Notice2023-22925
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt Risk Settings Rules Applicable to Options Trading
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
October 18, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 200 (Wednesday, October 18, 2023)</title>
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[Federal Register Volume 88, Number 200 (Wednesday, October 18, 2023)]
[Notices]
[Pages 71898-71903]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-22925]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98730; File No. SR-MEMX-2023-28]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Adopt Risk
Settings Rules Applicable to Options Trading
October 12, 2023.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 29, 2023, MEMX LLC (``MEMX'' or the ``Exchange'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rule change as described in Items I and II below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposed rule to amend
the Exchange's risk settings rules applicable to Options trading. The
Exchange has designated this proposal as ``non-controversial'' pursuant
to section 19(b)(3)(A)(iii) of the Act and provided the Commission with
the notice required by Rule 19b-4(f)(6)(iii) thereunder. The Exchange
has commenced operations of MEMX Options on September 27, 2023. As
such, the Exchange proposes to implement the changes to its options
risk controls immediately. The text of the proposed rule change is
provided in Exhibit 5.
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 provide optional risk
controls for Members \3\ who participate in the Exchange's options
market (such market, ``MEMX Options'' and such Members, ``Options
Members''), under proposed Interpretation and Policies .01 and .02 of
Exchange Rule 21.17, and to provide clarifying language in proposed
Interpretation and Policy .03 of Exchange Rule 21.17. In order to help
Options Users \4\ to manage their risk, the Exchange proposes to add
certain risk settings on MEMX Options which the Exchange already offers
to Users in its market for equity securities (``MEMX Equities''). Under
the proposed Interpretation and Policies .01 and .02 of Exchange Rule
21.17, Users will have the same ability to manage their risk with
respect to orders on the MEMX Options platform as Users currently have
on the MEMX Equities platform (as set forth in Interpretation and
Policies .01 and .02 of Exchange Rule 11.10). Lastly, the Exchange
proposes to add Interpretation and Policy .03 of Exchange Rule 21.17 to
clarify that the risk controls described in Exchange Rule 21.17 are
meant to supplement, and not replace, a User's internal risk monitoring
and management systems.
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\3\ See Exchange Rule 1.5(p).
\4\ See Exchange Rule 1.5(jj).
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The Exchange proposes to add controls which will be exercisable and
configurable by individual Users, and the thresholds of the controls
may be adjusted within certain limits away from the assigned default
values. The Exchange notes that other national securities exchanges
have similar risk settings rules in their rulebooks.\5\ As previously
noted, these risk settings will largely mirror the MEMX Equities
settings rules in Interpretation and Policies .01 and .02 to Rule
11.10. The Exchange additionally proposes to add clarifying language in
proposed Interpretation and Policy .03 of Exchange Rule 21.17.
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\5\ See, e.g., Interpretations and Policies .01 and .02(a) of
Rule 11.13 of the BYX Exchange Rulebook, available at <a href="https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf</a>;
Interpretations and Policies .01 and .02(a) of Rule 11.13 of the BZX
Exchange Rulebook, available at <a href="https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf</a>; Interpretations and
Policies .01 and .02(a) of Rule 11.10 the EDGA Exchange Rulebook,
available at <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf</a>; and Interpretations and Policies .01 and .02(a)
of Rule 11.10 the EDGX Exchange Rulebook, available at <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf</a>.
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Specifically, in proposed Interpretation and Policy .01 of Exchange
Rule 21.17, the Exchange proposes to offer risk settings that will
result in orders being cancelled on entry, including: (i) controls
related to the maximum dollar amount for a single order and the maximum
number of contracts that may be included in a single order; (ii)
controls related to order types or modifiers that can be utilized as
well as when the market is crossed; (iii) controls to restrict the
options classes for which a User may enter orders or to restrict
activity to test symbols only; (iv) controls prohibiting the entry of
duplicative orders; (v) controls restricting the overall rate of order
entry; and (vi) credit controls measuring both gross and net exposure
that warn when approached, and when breached, prevent submission of
either all new orders or Market Orders \6\ only. The Exchange further
proposes, in proposed Interpretation and Policy .02 of Exchange Rule
21.17, to offer (vii) risk functionality that permits a User to
[[Page 71899]]
cancel all unexecuted orders and quotes in the MEMX Options Book, block
the entry of any new orders or quotes, or both cancel all unexecuted
orders and quotes and block the entry of any new orders and quotes; and
(viii) batch cancel functionality. Each of these functionalities will
be further described in the paragraphs below. Additionally, in proposed
Interpretation and Policy .03 to Exchange Rule 21.17, the Exchange
would provide clarifying language that the risk controls described in
Exchange Rule 21.17 do not replace the User's own internal risk
management systems, monitoring, and procedures and are not designed for
compliance with Exchange Act Rule 15c3-5.\7\
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\6\ See Exchange Rule 21.1(d)(2).
\7\ 17 CFR 240.15c3-5.
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Publication of Established Numeric Values
Current Rule 21.17 states that ``all numeric values established by
the Exchange pursuant to this Rule will be maintained by the Exchange
in publicly available specifications and/or published in a Regulatory
Circular.'' As the proposed Interpretations and Policies described
below would be contained in Rule 21.17, that language would also apply
to such Interpretations and Policies. As a result, to the extent the
Exchange establishes default values for certain risk settings, as
described below, such default values would be readily ascertainable by
Users and such Users will be able to determine whether they wish to
maintain the default values established by the Exchange or to adopt
different values in accordance with their overall risk mitigation
strategy.
The Exchange notes that other national securities exchanges
establish numeric values pursuant to the risk settings for their
options platforms in publicly available specifications and regulatory
circulars.\8\
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\8\ See, e.g., Rule 21.17 of the BZX Exchange Rulebook,
available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf</a>; and Rule 16.3 of the EDGX Exchange
Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf</a>.
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Controls Related to Maximum Dollar Amount and Maximum Number of
Contracts
Proposed paragraph (a) of proposed Interpretation and Policy .01 of
Exchange Rule 21.17 would provide for order entry controls related to
(i) the maximum dollar amount for a single order, and (ii) the maximum
number of contracts that may be included in a single order. These
controls on maximum notional value per order and the maximum number of
contracts per order would each be User-configurable up to a maximum
allowable limit. The Exchange would set default values on the maximum
notional value per order and maximum number of contracts per order.\9\
The System \10\ will reject or cancel an order that exceeds the User-
configured limits or which exceeds the default value if the User has
not entered any configuration for these controls. This proposed
paragraph (a) would provide Options Members with the same risk control
functionality on maximum notional value per order and maximum number of
contracts per order as is currently provided to Members of MEMX
Equities under Interpretation and Policy .01(a) and .01(b) of Exchange
Rule 11.10. The Exchange notes that at least one other options exchange
provides similar functionality on its trading platform.\11\ The
Exchange also notes that other national securities exchanges, including
the Exchange, include this functionality on their equities
platforms.\12\ The purpose of proposed paragraph (a) of Interpretation
and Policy .01 of Exchange Rule 21.17 is to provide the same maximum
notional value risk setting functionality and maximum share risk
setting functionality for Users on MEMX Options, as is currently
provided to Users on MEMX Equities.
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\9\ See ``Publication of Established Numeric Values'' above for
a description of how the Exchange will notify Members of default
values applicable to risk settings.
\10\ See Exchange Rule 1.5(gg).
\11\ See, e.g., Rule 6.40P-O(a)(2)(A)(i) of the NYSE Arca
Exchange Rulebook, available at <a href="https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127">https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127</a>.
\12\ See Interpretations and Policies .01(a) and .01(b) of Rule
11.13 of the BYX Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf</a>;
Interpretations and Policies .01a and .01(b) of Rule 11.13 of the
BZX Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf</a>; Interpretations and
Policies .01(a) and .01(b) of Rule 11.10 of the EDGA Exchange
Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf</a>; and Interpretations and Policies .01(a)
and .01(b) of Rule 11.10 of the EDGX Exchange Rulebook, available
at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf</a>. See also Interpretations and Policies 01(a) and
.01(b) of Rule 11.10 of the MEMX Rulebook, available at: <a href="https://info.memxtrading.com/regulation/memx-rules/">https://info.memxtrading.com/regulation/memx-rules/</a>.
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Controls Related to Order Types or Modifiers and Specific Market
Conditions
Proposed paragraph (b) of Interpretation and Policy .01 of Exchange
Rule 21.17 would provide controls designed to prevent the entry of
specific order types and modifiers, as well as the entry of orders when
specific market conditions occur. The Exchange would provide a User-
configurable on/off switch to allow or disallow the entry of specific
types of orders or the entry of any orders upon the existence of
certain market conditions. The default value would be to allow the
entry of orders. Specifically, the Exchange at this time would provide
an on/off switch for (i) orders marked as Intermarket Sweep Orders
(``ISOs''), (ii) orders entered when the National Best Bid and Offer
(``NBBO'') is crossed, and (iii) Market Orders. With respect to
controls on ISOs, the proposal would provide MEMX Options Users with
the same ability to allow or disallow ISOs as is currently available to
Users of MEMX Equities under Interpretation and Policy .01(c) of
Exchange Rule 11.10. With respect to controls to allow or cancel
incoming orders when the market is crossed, the proposal would provide
MEMX Options Users with the same ability to allow or disallow incoming
orders during a crossed market as is currently available to Members of
MEMX Equities under Exchange Rule 11.10(a)(2). To clarify, with respect
to controls on ISO orders and orders during crossed markets, proposed
paragraph (b) of Interpretation and Policy .01 of Exchange Rule 21.17
would provide the same ISO and crossed market functionalities for Users
on MEMX Options, as are currently provided to Users on MEMX Equities.
The Exchange notes that at least one other options exchange provides
similar functionality on its trading platform.\13\ The Exchange also
notes that other national securities exchanges, including the Exchange,
provide this functionality on their equities platforms.\14\
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\13\ See, e.g., Rule 6.40P-O(a)(2)(A)(iii) of the NYSE Arca
Exchange Rulebook, available at <a href="https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127">https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127</a>.
\14\ See Interpretations and Policy .01(c) of Rule 11.13 of the
BYX Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf</a>; Interpretations and Policy
.01(c) of Rule of Rule 11.13 of the BZX Exchange Rulebook, available
at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf</a>; Interpretations and Policy .01(c) of Rule
11.10 the EDGA Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf</a>;
Interpretations and Policy .01(c) of Rule 11.10 the EDGX Exchange
Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf</a>. See also Interpretations and Policy
.01(c) of Rule 11.10 of the MEMX Rulebook, available at: <a href="https://info.memxtrading.com/regulation/memx-rules/">https://info.memxtrading.com/regulation/memx-rules/</a>.
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With respect to controls on Market Orders, the Exchange does not
presently provide this functionality for MEMX Equities. The Exchange
notes that other national securities exchanges provide functionality
for Users to apply a risk
[[Page 71900]]
setting that would reject market orders during continuous trading or
auctions.\15\ The Exchange proposes to apply the same functionality to
MEMX Options. Using this functionality, a User of MEMX Options would be
allowed to reject Market Orders; the default setting would be to allow
Market Orders. The Exchange proposes to make the risk setting User-
configurable and will not require Users to utilize the Market Order
risk setting. The purpose of this proposed risk setting is designed to
prevent the entry of orders that may cause undue market impact, and
reduce the potential for disruptive, market-wide events.
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\15\ See Exchange Act Release Nos. 97988 (July 25, 2023), 88 FR
49513 (July 31, 2023)(SR-CboeEDGA-2023-012); 97986 (July 25, 2023),
88 FR 49540 (July 31, 2023) (SR-CboeBYX-2023-011); 97987 (July 25,
2023), 88 FR 49516 (July 31, 2023) (SR-CboeEDGX-2023-046); see also
Nasdaq Rulebook Section 5(b), available at: <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/nasdaq-equity-6">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/nasdaq-equity-6</a>.
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Controls to Restrict Options Classes To Test Symbols
Proposed paragraph (c) of Interpretation and Policy .01 of Exchange
Rule 21.17 would provide controls to restrict the options classes for
which a User may enter orders to test symbols only, which would apply
upon order entry. The Exchange would provide a User-configurable on/off
switch to restrict orders entered to test symbols only if configured by
the User. The default value of such on/off switch will be to allow all
options classes. The proposal would provide MEMX Options Users with the
same ability to restrict options classes as is currently available to
Users of MEMX Equities under Interpretation and Policy .01(d) of
Exchange Rule 11.10.
The Exchange notes that at least one other options exchange
provides similar functionality on its trading platform.\16\ The
Exchange also notes that other national securities exchanges, including
the Exchange, already have controls to restrict the entry of orders in
specifically identified securities on their equities platforms.\17\ The
purpose of proposed paragraph (c) of Interpretation and Policy .01 of
Exchange Rule 21.17 is to provide Users on MEMX Options the same
functionality to restrict the types of options classes which can be
traded, as is currently provided to Users on MEMX Equities to restrict
the types of securities which can be traded to test symbols only.
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\16\ See, e.g., Rule 6.40P-O(a)(2)(A)(iv) of the NYSE Arca
Exchange Rulebook, available at <a href="https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127">https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127</a>.
\17\ See Interpretations and Policy .01(d) of Rule 11.13 of the
BYX Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf</a>; Interpretations and Policy
.01(d) of Rule of Rule 11.13 of the BZX Exchange Rulebook, available
at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf</a>; Interpretations and Policy .01(d) of Rule
11.10 the EDGA Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf</a>;
Interpretations and Policy .01(d) of Rule 11.10 the EDGX Exchange
Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf</a>. See also Interpretations and Policy
.01(d) of Rule 11.10 of the MEMX Rulebook, available at: <a href="https://info.memxtrading.com/regulation/memx-rules/">https://info.memxtrading.com/regulation/memx-rules/</a>.
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Controls To Prohibit Duplicative Orders
Proposed paragraph (d) of Interpretation and Policy .01 of Exchange
Rule 21.17 would provide controls to prohibit duplicative orders, which
would apply upon order entry.\18\ The Exchange would provide the User
with the ability to set a duplicative order count and time window in
seconds, subject to a maximum allowable limit of order count and time
window. The Exchange would also provide default values for order count
and time window in seconds, which would be the minimum values to be
selected.\19\ The control would be triggered when the duplicative order
count is exceeded within the time window specified. When such control
is triggered, the System would reject incoming orders. Order
cancellations would be processed normally during the time when the
control is triggered.
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\18\ A duplicative order is one with the same Executing Firm
Identifier (``EFID''), side, price, size, and symbol.
\19\ See ``Publication of Established Numeric Values'' above for
a description of how the Exchange will notify Members of default
values applicable to risk settings.
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The Exchange notes that at least one other options exchange
provides similar functionality to prevent duplicative orders on its
trading platform.\20\ The Exchange notes that other national securities
exchanges, including the Exchange, include controls on duplicative
orders in their risk settings for their equities platforms.\21\ The
proposal would provide Users of MEMX Options with the same ability to
prohibit duplicative orders as is currently available to Users of MEMX
Equities under Interpretation and Policy .01(e) of Exchange Rule 11.10.
The purpose of proposed paragraph (d) of Interpretation and Policy .01
of Exchange Rule 21.17 is to provide the same functionality to prohibit
duplicative orders for Users on MEMX Options, as is currently provided
to Users on MEMX Equities.
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\20\ See, e.g., Rule 6.40P-O(a)(2)(A)(v) of the NYSE Arca
Exchange Rulebook, available at <a href="https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127">https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127</a>.
\21\ See Interpretations and Policy .01(e) of Rule 11.13 of the
BYX Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf</a>; Interpretations and Policy
.01(e) of Rule of Rule 11.13 of the BZX Exchange Rulebook, available
at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf</a>; Interpretations and Policy .01(f) of Rule
11.10 the EDGA Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf</a>;
Interpretations and Policy .01(e) of Rule 11.10 the EDGX Exchange
Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf</a>. See also Interpretations and Policy
.01(e) of Rule 11.10 of the MEMX Rulebook, available at: <a href="https://info.memxtrading.com/regulation/memx-rules/">https://info.memxtrading.com/regulation/memx-rules/</a>.
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Controls To Restrict the Overall Rate of Orders
Proposed paragraph (e) of Interpretation and Policy .01 of Exchange
Rule 21.17 would provide controls to restrict the overall rate of
orders, which would apply upon order entry. The control would include a
default value for the time increment and a default value for the number
of orders entered during that time increment.\22\ The Exchange would
provide the User with the ability to configure an order count and time
window, subject to minimum and maximum values identified by the
Exchange. The control would be triggered when the order count is
exceeded within the time window specified. When such control is
triggered, the System would reject incoming orders. Order cancellations
would be processed normally during the time when the control is
triggered. The proposal would provide Users of MEMX Options with the
same ability to restrict the rate of orders as is currently available
to Users of MEMX Equities under Interpretation and Policy .01(f) of
Exchange Rule 11.10.
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\22\ See ``Publication of Established Numeric Values'' above for
a description of how the Exchange will notify Members of default
values applicable to risk settings.
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The Exchange also notes that other national securities exchanges,
including the Exchange, already have risk settings for their Equities
platform which allow Users to restrict the rate of orders.\23\ The
[[Page 71901]]
purpose of proposed paragraph (e) of Interpretation and Policy .01 of
Exchange Rule 21.17 is to provide the same functionality to set the
maximum overall rate of orders for Users on MEMX Options, as is
currently provided to Users on MEMX Equities.
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\23\ See, e.g., Interpretations and Policy .01(f) of Rule 11.13
of the BYX Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf</a>; Interpretations and
Policy .01(f) of Rule of Rule 11.13 of the BZX Exchange Rulebook,
available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf</a>; Interpretations and Policy .01(f) of Rule
11.10 the EDGA Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf</a>; and
Interpretations and Policy .01(f) of Rule 11.10 the EDGX Exchange
Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf</a>. See also Interpretations and Policy
.01(f) of Rule 11.10 of the MEMX Rulebook, available at: <a href="https://info.memxtrading.com/regulation/memx-rules/">https://info.memxtrading.com/regulation/memx-rules/</a>.
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Credit Controls for Gross and Net Exposure
Proposed paragraph (f) of Interpretation and Policy .01 of Exchange
Rule 21.17 would provide for credit controls on gross and net exposure,
which would apply upon order entry. The default value for each such
controls would be set to a maximum dollar amount.\24\ Users would be
able to configure the limit for each control, subject to a minimum
limit amount. Users would be able to select configurable controls on
daily gross notional exposure, either for (i) all orders or (ii) only
Market Orders. For any bid or offer, the System will cancel or reject
it if such bid or offer causes the User's daily gross notional exposure
to exceed a User-configured limit. For any Market Order, the System
will cancel or reject it if such Market Order causes the User's daily
gross notional exposure to exceed a User-configured limit. Similarly,
Users would be able to select configurable controls on daily net
notional exposure, either for (i) all orders or (ii) only Market
Orders. For any bid or offer, the System will cancel or reject it if
such bid or offer causes the User's daily net notional exposure to
exceed a User-configured limit. For any Market Order, the system will
cancel or reject it if such Market Order causes the User's daily gross
notional exposure to exceed a User-configured limit. In addition to
blocking orders for each of the controls set forth above, the System
will block either all new orders or Market Orders only once an
applicable setting has been breached.
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\24\ See ``Publication of Established Numeric Values'' above for
a description of how the Exchange will notify Members of default
values applicable to risk settings.
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This proposal would provide Users of MEMX Options with the same
ability to set configurable controls on daily net notional and daily
gross notional exposure, for all orders or for Market Orders, as is
currently available to Users of MEMX Equities under Interpretation and
Policy .01(g) of Exchange Rule 11.10. The Exchange notes that other
national securities exchanges, including the Exchange, already provide
functionality to set configurable controls on daily net notional
exposure and daily gross notional exposure that apply on order
entry.\25\
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\25\ See, e.g., Interpretations and Policy .01(h) of Rule 11.13
of the BYX Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BYX_Rulebook.pdf</a>; Interpretations and
Policy .01(h) of Rule of Rule 11.13 of the BZX Exchange Rulebook,
available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/BZX_Exchange_Rulebook.pdf</a>; Interpretations and Policy .01(h) of Rule
11.10 the EDGA Exchange Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGA_Rulebook.pdf</a>; and
Interpretations and Policy .01(h) of Rule 11.10 the EDGX Exchange
Rulebook, available at: <a href="https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf">https://cdn.cboe.com/resources/regulation/rule_book/EDGX_Rulebook.pdf</a>. See also Interpretations and Policy
.01(h) of Rule 11.10 of the MEMX Rulebook, available at: <a href="https://info.memxtrading.com/regulation/memx-rules/">https://info.memxtrading.com/regulation/memx-rules/</a>.
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The Exchange believes that credit controls on daily net notional
and daily gross notional exposure are of importance in the options
markets. The purpose of proposed paragraph (f) of Interpretation and
Policy .01 of Exchange Rule 21.17 is to provide the same functionality
to set configurable controls on daily net notional exposure and daily
gross notional exposure for Users on MEMX Options, as is currently
provided to Users on MEMX Equities.
Controls for Block and Cancel Functionality
Proposed paragraph (a) of Interpretation and Policy .02 of Exchange
Rule 21.17 would provide functionality to (i) cancel all unexecuted
orders and quotes in the MEMX Options Book, (ii) block the entry of any
new orders and quotes, or (iii) both cancel all unexecuted orders and
quotes in the MEMX Options Book and block the entry of any new orders
and quotes. Additionally, in addition to functionality (i), (ii), and
(iii) described in this paragraph, the Exchange will provide
functionality to (iv) automatically cancel a User's orders to the
extent the User loses its connection to the Exchange. This proposal
would provide Users of MEMX Options with the same block and cancel
functionality as is currently available to Users of MEMX Equities under
Interpretation and Policy .02(a) of Exchange Rule 11.10. The Exchange
notes that at least one other options exchange provides similar
functionality on its trading platform.\26\ The purpose of proposed
paragraph (a) of Interpretation and Policy .02 of Exchange Rule 21.17
is to provide the same functionality to block new orders, cancel open
orders, block new orders and cancel open orders, and cancel orders if a
User loses connection to the Exchange for Users on MEMX Options, as is
currently provided to Users on MEMX Equities.
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\26\ See Rule 6.40P-O(e)(3) and 6.40P-O(e)(4) of the NYSE Arca
Exchange Rulebook, available at <a href="https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127">https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127</a>.
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Controls for Mass Cancellation of Trading Interest Functionality
Finally, the Exchange proposes paragraph (b) of Interpretation and
Policy .02 of Exchange Rule 21.17, which would provide functionality to
Users of MEMX Options for the mass cancellation of trading interest
(i.e., ``batch cancel'' functionality). Users would be able to cancel
any orders in any series of options by requesting the Exchange to
affect such cancellation as per the instructions of the User. A User
initiating such a request may also request that the Exchange block new
inbound orders in any series of options. The block will remain in
effect until the User requests the Exchange remove the block. Proposed
paragraph (b) of Interpretation and Policy .02 of Exchange Rule 21.17
would provide the same batch cancel functionality to Users of MEMX
Options as is available to Users of MEMX Equities under Interpretation
and Policy .02(b) of Exchange Rule 11.10. The Exchange notes that at
least one other options exchange provides similar functionality on its
trading platform.\27\ The purpose of this proposed paragraph (b) is to
provide the same batch cancel functionality to Users of MEMX Options as
is currently provided to Users of MEMX Equities.
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\27\ See, e.g., Nasdaq Options Market Rulebook Chapter 3,
Section 19, available at: <a href="https://listingcenter.nasdaq.com/RuleBook/Nasdaq/rules/Nasdaq%20Options%203">https://listingcenter.nasdaq.com/RuleBook/Nasdaq/rules/Nasdaq%20Options%203</a>.
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The purpose of these risk settings is to provide MEMX Options Users
with functionality to assist in risk management, which will protect
both the User as well as the Exchange from entering potentially
erroneous orders that could have potential market impact. The Exchange
proposes to make these risk settings available to all Users and will
not require Users to use any of the risk settings provided. The
Exchange will not provide any preferential treatment to Users based
upon their use of any, all, or none of the risk settings.
Clarifying Language On Risk Controls
Pursuant to Rule 15c3-5 under the Act,\28\ a broker-dealer with
market access must perform appropriate due diligence to assure that its
controls are reasonably designed to be effective, and otherwise
consistent with the rule.\29\
[[Page 71902]]
Use of the Exchange's proposed risk settings for MEMX Options will not
automatically constitute compliance with Exchange or federal rules and
responsibility for compliance with all Exchange and SEC rules remains
with the User. In order to clarify that the risk controls proposed for
MEMX Options are not a substitute for a User's 15c3-5 obligations, the
Exchange proposes to provide clarifying language to this effect in
proposed Interpretation and Policy .03 to Exchange Rule 21.17. The
purpose of Interpretation and Policy .03 to Exchange Rule 21.17 is to
make clear that the User, and not the Exchange, will have the full
responsibility for ensuring that their orders comply with applicable
securities rules, laws, and regulations, and may not rely on the risk
settings for any such purpose. The Exchange notes that other exchanges
have included similar clarifying language in their options rules.\30\
The Exchange wishes to make clear that the use of the proposed risk
settings can replace User-managed risk management solutions, and use of
the proposed risk settings does not automatically constitute compliance
with Exchange rules. Rather, the Exchange intends these controls to act
as a complement to its Members' overall suite of controls designed to
comply with Rule 15c3-5 and other applicable securities rules, laws and
regulations.
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\28\ See supra note 7.
\29\ See Division of Trading and Markets, Responses to
Frequently Asked Questions Concerning Risk Management Controls for
Brokers or Dealers with Market Access, available at <a href="https://www.sec.gov/divisions/marketreg/faq-15c-5-riskmanagement-controls-bd.htm">https://www.sec.gov/divisions/marketreg/faq-15c-5-riskmanagement-controls-bd.htm</a>.
\30\ See, e.g., Commentary .01 to Rule 6.40P-O of the NYSE Arca
Exchange Rulebook, available at <a href="https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127">https://nysearca.wolterskluwer.cloud/rules/b44a170e7ccd1000a69b90b11c2ac4f10127</a>.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of section 6(b) of the Act,\31\ in general, and
furthers the objectives of sections and 6(b)(5) of the Act,\32\ 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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\31\ 15 U.S.C. 78f(b).
\32\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed risk settings promote just and
equitable principles of trade because the risk settings will be equally
available to all Users who trade on MEMX Options and such Users can
employ such risk settings as part of their overall risk management
strategy. Three of the proposed risk settings will apply to orders from
all Users and cannot be turned off, namely the duplicative order check,
the order rate check and the maximum contracts and maximum notional
check. However, the Exchange will establish default values for these
risk settings that are made publicly available through a Regulatory
Circular and/or publicly available specifications, as discussed above.
Further, Users will be able to configure these settings to different
levels that align with their overall risk mitigation strategy. The
remaining risk settings are optional and Users will be able to select
whether they would like to use any, all, or none of these risk
settings. No preferential treatment will be provided to Users who have
elected to use any, all, or none of the optional risk settings that are
available. Use of the risk settings does not unfairly discriminate
among the Users of MEMX Options because each risk setting is available
to all Users.
The Exchange believes the proposed risk settings will remove
impediments to and perfect the mechanism of a free and open market and
national market system because it provides additional functionality for
Users to manage risk. The proposed risk settings would provide Users
with the means to manage and control their risk profile, helping to
ensure the proper functioning of the market. The Exchange believes that
these controls are designed to protect investors and the public
interest because the proposed risk mitigation functionality will aid
Users in minimizing their financial exposure and reducing the potential
for market-disrupting events. The risk management functionality of the
risk settings could, in turn, enhance the integrity of trading on the
securities markets and help to assure the stability of the financial
system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposal is consistent with section
6(b)(8) of the Act \33\ in that it does not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act as explained below. The Exchange believes the
proposal will not impose a burden on intermarket competition because
Users of MEMX Options will be able to decide how they wish to utilize
the risk settings offered in the context of their overall risk
mitigation strategy. Users of MEMX Options are free to include the risk
settings available as part of their determination of where to trade, or
in many cases, not to use them at all. The Exchange does not believe
that the proposed rule change imposes a burden on intramarket
competition because the proposed risk settings will be available
equally to all Users. As previously discussed, the proposed risk
setting on MEMX Options which differs from the risk settings on MEMX
Equities (namely, controls on Market Orders) has been implemented by
other exchanges.\34\ Users would be able to choose the settings best
suited to their risk profile, potentially enabling them to better
manage their risk while trading on the Exchange. The Exchange believes
that the proposed risk setting will enable Users to strengthen their
risk management capabilities, which, in turn, may enhance the integrity
of trading on the options markets and help to assure the stability of
the financial system.
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\33\ 15 U.S.C. 78f(b)(8).
\34\ See supra note 15.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to section
19(b)(3)(A)(iii) of the Act \35\ and Rule 19b-4(f)(6) thereunder \36\
in that it effects a change that: (i) does not significantly affect the
protection of investors or the public interest; (ii) does not impose
any significant burden on competition; and (iii) by its terms, does not
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest.\37\
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\35\ 15 U.S.C. 78s(b)(3)(A)(iii).
\36\ 17 CFR 240.19b-4(f)(6).
\37\ In addition, Rule 19b-4(f)(6) requires a self-regulatory
organization to give the Commission written notice of its intent to
file the proposed rule change, along with a brief description and
text of the proposed rule change, at least five business days prior
to the date of filing of the proposed rule change, or such shorter
time as designated by the Commission. The Exchange has satisfied
this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative prior to 30 days after the date of the filing.
However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become operative upon filing. In support of its
[[Page 71903]]
waiver request, the Exchange states that the proposal will further the
interests of investors and the public by making available a risk
functionality by which Members (and each Member's Users) can manage
their risk on the Exchange's options platform, MEMX Options. These risk
settings will allow each User to configure a risk profile applicable to
their risk tolerance and as necessary in the context of their overall
risk management program, which the Exchange believes will assist in
maintaining the Exchange as a fair and orderly market that better
serves the interest of investors. Additionally, as discussed above, the
proposed changes will not impose any significant or undue burden on
competition because Options Members can decide how they wish to utilize
the risk settings offered in the context of their overall risk
mitigation strategy.
Further, the Exchange launched MEMX Options on September 27, 2023.
Waiver of the 30-day operative delay would allow the Exchange to
implement the proposed change to offer the proposed risk settings
immediately, which would benefit Members and investors by enabling the
Exchange to provide additional functionality for Options Members to
manage their risk. The Exchange states that these controls are designed
to protect investors and the public interest because the proposed risk
mitigation functionality will aid Members in minimizing their financial
exposure and reducing the potential for market-disrupting events. For
these reasons, and because the proposal does not raise any new or novel
issues that have not been previously considered by the Commission, the
Commission believes that waiver of the operative delay is consistent
with the protection of investors and the public interest. Accordingly,
the Commission hereby waives the 30-day operative delay and designates
the proposal operative upon filing.\38\
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\38\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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#6d1f180108400e0200000803191e2d1e080e430a021b"><span class="__cf_email__" data-cfemail="b0c2c5dcd59dd3dfddddd5dec4c3f0c3d5d39ed7dfc6">[email protected]</span></a>. Please include
file number SR-MEMX-2023-28 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-MEMX-2023-28. 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-MEMX-2023-28 and should be
submitted on or before November 8, 2023.
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\39\ 17 CFR 200.30-3(a)(12) and (a)(59).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-22925 Filed 10-17-23; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.