Notice2023-18301
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 3, Section 15 (Risk Protections) To Adopt an Active Quote Protection
Primary source
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Published
August 25, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 164 (Friday, August 25, 2023)</title>
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[Federal Register Volume 88, Number 164 (Friday, August 25, 2023)]
[Notices]
[Pages 58373-58378]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-18301]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98179; File No. SR-BX-2023-019]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 3,
Section 15 (Risk Protections) To Adopt an Active Quote Protection
August 21, 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 August 11, 2023, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Options 3, Section 15 (Risk
Protections) to adopt an active quote protection.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/bx/rules">https://listingcenter.nasdaq.com/rulebook/bx/rules</a>, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to adopt an active risk
counter functionality called active quote protection (``Active Quote
Protection'') in Options 3, Section 15. The Exchange intends to begin
implementation prior to December 20, 2024, and will provide prior
notice of the implementation date to Members in an Options Trader
Alert.
The Exchange proposes to offer an optional active risk counter
functionality called Active Quote Protection, which will be available
to Market Makers as an alternative to existing passive risk counter
functionality described in Options 3, Section 15(c)(2)(A) (i.e.,
``Quotation Adjustments'').\3\ The proposed Active
[[Page 58374]]
Quote Protection functionality will be similar to existing active risk
counter functionality on another options exchange, which currently
allows exchange users to actively decrement the risk counter by a
specified amount at any time, rather than waiting until a risk limit is
reached or the user otherwise sends a specific instruction to the
exchange to completely reset the counting program.\4\
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\3\ As described below, the Exchange will specifically define
this passive risk counter functionality as ``Rapid Fire'' within
this Rule.
\4\ See MEMX LLC (``MEMX'') Rule 21.16(b) (Active Risk Counter).
See also Securities Exchange Act Release No. 95445 (August 8, 2022),
87 FR 49894 (August 12, 2022) (SR-MEMX-2022-10). Similar to the
proposed Active Quote Protection, the active risk counter on MEMX is
voluntary and offers a way for users to proactively manage their
risk. The MEMX risk protection, however, allows the user to actively
manage all the risk limits specified in MEMX's rule (e.g., executed
contracts, notional value, etc.) whereas the Exchange's proposal
would allow Market Makers to actively manage executed contracts
only, as discussed later in this filing. In addition, the Exchange's
proposal will only apply to quotes whereas MEMX's functionality
applies to both orders and quotes.
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Today, the Exchange requires Market Makers to configure risk
exposure thresholds based on either percentage of executed quotes
(``Percentage Threshold'') or total number of executed contracts
(``Volume Threshold''). The Exchange also offers two optional risk
exposure thresholds based on the absolute value of the difference
between long and short positions (``Delta Threshold''), and absolute
value of the difference between contracts bought and contracts sold
(``Vega Threshold'') (collectively, ``Thresholds'').\5\ As set forth in
Options 3, Section 15(c)(2)(A), the System tracks each Threshold with a
corresponding risk counter over a Market Maker-specified rolling time
period not to exceed 30 seconds. Furthermore, Section 15(c)(2)(A)
describes that when a risk counter exceeds the corresponding Threshold
during the specified time period, the System would automatically remove
the Market Maker's quotes in all series of the applicable options class
(each, a ``Purge Event''). As a result of a Purge Event, the
corresponding risk counter and Threshold would reset upon such removal.
The Exchange also notes that pursuant to Section 15(c)(2)(D) today, the
Thresholds and risk counters can be completely reset if the Market
Maker specifically requests the System to remove quotes in all options
series in an underlying issue. This risk protection is passive in that
the risk counters wait to reset until the expiry of a specified time
period, a Purge Event, or when the Market Maker otherwise sends a
specific instruction to the Exchange to remove quotes to completely
reset the counters.
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\5\ The Thresholds are described in detail in Options 3, Section
15(c)(2)(A)(i)-(iv). If a Market Maker does not provide a parameter
for each Threshold, the Exchange will apply default parameters
announced to Members.
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The Exchange now proposes to introduce a new risk protection called
Active Quote Protection that would enable Market Makers to actively
manage their executed contract limit (``Contract Limit'') by sending an
electronic instruction to the Exchange to decrement their executed
contract limit counter (``Limit Counter'') by a specified amount at any
time, rather than waiting until the expiry of a defined time period,
when the risk limit is exceeded (like a Purge Event), or when the
Market Maker otherwise sends a specific instruction to purge quotes to
completely reset the risk counter.\6\
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\6\ If the Market Maker opting to use Active Quote Protection
does not provide a Contract Limit at the outset, the Exchange will
apply a default parameter for the Active Quote Protection Contract
Limit (which would be announced to Participants). The Exchange will
initially set the default Contract Limit at 100 contracts.
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The Contract Limit, as set by the Market Maker, would apply for the
duration of the trading day. Once the Market Maker's Limit Counter
exceeds the Contract Limit set by the Market Maker, the System would
automatically remove quotes in all series of the applicable options
class submitted through the Exchange's Specialized Quote Feed
protocol,\7\ identical to how the quote removal mechanism works for a
Purge Event today.\8\ Today, Purge Events are triggered under the
existing Quotation Adjustments on the first execution that exceeds the
applicable Threshold. Once an execution occurs, the System checks all
Thresholds to see if they have been exceeded. If exceeded, the Market
Maker's quote would be purged pursuant to Options 3, Section
15(c)(2)(D). In order to remain consistent with the firm quote
obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS,
any marketable orders or quotes that are executable against a Market
Maker's quotes that are received \9\ prior to the time the applicable
Threshold is triggered will be automatically executed up to the size of
the Market Maker's quote, regardless of whether the execution would
cause the Market Maker to exceed their pre-set Percentage Threshold,
Volume Threshold, Delta Threshold, or Vega Threshold.\10\
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\7\ Specialized Quote Feed or ``SQF'' is an interface that only
Market Makers may use to submit quotes to the Exchange. See Options
3, Section 7(e)(1)(B).
\8\ See Options 3, Section 15(c)(2)(C) (renumbered as Section
15(c)(2)(D) under this proposal, as noted below).
\9\ The time of receipt for an order or quote is the time such
message is processed by the Exchange's order book.
\10\ See current Options 3, Section 15(c)(2)(C)(ii). The
Exchange will renumber this as Section 15(c)(2)(D)(ii) and clarify
this provision in the manner described later in this filing.
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Under Active Quote Protection, the System would similarly handle
the Market Maker's quote in that the quote could be filled one
execution over the Contract Limit before the Market Maker's remaining
quotes are cancelled by the System in order to be consistent with the
firm quote obligations under Rule 602 of Regulation NMS. Specifically,
the Exchange notes that any marketable orders or quotes that are
executable against a Market Maker's quotes that are received \11\ prior
to the time the Contract Limit is triggered will be automatically
executed up to the size of the Market Maker's quote, regardless of
whether the execution would cause the Market Maker to exceed the
Contract Limit.\12\
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\11\ See supra note 9.
\12\ For both the current Quotation Adjustments and proposed
Active Quote Protection, the System will execute marketable interest
up to the size of the Market Maker's quote, but cannot guarantee
interest will be fully executed, as is the case with any execution
in the Exchange's order book. There is always the possibility that
the Market Maker's quote size (and/or Market Maker's quote plus
other interest on the order book) may not be sufficient volume to
fill the incoming interest.
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Additionally, under Active Quote Protection, Market Makers will be
able to submit a request (i) to decrement their Limit Counter by a
specified number of contracts, or (ii) to fully decrement their Limit
Counter to zero.\13\ Market Makers that elect to use the proposed
Active Quote Protection on a badge \14\ will not be able to use the
existing Threshold risk protections described above on the same badge
(i.e., the active and passive risk counter functionality would be
mutually exclusive per badge) given that it would be unnecessarily
complex to implement from a technology standpoint. Market Makers may be
associated with multiple badges today, so if they want to use both risk
protections for their activity on the Exchange, they will be able to
set either the active or passive risk counter functionality on each
one.
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\13\ As discussed later in this filing, in order to re-enter the
System after their quotes are purged pursuant to the Active Quote
Protection, Market Makers will need to submit the same request to
fully decrement their Limit Counter to zero.
\14\ The term ``badge'' means an account number, which may
contain letters and/or numbers, assigned to BX Market Makers. A BX
Market Maker account may be associated with multiple badges. See
Options 1, Section 1(a)(6).
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To effectuate the foregoing changes, the Exchange proposes to set
forth the new risk protection in paragraph (B) of Options 3, Section
15(c)(2), as follows: \15\
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\15\ As a result, the Exchange will also renumber existing
paragraphs (C)-(F) as proposed paragraphs (D)-(G).
[[Page 58375]]
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In lieu of Rapid Fire, a Market Maker may provide an executed
contract limit (``Contract Limit'') that, if exceeded, the System
will automatically remove the Market Maker's quotes in all series of
an options class submitted through SQF. The System will apply the
Contract Limit for the duration of the trading day. For each class
of options, the System will maintain an active limit counter that
will track the current number of contracts executed through the
Market Maker's quotes (``Limit Counter''). If the Limit Counter
exceeds the Contract Limit established by the Market Maker, the
System will automatically remove the Market Maker's quotes as
described in paragraph (D) below. Market Makers may submit a request
(i) to decrement their Limit Counter by a specified number of
contracts, or (ii) to fully decrement their Limit Counter to zero,
including to re-enter the System as described in paragraph (F)
below.
The Exchange also proposes to amend current paragraph (F)
(renumbered to paragraph (G) under this proposal) of Options 3, Section
15(c)(2) to specify that the active and passive risk counter
functionality will be mutually exclusive per badge). As amended,
proposed paragraph (G) will provide:
The Exchange will require BX Market Makers to utilize the
Percentage Threshold, the Volume Threshold, or the Contract Limit.
For Market Makers that elect to utilize the Contract Limit, the
Percentage Threshold, Volume Threshold, Delta Threshold, and Vega
Threshold will not be available for use on the Market Maker's badge.
The Delta, Vega and Multi-Trigger Thresholds are optional.
As described above, once the Limit Counter exceeds the Contract
Limit set by the Market Maker under the proposed Active Quote
Protection, the System would automatically remove quotes in the same
manner as currently specified for a Purge Event in proposed paragraph
(D) of Options 3, Section 15(c)(2). Accordingly, the Exchange proposes
to add Active Quote Protection's Contract Limit throughout this Rule.
Specifically, proposed paragraph (D) will provide that the System will
automatically remove quotes in all series of an options class in an
underlying security when the Percentage Threshold, Volume Threshold,
Delta Threshold, Vega Threshold, or the Contract Limit has been
exceeded. The System will automatically remove quotes in all series of
an option class in all underlying securities when the Multi-Trigger
Threshold \16\ has been exceeded. The System will send a Purge
Notification Message to the BX Market Maker for all affected options
when the above thresholds have been exceeded. Proposed subparagraph
(D)(i) will provide that the Percentage Threshold, Volume Threshold,
Delta Threshold, Vega Threshold, Contract Limit, and Multi-Trigger
Threshold are considered independently of each other.
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\16\ Multi-Trigger Threshold is defined in current paragraph (B)
(proposed paragraph (D)) of Section 15(c)(2) as the number of
allowable triggers by which the Exchange will automatically remove
quotes in all options series in all underlying issues submitted
through designated BX protocols as specified by the Exchange. This
threshold is part of the Exchange's Multi-Trigger risk protection.
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Further, as discussed above, any marketable orders or quotes that
are executable against a Market Maker's quotes that are received \17\
prior to the time the applicable Threshold or Contract Limit is
triggered will be automatically executed up to the size of the Market
Maker's quote, even if such execution would cause the Market Maker to
exceed any of their pre-set risk limits with respect to any of the
foregoing risk parameters. The Exchange notes that the current related
Rule in sub-paragraph (C)(ii) only mentions that quotes will execute up
to the Market Maker's size, and is silent on marketable orders. In
addition, the current Rule does not specify the time of receipt of such
marketable interest that is executable against the size of the Market
Maker's quote. As such, the Exchange proposes to add this specificity
in proposed sub-paragraph (D)(ii) to better describe how the System
operates today for Quotation Adjustments and how the System will
operate for proposed Active Quote Protection. In particular, sub-
paragraph (D)(ii) will provide:
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\17\ See supra note 9.
The System will execute any marketable orders or quotes that are
executable against a Market Maker's quote and received prior to the
time the Percentage Threshold, Volume Threshold, Delta Threshold,
Vega Threshold, or Contract Limit is triggered up to the size of the
Market Maker's quote, even if such execution results in executions
in excess of the Market Maker's applicable Threshold or Contract
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Limit with respect to any parameter.
In addition, when the System removes quotes as a result of
exceeding the Contract Limit under Active Quote Protection, the
Exchange proposes to require the Market Maker to submit a request to
re-enter the System. This request will be the same type of message as
the request described in proposed paragraph (B) where the Market Maker
must request to fully decrement their Limit Counter back to zero in
order to re-enter the System. This requirement will be added in
proposed paragraph (F) of Options 3, Section 15(c)(2), and will be
similar to how the existing quote purge mechanism works for the
Thresholds today, except the Market Maker needs to send a separate
message (i.e., a re-entry indicator) to re-enter the System when their
quotes are purged as a result of exceeding any of the existing
Thresholds.
The Exchange also proposes that the new Active Quote Protection
would leverage the existing multi-trigger (``Multi-Trigger'')
functionality currently set forth in Options 3, Section 15(c)(2)(B)
(renumbered as Section 15(c)(2)(C) under this proposal). Today, Multi-
Trigger is a risk protection offered alongside the current Quotation
Adjustments. A BX Market Maker or BX Market Maker Group, which is
defined as multiple affiliated BX Market Makers,\18\ may provide the
specified time period and number of allowable Purge Events by which the
Exchange will automatically remove quotes in all options series in all
underlying issues submitted through designated BX protocols as
specified by the Exchange (``Multi-Trigger Threshold''). Multi-Trigger
is triggered when during a time period established by the Market Maker
not to exceed 30 seconds, the total number of Quotation Adjustment
Purge Events exceeds the Multi-Trigger Threshold provided to the
Exchange by the BX Market Maker or BX Market Maker Group. When Multi-
Trigger is triggered, the System automatically purges all of the Market
Maker's or Group's quotes in all options series in an underlying issue.
As set forth in current Options 3, Section 15(c)(2)(E) (renumbered to
Section 15(c)(2)(F) under this proposal), when the System removes
quotes as a result of the Multi-Trigger Threshold, the Market Maker
must manually request re-entry to the System by contacting the
Exchange. Exchange staff must then set a re-entry indicator in this
case to enable re-entry, which will cause the System to send a Reentry
Notification Message to the BX Market Maker or Group for all options
series in all underlying issues. The Market Maker's Clearing Firm will
be notified regarding the trigger and re-entry into the System after
quotes are removed as a result of the Multi-Trigger Threshold, provided
the Market Maker's Clearing Firm has requested to receive such
notification.
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\18\ This would be more than one BX Market Maker, but does not
require the aggregation of all of the Participant's Market Makers. A
Group would be comprised of BX Market Makers affiliated with one
Participant (i.e., one BX options member firm). The Participant
would be required to define a Group by providing a list of such
affiliated BX Market Makers to the Exchange.
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Today, Multi-Trigger is meant to provide Market Makers or a Group
with protection from the risk of multiple executions across multiple
series of an option or across multiple options. This risk protection
recognizes that risk to
[[Page 58376]]
Market Makers is not limited to a single series in an option or even to
all series in an option; Market Makers that quote in multiple series of
multiple options have significant exposure, requiring them to offset or
hedge their overall positions. Market Makers are required to
continuously quote in assigned options, and quoting across many series
in an option or multiple options creates the possibility of executions
that can create large, unintended principal positions that could expose
Market Makers to unnecessary risk. Multi-Trigger is therefore intended
to assist Market Makers or Groups in managing their market risk by
tracking the number of Purge Events relative to the Multi-Trigger
Threshold set by the Market Maker or Group. The Exchange believes that
tracking the number of Active Quote Protection Purge Events for a
Market Maker or Group against its Multi-Trigger Threshold would be
similarly useful for managing market risk.
To that end, the Exchange proposes to update Multi-Trigger to add
purge events under Active Quote Protection to the Multi-Trigger counter
such that Active Quote Protection purge events and Purge Events under
the current Quotation Adjustments will be aggregated together as
counting toward the specified Multi-Trigger Threshold. Accordingly, the
Exchange proposes to add references to the Active Quote Protection rule
(i.e., proposed paragraph (B) of Options 3, Section 15(c)(2))
throughout the Multi-Trigger rule in proposed paragraph (C),
specifically:
A BX Market Maker or BX Market Maker Group (multiple affiliated
BX Market Makers is a ``Group'' as defined by a BX Participant and
provided by such Participant to the Exchange) may provide a
specified time period and number of allowable triggers by which the
Exchange will automatically remove quotes in all options series in
all underlying issues submitted through designated BX protocols as
specified by the Exchange (``Multi-Trigger Threshold''). During a
specified time period established by the BX Market Maker not to
exceed 30 seconds (``Multi-Trigger Specified Time Period''), the
number of times the System automatically removes the BX Market
Maker's or Group's quotes in all options series will be based on the
number of triggers of the Percentage Threshold described in
paragraph (A)(i) above, the Volume Threshold described in paragraph
(A)(ii) above, the Delta Threshold described in paragraph (A)(iii)
above, the Vega Threshold described in paragraph (A)(iv) above, and
the Contract Limit described in paragraph (B) above. Once the System
determines that the number of triggers exceeds a number established
by either the BX Market Maker or Group, during a Multi-Trigger
Specified Time Period, the System will automatically remove all
quotes in all options series in all underlying issues for that BX
Market Maker or Group. A trigger is defined as the event which
causes the System to automatically remove quotes in all options
series in an underlying issue. A Multi-Trigger Specified Time Period
will commence after every trigger of the Percentage Threshold,
Volume Threshold, Delta Threshold, Vega Threshold, or Contract
Limit, and will continue until the System removes quotes as
described in paragraph (D) below or the Multi-Trigger Specified Time
Period expires. The System counts triggers within the Multi-Trigger
Specified Time Period across all triggers for the BX Market Maker or
Group. A Multi-Trigger Specified Time Period operates on a rolling
basis in that there may be multiple Multi-Trigger Specified Time
Periods occurring simultaneously and such Multi-Trigger Specified
Time Periods may overlap.
The following example illustrates the proposed behavior of the
Active Quote Protection risk protection:
Market Maker AAPL
Contract Limit: 100
<bullet> Market Maker trades a transaction for 10 contracts in
AAPL; Limit Counter goes from 0 to 10.
<bullet> Market Maker sends a request to decrement its Limit
Counter in AAPL for 10 contracts; Limit Counter goes from 10 to 0.
<bullet> Market Maker trades a transaction for 20 contracts in
AAPL; Limit Counter goes from 0 to 20.
<bullet> Market Maker trades a transaction for 50 contracts in
AAPL; Limit Counter goes from 20 to 70.
<bullet> Market Maker sends a request to decrement its Limit
Counter in AAPL for 20 contracts; Limit Counter goes from 70 to 50.
<bullet> Market Maker trades a transaction for 60 contracts in
AAPL; Limit Counter goes from 50 to 110 and all Market Maker quotes in
AAPL are automatically purged after the execution because the Limit
Counter exceeded the Market Maker's Contract Limit of 100 executed
contracts.
<bullet> At this point, the Market Maker must send a request to
fully decrement its Limit Counter in AAPL back to zero in order to
begin quoting again.
The following example illustrates how Multi-Trigger will work with
the proposed Active Quote Protection functionality:
<bullet> Assume Market Maker in AAPL and SPY has Quotation
Adjustments set for AAPL and Active QP set for SPY.
<bullet> Market Maker sets its Multi-Trigger Threshold so that it
is triggered at 25 purge events within a 20 second time period.
<bullet> On a given trading day, if an Active Quote Protection
Purge Event is triggered 15 times in SPY and a Quotation Adjustment
Purge Event is triggered 10 times in AAPL, all within 20 seconds, then
the Exchange will automatically remove all of the Market Maker's quotes
AAPL and SPY.
Technical Amendments
The Exchange proposes a few technical, non-substantive amendments
in Options 3, Section 15(c)(2). With the addition of the new Active
Quote Protection rule in proposed paragraph (B), the Exchange proposes
to renumber existing paragraphs (B)-(F) as proposed paragraphs (C)-(G)
and make related changes to update existing cross-cites within Section
15(c)(2). The Exchange also proposes in paragraph (A) to correct the
current cross-cites to paragraphs (B) and (C) to paragraphs (D) and (E)
because the Exchange originally intended to refer to how the System
removes quotes either pursuant to a Purge Event (which is governed by
proposed paragraph (D)) or pursuant to a Market Maker specifically
requesting the System to remove quotes in all series of an underlying
issue (which is governed by proposed paragraph (E)). The Exchange
proposes to reword the rule text within proposed Options 3, Section
15(c)(2)(D) to replace the term ``options'' with the words ``series of
an options class'' to conform the wording in this paragraph to other
rule text with Options 3, Section 15. Additionally, the Exchange
proposes to add the words ``or Group'' to Options 3, Section
15(c)(2)(F) because a Group may also request re-entry pursuant to
proposed Options 3, Section 15(c)(2)(C) and would receive a Reentry
Notification Message.
Lastly, the Exchange proposes to title paragraph (A) as ``Rapid
Fire'' and paragraph (C) as ``Multi-Trigger'' to more clearly identify
which rules apply to which risk protections.
2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act,\19\ in general, and furthers the objectives of section
6(b)(5) of the Act,\20\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
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\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed Active Quote Protection
risk protection is consistent with the Act because it will enhance the
risk protection tools available to Market Makers and Groups by
introducing a
[[Page 58377]]
new method of establishing and monitoring for risk parameters that will
be offered as an alternative to existing Rapid Fire risk parameters,
thereby supporting a Market Maker's ability to manage their risk on the
Exchange, and also providing them with flexibility to use additional
tools to manage risk. As noted above, while the passive (Rapid Fire)
and active (Active QP) risk counter functionality will be mutually
exclusive on each badge, Market Makers will still be able to use both
to cover their activity on the Exchange by getting multiple badges and
setting each risk counter by badge. The Exchange believes that offering
more risk management tools to Market Makers would mitigate their
exposure to excessive risk. The Exchange further believes that having
the new Active Quote Protection functionality leverage the existing
Multi-Trigger functionality will similarly support a Market Maker's
ability to manage their risk on the Exchange by including Active Quote
Protection purge events to the Multi-Trigger counter. As noted above,
the risk to Market Makers is not limited to a single series in an
option or even multiple series in an option as Market Makers that quote
in multiple series of multiple options have significant exposure,
requiring them to offset or hedge their overall positions. Market
Makers are required to continuously quote in assigned options, and
quoting across many series in an option or multiple options creates the
possibility of executions that can create large, unintended principal
positions that could expose Market Makers to unnecessary risk. Today,
Multi-Trigger is designed to assist Market Makers or a Group in
managing their market risk by tracking the number of Purge Events
relative to the market-wide parameter set by the Market Maker or the
Group. The Exchange therefore believes that tracking the number of
Active Quote Protection purge events for a Market Maker against its
Multi-Trigger Threshold would be similarly useful for managing market
risk so that they can provide deep and liquid markets to the benefit of
all investors. Ultimately, the Exchange believes that providing Market
Makers with additional tools in the manner described above to manage
their risk parameters serves to perfect the mechanism of a free and
open market and a national market system, and, in general to protect
investors and the public interest because Market Makers will be better
able to manage risks with these tools.
With regard to the impact of this proposal on system capacity, the
Exchange notes that it has analyzed its capacity and represents that it
and the Options Price Reporting Authority have the necessary systems
capacity to handle any potential additional traffic associated with the
proposed rule change. The Exchange believes that its members will not
have a capacity issue as a result of this proposal.
The Exchange further represents that its proposal will continue to
operate consistently with the firm quote obligations of a broker-dealer
pursuant to Rule 602 of Regulation NMS. Specifically, any marketable
interest that is executable against a Market Maker's quotes that are
received \21\ by the Exchange prior to the time this functionality is
triggered will be automatically executed at the price up to the Market
Maker's size, regardless of whether such execution results in
executions in excess of the Market Maker's pre-set Contract Limit.\22\
As discussed above, this is also in line with how current Rapid Fire
operates today. The Exchange believes that the proposed changes in
proposed sub-paragraph (D)(ii) to specify that this Rule will apply to
marketable orders and quotes (currently silent on marketable orders),
and to specify the time of receipt of such marketable interest that is
executable against the size of the Market Maker's quote, will promote
clarity in how the System currently operates for Rapid Fire and will
operate for Active Quote Protection.
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\21\ See supra note 9.
\22\ See proposed subparagraph (D)(ii) of Options 3, Section
15(c)(2).
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As noted above, the proposed Active Quote Protection functionality
is similar to existing active risk counter functionality on another
options exchange, which currently allows users to actively decrement
the risk counter by a specified amount at any time, rather than waiting
until a risk limit is reached or the user otherwise sends a specific
instruction to the exchange to completely reset the counting
program.\23\
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\23\ See supra note 4.
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Technical Amendments
The Exchange believes that the technical amendments in Options 3,
Section 15(c)(2) described above are consistent with the Act because
they will promote clarity in the rules and make the Rulebook easier to
navigate for market participants by updating rule numbering and
existing cross-cites as described above. Furthermore, the Exchange also
believes that adding the defined terms for Rapid Fire and Multi-Trigger
in the rule text will promote clarity so that Members can more easily
locate the relevant functionalities in the Rulebook. Rewording the rule
text within proposed Options 3, Section 15(c)(2)(D) to replace the term
``options'' with the words ``series of an options class'' will conform
the wording in this paragraph to other rule text with Options 3,
Section 15. Finally, adding the words ``or Group'' to Options 3,
Section 15(c)(2)(F) will make the sentence more accurate because a
Group may also request re-entry pursuant to proposed Options 3, Section
15(c)(2)(C) and would receive a Reentry Notification Message.
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 does not believe that the proposed Active Quote
Protection functionality will impose any undue burden on intra-market
competition as it is aimed at mitigating exposure to excessive risk
when trading on the Exchange. While the Exchange will offer the
proposed functionality to Market Makers only, the proposed risk
protection is intended to provide Market Makers with an additional tool
to manage their risk parameters in a manner they deem appropriate. As
such, the Exchange believes that the proposed functionality may
facilitate Market Makers' provision of liquidity on the Exchange,
thereby benefitting all market participants through additional
execution opportunities at potentially improved prices.
The Exchange also believes that its Active Quote Protection
proposal does not impose an undue burden on inter-market competition as
the proposed risk protection is similar to an existing risk protection
on MEMX \24\ as described above, and any options market could adopt
similar rules.
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\24\ See supra note 4.
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Lastly, the Exchange does not believe that the proposed technical
amendments in Options 3, Section 15(c)(2) will impose an undue burden
on competition as these are non-substantive changes to promote clarity
in the rules and make the Rulebook easier to navigate for market
participants.
[[Page 58378]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to section 19(b)(3)(A)(iii) of the Act \25\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\26\
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\25\ 15 U.S.C. 78s(b)(3)(A)(iii).
\26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c3b1b6afa6eea0acaeaea6adb7b083b0a6a0eda4acb5"><span class="__cf_email__" data-cfemail="8efcfbe2eba3ede1e3e3ebe0fafdcefdebeda0e9e1f8">[email protected]</span></a>. Please include
file number SR-BX-2023-019 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-BX-2023-019. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-BX-2023-019 and should be
submitted on or before September 15, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18301 Filed 8-24-23; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 25, 2023.
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