changes to the ALO rule in
Options 3, Section 7(n) are consistent with the Act. As discussed
above, the Exchange is enhancing current ALO functionality to reflect
that the Exchange will handle ALOs in a consistent manner with the new
continuous re-pricing mechanism that is
[[Page 8968]]
being proposed concurrently in the Re-Pricing Filing as proposed
Options 3, Section 5(d) in situations where the ALO would not lock or
cross an order or quote on the System, but would lock or cross the
NBBO.\115\ The Exchange therefore believes that the proposed changes
will make clear how the Exchange will handle ALOs under the new re-
pricing mechanism. The ALO order type was adopted to provide market
participants greater control over the circumstances in which their
orders are executed. As noted above, the purpose of an ALO is to
provide liquidity. For investors and market participants that elect
only to provide liquidity in certain circumstances, such as to receive
a maker fee (or rebate) upon execution of an order, the Exchange
continues to believe that ALOs, as amended under this proposal, will
continue to accommodate this strategy. The proposed order handling for
ALOs is consistent with how ALOs are handled on BX today.\116\
---------------------------------------------------------------------------
\115\ See supra note 33.
\116\ See BX Options 3, Section 7(a)(12).
---------------------------------------------------------------------------
The Exchange also believes that adding ``or quotes'' in the ALO
rule at Options 3, Section 7(n) is consistent with the Act. Today, if
at the time of entry, an ALO would lock or cross one or more non-
displayed orders or quotes on the Exchange, the ALO will be cancelled
or re-priced in the manner specified within the ALO rule. Adding this
rule text will bring greater clarity around current ALO behavior.
The Exchange further believes that the proposed addition that ALOs
may only be submitted when an options series is open for trading will
make clear ALOs will not be accepted during the Opening Process as the
order book is not available. The proposed changes codify existing
System behavior, and will therefore promote transparency in the
Exchange's rules.
QCC With Stock Orders
The Exchange believes that the non-substantive change to correct a
cross-cite in the QCC with Stock Order rule in Options 3, Section 7(t)
will promote clarity in the Exchange's rules.
Opening Sweep
The Exchange believes that the proposed changes to the Opening
Sweep rule in Options 3, Section 7(u) are consistent with the Act. As
discussed above, the Exchange is codifying current System behavior and
providing additional context to the rule in a manner that is consistent
with Phlx's Opening Sweep rule in Phlx Options 3, Section 7(b)(6). The
Exchange therefore believes that the proposed changes promote greater
transparency in the Exchange's rules and consistency across the rules
of the Nasdaq affiliated options exchanges. Specifically, because an
Opening Sweep is an IOC order submitted by a Market Maker during the
Opening Process, the Exchange is making clear that Opening Sweeps are
entered through SQF in the proposed rule text. The Exchange also
believes that it is appropriate to specify that Opening Sweeps are not
subject to any risk protections in Options 3, Section 15 (except
Automated Quotation Adjustments) because the Opening Process itself has
boundaries (notably, the Quality Opening Market and the Opening Quote
Range) within which orders will be executed. Finally, the proposed
language relating to Opening Sweep participation in the Opening Process
and cancellation upon the open merely provides additional context in
the order type rule. As noted above, Opening Sweeps are already
described in the opening rule today in Options 3, Section 8, and apply
only during the Opening Process.
Time in Force
The Exchange believes that the proposed changes to the TIF rules
are consistent with the Act. As discussed above, the Exchange believes
that certain existing functionality currently described as an ``order
type'' in Options 3, Section 7 would be more precisely described as a
TIF attribute that designates the basic parameters of an order type.
Relocating and centralizing the existing TIF rules into proposed
Supplementary Material .02 to Options 3, Section 7 will therefore
clearly delineate these order attributes and make the proposed rules
easier to navigate. Codifying the definition of ``TIF'' in proposed
Supplementary Material .02 will add greater clarity and transparency to
the Exchange's rules in a manner consistent with BX Options 3, Section
7(b).
The Exchange believes that the adjustments in proposed
Supplementary Material .02(a) to Options 3, Section 7 to add that Day
orders may be entered through FIX, OTTO, or Precise will add further
granularity and clarity to the Exchange's rules. The proposed changes
provide additional detail about current functionality in a manner that
is consistent with the level of detail in BX's Day order.\117\
---------------------------------------------------------------------------
\117\ See supra note 41.
---------------------------------------------------------------------------
The Exchange believes that the adjustments to the relocated GTC and
GTD rules in proposed Supplementary Material .02(b) and (c) will add
further granularity and clarity to how these TIFs operate today. The
Exchange further believes that aligning the level of detail in the GTD
rule to the GTC rule, as described above, is appropriate because these
two TIFs are meant to be functionally similar except the manner in
which they persist in the System.
The Exchange believes that the proposed changes to the relocated
IOC rule in proposed Supplementary Material .02(d) will promote greater
transparency in the Exchange's rules by providing more granularity to
current IOC functionality. Further, the changes conform the Exchange's
IOC rule to BX's IOC rule, thereby promoting consistency across the
rules of the Nasdaq affiliated options exchanges. Specifically, the
proposed changes to remove the word ``limit'' will make clear that IOC
orders may be sent as either a Market or Limit Order today, identical
to BX IOC orders.\118\ The proposed changes to state that IOC orders
are not eligible for routing, and that IOC orders may be entered
through FIX, OTTO, Precise, or SQF, will codify current IOC behavior in
a manner that is consistent with BX's IOC rule.\119\
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\118\ See supra note 42.
\119\ See supra notes 43--44.
---------------------------------------------------------------------------
As it relates to the proposed changes to memorialize the various
risk protections that are excluded from applying to Market Maker IOC
orders entered through SQF, the Exchange believes this is appropriate
because only Market Makers utilize SQF to enter IOC orders. As
discussed above, Market Makers are professional traders with more
sophisticated infrastructures than other market participants, and are
able to manage their risk through their own risk settings in addition
to the risk protections required by the Exchange. The Exchange will
continue to apply the specified risk protections on IOC orders entered
through FIX, OTTO, and Precise, which are used by the other market
participants. The proposed changes will harmonize the Exchange's IOC
rule with BX's IOC rule.\120\ Further, the proposal to add
substantially similar exclusionary language into the SQF rule itself at
Supplementary Material .03(c) to Options 3, Section 7 will make clear
that these risk protections will not apply to IOC orders entered
through SQF.
---------------------------------------------------------------------------
\120\ See supra notes 49--50.
---------------------------------------------------------------------------
Specifying in the proposed IOC rule that orders entered into the
Exchange's various auction and crossing mechanisms are considered to
have a TIF of IOC memorializes current System behavior, and is intended
to bring greater transparency in how these order types are handled
today. As noted
[[Page 8969]]
above, BX currently has substantially similar language in its IOC rule
for BX PRISM orders in BX Options 3, Section 7(b)(2).
Lastly, the Exchange believes that the adjustments to the relocated
OPG rule in proposed Supplementary Material .02(e) to Options 3,
Section 7 will add granularity and clarity to how OPG orders operate,
and will conform the OPG rule with the level of detail currently in
BX's OPG rule in BX Options 3, Section 7(b)(1). As discussed above, the
Exchange is proposing to enhance OPG functionality to allow both Market
and Limit OPG orders whereas today, only Limit OPG orders are allowed.
This harmonizes OPG functionality with BX OPG functionality. The other
modifications to replace ``opening rotation'' with ``Opening Process,''
stating OPG orders may not route, and indicating that OPG orders are
not subject to the protections listed in Options 3, Section 15 (except
Size Limitation) all memorialize current OPG behavior, and align to the
current BX OPG rule. As discussed above, the Exchange does not apply
any of the risk protections in Options 3, Section 15 (except Size
Limitation) because the Opening Process itself has boundaries within
which orders will be executed.
Opening Process
The Exchange believes that the proposed changes to the Opening
Process in Options 3, Section 8 are consistent with the Act. As
discussed above, the Exchange is proposing to remove the current
limitation that only allows Public Customers interest to route during
the opening, and will instead allow all market participant interest to
route. The proposed changes will serve to more closely align the
Exchange's Opening Process with BX's Opening Process. Like BX, the
Exchange believes that it will be beneficial to provide all market
participants with the opportunity to have their interest executed on
away markets during the Opening Process. The Exchange further believes
that the related changes to remove references to ``Public Customer''
throughout Options 3, Section 8, and to update the cross-cite currently
pointing to the Priority Customer priority overlay to the more general
priority rule, will add clarity, transparency, and internal consistency
to Exchange rules regarding the proposed handling of routable interest
during the Opening Process.
The Exchange believes that its proposal to no longer round in the
direction of the previous trading day's closing price and simply round
up to the MPV, if the mid-point of the highest and lowest of the
Potential Opening Prices is not expressed as a permitted MPV, will
simplify and bring greater transparency to the Opening Process, to the
benefit of investors. Market participants can now have a better sense
of how the Potential Opening Price will be calculated without having to
account for the closing price of each options series. The Exchange
believes this may promote greater efficiency in the marketplace
especially in view of the continued growth in the number of options
today.
The Exchange further believes that the proposed changes to replace
``are marketable against the ABBO'' with ``cross the ABBO'' will better
articulate how the Exchange currently determines the OQR boundaries in
the scenario specified in Options 3, Section 8(i)(3). Lastly, the
Exchange believes that the non-substantive change in paragraph
(j)(3)(B) of Options 3, Section 8 will bring greater clarity to the
Rulebook.
Auction Mechanisms
Facilitation and Solicited Order Mechanisms
The Exchange believes that its proposal to relocate the rule text
relating to Responses from Supplementary Material .02 to Options 3,
Section 11 into the introductory paragraph of Options 3, Section 11,
and adding that Responses can be modified, is consistent with the Act.
The Exchange is relocating this language into the introductory
paragraph of Options 3, Section 11 after the definition of ``Response''
for better readability. The proposed change to add ``or modified'' to
indicate that Responses may be canceled or modified any time prior to
execution better aligns the rule text to current System behavior. As
noted above, the rules for the complex Facilitation and Solicited Order
Mechanisms in Options 3, Sections 11(c)(7) and (e)(4), respectively,
already provide for this concept.
Price Improvement Mechanism
The Exchange's proposal to amend Options 3, Section 13(b)(4) to
clarify the current rule text by adding the words ``or modified'' after
``canceled'' is consistent with the Act because the additional text
will make clear that a Crossing Transaction may not be modified unless
the Counter-Side Order is being improved during the exposure period.
The Exchange's proposal to add clarifying rule text within Options
3, Section 13(b)(5) which states, ``Crossing Transactions submitted at
or before the opening of trading are not eligible to initiate an
Auction and will be rejected'' is consistent with the Act because it
will bring greater clarity to when a Crossing Transaction is currently
eligible to initiate a PIM. The PIM considers both the NBBO and local
book for its entry price validation and therefore requires an opening
for the PIM to begin.
The Exchange's proposal to amend the current PIM functionality
within Options 3, Section 13(c)(3) to permit Improvement Orders to be
canceled or modified is consistent with the Act. The Exchange proposes
to amend this functionality so that Improvement Orders may be canceled
or modified similar to functionality on BX today within Options 3,
Section 13(ii)(a)(8). Today, during the exposure period, Improvement
Orders may not be canceled and Improvement Orders 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.
The modification and cancellation of an Improvement Order through OTTO
will be similar to the manner in which a Cancel and Replace Order would
be handled outside of the auction process. For Improvement Orders
through SQF, the modification and cancellation of such orders will be
handled by sending new Improvement Orders that overwrite the existing
Improvement Order with updated price/quantity instructions. Improvement
Orders are not visible to other auction participants, including the
Agency Order. The Exchange believes that providing responders with
flexibility to cancel or modify their Improvement Orders may encourage
market participants to respond to more auctions, including PIM.
The proposal to amend Options 3, Section 13(d)(5) to permit an
auction to automatically terminate upon the occurrence of a trading
halt with execution solely with the Counter-Side Order is consistent
with the Act. This functionality would be similar to rule text within
BX Options 3, Section 13(ii)(C). The Exchange believes that utilizing
the price of the Counter-Side Order to execute the Crossing Transaction
promotes just and equitable principles of trade, and fosters
cooperation and coordination with persons engaged in facilitating
transactions in securities since the Counter-Side Order has guaranteed
that an execution will occur at the same price as the Crossing
Transaction, or better, prior to the trading halt, and Improvement
Orders offer no such guarantee, the Counter-Side Order is the only
valid price at which to execute the Crossing Transactions, and the
Counter-
[[Page 8970]]
Side Order is the appropriate contra-side.\121\
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\121\ The Exchange notes that trading on the Exchange in any
option contract will be halted whenever trading in the underlying
security has been paused or halted by the primary listing market.
---------------------------------------------------------------------------
The Exchange believes that the proposed System change to adopt a
new same side execution price check for PIM in new subsection (d)(6) of
Options 3, Section 13 is consistent with the Act. As discussed above,
this feature would be functionally identical to BX PRISM in BX Options
3, Section 13(ii)(I). Like BX, the proposed price check is designed to
ensure that the Exchange would not trade at prices that would lock or
cross interest on the same side of the market as the Agency Order where
limit orders have rested and obtained priority to execute at that
price. In the event where a limit order arrives on the same side of the
market as the Agency Order and is at the same or better price than the
initiating Crossing Transaction price, the Exchange would execute the
entire PIM transaction at the initiating Crossing Transaction price.
The execution takes place at this price because the PIM is guaranteed
an execution and the PIM agency side instructions would not allow an
execution to take place at a higher (lower) price than submitted for a
buying (selling) agency side PIM order. Considering that the limit
order has arrived either at or better on the same side as the Agency
Order than the agency side price, the initiating Crossing Transaction
price is the only price at which the guaranteed execution can take
place.
The Exchange's proposal to amend Options 3, Section 13(e)(4)(ii) to
permit Improvement Complex Orders to be canceled or modified is
consistent with the Act. Further, similar to the proposed change for
simple PIM, the Exchange notes that the modification and cancellation
of an Improvement Complex Order will be similar to the manner in which
a Cancel and Replace Order would be handled outside of the auction
process. Improvement Complex Orders are not visible to other auction
participants, including the Agency Complex Order. Further, similar to
the proposed changes for simple PIM, the Exchange believes that
providing responders with flexibility to cancel or modify their
Improvement Complex Orders may encourage market participants to respond
to more auctions, including Complex PIM.
The Exchange's proposal to amend Options 3, Section 13(e)(4)(iv) at
new ``(D)'' to provide that the exposure period for a Complex PIM will
automatically terminate when a resting Complex Order in the same
complex strategy on either side of the market becomes marketable
against the Complex Order book or bids and offers for the individual
legs is consistent with the Act. The proposed changes will codify
current System behavior and will provide greater transparency to market
participants for situations in which early termination would occur for
Complex PIMs today. As noted above, Complex Order Exposure currently
early terminates in similar situations, so the proposed language for
Complex PIM closely tracks existing Complex Exposure language in
Supplementary Material .01(b)(ii) to Options 3, Section 14.\122\ The
Exchange believes that it is appropriate to early terminate Complex PIM
under these circumstances for the following reasons. When the resting
Complex Order is on the same side as the Agency Complex Order, interest
that becomes marketable against the resting Complex Order would also be
marketable against the Complex PIM order. Therefore, early terminating
the Complex PIM would allow the Complex PIM order to interact with this
interest given that the Complex PIM order is at a superior price
compared to the resting Complex Order, thus providing an opportunity
for price improvement for the Agency Complex Order. Additionally, when
the resting Complex Order is on the opposite side of the Agency Complex
Order, interest that arrives marketable against the resting Complex
Order is now at a superior price to the Agency Complex Order. The
Exchange would therefore early terminate in this scenario and execute
the Complex PIM order with its contra side order because it is no
longer at top of book.
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\122\ Supplementary Material .01(b)(ii) of ISE Options 3,
Section 14 provides that exposure period for a Complex Order will
end immediately: (A) upon the receipt of a Complex Order for the
same complex strategy on either side of the market that is
marketable against the Complex Order book or bids and offers for the
individual legs; (B) upon the receipt of a non-marketable Complex
Order for the same complex strategy on the same side of the market
that would cause the price of the exposed Complex Order to be
outside of the best bid or offer for the same complex strategy on
the Complex Order book; or (C) when a resting Complex Order for the
same complex strategy on either side of the market becomes
marketable against interest on the Complex Order book or bids and
offers for same individual legs of the complex strategy.
---------------------------------------------------------------------------
The Exchange's proposal to relocate the last sentence of Options 3,
Section 13(e)(3) into Options 3, Section 13(e)(4)(iv) at new ``(E)'' is
consistent with the Act. This non-substantive amendment will relocate
the rule text to a more logical place within the Complex PIM rule.
The Exchange believes that its proposal to codify existing Complex
PIM behavior in Options 3, Section 13(e)(5) to articulate that the
complex mid-way price will be rounded to the $0.01 increment that
favors the Agency Complex Order will promote clarity and transparency
in the Exchange's rules by better aligning the rule text with the
current operation of the System. As noted above, the simple PIM rule
already articulates that the mid-way price will be rounded to the $0.01
increment that favors the Agency Order in Options 3, Section 13(d)(4).
The rounding for Complex PIM currently operates the same way as simple
PIM in this respect, so the proposed Complex PIM language closely
tracks the simple PIM language
Finally, the proposal to amend Supplementary Material .02 to
Options 3, Section 15 to add a sentence which provides, ``It will be
considered a violation of this Rule and will be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of Options 9, Section 1 if an Electronic Access Member
submits a PIM Order (initiating an auction) and also submits its own
Improvement Order in the same auction,'' is consistent with the Act. BX
has a similar prohibition within Options 3, Section 13(iii). The
proposed new rule is designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
by providing guidance to Members where certain behavior within a PIM
will not be considered a bona fide transaction.
Order Price Protection
The Exchange believes that its proposal to replace its current
Limit Order Price Protection with a similar ``fat finger'' check called
Order Price Protection in Options 3, Section 15(a)(1)(A) is consistent
with the Act. The proposed OPP would similarly prevent the execution of
limit orders at prices outside pre-set numerical or percentage
parameters, and is designed to prevent limit orders entered at clearly
unintended prices from executing in the System to the detriment of
market participants. The proposed risk protection is also functionally
similar to BX's OPP in BX Options 3, Section 15(a)(1), and therefore is
not novel.\123\ Similar to BX, the Exchange believes that the proposed
fixed dollar amount
[[Page 8971]]
and percentage parameters will protect against erroneous executions,
while also allowing orders to execute within a reasonable range.
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\123\ As noted above, the Exchange is proposing to adopt an OPP
rule that more accurately describes the proposed functionality than
BX's current OPP rule, so BX will align its current OPP rule to the
Exchange's proposed rule text in a separate rule filing.
---------------------------------------------------------------------------
The Exchange believes that using the Reference BBO (i.e., better of
the NBBO or the internal market BBO) to calculate the proposed OPP,
identical to current BX OPP functionality, will similarly protect
investors and the public interest where the internal market BBO is
better than the NBBO.
The Exchange further believes that its proposal to add language
allowing Exchange discretion to temporarily deactivate OPP on an intra-
day basis is consistent with the Act. BX has identical language today
in BX Options 3, Section 15(a)(1)(A)(i), and similar to BX, the
Exchange believes that having this discretion will be useful if the
Exchange determined that unusual market conditions warranted
deactivation in the interest of a fair and orderly market. Like BX, the
Exchange believes that it will be useful to have the flexibility to
temporarily disable OPP intra-day in response to an unusual market
event (e.g., if dissemination of data was delayed and resulted in
unreliable underlying values needed for the Reference BBO) to maintain
a fair and orderly market. This will promote just and equitable
principles of trade and ultimately protect investors.
Post-Only Quoting Protection
The Exchange's proposal to adopt a new Post-Only Quote
Configuration in Options 3, Section 15(a)(3)(C) to permit Market Makers
to prevent their quotes from removing liquidity from the Exchange's
order book promotes equitable principles of trade and protects
investors and the public interest by enhancing the risk protections
available to Market Makers. This optional risk protection would enable
Market Maker to better manage their risk when quoting on the Exchange.
As noted above, BX offers identical functionality today in BX Options
3, Section 15(c)(3).
The proposed risk protection allows Market Makers the ability to
avoid removing liquidity from the Exchange's order book if their quote
would otherwise lock or cross any resting order or quote on the
Exchange's order book upon entry, thereby protecting investors and the
general public as Market Makers transact a large number of orders on
the Exchange and bring liquidity to the marketplace. Market Makers
would utilize the proposed risk protection to avoid unintentionally
taking liquidity with resting interest \124\ on the order book. As a
result of taking liquidity, Market Makers would incur a taker fee that
may impact the Market Maker's ability to provide liquidity and meet
quoting obligations. Market Makers are required to add liquidity on the
Exchange and, in turn, are rewarded with lower pricing \125\ and
enhanced allocations.\126\ Specifically, the risk protection would
permit Market Makers to add liquidity only and avoid removing resting
interest on the order book, which will lead to enhanced liquidity on
the Exchange and in turn will benefit and protect investors and the
public interest through the potential for greater volumes of orders and
executions on the Exchange.
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\124\ As noted above, this would include any re-priced orders as
described in the Re-Pricing Filing as proposed Options 3, Section
5(d), ALOs as described in proposed Options 3, Section 7(n), and any
re-priced quotes as described in Options 3, Section 4(b)(6). As
discussed above, ALOs may re-price.
\125\ See Options 7, Section 3.
\126\ See Options 3, Section 10.
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The Exchange does not believe that introducing this Post-Only Quote
Configuration will unfairly discriminate among market participants.
Today, all Members may utilize the existing Add Liquidity Order type to
prevent orders from removing liquidity from the Exchange's order book
upon entry. The Post-Only Quote Configuration is available to Market
Makers only as a risk protection. Unlike other market participants,
Market Makers have certain obligations on the market, such as
requirements to provide continuous two-sided quotes on a daily basis
\127\ and are subject to various obligations associated with providing
liquidity on the market.\128\ Market Makers are liquidity providers on
the Exchange and, therefore, are offered certain quote risk protections
noted to allow them to manage their risk more effectively.\129\ The
proposed Post-Only Quote Configuration is another risk protection
afforded to Market Makers to assist them in managing their risk while
continuing to comply with their obligations. The Exchange notes that
enhancing the ability of Market Makers to add liquidity and avoid
taking liquidity from the order book promotes just and equitable
principles of trade on the Exchange and protects investors and the
public interest, thereby enhancing market structure by allowing Market
Makers to add liquidity only. Greater liquidity benefits all market
participants by providing more trading opportunities and attracting
greater participation by Market Makers. Also, an increase in the
activity of Market Makers in turn facilitates tighter spreads.
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\127\ See Options 2, Section 5(e).
\128\ See Options 2, Section 4.
\129\ Options 3, Section 15(a)(3) currently sets forth the Anti-
Internalization and Quotation Adjustments Protections that are
available today to Market Makers.
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Kill Switch
The Exchange does not believe that the proposed decommission of the
GUI Kill Switch for order cancellation will affect the protection of
investors or the public interest or the maintenance of a fair and
orderly market because no Members have used the GUI Kill Switch risk
protection in 2022.\130\ The Exchange does not charge any fees for the
GUI Kill Switch. In addition, the Exchange notes that the use of this
tool is completely optional, and the Exchange will continue to offer
substantially similar Kill Switch functionality through FIX, Precise,
and OTTO. As set forth in the Kill Switch rule, the GUI Kill Switch
allows for the cancellation and restriction of orders for the requested
Identifier(s) on a user or group level, whereas the port Kill Switch
allows for cancellation and restriction of orders for the requested
Identifier(s) on a user level.\131\ While the GUI Kill Switch had more
optionality around how Members may combine the Kill Switch request by
Identifier(s), no Members have used the GUI Kill Switch risk protection
this year. Furthermore, Members will retain the ability to contact
market operations staff to manually purge their orders from the market.
In addition, the Exchange will continue to implement System-enforced
risk mechanisms that automatically remove orders for the Member once
certain pre-set thresholds or conditions are met (i.e., market wide
risk protection and cancel on disconnect).
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\130\ As noted above, the Exchange will provide prior notice of
the decommission to all Members via Options Trader Alert.
\131\ See Options 3, Section 17(a)(1) and (2).
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Also, the Exchange believes that the low usage rate for the GUI
Kill Switch does not warrant the continuous resources necessary for
System support of such tools. As a result, the Exchange believes that
the proposal will remove impediments to and perfect the mechanism of a
free and open market and a national market system by allowing the
Exchange to reallocate System capacity and resources currently used to
maintain this functionality to the development and maintenance of other
business initiatives and risk management products.
As noted above, the Exchange previously amended its rules to
decommission the quote removal Kill
[[Page 8972]]
Switch that was available to Market Makers through the GUI.\132\
Similar to the GUI Kill Switch for quote removal, the Exchange has
found that no Members use the GUI Kill Switch to cancel their orders,
but rather, utilize other means to purge their existing orders from the
System. The Exchange therefore believes that eliminating the GUI Kill
Switch all together (including for orders as proposed herein) will
streamline the Exchange's risk protection offerings in a manner that
reflects Member use.
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\132\ See supra note 89.
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Data Feeds and Trade Information
The Exchange believes that the proposed changes to the current data
feed offerings in Options 3, Section 23(a) are consistent with the Act.
Specifically, the Exchange believes that the proposed changes to its
Depth of Market Feed to provide full depth-of-market information will
serve to more closely align the information provided on the Exchange's
Depth of Market Feed with that of BX's Depth of Market Feed in BX
Options 3, Section 23(a)(1), thereby ensuring a more consistent
technology offering across the Nasdaq affiliated options exchanges. The
Exchange also believes that the modified Depth of Market Feed will help
to protect a free and open market by providing additional data to the
marketplace. The Exchange further believes that the proposed changes to
add more specificity around what would be provided in the opening/
reopening order imbalance information, and to correct an erroneous
reference to ``ISE'' in the Depth of Market Feed rule will promote
transparency and clarity in the Exchange's rules.
The Exchange believes that the proposed changes to the Order Feed
around what type of information would be available on this data feed
offering, as further described above, will promote clarity and
transparency in the Exchange's rules. Furthermore, the proposed data
elements in the Order Feed are based on data elements that currently
exist on other markets. For instance, the specificity around what would
be provided in the opening/reopening order imbalance information, as
well as the auction and exposure notifications are identical to the
content within BX's Depth of Market Feed in BX Options 3, Section
23(a)(1). As noted above, the Attributable Order content is similar to
the data elements on Cboe's current multicast PITCH feed.\133\
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\133\ See supra note 93.
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The Exchange believes that the proposed changes to the existing Top
Quote Feed to rebrand into the Top Feed, to no longer provide
information for opening price, daily trading volume, and high and low
prices for the day, will serve to further align the Exchange's Top Feed
with BX's Top Feed in BX Options 3, Section 23(a)(2), thereby ensuring
a more consistent technology offering across the Nasdaq affiliated
options exchanges.
The proposed changes to the Trades Feed to no longer provide
information for opening price, daily trading volume, and high and low
prices for the day are intended to align to the proposed changes to the
Top Feed described above. The Exchange believes that removing this
language will promote clarity and transparency in the Exchange's rules.
The proposed changes to the Spread Feed to provide full depth-of-
book information rather than at the first five price levels are
intended to align to the proposed changes to the Depth of Market Feed
described above. The proposed full depth language will also be
substantially similar to the full depth language in BX's Depth of
Market Feed in BX Options 3, Section 23(a)(1) and in the Exchange's
proposed Depth of Market Feed in proposed Options 3, Section 23(a)(1),
except the proposed language herein will be tailored to complex
functionality. Furthermore, the proposed Attributable Complex Order
content is similar to the content currently on Cboe's Complex Multicast
PITCH feed.\134\ The Exchange believes that the modified Spread Feed
will help to protect a free and open market by providing additional
data to the marketplace. The Exchange also believes that the proposed
changes to reorganize and incorporate existing concepts in the Spread
Feed rule a manner that is more consistent with the other amended data
feed rules in Options 3, Section 23(a) will make the rules easier to
navigate for market participants.
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\134\ See supra note 98.
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The Exchange believes that it is consistent with the Act to no
longer offer TradeInfo when the Exchange migrates over the enhanced
Nasdaq functionality, as there is a lack of demand from Members.\135\
The Exchange does not assess a fee for TradeInfo. As noted above,
Members use FIX, FIX DROP, and CTI to obtain order information
currently available in TradeInfo, and to cancel orders through FIX. The
Exchange further believes that the proposed decommission of TradeInfo
will remove impediments to and perfect the mechanism of a free and open
market and a national market system by allowing the Exchange to
reallocate System capacity and resources currently used to maintain
this functionality to the development and maintenance of other business
initiatives and risk management products.
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\135\ As noted above, the Exchange will provide prior notice of
the decommission to all Members through an Options Trader Alert.
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The Exchange's proposal to eliminate TradeInfo pricing from Options
7, Section 7.C(ii)(3) in its entirety is reasonable, equitable, and not
unfairly discriminatory because TradeInfo would no longer be available
to any Member. It is reasonable to remove all references to TradeInfo
pricing from the Exchange's Pricing Schedule as the Exchange is
removing this functionality from its Rulebook. As discussed above, the
Exchange does not assess a fee for TradeInfo today. Additionally, it is
equitable and not unfairly discriminatory to remove the references to
TradeInfo pricing from the Pricing Schedule because no Member would be
able to utilize this functionality once it is removed from the System.
Optional Risk Protections
The Exchange believes that introducing the optional quantity and
notional value risk protections as described above will protect
investors and the public interest, and maintain fair and orderly
markets, by providing market participants with another tool to manage
their order risk. As noted above, BX offers functionally identical
optional risk protections in BX Options 3, Section 28.\136\ In
addition, providing Members with more tools for managing risk will
facilitate transactions in securities because Members will have more
confidence that risk protections are in place. As a result, the new
functionality has the potential to promote just and equitable
principles of trade.
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\136\ As noted above, while the proposed rule text in Options 3,
Section 28 adds more granularity, including around how orders are
rejected when the value thresholds for the options risk protections
are exceeded, the Exchange understands that the BX optional risk
protections operate in the same manner. In addition, BX's rule does
not include Precise as this order entry port is not available on BX
today.
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Corrective Changes
The Exchange believes that the proposed changes to Supplementary
Material .04 to Options 3, Section 7 to add Precise will make clear
that Members may also use Precise (in addition to FIX) to route their
orders using FIND or SRCH, or mark orders as DNR. The Exchange
therefore believes that the proposed changes will add
[[Page 8973]]
greater transparency to the Rulebook, which would benefit market
participants and investors by reducing potential confusion. The
Exchange similarly believes that the technical change to fix the
incorrect cross-reference to the minimum trading increment rule in
Options 3, Section 10(b)(1) will add greater transparency to the
Rulebook and reduce any potential confusion.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange operates in a
competitive market and regularly competes with other options exchanges
for order flow. As discussed above, the Exchange is re-platforming its
System in connection with the technology migration to enhanced Nasdaq
functionality, which the Exchange believes would promote competition
among options exchanges by potentially attracting additional order flow
to the Exchange with the enhanced trading platform.
As it relates to the elimination of fees for TradeInfo from Options
7, the Exchange believes that its proposal does not impose an undue
burden on competition because TradeInfo would no longer be available to
any Members.
The basis for the majority of the proposed rule changes are the
rules of the Nasdaq affiliated options exchanges, which have been
previously filed with the Commission as consistent with the Act. As it
relates to bulk messaging for quotes as proposed in Options 3, Section
4(b)(3), the Exchange notes that Cboe similarly allows for bulk
messaging in Cboe Rule 1.1, except Cboe also allows bulk messaging for
orders, unlike the Exchange. As it relates to the proposal in Options
3, Section 7(g)(4) to codify the refresh features into the Exchange's
Reserve Order rule, the Exchange notes that Cboe's Reserve Order
functionality has similar refresh features in Cboe Rule 5.6(c). As it
relates to the proposal in Options 3, Section 23(a) to add Attributable
Order and Attributable Complex Order content in the Order Feed and
Spread Feed, respectively, Cboe currently has similar data elements
available on its Multicast PITCH feed and Complex Multicast PITCH
feed.\137\
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\137\ See supra notes 93 and 98.
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The proposed rule changes are based on the following rules of the
Nasdaq affiliated exchanges:
<bullet> The Market Order proposal in Options 3, Section 7(a) will
be materially identical to BX's Market Orders in BX Options 3, Section
7(a)(5).
<bullet> The ISO proposal in Options 3, Section 7(b)(5) will be
substantially similar to BX's ISO in BX Option 3, Section 7(a)(6).
Unlike BX, the Exchange's ISO proposal will not refer to how ISOs may
be entered on the Exchange as the Exchange intends address that in a
separate rule filing.
<bullet> The Exchange's AON proposal will be substantially similar
to BX's Contingency Order rule in BX Options 3, Section 7(a)(4)(A)
(except BX's rule also describes Minimum Quantity Orders, which the
Exchange does not offer today) and BX's AON rule in BX Options 3,
Section 7(a)(7).
<bullet> The Stop Order proposal in Options 3, Section 7(d) will be
substantially similar to Phlx Options 3, Section 7(b)(4), except Phlx
does not currently explicitly state that Phlx Stop Orders may only be
entered through FIX or Precise because Phlx only offers one order entry
protocol (FIX), unlike the Exchange, which offers three (FIX, Precise,
and OTTO).
<bullet> The Stop Limit Order proposal in Options 3, Section 7(e)
will be substantially similar to Phlx Options 3, Section 7(b)(4)(A),
except Phlx does not currently explicitly state that Phlx Stop Limit
Orders may only be entered through FIX or Precise for the same reasons
stated for Stop Orders above.
<bullet> The Preferenced Order proposal in Options 3, Section 7(l)
will be materially identical to Phlx's Directed Order rule in Phlx
Options 3, Section 7(b)(11).
<bullet> The ALO proposal in Options 3, Section 7(n) will be
materially identical to BX ALOs in BX Options 3, Section 7(a)(12).
<bullet> The Opening Sweep proposal in Options 3, Section 7(u) will
be materially identical to the Phlx Opening Sweep in Phlx Options 3,
Section 7(b)(6).
<bullet> The Day order proposal in Supplementary Material .02(a) to
Options 3, Section 7 will be substantially similar to BX Options 3,
Section 7(b)(3), except BX's rule does not refer to OTTO or Precise
because BX does not offer OTTO or Precise functionality today.
<bullet> The IOC proposal in Supplementary Material .02(d) to
Options 3, Section 7 will be substantially similar to BX's IOC in BX
Options 3, Section 7(b)(2), except the BX rule does not refer to OTTO,
Precise, or Complex Order Price Protection as BX does not offer these
features today.
<bullet> The OPG proposal in Supplementary Material .02(e) to
Options 3, Section 7 will be materially identical to BX's OPG in BX
Options 3, Section 7(b)(1).
<bullet> The Opening Process proposal in Options 3, Section 8 to
allow all market participant interest to route will be identical to
BX's Opening Process in BX Options 3, Section 8.
<bullet> The following proposed changes to PIM are based on BX
PRISM: (1) proposed Options 3, Section 13(b)(5) will be materially
identical to BX Options 3, Section 13(i)(E); (2) proposed Options 3,
Section 13(c)(3) will be materially identical to BX Options 3, Section
13(ii)(A)(8); (3) proposed Options 3, Section 13(d)(5) will be
functionally similar to BX Options 3, Section 13(ii)(C); (4) proposed
Options 3, Section 13(d)(6) will be functionally similar to BX Options
3, Section 13(ii)(I); (5) proposed Options 3, Section 13(e)(4)(ii) will
be functionally similar to BX Options 3, Section 13(ii)(A)(8) with
respect to the ability to cancel or modify PIM responses (Improvement
Orders); and (6) proposed Supplementary Material .02 to Options 3,
Section 13 will be materially identical to BX Options 3, Section
13(iii).
<bullet> The proposed OPP risk protection in Options 3, Section
15(a)(1)(A) will be functionally similar to BX OPP in BX Options 3,
Section 15(a)(1).\138\
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\138\ As noted above, BX will file a separate rule change to
conform its OPP rule to the Exchange's proposed rule.
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<bullet> The proposed Post-Only Quote Configuration in Options 3,
Section 15(a)(3)(C) will be functionally identical to the BX Post-Only
Quote Configuration in BX Options 3, Section 15(c)(3).
<bullet> The Depth of Market Feed proposal in Option 3, Section
23(a)(1) will be substantially similar to the BX Depth of Market Feed
in BX Options 3, Section 23(a)(1), except the Exchange will not offer
auction and exposure notifications on its Depth of Market Feed like BX
does today.
<bullet> The Order Feed proposal in Options 3, Section 23(a)(2)
will contain data elements that are identical to those on BX's Depth of
Market Feed in BX Options 3, Section 23(a)(1), specifically around what
would be provided in the opening/reopening order imbalance information
(i.e., the size of matched contracts and size of the imbalance), and
auction and exposure notifications.
<bullet> The Top Feed proposal in Options 3, Section 23(a)(3) will
be substantially similar to the BX Top Feed in BX Options 3, Section
23(a)(2), except the
[[Page 8974]]
Exchange will continue to provide aggregated size information unlike
BX.
<bullet> The Spread Feed proposal in Options 3, Section 23(a)(5)
will contain full depth language that is substantially similar to BX's
Depth of Market Feed in BX Options 3, Section 23(a)(1), except the
proposed language in the Spread Feed will be tailored to complex
functionality.
<bullet> The proposed optional quantity and notional value risk
protections in Options 3, Section 28 will be functionally identical to
the protections in BX Options 3, Section 28.\139\
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\139\ As noted above, while the proposed rule text in Options 3,
Section 28 adds more granularity, including around how orders are
rejected when the value thresholds for the options risk protections
are exceeded, the Exchange understands that the BX optional risk
protections operate in the same manner. In addition, BX's rule does
not include Precise as this order entry port is not available on BX
today.
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The Exchange reiterates that the proposed rule change is being
proposed in the context of the technology migration to enhanced Nasdaq
functionality. The Exchange further believes the proposed rule change
will benefit Members by providing a more consistent technology
offering, as well as consistent rules, for market participants on the
Nasdaq affiliated options exchanges. In addition, the proposed rule
change relates to adding clarity and consistency in the Exchange's
Rulebook, and are designed to reduce any potential investor confusion
as to the features and applicability of certain functionality presently
available on the Exchange.
The Exchange does not believe that the proposed rule change will
impose any burden on intra-market competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as the majority
of the proposed changes will apply to all Members. As it relates to the
proposed rule change relating to bulk message functionality, while the
Exchange currently offers this functionality to Market Makers only,
bulk messaging is intended to provide Market Makers with an additional
tool to meet their various quoting obligations in a manner they deem
appropriate. As such, the Exchange believes that this functionality may
facilitate Market Makers' provision of
[…truncated; see source link]Indexed from Federal Register on February 10, 2023.
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.