Notice2025-04515
Self-Regulatory Organizations: Investors Exchange LLC; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Adopt Rules To Govern the Trading of Options on the Exchange for a New Facility Called IEX Options
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
March 19, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 52 (Wednesday, March 19, 2025)</title>
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[Federal Register Volume 90, Number 52 (Wednesday, March 19, 2025)]
[Notices]
[Pages 12890-12914]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-04515]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102663; File No. SR-IEX-2025-02]
Self-Regulatory Organizations: Investors Exchange LLC; Notice of
Filing of Amendment No. 1 to a Proposed Rule Change To Adopt Rules To
Govern the Trading of Options on the Exchange for a New Facility Called
IEX Options
March 13, 2025.
On January 10, 2025, the Investors Exchange LLC (``IEX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt rules to govern the trading of options on
IEX Options LLC, a facility of the Exchange that will be established in
a separate rule filing. The proposed rule change was published for
comment in the Federal Register on January 21, 2025.\3\ On March 6,
2025, the Commission designated a longer period within which to take
action on the proposed rule change.\4\ On March 12, 2025, the Exchange
filed Amendment No. 1 to the proposed rule change.\5\ The Commission
has received comments on the proposed rule change.\6\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended by Amendment No. 1, from interested persons. Items I and II
below have been prepared by the Exchange.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 102190 (Jan. 14,
2025), 90 FR 7205.
\4\ See Securities Exchange Act Release No. 102536, 90 FR 11866
(Mar. 12, 2025). The Commission designated April 21, 2025 as the
date by which it should either approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change. See id.
\5\ Amendment No. 1 is publicly available on the Commission's
website at: sriex202502-580115-1667463.pdf. See infra, notes 9--12
and accompanying text for a further explanation of the proposed
revisions to the proposed rule change set forth in Amendment No. 1.
\6\ Comments on the proposed rule change are available at
<a href="https://www.sec.gov/comments/sr-iex-2025-02/sriex202502.htm">https://www.sec.gov/comments/sr-iex-2025-02/sriex202502.htm</a>.
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[[Page 12891]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
On January 10, 2025, IEX, pursuant to the provisions of Section
19(b)(1) under the Act and Rule 19b-4 thereunder, filed with the
Commission proposed rule change SR-IEX-2025-02 (the ``Initial
Proposal'').\7\ As described in the Initial Proposal, IEX is proposing
to adopt rules to govern the trading of options on IEX Options LLC, a
facility of the Exchange that will be established in a separate rule
filing (referred to herein as ``IEX Options''). The Exchange is filing
this proposal (``Amendment No. 1'') to amend the Initial Proposal as
described herein. Amendment No. 1 replaces and supersedes the Initial
Proposal in its entirety.
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\7\ See Securities Exchange Act Release No. 102190 (January 14,
2025), 90 FR 7205 (January 21, 2025) (``Initial Filing''), available
at <a href="https://www.iexexchange.io/resources/regulation/rule-filings">https://www.iexexchange.io/resources/regulation/rule-filings</a>.
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As proposed, the Exchange will operate IEX Options as a fully
automated trading system built on the core functionality of the
Exchange's approved equities platform, and in a manner similar to that
of other options exchanges. In addition, IEX Options will utilize a de
minimis delay on incoming order and quote messages designed to enable
IEX to update its view of the market prior to processing orders and
quotes, and an optional Market Maker quote parameter designed to
protect Market Makers from excessive risk due to execution of stale
quotes, in addition to other risk protections substantially similar to
those offered by other options exchanges.
The text of the proposed rule change is available at the Exchange's
website at <a href="https://www.iexexchange.io/resources/regulation/rule-filings">https://www.iexexchange.io/resources/regulation/rule-filings</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 the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 self-regulatory organization
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
Overview
The Commission published the proposed rule change for comment in
the Federal Register on January 21, 2025,\8\ and on March 6, 2025,
extended the review period to April 21, 2025.\9\
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\8\ Id.
\9\ See Securities Exchange Act Release No. 102536 (March 6,
2025), 90 FR 11866 (March 12, 2025).
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The Exchange is filing this Amendment No. 1 to the Initial Proposal
in order to provide increased clarity and modify certain aspects of the
Initial Filing. First, IEX proposes that the duration of the latency
mechanism (i.e., the de minimis delay on incoming order and quote
messages) set forth in proposed Rule 22.100(n) would be a fixed
duration of 350 microseconds rather than being configurable by the
Exchange. Second, as described herein, IEX proposes changes to more
narrowly tailor the application of the proposed Options Risk Parameter
(``ORP''),\10\ the optional Market Maker quote parameter designed to
protect Market Makers from excessive risk due to execution of stale
quotes. Specifically, IEX proposes to amend language pertaining to the
ORP to refine and clarify its function, as follows: (i) revise proposed
Rule 23.150(h)(1) to provide that the Exchange will determine on a
class-by-class basis whether to apply the ORP, which determination will
be communicated by Trading Alert; (ii) revise proposed Rule
23.150(h)(1)(C) to specify that if a quote instability determination is
generated for an options series being quoted by a Market Maker and the
quote is above (below) the price level of the quote instability
determination, the quote will be cancelled or repriced to the price
level of the quote instability determination, as selected by the Market
Maker; (iii) revise the Indicator formula specified in Supplementary
Material .04 to proposed Rule 23.150 (``quote instability
calculation'') to provide that the formula will assess price changes in
the underlying security in the context of the value of the options
series (rather than the value of the underlying) when determining
whether to issue a quote instability determination; and (iv) provide
that the Exchange would introduce a new variable to the quote
instability determination formula, a delta \11\ bound band, that would
prevent quote instability determinations for those options series with
deltas outside of the band, in order to more narrowly tailor
application of the ORP to those options series that present the
greatest risk of adverse selection to Market Makers.
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\10\ See proposed Rule 23.150(h)(1).
\11\ Delta is a measure of how sensitive an options series price
is to changes in the price of the underlying security.
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In addition, as described herein, this Amendment 1 clarifies that
the quote instability threshold range of 0-1, set forth in subsection
(2)(e) of the quote instability calculation, reflects a scale from 0%
to 100%, referencing the extent of the anticipated change in the quoted
option price compared to the then-current price of the option. The
quote instability threshold thus operates as a measure of whether the
value of the quote instability determination price change is
sufficiently meaningful enough to warrant generation of a quote
instability determination. Additionally, the Exchange proposes several
minor non-substantive stylistic edits and corrections to typographical
errors in the Exhibit 5 to the Initial Proposal.\12\
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\12\ See proposed Rule 23.120, Supplementary Material .01 (text
corrected to be formatted in italics), proposed Rule 23.130(g)(2)(B)
(was denoted as (A) incorrectly), proposed Rule 23.150(h) (intro
language misspelled ``cancellation''), proposed Rule 23.150(h)(1)(C)
(misspelled ``cancelled''). In addition, in proposed Supplementary
Material .04 to Rule 23.150, IEX replaced brackets around several
formula inputs with parentheses to avoid confusion with the use of
brackets to indicate deleted text. Further, IEX confirmed the
capitalization of the word ``proposed'' in several places.
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The Exchange proposes to adopt a series of rules in connection with
IEX Options, which will be a facility of the Exchange.\13\ As proposed,
the Exchange will operate IEX Options as a fully automated trading
system built on the core functionality of the Exchange's approved
equities platform, and in a manner similar to that of other options
exchanges.\14\
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\13\ IEX will file a separate proposed rule change with the
Commission pursuant to Section 19 of the Act to provide that IEX
Options will be operated by IEX Options LLC, a Delaware limited
liability company wholly owned by the Exchange, as a facility of the
Exchange as that term is defined in Section 3(a)(2) of the Act.
\14\ The IEX Options proposed rules are largely based on the
rules of other options exchanges, as described herein. When a
particular proposed rule is described as ``substantively identical''
to a rule(s) of another exchanges that means that the substance of
the proposed IEX Options rule is identical to the referenced rule of
the other exchange, with differences only to reflect terminology and
numbering. When a particular proposed rule is described as
``substantially similar'' to a rule(s) of another exchange this rule
filing describes the relevant differences.
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As proposed, IEX Options will operate an electronic trading system
to
[[Page 12892]]
list and trade options issued by the Options Clearing Corporation
(``Clearing Corporation'' or ``OCC''). Specifically, IEX proposes to
operate a fully automated, pro-rata priority options market in a manner
similar to that of other options exchanges. In addition, IEX Options
will utilize a de minimis delay on incoming order and quote messages
designed to enable IEX to update its view of the market prior to
processing orders and quotes, and an optional Market Maker quote
parameter designed to protect Market Makers from excessive risk due to
execution of stale quotes, in addition to other risk protections
substantially similar to those offered by other options exchanges.
The Exchange proposes to adopt rules applicable to IEX Options that
are substantially similar to the approved rules of the MEMX, C1, MIAX,
and NYSE Amex and Arca options exchanges, with the material proposed
differences described herein.\15\
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\15\ See rulebooks of MEMX LLC (``MEMX''), Cboe Exchange, Inc.
(``C1''), Miami International Securities Exchange, LLC (``MIAX''),
NYSE Arca, Inc. (``NYSE Arca Options''), and NYSE American LLC
(``NYSE Amex Options''). However, IEX is not proposing to trade
index options at this time and therefore is not proposing rules for
the listing and trading of index options.
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As provided in proposed Rule 17.110 (Applicability), existing
Exchange Rules \16\ applicable to the IEX equities market contained in
Chapters 1 through 16 of the Exchange Rules will apply to Options
Members unless a specific Exchange Rule applicable to the IEX Options
market (in proposed Chapters 17 through 29 of the Exchange Rules)
governs or unless the context otherwise requires.
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\16\ See IEX Rule 1.160(jj).
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The IEX Options Trading System \17\ will provide for the electronic
display and execution of orders on a pro-rata basis. All Exchange
Members will be eligible to participate in IEX Options by qualifying as
Options Members \18\ and obtaining one or more trading permits for
their activity on IEX Options, in accordance with applicable IEX
Options rules. The IEX Options Trading System will provide an optional
routing service for orders when trading interest is not present on IEX
Options and will comply with all applicable securities laws and
regulations and the obligations of the Options Order Protection and
Locked/Crossed Market Plan.
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\17\ See proposed Rule 22.100(a).
\18\ See proposed Rule 17.100.
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IEX Options Members
Pursuant to the proposed rules in Chapter 18 (Participation on IEX
Options), the Exchange will authorize any Exchange Member that meets
certain enumerated qualification requirements (any such Member, an
``Options Member'') and any Options Member's Sponsored Participants to
obtain access to, and transact business on, IEX Options.\19\
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\19\ See proposed Rules 18.100, 18.110, 18.120, and 18.130.
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There will be three types of Options Members--Options Order Entry
Firms (``OEFs''), Options Market Makers, and Options Clearing Members.
Options Members may act in one, two, or all such capacities. OEFs will
be those Options Members representing Customer Orders as agent on IEX
Options or trading as principal on IEX Options. Options Market Makers,
in turn, will be eligible to participate as Registered Market Makers or
Specialists, as set forth in Rule 23.100. Additionally, all Options
Market Makers may participate as Directed Marker Makers.\20\ Clearing
Members will be those Options Members that have been admitted to
membership in the Clearing Corporation pursuant to the provisions of
the Rules of the Clearing Corporation and are self-clearing or that
clear IEX Options Transactions for other Options Members.
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\20\ Directed Market Makers are subject to enhanced quoting
obligations (as compared to Registered Market Markers) as set forth
in proposed Rule 23.150(e)(3), which is substantively identical to
NYSE Amex Options Rule 964.1NYP.
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IEX proposes to issue different types of Trading Permits to Options
Members that allow the Trading Permit Holders to: (i) trade one or more
products authorized for trading on the Exchange; (ii) act in one or
more trading functions authorized by the Rules of IEX Options; and/or
(iii) act as a Clearing Member.\21\ Trading Permits shall be for the
types and terms as shall be determined by the Exchange from time to
time, and subject to effectiveness of one or more rule filings pursuant
to Section 19(b) of the Act. The proposed rule governing IEX's Trading
Permits, 18.140, is based on C1 Rule 3.1.\22\
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\21\ See proposed Rule 18.140.
\22\ On C1, part of the process of applying to be a Trading
Permit Holder is for a broker-dealer to qualify as a participant or
member of the exchange. IEX's proposed rule therefore differs from
C1 Rule 3.1 because it does not include the membership
qualification-related provisions that are addressed elsewhere in
IEX's proposed Chapter 18. In particular, IEX is not proposing to
incorporate C1 Rule 3.1(a)(3)'s language regarding jurisdiction over
Trading Permit Holders because it is covered by Rule 2.120
(requiring all IEX Members to consent to the Exchange's
jurisdiction) and proposed Rule 18.140(e) (applying the Exchange's
jurisdictional authority to all Options Members). In addition, C1's
rule includes limitations on the number of trading permits the
exchange may issue. IEX is not proposing such limitations.
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The rules governing Registered Market Makers and Specialists are
substantially based on MIAX and C1 rules.\23\ To become an Options
Market Maker, an Options Member will be required to register by filing
a written application and obtain any required trading permits.\24\ The
Exchange will not place any limit on the number of entities that may
become Options Market Makers, the number of appointments an Options
Market Maker may have, or the number of Options Market Makers that may
have appointments in a class unless the Exchange determines to impose
any such limit based on system constraints, capacity restrictions, or
other factors relevant to protecting the integrity of the Trading
System. The Exchange will not impose any such limitations until it has
submitted objective standards for imposing the limits to the Commission
for its review and approval.\25\
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\23\ See MIAX Rules 600-609 (regarding market maker
qualifications and obligations) and MIAX Rules 514(d), (e), and (g)
(regarding market maker quoting and priority). The primary
differences between these MIAX rules and IEX's proposed Market Maker
rules are: (1) MIAX has three tiers of market makers, while IEX
proposes to have two tiers; (2) MIAX puts Market Makers at a
priority level above other non-Priority Customer interest, while IEX
will not (IEX's proposed rules are substantively identical to the
priority rules in C1 Rule 5.32 as it pertains to C1's Preferred
Market Makers); (3) IEX proposes to allocate participation
entitlements for Specialists with a priority quote based on the
amount of non-Priority customer interest (which is how C1 Rule
5.32(a)(2)(B) allocates priority overlays), while MIAX only looks at
the amount of other market marker interest; and (4) MIAX offers a
Market Turner priority overlay which IEX is not proposing to adopt.
\24\ See proposed Rules 23.100 and 18.140.
\25\ This provision is substantively identical to MEMX Rule
22.2(c) and MIAX Rule 600(d).
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As proposed, the Exchange shall appoint Registered Market Makers to
one or more classes of options contracts traded on the Exchange. In
making such appointments the Exchange shall consider the financial
resources available to the Registered Market Maker, the Registered
Market Maker's experience and expertise in market making or options
trading, the preferences of the Registered Market Maker to receive
appointments in specific options classes, and the maintenance and
enhancement of competition among Registered Market Makers in each class
of options contracts to which they are appointed.\26\
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\26\ See proposed Rule 23.120(a)(1).
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While there may be several Registered Market Makers appointed to a
particular class of options contracts, the Exchange may appoint only
one Specialist to each options class traded on the Exchange.\27\
[[Page 12893]]
To be appointed as a Specialist, an Options Member must first satisfy
the criteria for appointment as a Registered Market Maker set forth in
Rule 23.120(a)(1) and then must participate in the Specialist
Qualification Process conducted by the Exchange and detailed in
proposed Rule 23.130(b).\28\ Factors to be considered for selection as
a Specialist include, but are not limited to, representations regarding
capital operations, personnel or technical resources.\29\ After
designating certain Market Makers as Specialists, the Exchange will
conduct a process to determine which options classes to allocate to
which Specialist, based upon which candidate appears best able to
perform the functions of a Specialist in the designated options
classes. Factors to be considered in the allocation of options classes
to Specialists by the Exchange include, but are not limited to the
following: experience with trading the options issue; adequacy of
capital; willingness to promote the Exchange as a marketplace;
operational capacity; support personnel; history of adherence to
Exchange rules and securities laws; and evaluations made pursuant to
Rule 23.130(f).\30\ The Exchange will also consider the number and
quality of issues that have been allocated, reallocated or transferred
to a Specialist and the Specialist's willingness to promote the
Exchange as a marketplace.\31\
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\27\ See proposed Rule 23.130(g)(1)(A), which is substantively
identical to NYSE Amex Options Rule 923NY(b). The language providing
that the Exchange ``may'' appoint only one Specialist to each
options class is based upon and substantively identical to NYSE Amex
Options Rule 923NY(b).
\28\ IEX based the proposed Specialist rule (23.130) on NYSE
Amex Options Rules 927NY, 927.1NY, and 927.2NY because these rules
provide clear instructions to prospective Specialist candidates
about the manner in which the Exchange selects and evaluates
Specialists, and detailed rules about Specialist rights and
obligations.
\29\ See proposed Rule 23.130(b)(1). This rule is substantively
identical to NYSE Amex Options Rule 927NY, with the exception that
IEX is not proposing to obligate Specialists to make FLEX quotes,
because those are not offered by the Exchange.
\30\ See proposed Rule 23.130(g). This rule is substantively
identical to NYSE Amex Options Rule 927.2NY
\31\ Id.
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The Exchange will also evaluate the performance of Specialists, and
upon a finding that a Specialist failed to meet minimum performance
standards, may take adverse action against the Specialist; Specialists
shall have the right to appeal any adverse actions against them
pursuant to IEX Rule Series 9.500, which governs adverse actions.\32\
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\32\ See proposed Rule 23.130(b)(2), and (f). These rules are
substantively identical to NYSE Amex Options Rules 927NY(b)(2) and
927.1NY, respectively.
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Quotations may only be entered by a Market Maker and only in
classes of options contracts to which the Market Maker is
appointed.\33\ Market Makers may also submit orders in classes of
options contracts to which the Market Maker is appointed, which shall
constitute a quote, and thus would help to satisfy the Market Maker's
quoting obligation.\34\ In addition, an Options Market Maker with an
OEF trading permit may submit orders in classes of options in which the
Market Maker has no appointment, provided that the total number of such
orders executed by the Market Maker do not exceed 25% of all contracts
the Market Maker executes on the Exchange in any calendar quarter.\35\
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\33\ See proposed Rule 23.150(a).
\34\ See proposed Rule 17.100 (defining ``Quote'' to include
orders entered by a Market Maker in the option series to which such
Market Maker is registered).
\35\ See proposed Rule 23.150(g).
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Options Market Makers will be required to electronically engage in
a course of dealing reasonably calculated to contribute to the
maintenance of fair and orderly markets.\36\ IEX does not propose to
incorporate MIAX's requirement that Market Makers refrain from
purchasing an option at a price more than $0.25 below parity,\37\
because IEX does not believe the restriction is necessary to the
maintenance of fair and orderly markets requirement, and notes that
other exchanges do not include this restriction.\38\ Market Makers will
be required to maintain a two-sided market on a continuous basis \39\
in at least 60% of the non-adjusted options series to which they are
appointed as Registered Market Makers and at least 90% of the non-
adjusted options series to which they are appointed as Specialists,
provided the options classes have a time to expiration of less than
nine months.\40\ And, as noted above, Directed Market Makers are
subject to enhanced quoting obligations compared to Registered Market
Makers.\41\ Market Makers and Specialists may use quotes and orders to
meet the applicable quoting requirements. These obligations will not
apply to an intra-day add-on series on the day during which such series
was added for trading. Market Maker quotes must be firm quotes that
comply with enumerated price and size rules.\42\ These obligations also
will not apply when an Options series is halted because the underlying
security has entered a Limit or Straddle state.\43\ Registered Market
Makers and Specialists also must maintain minimum net capital in
accordance with Commission and Exchange rules.\44\ Substantial or
continued failure by an Options Market Maker to meet any of its
obligations and duties will subject the Options Market Maker to
disciplinary action, suspension, or revocation of the Market Maker's
registration as such or its appointment in one or more of its appointed
options classes.\45\
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\36\ See proposed Rule 23.140(a).
\37\ See MIAX rule 603(a).
\38\ See, e.g., NYSE Arca Options Rule 6.37-O.
\39\ ``Continuous quoting'' is defined as 90% of the time. See
proposed Rule 23.150(e).
\40\ See proposed Rule 23.150(e)(2) and (e)(1). Proposed Rule
23.150(e)(1) is based upon and substantively identical to NYSE Amex
Options Rule 925.1NYP(b) and proposed Rule 23.150(e)(2) is based
upon and substantively identical to NYSE Amex Options Rule
925.1NYP(c).
\41\ See supra note 20.
\42\ See proposed Rule 23.150(b) and (d).
\43\ See Supplementary Material .01 to proposed Rule 23.150(h),
which is substantively identical to MIAX Rule 530(f)(1).
\44\ See proposed Rule 23.180 ($200,000 net capital requirement
for Registered Market Makers), which is substantively identical to
MEMX Rule 22.9 and proposed Rule 23.130(c)(1)(H) ($1,000,000 net
capital requirement for Specialists), which is substantively
identical to Amex Options Rule 927NY(c)(10).
\45\ See proposed Rule 23.120(f). NYSE Amex Options Rule
927.1NY(1)(B) specifies that NYSE Amex Options provides its
specialists information related to their market share in allocated
issues on a monthly basis as part of the evaluation process. IEX is
not proposing to include this provision because it understands that
Specialist firms are well-equipped to monitor their market share and
performance on IEX and other markets.
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As on other exchanges, Options Market Makers receive certain
benefits for carrying out their duties. For example, a lender may
extend credit to a broker-dealer without regard to the restrictions in
Regulation T of the Board of Governors of the Federal Reserve System if
the credit is to be used to finance the broker-dealer's activities as a
specialist or market maker on a national securities exchange. Thus, an
Options Market Maker has a corresponding obligation to hold itself out
as willing to buy and sell options for its own account on a regular or
continuous basis to justify this favorable treatment.
Every Options Member shall at all times maintain membership in
another registered options exchange that is not registered solely under
Section 6(g) of the Exchange Act or in FINRA.\46\ OEFs and other
Options Members that transact business with Public Customers must at
all times be members of FINRA. Pursuant to proposed Rule 18.110(h),
every Options Member will be required to have at least one registered
Options Principal who satisfies the criteria of that rule, including
the satisfaction of a proper qualification examination. An OEF may only
transact business with Public Customers if such Options Member also is
an Options Member of another registered national securities
[[Page 12894]]
exchange or association with which the Exchange has entered into an
agreement under Rule 17d-2 under the Exchange Act \47\ pursuant to
which such other exchange or association shall be the designated
options examining authority for the OEF.\48\
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\46\ See proposed Rule 18.110(g).
\47\ 17 CFR 240.17d-2.
\48\ See Rule 27.100.
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The proposed rules relating to qualification and participation on
IEX Options as an Options Member (including as an OEF, Options Market
Maker, or Clearing Member) are substantively identical to the relevant
rules of MEMX Options.\49\
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\49\ See MEMX Rulebook Chapters 17 and 22.
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As provided in proposed Rule 17.110, existing Exchange Rules
applicable to the IEX equities market contained in Chapters 1 through
16 of the Exchange Rules will apply to Options Members unless a
specific Exchange Rule applicable to the IEX Options market (proposed
Chapters 17 through 29 of the Exchange Rules) governs or unless the
context otherwise requires. Options Members can therefore provide
sponsored access to the IEX Options Exchange to a non-Member (i.e., a
Sponsored Participant) pursuant to Rule 11.130 of the Exchange Rules.
Definitions
The Exchange proposes to define a series of terms under proposed
Rule 17.100 (Definitions), which are to be used in proposed Chapters 17
to 29 relating to the trading of options contracts on the Exchange.
Unless otherwise indicated, all of the terms defined in proposed Rule
17.100 are either identical or substantially similar to definitions
included in MEMX Rule 16.1. Any modifications to the MEMX definitions,
or definitions based upon the rules of other exchanges are specifically
indicated below.
The definitions under proposed Rule 17.100 are as follows:
<bullet> ABBO. The term ``ABBO'' or ``Away Best Bid or Offer''
means the best bid(s) or offer(s) disseminated by other Eligible
Exchanges (as defined in Rule 28.100) and calculated by the Exchange
based on market information the Exchange receives from OPRA.\50\
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\50\ IEX notes that this definition differs from the MEMX
definition of ABBO by spelling out the phrase ``Away Best Bid or
Offer'' that ABBO refers to for added clarity.
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<bullet> Aggregate Exercise Price. The term ``Aggregate Exercise
Price'' means the exercise price of an options contract multiplied by
the number of units of the underlying security covered by the options
contract.
<bullet> American-Style Option. The term ``American-Style'' option
means an options contract that, subject to the provisions of Rule
24.100 (relating to the cutoff time for exercise instructions) and to
the Rules of the Clearing Corporation, may be exercised at any time
from its commencement time until its expiration.
<bullet> Associated Person and Person Associated with an Options
Member. The terms ``associated person'' and ``person associated with an
Options Member'' mean any partner, officer, director, or branch manager
of an Options Member (or any person occupying a similar status or
performing similar functions), any person directly or indirectly
controlling, controlled by, or under common control with an Options
Member or any employee of an Options Member, except that any person
associated with an Options Member whose functions are solely clerical
or ministerial shall not be included in the meaning of such term for
purposes of these Rules.
<bullet> Bid. The term ``bid'' means a Limit order to buy one or
more options contracts.
<bullet> Board. The term ``Board'' means the Board of Directors of
Investors' Exchange LLC.
<bullet> Call. The term ``call'' means an options contract under
which the holder of the option has the right, in accordance with the
terms of the option, to purchase from the Clearing Corporation the
number of shares of the underlying security covered by the options
contract.
<bullet> Capacity. The term ``capacity'' means the capacity in
which a User submits an order, which the User specifies by applying the
corresponding code to the order. The capacity codes available on IEX
Options will be listed in publicly available specifications and
published in a Regulatory Circular.
<bullet> Class of Options. The terms ``class'' or ``class of
options'' mean all options contracts with the same unit of trading
covering the same underlying security.
<bullet> Clearing Corporation and OCC. The terms ``Clearing
Corporation'' and ``OCC'' mean The Options Clearing Corporation.
<bullet> Clearing Member. The term ``Clearing Member'' means an
Options Member that is self-clearing or an Options Member that clears
IEX Options Transactions for other Options Members.
<bullet> Closing Purchase Transaction. The term ``closing purchase
transaction'' means an IEX Options Transaction that reduces or
eliminates a short position in an options contract.
<bullet> Closing Writing Transaction. The term ``closing writing
transaction'' means an IEX Options Transaction that reduces or
eliminates a long position in an options contract.
<bullet> Control. The term ``control'' means the power to exercise
a controlling influence over the management or policies of a person,
unless such power is solely the result of an official position with
such person. Any person who owns beneficially, directly or indirectly,
more than 20% of the voting power in the election of directors of a
corporation, or more than 25% of the voting power in the election of
directors of any other corporation which directly or through one or
more affiliates owns beneficially more than 25% of the voting power in
the election of directors of such corporation, shall be presumed to
control such corporation.\51\
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\51\ This definition is substantively identical to the
definition in C1 Rule 1.1. IEX proposes to incorporate this
definition, because the term is not specifically defined in the MEMX
rulebook and IEX believes that term would provide helpful context to
Options Members with respect to other rules that use the term, e.g.,
proposed IEX Rule 19.200.
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<bullet> Covered Short Position. The term ``covered short
position'' means (i) an options position where the obligation of the
writer of a call option is secured by a ``specific deposit'' or an
``escrow deposit'' meeting the conditions of Rules 610(f) or 610(g),
respectively, of the Rules of the Clearing Corporation, or the writer
holds in the same account as the short position, on a share-for-share
basis, a long position either in the underlying security or in an
options contract of the same class of options where the exercise price
of the options contract in such long position is equal to or less than
the exercise price of the options contract in such short position; and
(ii) an options position where the writer of a put option holds in the
same account as the short position, on a share-for-share basis, a long
position in an options contract of the same class of options where the
exercise price of the options contract in such long position is equal
to or greater than the exercise price of the options contract in such
short position.
<bullet> Customer. The term ``Customer'' means a Public Customer or
a broker-dealer.
<bullet> Customer Order. The term ``Customer order'' means an
agency order for the account of a Customer.
<bullet> Directed Order. The term ``Directed Order'' is an order
entered into the Trading System by an Options Member with a designation
for a Market Maker in that class (referred to as a ``Directed Market
Maker'' or ``DMM''). To qualify as a Directed Order, an order must be
[[Page 12895]]
entered on behalf of a Priority Customer.\52\
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\52\ This definition is based upon the definition in MIAX
Options Exchange (``MIAX'') Rule 100, with the distinction that IEX
proposes to make any Market Maker eligible to receive a Directed
Order, while MIAX only allows their Lead Market Makers (akin to
IEX's proposed ``Specialists'') and Primary Lead Market Makers
eligible; this aspect of IEX's proposed rule change is based upon
and substantially similar to C1 Rule 5.32. Additionally, IEX
proposes to include language in the last sentence of this definition
based on NYSE Amex Rule 900.3NYP(i)(4) to clarify that an order
submitted on behalf of a non-Priority Customer would be treated as a
non-Directed Order.
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<bullet> Discretion. The term ``discretion'' means the authority of
a broker or dealer to determine for a Customer the type of option, the
class or series of options, the number of contracts, or whether options
are to be bought or sold.
<bullet> European-Style Option. The term ``European-style option''
means an options contract that, subject to the provisions of Rule
24.100 (relating to the cutoff time for exercise instructions) and to
the Rules of the Clearing Corporation, can be exercised only on its
expiration date.
<bullet> Exchange Act. The term ``Exchange Act'' or ``Act'' means
the Securities Exchange Act of 1934, as amended, or Rules thereunder.
<bullet> Exercise Price. The term ``exercise price'' means the
specified price per unit at which the underlying security may be
purchased or sold upon the exercise of an options contract.
<bullet> He, Him, and His. The terms ``he,'' ``him'' and ``his''
are deemed to refer to persons of female as well as male gender, and to
include organizations, as well as individuals, when the context so
requires.
<bullet> IEX Exchange and Exchange. The terms ``IEX Exchange'' and
``Exchange'' mean Investors' Exchange LLC, a registered national
securities exchange.
<bullet> IEX Options. The term ``IEX Options'' means IEX Options
LLC, a Delaware limited liability company wholly owned by the Exchange,
which operates as an options trading facility of the Exchange under
Section 3(a)(2) of the Exchange Act.
<bullet> IEX Options Book. The term ``IEX Options Book'' means the
electronic book of options orders maintained by the Trading System.\53\
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\53\ This definition is substantively identical to the
equivalent definition in the MEMX rulebook, except that it refers to
IEX, not MEMX.
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<bullet> IEX Options Transaction. The term ``IEX Options
Transaction'' means a transaction involving an options contract that is
effected on or through IEX Options or its facilities or systems.\54\
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\54\ This definition is substantively identical to the
equivalent definition in the MEMX rulebook, except that it refers to
IEX, not MEMX.
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<bullet> Individual Equity Option. The term ``individual equity
option'' means an options contract which is an option on an equity
security.
<bullet> Long Position. The term ``long position'' means a person's
interest as the holder of one or more options contracts.
<bullet> Market Makers (and Options Market Makers). The terms
``Market Makers'' or ``Options Market Makers'' refer collectively to
Options Members registered, pursuant to Rule 23.100, as either a
``Registered Market Maker'' or a ``Specialist''.\55\
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\55\ This definition is substantively identical to the
definition in the MIAX rulebook, except that MIAX has three classes
of Market Makers (Registered Market Makers, Lead Market Makers, and
Primary Lead Market Makers) while IEX proposes to have two classes
of Market Makers: Registered Market Makers (equivalent to MIAX
Registered Market Maker) and Specialists (which is based on MIAX's
Lead Market Maker and Primary Lead Market Maker rules). IEX proposes
to incorporate this definition, because the Market Maker rules
proposed herein are substantially based upon the rules of MIAX.
---------------------------------------------------------------------------
<bullet> MPID. The term ``MPID'' means unique market participant
identifier assigned to an Options Member.
<bullet> NBB, NBO, and NBBO. The term ``NBB'' means the national
best bid, the term ``NBO'' means the national best offer, and the term
``NBBO'' means the national best bid or offer as calculated by IEX
Options based on market information received by IEX Options from OPRA.
<bullet> Offer. The term ``offer'' means a Limit order to sell one
or more options contracts.
<bullet> OPRA. The term ``OPRA'' means the Options Price Reporting
Authority.
<bullet> Opening Purchase Transaction. The term ``opening purchase
transaction'' means a IEX Options Transaction that creates or increases
a long position in an options contract.
<bullet> Opening Writing Transaction. The term ``opening writing
transaction'' means a IEX Options Transaction that creates or increases
a short position in an options contract.
<bullet> Options Contracts. The term ``options contract'' means a
put or a call issued, or subject to issuance by the Clearing
Corporation pursuant to the Rules of the Clearing Corporation.
<bullet> Options Market Close and Market Close. The terms ``options
market close'' and ``market close'' mean the time the Exchange
specifies for the end of a trading session on the Exchange on that
trading day.
<bullet> Options Market Open and Market Open. The terms ``options
market open'' and ``market open'' mean the time the Exchange specifies
for the beginning of a trading session on the Exchange on that trading
day.
<bullet> Options Member. The term ``Options Member'' means a firm,
or organization that is registered with the Exchange pursuant to
Chapter 18 of these Rules for purposes of participating in options
trading on IEX Options as an ``Options Order Entry Firm'', ``Options
Market Maker'', or ``Clearing Member.''
<bullet> Options Member Agreement. The term ``Options Member
Agreement'' means the agreement to be executed by Options Members to
qualify to participate on IEX Options.
<bullet> Options Order Entry Firm, Order Entry Firm, and OEF. The
terms ``Options Order Entry Firm'' and ``Order Entry Firm'' or ``OEF''
mean those Options Members representing as agent Customer Orders on IEX
Options and those non-Market Maker Members conducting proprietary
trading.
<bullet> Options Principal. The term ``Options Principal'' means a
person engaged in the management and supervision of the Options
Member's business pertaining to options contracts that has
responsibility for the overall oversight of the Options Member's
options related activities on the Exchange.
<bullet> Order. The term ``order'' means a firm commitment to buy
or sell options contracts as defined in Rule 22.100.
<bullet> Outstanding. The term ``outstanding'' means an options
contract which has been issued by the Clearing Corporation and has
neither been the subject of a closing writing transaction nor has
reached its expiration date.
<bullet> Primary Market. The term ``primary market'' means the
primary exchange on which an underlying security is listed.\56\
---------------------------------------------------------------------------
\56\ This definition is based on the definition in C1 Rule 1.1,
because IEX believed the definition was easier to understand than
the equivalent definition in the MEMX rulebook.
---------------------------------------------------------------------------
<bullet> Priority Customer and Priority Customer Order. The term
``Priority Customer'' means any person or entity that is not: (A) a
broker or dealer in securities; or (B) a Professional. The term
``Priority Customer Order'' means an order for the account of a
Priority Customer.
<bullet> Professional. The term ``Professional'' means any person
or entity that (A) is not a broker or dealer in securities; and (B)
places more than 390 orders in listed options per day on average during
a calendar month for its own beneficial account(s). All Professional
orders shall be appropriately marked by Options Members.\57\
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\57\ See Proposed Supplementary Material .01 to Rule 17.100,
which sets forth the methodology for calculation of Professional
orders.
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[[Page 12896]]
<bullet> Protected Quotation. The term ``Protected Quotation'' has
the meaning provided in Rule 28.100.
<bullet> Public Customer and Public Customer Order. The term
``Public Customer'' means a person that is not a broker or dealer in
securities. The term ``Public Customer Order'' means an order for the
account of a Public Customer.
<bullet> Put. The term ``put'' means an options contract under
which the holder of the option has the right, in accordance with the
terms and provisions of the option and the Rules of the OCC, to sell to
the Clearing Corporation the number of units of the underlying security
covered by the options contract, at a price per unit equal to the
exercise price, upon the timely exercise of such option.
<bullet> Quarterly Options Series. The term ``Quarterly Options
Series'' means a series in an options class that is approved for
listing and trading on the Exchange in which the series is opened for
trading on any business day and expires at the close of business on the
last business day of a calendar quarter.
<bullet> Quote or Quotation. The terms ``quote'' or ``quotation''
means a bid or offer entered by a Market Maker as a firm order that
updates the Market Maker's previous bid or offer, if any. When the term
order is used in these Rules and a bid or offer is entered by the
Market Maker in the options series to which such Market Maker is
registered, such order shall, as applicable, constitute a quote or
quotation for purposes of these Rules. A quote or quotation may be
canceled or repriced in accordance with Rules 22.250, 22.260, or
23.150, if so designated by the Market Maker to assist in its risk
management.
<bullet> Registered Market Maker. The term ``Registered Market
Maker'' means an Options Member registered with the Exchange for the
purpose of making markets in securities traded on the Exchange, who is
vested with the rights and responsibilities specified in Chapter 23 of
these Rules with respect to Registered Market Makers.\58\
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\58\ This definition is substantively identical to the
definition in MIAX Rule 100. IEX proposes to incorporate this
definition, because the Market Maker rules proposed herein are
substantially based upon the rules of MIAX.
---------------------------------------------------------------------------
<bullet> Responsible Person. The term ``Responsible Person'' means
a U.S.-based officer, director, or management-level employee of an
Options Member, who is registered with the Exchange as an Options
Principal, responsible for the direct supervision and control of
associated persons of that Options Member.
<bullet> Rules of IEX Options. The term ``Rules of IEX Options''
mean the rules contained in Chapters 17 to 29 of the Investors Exchange
Rules governing the trading of options on the Exchange.
<bullet> Rules of the Clearing Corporation and Rules of the OCC.
The terms ``Rules of the Clearing Corporation'' and ``Rules of the
OCC'' mean the Certificate of Incorporation, the By-Laws and the Rules
of the Clearing Corporation, and all written interpretations thereof,
as may be in effect from time to time.
<bullet> SEC or Commission. The terms ``SEC'' or ``Commission''
mean the United States Securities and Exchange Commission.
<bullet> Series of Options. The terms ``series'' or ``series of
options'' mean all options contracts of the same class that are the
same type of options and have the same exercise price and expiration
date.
<bullet> Short Position. The term ``short position'' means a
person's interest as the writer of one or more options contracts.
<bullet> Short Term Options Series. The term ``Short Term Options
Series'' means a series in an options class that is approved for
listing and trading on the Exchange in which the series is opened for
trading on any Monday, Tuesday, Wednesday, Thursday or Friday that is a
business day and that expires on the Monday, Tuesday, Wednesday,
Thursday or Friday of the next business week, or, in the case of a
series that is listed on a Friday and expires on a Monday, is listed
one business week and one business day prior to that expiration. If a
Tuesday, Wednesday, Thursday or Friday is not a business day, the
series may be opened (or shall expire) on the first business day
immediately prior to that Tuesday, Wednesday, Thursday or Friday,
respectively. For a series listed pursuant to this section for Monday
expiration, if a Monday is not a business day, the series shall expire
on the first business day immediately following that Monday.
<bullet> Specialist. The term ``Specialist'' means a Market Maker
appointed by the Exchange to act as the primary lead Market Maker for
the purpose of making markets in securities traded on the Exchange. The
Specialist is vested with the rights and responsibilities specified in
Chapter 23 of these Rules with respect to Specialists.\59\
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\59\ This definition is substantively identical to the
definition of Lead Market Makers and Primary Lead Market Makers in
MIAX Rule 100. As discussed above, IEX proposes to incorporate the
MIAX definitions for both Lead Market Makers and Primary Lead Market
Makers into its definition for Specialists, because the Market Maker
rules proposed herein are substantially based upon the rules of
MIAX.
---------------------------------------------------------------------------
<bullet> SRO. The term ``SRO'' means a self-regulatory organization
as defined in Section 3(a)(26) of the Exchange Act.
<bullet> Timestamp. The term ``timestamp'' means the effective time
sequence assigned to an order for purposes of determining its priority
ranking.
<bullet> Trading Permit. The term ``Trading Permit'' means a
license issued by the Exchange to an Options Member that grants the
Trading Permit Holder (``TPH'') the right to access one or more of the
facilities of the Exchange for the purpose of effecting transactions in
options traded on the Exchange without the services of another person
acting as broker, and otherwise to access the facilities of the
Exchange for purposes of trading or reporting transactions or
transmitting orders or quotations in options traded on the Exchange, or
to engage in other activities that, under the Rules of IEX Options, may
only be engaged in by the TPH that satisfies any applicable
qualification requirements to exercise those rights. A Trading Permit
conveys no ownership interest in the Exchange, is only available
through the Exchange, and is subject to the terms and conditions set
forth in Rule 18.140.\60\
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\60\ This definition is substantively identical to the
definition in C1 Rule 1.1. IEX proposes to incorporate this
definition, because its proposed Trading Permit rule (Rule 18.140),
is substantively similar to the equivalent C1 Rule (C1 Rule 3.1).
---------------------------------------------------------------------------
<bullet> Trading Permit Holder. The term ``Trading Permit Holder''
or ``TPH'' means the holder of a Trading Permit, as described in IEX
Rule 18.140.\61\
---------------------------------------------------------------------------
\61\ This definition is substantively identical to the
definition in C1 Rule 1.1. IEX proposes to incorporate this
definition, because its proposed Trading Permit rule (Rule 18.140),
is substantively similar to the equivalent C1 Rule (C1 Rule 3.1).
---------------------------------------------------------------------------
<bullet> Trading System. The term ``Trading System'' means the
automated trading system used by IEX Options for the trading of options
contracts.
<bullet> Type of Option. The term ``type of option'' means the
classification of an options contract as either a put or a call.
<bullet> Uncovered. The term ``uncovered'' means a short position
in an options contract that is not covered.
<bullet> Underlying Security. The term ``underlying security''
means the security that the Clearing Corporation shall be obligated to
sell (in the case of a call option) or purchase (in the case of a put
option) upon the valid exercise of an options contract.
<bullet> User. The term ``User'' means any Options Member or
Sponsored Participant who is authorized to obtain access to the Trading
System pursuant to Rule 11.130 (Access).
[[Page 12897]]
Execution System
IEX Options will utilize a pro-rata allocation model with execution
priority dependent on the size and capacity of an order; specifically,
Priority Customer or non-Priority Customer, as well as status as a
Registered Market Maker or Specialist, as applicable. The proposed pro-
rata allocation model is similar to the MIAX and NYSE Amex options
exchanges.\62\
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\62\ See infra note 86.
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The Exchange will become an exchange member of the OCC. The Trading
System will be linked to OCC for the Exchange to transmit locked-in
trades for clearance and settlement.\63\
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\63\ Proposed Rule 22.220(a) notes that all Options transactions
shall be submitted for clearance to the Clearing Corporation, and
the Exchange shall assume no responsibility with respect to any
unmatched trade or for any delays or errors in the reporting to it
of trade information. This provision is based upon and substantively
identical to MIAX Rule 524.
---------------------------------------------------------------------------
IEX Options will include a de minimis delay on incoming order and
quote messages designed to enable IEX to update its view of the market
prior to processing orders and quotes, and an optional Market Maker
quote parameter designed to protect Market Makers from excessive risk
due to execution of stale quotes, in addition to other risk protections
substantially similar to those offered by other options exchanges.
Anonymity. As set forth in proposed Rule 22.190, aggregated and
individual transaction reports produced by the Trading System will
indicate the details of a User's transactions, including the contra
party's unique market participant identifier (``MPID''), capacity, and
clearing firm account number.\64\
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\64\ The Exchange shall also reveal a User's identity: (i) when
a registered clearing agency ceases to act for a participant, or the
User's clearing firm, and the registered clearing agency determines
not to guarantee the settlement of the User's trades; and (ii) for
regulatory purposes or to comply with an order of an arbitrator or
court. See proposed Rule 22.190. The Exchange notes that proposed
Rule 22.190 is identical to MEMX Rule 21.10.
---------------------------------------------------------------------------
Latency Mechanism.\65\ IEX's proposal includes a de minimis
hardware based latency mechanism (or speedbump) of 350 microseconds
added to each incoming order and quote message \66\ designed to enable
IEX to update its view of the market prior to processing orders and
quotes as well as to perform the Options Quote Indicator
(``Indicator'') calculation with current market data.\67\ If the
Exchange determines to change the duration of the delay, it will do so
only pursuant to an effective rule filing submitted to the Commission
pursuant to Section 19 of the Exchange Act.\68\
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\65\ See proposed Rule 22.100(n).
\66\ As it does for with equities trading (which also applies an
inbound latency of 350 microseconds), IEX will subject incoming
order and quote messages to a de minimis delay using coiled optical
fiber. See Rule 11.510(a). Due to force majeure events and acts of
third parties, the Exchange does not guarantee that the delay will
always be consistent. The Exchange will periodically monitor such
latency and will make adjustments to the latency as reasonably
necessary to achieve consistency with the latency targets as soon as
commercially practicable.
\67\ See infra for more information about the Indicator.
\68\ The latency mechanism will not apply to outbound
communications from the Exchange to a User, inbound and outbound
communications between the Exchange and an Away Market regarding a
routed order, inbound communications from data feeds, order
processing and order execution on the IEX Options Order Book,
outbound communications to the Exchange's proprietary data feeds or
OPRA.
---------------------------------------------------------------------------
Hours of Operation. As provided in proposed Rule 22.110(a), the IEX
Options Trading System will begin accepting orders and quotes beginning
at 8:00 a.m.\69\ pursuant to the market opening procedures described in
proposed Rule 22.160. Orders and bids and offers shall be open and
available until 4:00 p.m. except for options contracts on Fund Shares,
as defined in proposed Rule 20.120(i), which may close as of 4:15 p.m.
The Proposed Hours of Operation rule is based on MEMX Rule 21.2, except
that MEMX does not allow for submission of quotes before the market
opens for trading; IEX notes that other exchanges begin accepting
orders and quotes before the market opens, for example C1 begins
accepting quotes at 7:30 a.m.\70\ Except as set forth above, IEX
Options shall operate during the normal business days and hours set
forth in the rules of the primary market trading the securities
underlying options traded on IEX Options, absent unusual conditions as
may be determined by the Exchange.\71\ IEX Options will not be open for
business on any holiday observed by the Exchange.\72\
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\69\ All times in this filing refer to the Eastern time zone.
\70\ See C1 Rule 5.7.
\71\ See proposed IEX Rule 22.110(b).
\72\ See proposed IEX Rule 22.110(c).
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Units of Trading. As stated in proposed Rule 22.120, the unit of
trading in each series of options traded on IEX Options will be the
unit of trading established for that series by the OCC pursuant to the
rules of the OCC and the agreements of the Exchange with the OCC. The
proposed determination of the unit of trading for a series of options
traded on IEX Options is the same as on MEMX Options pursuant to MEMX
Rule 21.3.
Minimum Quotation and Trading Increments. As stated in proposed
Rule 22.140(a), the Exchange is proposing to apply the following
quotation increments: (1) if the options series is trading at less than
$3.00, five (5) cents; (2) if the options series is trading at $3.00 or
higher, ten (10) cents; and (3) if the options series is trading
pursuant to the Penny Interval Program one (1) cent if the options
series is trading at less than $3.00, five (5) cents if the options
series is trading at $3.00 or higher, except for QQQ, SPY, or IWM where
the minimum quoting increment will be one (1) cent for all series. In
addition, as stated in proposed Rule 22.140(b), the Exchange is
proposing that the minimum trading increment for options contracts
traded on IEX Options will be one (1) cent for all series. Such
proposed minimum quotation and trading increments are the same as on
MEMX Options pursuant to MEMX Rules 21.5(a) and (b).
Penny Interval Program. As set forth in proposed Rule 22.140(c),
the Exchange is proposing to adopt a Penny Interval Program that is
substantially similar to the penny programs of other exchanges,
including MEMX Options pursuant to MEMX Rule 21.5(d), which includes
minimum quoting requirements for options classes listed under the Penny
Interval Program. However, eligibility for inclusion in the Penny
Interval Program will be limited to those classes already operating
under penny programs of other options exchanges at the time IEX Options
is launched. The list of options classes included in the Penny Interval
Program will be announced by the Exchange via circular distributed to
Options Members and published by the Exchange on its website.
Order Types and Handling Instructions. The Trading System will make
available to Users two Order Types (as defined in proposed Rule
22.100(d))--Limit orders and Market orders--as well as various order
instructions and modifiers that can be appended to such orders. The
characteristics and functionality of each Order Type is substantially
similar to what is currently approved for use in the Exchange's
equities trading facility or on other options exchanges, including MEMX
Options, except where described below.
IEX Options will support bulk messages for Options Market Makers as
specified in the description of each Order Type or other instruction.
Proposed Rule 22.100(d) includes the following details with respect to
Limit orders and Market orders:
<bullet> Limit order. Limit orders are orders (including bulk
messages) to buy or sell an option at a specified price or better.
[[Page 12898]]
A Limit order is marketable when, for a Limit order to buy, at the time
it is entered into the Trading System, the order is priced at the
current inside offer or higher, or for a Limit order to sell, at the
time it is entered into the Trading System, the order is priced at the
current inside bid or lower.
<bullet> Market order. Market orders are orders to buy or sell at
the best price available at the time of execution. Market orders to buy
or sell an option traded on IEX Options will be rejected if they are
received when the underlying security is subject to a ``Limit State''
or ``Straddle State'' as defined in the Plan to Address Extraordinary
Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act
(the ``Limit Up-Limit Down Plan''). Bulk messages may not be Market
orders.
Pursuant to Rule 22.100(d)(3), Users have the option to designate
an order as ``attributable'' to that User's MPID. Attributable orders
are Market or Limit orders which display the User's MPID for purposes
of trading on the Exchange. Use of attributable orders is voluntary.
Attributable orders may not be available for all Exchange processes.
The Exchange will distribute a circular to Options Members specifying
the processes for which the attributable order-type shall be
available.\73\
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\73\ The proposed definition is substantively identical to the
definition in MIAX Rule 516(e). IEX proposes to incorporate this
definition and functionality, because MEMX Options does not have
Attributable Orders.
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The Trading System will also make available to Users several
additional instructions that can be designated on an order (``Handling
Instructions''). A Handling Instruction applied to a bulk message
applies to each bid and offer within that bulk message. The Handling
Instructions available on IEX Options are described in proposed Rule
22.100(e) and will include the following:
<bullet> Book Only. Book Only is an instruction that an order is to
be ranked and executed on the Exchange pursuant to proposed Rule 22.170
(Order Display and Book Processing) or to be repriced or cancelled, as
appropriate, without routing away to another options exchange.
<bullet> Post Only. Post Only is an instruction that an order is to
be ranked and executed on the Exchange pursuant to proposed Rule 22.170
(Order Display and Book Processing) or cancelled, as appropriate,
without routing away to another options exchange except that the order
will not remove liquidity from the IEX Options Book. The Trading System
reprices, cancels or rejects a bid (offer) designated as Post Only with
a price that locks or crosses the Exchange's best offer (bid). A Market
order cannot be designated as Post Only.
<bullet> Intermarket Sweep Order (``ISO''). ISOs are orders that
shall have the meaning provided in proposed Rule 28.100, which relates
to intermarket trading. Such orders may be executed at one or multiple
price levels in the Trading System without regard to Protected
Quotations at other options exchanges (i.e., may trade through such
quotations). The Exchange relies on the marking of an order as an ISO
order when handling such order, and thus, it is the entering Options
Member's responsibility, not the Exchange's responsibility, to comply
with the requirements relating to ISOs. ISOs are not eligible for
routing pursuant to proposed Rule 22.180. A Market order cannot be
designated as an Intermarket Sweep Order. Users may not designate bulk
messages as ISOs.
The Exchange notes that each of the proposed Order Types and
Handling Instructions available on IEX Options are based upon and
substantially similar to those of MEMX, with the exception of the
Attributable Orders not offered by MEMX.
Time-in-Force (``TIF'') Designations. Users entering orders into
the Trading System may designate such orders to remain in force and
available for display and/or potential execution for varying periods of
time. Unless cancelled earlier, once these time periods expire, the
order (or the unexecuted portion thereof) is returned to the entering
party. A TIF applied to a bulk message applies to each bid and offer
within that bulk message. Unless otherwise specified in the Exchange
Rules or the context indicates otherwise, the Exchange determines which
of the following TIFs are available on a class or system basis. The TIF
designations available on IEX Options are described in proposed Rule
22.100(g) and will include the following:
<bullet> Immediate Or Cancel (``IOC''). IOC means, for an order so
designated, an order that is to be executed in whole or in part as soon
as such order is received. The portion not so executed immediately on
the Exchange or another options exchange is cancelled and is not posted
to the IEX Options Book. IOC orders that are not designated as Book
Only and that cannot be executed in accordance with proposed Rule
22.170 on the Trading System when reaching the Exchange will be
eligible for routing away pursuant to proposed Rule 22.180.
<bullet> Day. Day means, for an order so designated, an order to
buy or sell which, if not executed expires at market close. Market
Makers may designate bulk messages as Day.
The Exchange notes that each of the proposed TIF designations
available on IEX Options is identical to the same TIF designations
available on MEMX Options, except that they are applied differently in
one respect. Specifically, MEMX Options allows bulk messages to have a
TIF of IOC. IEX is proposing to only allow bulk messages to have a TIF
of DAY so that Market Makers do not take liquidity with quotes
submitted via bulk messages, and which are meant for liquidity
provision by Market Makers, which by definition the Exchange believes
constitutes orders resting on the Order Book.
Anti-Internalization Qualifier (``AIQ'') Modifiers. As with its
equities market, the Exchange will allow Users to use certain AIQ
modifiers, which are described in proposed Rule 22.100(h). Any incoming
order designated with an AIQ modifier will be prevented from executing
against a resting opposite side order also designated with an AIQ
modifier and originating from the same MPID, Options Member identifier,
trading group identifier, or Sponsored Participant identifier. The
Exchange will offer the following AIQ modifiers: AIQ Cancel Newest,
described in proposed Rule 22.100(h)(1); AIQ Cancel Oldest, described
in proposed Rule 22.100(h)(2); AIQ Cancel Both, described in proposed
Rule 22.100(h)(3); and AIQ Cancel Smallest, described in proposed Rule
22.100(h)(4). The Exchange notes that each of the proposed AIQ
modifiers available on IEX Options is substantially similar to the same
modifiers available on MEMX Options,\74\ with the distinction that on
MEMX a market maker may include the AIQ modifier on bulk messages,
while IEX is proposing to not allow AIQ modifiers to be included on
bulk messages because it would be meaningless on IEX where bulk
messages will only be for liquidity adding quotes, and the AIQ modifier
that dictates the AIQ interaction is determined by the liquidity
removing order.\75\
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\74\ MEMX does not offer an AIQ Cancel Smallest modifier, but it
is offered by other exchanges such as C1. See C1 Rule 5.6 (Match
Trade Prevention Modifier--MTP Cancel Smallest).
\75\ MEMX calls them ``Match Trade Prevention'' modifiers. See
MEMX Rule 21.1(h).
---------------------------------------------------------------------------
Re-Pricing Mechanism. Like other options exchanges, the Exchange
proposes to offer a re-pricing mechanism to Users to comply with the
order protection and trade through restrictions of the Options Order
Protection and Locked/Crossed Market
[[Page 12899]]
Plan.\76\ This re-pricing mechanism, described in proposed Rule
22.100(i), is referred to by the Exchange as Price Adjust and is
substantially similar to the Price Adjust mechanism offered by MEMX
Options pursuant to MEMX Rule 21.1(i), with the exception that IEX will
only allow the ranked price and displayed price of an order that has
been repriced to be adjusted to a more aggressive price one additional
time (unlike MEMX, which allows multiple adjustments).\77\
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\76\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (Aug. 6, 2009) (File No. 4-546).
\77\ The Exchange notes that this behavior is substantially
similar to the ``single price adjust'' behavior in C1 Rule
5.32(b)(2)(A).
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MPIDs. As proposed in Rule 22.100(j), the term ``MPID'' means the
unique market participant identifier assigned to a User and shall refer
to what the Trading System uses to identify the User and the clearing
number for the execution of orders and quotes submitted to the Trading
System with that MPID. Each MPID corresponds to a single User and a
single clearing number of a Clearing Member with the Clearing
Corporation. A User may obtain multiple MPIDs, which may be for the
same or different clearing numbers. A User is able (in a form and
manner determined by the Exchange) to designate which of its MPIDs may
be used for each of its ports. If a User submits an order or quote
through a port with an MPID not enabled for that port, the Trading
System cancels or rejects the order or quote. The Exchange notes that
its proposed Rule 22.100(j) is identical to MEMX Rule 21.1(j) except
that MEMX uses the term EFID rather than MPID.
Ports and Bulk Messages. Proposed Rule 22.100(k) defines two types
of ports: (1) a ``physical port,'' which provides a physical connection
to the Trading System and may provide access to multiple logical ports;
and (2) a ``logical port'' or ``application session,'' which provides
Users with the ability within the Trading System to accomplish a
specific function through a connection, such as order entry, data
receipt, or access to information. The Exchange notes that each of the
proposed types of ports available on IEX Options is identical to the
same types of ports on MEMX Options.
The term ``bulk message'' is proposed to mean a single electronic
message a User submits with a Market Maker Capacity to the Exchange in
which the User may enter, modify, or cancel up to an Exchange-specified
number of bids and offers (which number the Exchange will announce via
Exchange notice and publicly available technical specifications). The
Trading System handles a bulk message in the same manner as it handles
an order or quote, unless the Exchange Rules specify otherwise.
Only Market Makers may submit bulk messages through a logical port
in a class in which the Market Maker has an appointment. In addition,
bulk messages have a default TIF of Day and a default designation of
Post Only. As proposed, the Trading System will cancel, reject, or
reprice a Post Only bulk message bid (offer) with a price that locks or
crosses the Exchange best offer (bid) or ABO (ABB).\78\ These
provisions are similar to the manner in which market maker bulk
messages are handled by MEMX, which allows bulk messages to also have a
TIF of IOC, a designation as book only, and post only bulk messages in
unassigned classes.\79\
---------------------------------------------------------------------------
\78\ See proposed IEX Rule 22.100.
\79\ See MEMX Rule 21.1(l). IEX notes that the ability of the
Trading System to cancel or reject a post only order submitted on a
bulk port with a price that locks or crosses the Exchange best offer
(bid) or ABO (ABB) is substantively identical to MEMX Rule
21.1(l)(3); IEX will also allow the Trading System to reprice a post
only order submitted on a bulk port with a price that locks or
crosses the Exchange best offer (bid) or ABO (ABB), which is
substantively identical to the functionality in C1 Rule
5.32(b)(1)(B).
---------------------------------------------------------------------------
Cancel Back. The term ``Cancel Back'' is proposed to mean an
instruction a User designates on an order (including bulk messages) to
not be subject to the Price Adjust process pursuant to proposed Rule
22.100(i). The Trading System cancels or rejects an order with a Cancel
Back instruction (immediately at the time the Trading System receives
the order or upon return to the Trading System after being routed away)
if displaying the order on the Book would create a violation of
proposed Rule 28.120, or if the order cannot otherwise be executed or
displayed in the Book at its limit price. The Trading System executes a
Book Only--Cancel Back order against resting orders. The proposed
definition of Cancel Back in proposed Rule 22.100(m) is substantively
identical to a Cancel Back Order defined in MEMX Rule 21.1(m).
Market Opening Procedures. As proposed, the Trading System will
accept quotes, Limit orders with a TIF of DAY and Market orders for
inclusion in the opening process (``Opening Process'') beginning at
8:00 a.m. or immediately upon trading being halted in an options series
due to the primary listing market for the applicable underlying
security declaring a regulatory trading halt, suspension, or pause with
respect to such security (a ``Regulatory Halt''), and will continue to
accept Market and Limit orders and quotes until such time as the
Opening Process is initiated in that options series (the ``Pre-open
state'').\80\
---------------------------------------------------------------------------
\80\ See proposed Rule 22.160(a)(13).
---------------------------------------------------------------------------
After the first transaction on the primary listing market after
9:30 a.m. in the securities underlying the options as reported on the
first print disseminated pursuant to an effective national market
system plan or the Regulatory Halt has been lifted, the related options
series will be opened automatically as described below. The Exchange
will conduct its ``Core Open Auction'' for each series of options
contracts upon receipt of an ``Auction Trigger'', i.e., the moment that
the Primary Market for the underlying security first disseminates both
a two-sided quote and a trade of any size that is at or within the
quote (in the case of reopening after a Regulatory Halt, the Auction
Trigger also includes notification that the underlying stock is no
longer halted).\81\ The Exchange will disseminate a message to market
participants indicating the initiation of the opening process, conduct
the opening auction, and then transition to continuous trading for each
series of options contracts.\82\ The proposed market opening procedures
are substantially similar to the market opening procedures specified in
NYSE Arca Options Rule 6.64P-O, subject to several differences, most
notably that any imbalance would be allocated on a pro rata basis.\83\
---------------------------------------------------------------------------
\81\ See proposed Rule 22.160(a)(5) and (7).
\82\ See proposed Rule 22.160. IEX notes that pursuant to
proposed Rule 22.160(b)(3), the priority overlays specified in
proposed Rule 22.170(f)(2) and (3) will not be available during an
Auction, but will resume once the Exchange has transitioned to
continuous trading.
\83\ See proposed Rule 22.160(b). Other differences include: IEX
will begin accepting orders for the opening auction at 8:00 a.m.,
while NYSE Arca begins accepting orders for their opening auction at
6:00 a.m. See proposed Rule 22.160(a)(13)(A) versus NYSE Arca
Options Rule 6.64P-O(a)(12)(A). Additionally, IEX will begin
disseminating Auction Imbalance Information at 8:30 a.m., while NYSE
Arca begins disseminating imbalance information at 8:00 a.m. See
proposed Rule 22.160(c)(1) versus NYSE Arca Options Rule 6.64P-
O(c)(1). Further, IEX does not define Far Clearing Price, because
IEX does not propose to have Auction Only orders, to which the Far
Clearing Price relates.
---------------------------------------------------------------------------
Order Display/Matching System. The Trading System will be based
upon functionality currently approved for use in the Exchange's
equities trading system. Specifically, the Trading System will allow
Users to enter Market orders and priced Limit orders to buy (bids) and
sell (offers). All bids or offers made and accepted on IEX Options in
accordance with the Exchange Rules shall constitute binding contracts,
subject to applicable requirements of the
[[Page 12900]]
Exchange Rules and the Rules of the Clearing Corporation. Such orders
are executable against marketable contra-side orders in the Trading
System.\84\ Resting quotes and orders on the IEX Options Book will be
prioritized according to price. If there are two or more quotes or
orders at the best price, then the options contracts will be allocated
proportionally according to size (in a pro-rata fashion), rounded down
to the nearest contract. If there are residual options contracts to be
filled, the quote or order with the largest remaining size (based on
the pro rata calculation) will receive the first contract, and each
successive contract (if any) will be allocated to each subsequent quote
or order based on size (largest to smallest). If there are two or more
quotes or orders with the same remaining size, then the quote or order
with the first time priority will be allocated the next options
contract. Each successive options contract (if any) will be allocated
in the same manner.\85\
---------------------------------------------------------------------------
\84\ See proposed Rule 22.170.
\85\ See proposed Rule 22.170(b). This pro-rata allocation
methodology is based upon the substantially similar methodology in
MIAX Rule 514(c)(2) and NYSE Amex Rule 964NYP(i)(2).
---------------------------------------------------------------------------
Routing. IEX Options will offer a simple optional routing
functionality to facilitate compliance with applicable regulations and
will not offer other complex routing strategies. Options Members can
designate orders that have not been executed in full by the Trading
System pursuant to Rule 22.170 above as either available for routing or
not available for routing.\86\ IEX Options will support orders that are
designated to be routed to the NBBO as well as orders that will execute
only within IEX Options. Orders that are designated to execute at the
NBBO will be routed to other options markets to be executed when the
Exchange is not at the NBBO \87\ consistent with the Options Order
Protection and Locked/Crossed Market Plan.\88\
---------------------------------------------------------------------------
\86\ See proposed Rule 22.180(a).
\87\ As described infra, if the order is eligible for the Step-
Up Mechanism (set forth in proposed Rule 22.270), the Trading System
will attempt to fill the order before routing it to an away market.
\88\ See supra note 77.
---------------------------------------------------------------------------
Subject to the exceptions contained in proposed Rule 28.110(b), the
Trading System will ensure that an order will not be executed at a
price that trades through another options exchange. An order that is
designated by an Options Member as routable will be routed in
compliance with applicable trade-through restrictions. Any order
entered with a price that would lock or cross a Protected Quotation
that is not eligible for either routing or the price adjust process as
defined in proposed Rule 22.100(i) will be cancelled. Bulk messages are
not eligible for routing.
IEX Options will route orders in options via IEX Services LLC
(``IEX Services''), which serves as the Outbound Router of the
Exchange, as defined in Rule 2.220 (IEX Services LLC as Outbound
Router).\89\ The function of the Outbound Router will be to route
orders in options listed and open for trading on IEX Options by
transmitting such orders to one or more routing brokers that are not
affiliated with the Exchange to other options exchanges (``Routing
Services'') pursuant to the Exchange Rules on behalf of IEX
Options.\90\ The Outbound Router is subject to regulation as a facility
of the Exchange, including the requirement to file proposed rule
changes under Section 19 of the Exchange Act.\91\ Parties that do not
desire to use the Routing Services provided by the Exchange must
designate orders as not available for routing.\92\ The Exchange notes
that the proposed rules relating to the routing of orders on IEX
Options to away options markets are substantively identical to the MEMX
Back-Up Order Routing Services described in MEMX Rule 21.9(e).\93\
---------------------------------------------------------------------------
\89\ See proposed Rule 22.180(d).
\90\ Id.
\91\ Id.
\92\ Id.
\93\ MEMX also offers the option of using its outbound router,
MEMX Execution Services to route directly to other exchanges. See
MEMX Rule 21.9(d). IEX is not proposing to adopt this functionality,
because it will only provide for routing through IEX Services to
third party broker dealers.
---------------------------------------------------------------------------
Priority of Routed Orders. Orders that have been routed by the
Trading System to other options exchanges are not ranked and maintained
in the IEX Options Book pursuant to Rule 22.170, and therefore are not
available to execute against incoming orders. Once routed by the
Trading System, an order becomes subject to the rules and procedures of
the destination options exchange including, but not limited to, order
cancellation. If a routed order is subsequently returned, in whole or
in part, that order, or its remainder, shall receive a new time stamp
reflecting the time of its return to the Trading System.\94\
---------------------------------------------------------------------------
\94\ See proposed Rule 22.180(b).
---------------------------------------------------------------------------
Market Access. In connection with the proposed rules regarding
routing to away options exchanges, proposed Rule 22.180(e) provides
that IEX Services has, pursuant to Rule 15c3-5 under the Act,\95\
implemented certain tests designed to mitigate the financial and
regulatory risks associated with providing the Exchange's Users with
access to such away options exchanges. Pursuant to the policies and
procedures developed by IEX Services to comply with Rule 15c3-5, if an
order or series of orders are deemed to be erroneous or duplicative,
would cause the entering User's credit exposure to exceed a preset
credit threshold, or are non-compliant with applicable pre-trade
regulatory requirements (as defined in Rule 15c3-5), IEX Services will
reject such orders prior to routing and/or seek to cancel any orders
that have been routed. This is consistent with the routing
implementation of other options exchanges, and the Exchange notes that
proposed Rule 22.180(e) is substantively identical to MEMX Rule
21.9(f).
---------------------------------------------------------------------------
\95\ 17 CFR 240.15c3-5.
---------------------------------------------------------------------------
Order Priority. After the opening, trades on the Exchange will
occur when a buy order/quote and a sell order/quote match on the
Exchange's order book. The Trading System shall execute trading
interest within the Trading System in price priority, meaning it will
execute all trading interest at the best price level within the Trading
System before executing trading interest at the next best price.
Pursuant to proposed Rule 22.170, after considering price priority, all
options contracts are allocated proportionally according to size (in a
pro-rata fashion). If the executed quantity cannot be evenly allocated,
the remaining options contracts will be distributed one at a time based
upon price-size-time priority.
In addition, the Exchange supports multiple priority overlays that
apply ahead of the default pro-rata allocation at a given price level.
Pursuant to proposed Rule 22.170(f),\96\ these priority overlays are
made available at the Exchange's discretion on a class-by-class basis:
(1) the Priority Customer overlay,\97\ which provides resting interest
from Priority Customers with priority over all non-Priority Customer
interest at the same price, will always take priority over all other
priority overlays; (2) the Specialist Participation Entitlement
overlay,\98\ which provides the Specialist with priority over interest
[[Page 12901]]
from other non-Priority Customers for a certain percentage of contracts
allocated at the same price (entitling the Specialist to 60% of the
allocation if there is another non-Priority Customer at the NBBO or 40%
if there are two or more other non-Priority Customers at the NBBO) \99\
when quoting at the NBBO, inclusive of the case in which the order is
directed to the Specialist; (3) the Directed Market Maker Participation
Entitlement overlay,\100\ which provides a Directed Market Maker with
priority over interest from other non-Priority Customers for a certain
percentage of contracts allocated at the same price (entitling the DMM
to 60% of the allocation if there is another non-Priority Customer at
the NBBO or 40% if there are two or more other non-Priority Customers
at the NBBO) \101\ when quoting at the NBBO and always applies in place
of the Specialist Participation Entitlement overlay when both are in
effect and the order is directed to a Directed Market Maker other than
the Specialist; \102\ and (4) the Small-Size Order Entitlement
overlay,\103\ which provides a Specialist quoting at the NBBO the
priority to execute against the entire size of an order or quote of
five or fewer contracts that does not first execute against any
Priority Customer orders at that price, provided that if an order
subject to the Small-Size Order Entitlement is directed to a Directed
Market Maker who is not the Specialist quoting at the NBBO, and the
Directed Market Maker priority overlay is enabled in the series, then
the Directed Market Maker Participation Entitlement priority overlay
will apply instead of the Small-Size Order Entitlement priority
overlay,\104\ and in the case that an order subject to the Small-Size
Order Entitlement is directed to the Specialist, the Small-Size Order
Entitlement priority overlay will apply while the Specialist
Participation Entitlement and Directed Market Maker Entitlement
overlays will not.\105\
---------------------------------------------------------------------------
\96\ Proposed Rule 22.170(f) is based upon and substantially
similar to C1 Rule 5.32(a)(2), except is different in one respect.
Unlike C1, in the event that a Small-Size order is directed to a
Specialist, the IEX Options trading system will apply the Small-Size
Order Entitlement to the order and not the Directed Order guarantee,
meaning the Specialist will have priority to execute against the
entire size of the order that does not execute against any Priority
Customer orders at that price.
\97\ See proposed Rule 22.170(f)(1).
\98\ See proposed Rule 22.170(f)(2). This overlay may only be in
effect if the Priority Customer overlay is also in effect. See
proposed Rule 22.170(f).
\99\ These allocation entitlements are based on MIAX Rule
514(h)(1), after accounting for the additional priorities afforded
market makers on MIAX, as set forth in MIAX Rule 514(e). See supra
note 86 and accompanying text.
\100\ See proposed Rule 22.170(f)(2). This overlay may only be
in effect if the Priority Customer overlay is also in effect. See
proposed Rule 22.170(f).
\101\ These allocation entitlements are based on MIAX Rule
514(h)(1), after accounting for the additional priorities afforded
market makers on MIAX, as set forth in MIAX Rule 514(e). See supra
note 86 and accompanying text.
\102\ Prioritizing the DMM entitlement over the Specialist
entitlement in these circumstances is the same functionality offered
by several other exchanges. See, e.g., NYSE Amex Options Rule
964NYP(h)(1).
\103\ See proposed Rule 22.170(f)(3).
\104\ See proposed Rule 22.170(f)(3)(A).
\105\ See proposed Rule 22.170(f)(3)(B). This is functionally
identical to how NYSE Amex Options allocates small-size Directed
Orders that are directed to a Specialist. See NYSE Amex Options Rule
965NYP(h)(2)(B).
---------------------------------------------------------------------------
After executions resulting from the Priority Overlays described
above, orders and quotes within the Trading System for the accounts of
non-Priority Customers, including Professional Customers, have next
priority. If there is more than one highest bid or more than one lowest
offer on the Options Order Book for the account of a non-Priority
Customer, then such bids or offers will be afforded priority on a size
pro-rata basis, as described above.
Step Up Mechanism. IEX proposes to offer Options Members an
optional Step Up Mechanism (``SUM''), which is a feature within the
Trading System that provides automated order handling in designated
classes trading for qualifying orders that are not automatically
executed by the Trading System.\106\ The Exchange will determine
eligibility of an order for the SUM (including order size, type,
capacity, handling instructions, as well as which classes of options
contracts). The Exchange will not initiate the SUM process if the NBBO
is crossed.\107\ SUM automatically processes upon receipt of an
eligible order that is marketable against the BBO that is not the NBBO;
or an eligible order that would improve the Exchange's BBO and that is
marketable against the ABBO. This proposed functionality is
substantively identical to the Step-Up Mechanism offered by C1, with
the exception that IEX is not proposing to offer All or None
orders.\108\ IEX notes that the optional SUM mechanism is designed to
benefit a routable order that is not immediately eligible for execution
on the Exchange, but if routed to an away exchange might miss a
potential execution on that exchange. And, because SUM is optional, a
Member can choose not to have its order subject to the SUM mechanism if
it determines that the functionality is not consistent with its
objectives. Given the multitude of tradeable listed options securities
(compared to listed equities) not all available liquidity is always
reflected in an exchange's order book, and the SUM mechanism provides
an opportunity to source such additional liquidity to the benefit of
the order in question. Moreover, IEX notes as well that other options
exchanges offer similar mechanisms, and order flow might be directed to
such exchanges if IEX did not offer such a mechanism.
---------------------------------------------------------------------------
\106\ See proposed Rule 22.270. IEX's proposed Step-Up Mechanism
is substantively identical to C1 Rule 5.35.
\107\ See proposed Rule 22.270(a).
\108\ See C1 Rule 5.35.
---------------------------------------------------------------------------
Upon receipt of a SUM eligible order, the Trading System will
expose the order at the NBBO upon receipt for a period of time
determined by the Exchange on a class-by-class basis, which period of
time may not exceed one second. All Users may submit responses to the
exposure message, which must be limited to the size of the order being
exposed, may be modified, cancelled or replaced any time during the
exposure period, and are cancelled back at the end of the exposure
period if unexecuted. Responses priced at the prevailing NBBO or better
will immediately trade against the order in time priority. If during
the exposure period the Exchange receives an unrelated order (or quote)
on the opposite side of the market from the exposed order that could
trade against the exposed order at the prevailing NBBO price or better,
then the orders will trade at the prevailing NBBO price. The exposure
period will not terminate if a quantity remains on the exposed order
after such trade.
Responses that are not immediately executable based on the
prevailing NBBO may become executable during the exposure period based
on changes to the NBBO. In the event of a change to the NBBO and at the
conclusion of the exposure period, the Exchange will evaluate remaining
responses as well as the ABBO and execute any remaining portion of the
exposed order to the fullest extent possible at the best price(s) by
executing against responses and unrelated orders.
Following the exposure period, the Exchange will route the
remaining portion of the exposed order to other exchanges, unless
otherwise instructed by the User. Any portion of a routed order that
returns unfilled shall trade against the Exchange's best bid/offer
unless another exchange is quoting at a better price in which case new
orders shall be generated and routed to trade against such better
prices.
Data Dissemination. The Exchange will disseminate to OPRA the
highest bid and the lowest offer, and the aggregate quotation size
associated therewith that is available, in accordance with the
requirements of Rule 602 of Regulation NMS under the Act.\109\ The
Exchange will also offer three data products: (1) IEX Options DEEP: an
uncompressed data feed that offers depth of book quotations and
execution information based on options
[[Page 12902]]
orders entered into the Trading System; (2) IEX Options TOPS: an
uncompressed data feed that offers top of book quotations and execution
information based on options orders entered into the Trading System;
and (3) DROP: an uncompressed data feed that offers information
regarding the options trading activity of a specific User.\110\ DROP is
only available to the User to whom the specific data relates and those
recipients expressly authorized by the User.\111\
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\109\ See proposed Rule 22.240(a).
\110\ See proposed Rule 22.240(b).
\111\ Data products will be subject to fees as specified in an
effective Commission rule filing.
---------------------------------------------------------------------------
Risk Controls. The Exchange also proposes to offer to all Users of
IEX Options the ability to establish certain risk control parameters
and limits that are intended to assist Users in managing their market
risk. The proposed risk controls are based, in part, on those of the
NYSE Arca and C1 options exchanges, with certain additions and
differences described below. The proposed risk controls are designed to
offer Users protection from entering orders outside of certain size and
price parameters, as well as certain standard or Exchange-established
parameters based on order type and market conditions.
The proposed risk controls include: (i) pre-trade risk controls;
(ii) activity-based risk controls; and (iii) global risk controls, as
set forth in proposed Rule 22.250.\112\ Pre-trade, activity-based, and
global risk controls may be set before the beginning of a trading
day.\113\ Pre-trade, activity-based, and global risk controls can be
set at the MPID or MPID Group level,\114\ or both, depending on the
risk control.\115\ Additionally, pre-trade risk controls to restrict
the options class(es) transacted must be set per options class.\116\
The following describes each category of risk protection mechanism:
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\112\ Proposed Rule 22.250 is based upon and substantially
similar to NYSE Arca Rule 6.40P-O.
\113\ See proposed Rule 22.250(b)(1).
\114\ MPID Groups, defined in proposed Rule 22.250(a)(5), are
based upon C1 Rule 5.34(c)(4)(A), which allows for the setting of
risk control limits for EFID Groups, which are equivalent to MPID
Groups. IEX notes that it proposes to retain the right to limit the
number of MPID Groups an Options Member can configure based upon
potential technical limitations.
\115\ See proposed Rule 22.250(b)(2). IEX notes that while it
allows these risk controls to be set at MPID or MPID Group levels,
NYSE Arca allows the equivalent controls to be set at either the
MPID or the MPID Sub-ID level (a more granular level than the MPID).
\116\ See proposed Rule 22.250(b)(2).
---------------------------------------------------------------------------
Pre-Trade Risk Controls.\117\ The pre-trade risk controls mechanism
is a set of optional limits, each of which an Options Member may
utilize with respect to its trading activity on the Exchange. These
controls include controls related to the maximum dollar amount for a
single order to be applied one time and the maximum number of contracts
that may be included in a single order before it can be traded.
Additionally, there are optional controls related to the price of an
order or quote (including percentage-based and dollar-based controls),
controls related to the order types or modifiers that can be utilized,
controls to restrict the options classes transacted, and controls to
prohibit duplicative orders.
---------------------------------------------------------------------------
\117\ See proposed Rule 22.250(a)(1), which is substantively
identical to NYSE Arca Rule 6.40P-O(a)(2).
---------------------------------------------------------------------------
Activity-Based Risk Controls.\118\ The Exchange also proposes to
offer activity-based risk limits that may be applied to orders and
quotes in an options class (when acting as a Market Maker, an Options
Member is required to select at least one of the following controls)
\119\ based on specified thresholds measured over the course of a
configurable time period (``Interval''). The Exchange will offer the
following activity-based risk controls: (i) transaction-based risk
limits, which are pre-established limits on the number of an Options
Member's orders and quotes executed in a specified class of options per
Interval; (ii) volume-based risk limits, which are pre-established
limits on the number of contracts of an Options Member's orders and
quotes that can be executed in a specified class of options per
Interval; and (iii) percentage-based risk limits, which are pre-
established limits on the percentage of contracts executed in a
specified class of options as measured against the full size of an
Options Member's orders and quotes executed per Interval. To determine
whether an Options Member has breached the specified percentage limit,
the Exchange calculates the percent of each order or quote in a
specified class of options that is executed during an Interval (each, a
``percentage''), and sums up those percentages. This risk limit will be
breached if the sum of the percentages exceeds the pre-established
limit.
---------------------------------------------------------------------------
\118\ See proposed Rule 22.250(a)(2), which is substantively
identical to NYSE Arca Rule 6.40P-O(a)(3).
\119\ See proposed Rule 22.250(c)(2)(A).
---------------------------------------------------------------------------
Global Risk Control.\120\ The Exchange also proposes to offer a
global risk control, which is a pre-established limit on the number of
times an Options Member may breach its activity-based risk controls per
Interval.
---------------------------------------------------------------------------
\120\ See proposed Rule 22.250(a)(3), which is substantively
identical to NYSE Arca Options Rule 6.40P-O(a)(4).
---------------------------------------------------------------------------
Automated Breach Actions.\121\ Proposed Rule 22.250(c) details the
``automated breach actions'' the Exchange will take if any of the three
above-described risk controls are breached. Based on User preference,
these actions can include blocking new orders and quotes, canceling
orders and quotes on the Order Book, or notifying the Options Member of
the breach. With respect to the activity-based and global risk controls
(as well as Kill Switch Actions described below), in order to remain
consistent with the firm quote obligations of a broker-dealer pursuant
to Rule 602 of Regulation NMS, any marketable interest that is
executable against an order or quote that is received \122\ prior to
the time the applicable threshold is triggered and processed by the
Trading System will be automatically executed up to the size of the
resting order or quote, regardless of whether the execution would cause
the Member to exceed their pre-set risk threshold(s).\123\
---------------------------------------------------------------------------
\121\ See proposed Rule 22.250(c), which is substantively
identical to NYSE Arca Options Rule 6.40P-O(c).
\122\ The time of receipt for an order or quote is the time such
message is processed by the Exchange's order book.
\123\ Pre-trade risk controls are implemented prior to an order
or quote resting on the order book (or being placed on the book
again following an auction) and therefore do not implicate firm
quote obligations.
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Kill Switch Actions.\124\ Additionally, Options Members may direct
the Exchange to operate a ``kill switch'' to either cancel all
unexecuted orders and quotes on the Order Book, block the entry of any
new order and quote messages, or both.
---------------------------------------------------------------------------
\124\ See proposed Rule 22.250(e), which is substantively
identical to NYSE Arca Options Rule 6.40P-O(e).
---------------------------------------------------------------------------
Limit Order Price Protection.\125\ The Exchange also proposes to
offer price protection mechanisms, as set forth in proposed Rule
22.260.\126\ These protections include Limit Order Price Protection, in
which the Trading System will reject an order or quote upon entry, or
cancel at the conclusion of an auction, if its price exceeds a pre-
established, Exchange-defined ``specified threshold'' amount above or
below the reference price. The Reference Price for calculating Limit
Order Price Protection for an order or quote to buy (sell) will be the
NBO (NBB), provided that, immediately
[[Page 12903]]
following an auction, the reference price will be the price at which
the auction match occurred, or, if none, the upper (lower) auction
collar price, or, if none, the NBO (NBB).
---------------------------------------------------------------------------
\125\ See proposed Rule 22.260(a), which is substantively
identical to NYSE Arca Options Rule 6.62P-O(a)(3).
\126\ IEX notes that these proposed risk control mechanisms are
based on similar rules of other options exchanges, in particular:
NYSE Arca Options Rules 6.62P-O(a)(3) and 6.41P-O and C1 Rules
5.34(a)(1), (2) and (4).
---------------------------------------------------------------------------
Market Orders in No-Bid (Offer) Series.\127\ If the Trading System
receives a sell Market order in a series after it is open for trading
with an NBB of zero and an NBO less than or equal to $0.50, then the
Trading System converts the Market order to a Limit order with a limit
price equal to the minimum trading increment applicable to the series
and enters the order into the IEX Options. If the Trading System
receives a sell Market order in a series after it is open for trading
with an NBB of zero and an NBO greater than $0.50, then the Trading
System cancels or rejects the Market order, except if the sell Market
order would be subject to the drill-through protection (as discussed
below), in which case the order joins the ongoing drill-through
process. If the Trading System receives a buy Market order in a series
after it is open for trading with an NBO of zero, the Trading System
cancels or rejects the Market order.
---------------------------------------------------------------------------
\127\ See proposed Rule 22.260(b), which is substantively
identical to C1 Rule 5.34(a)(1).
---------------------------------------------------------------------------
Market Order NBBO Width Protection.\128\ If a User submits a Market
order to the Trading System when the NBBO width is greater than x% of
the midpoint of the NBBO, subject to a minimum and maximum dollar value
(the Exchange determines ``x'' and the minimum and maximum dollar
values on a class-by-class basis), the Trading System cancels or
rejects the Market order.
---------------------------------------------------------------------------
\128\ See proposed Rule 22.260(c), which is substantively
identical to C1 Rule 5.34(a)(2).
---------------------------------------------------------------------------
Price Reasonability Checks.\129\ Additionally, the Exchange will
apply price reasonability checks to most Limit orders and quotes during
continuous trading on each trading day. One price reasonability check,
the ``arbitrage check'', will reject order or quote messages to buy put
options if the price of the order is equal to or greater than the
strike price of the option and will reject (or cancel, if resting)
order or quote messages to buy call options if the price of the order
is equal to or greater than the price of the last trade in the
underlying security plus an Exchange-defined specified threshold.\130\
Another price reasonability check, the ``intrinsic value check'', will
assess the intrinsic value of an option based on the last sale price of
the underlying security (for calls) or the strike price of the option
(for puts), and reject or cancel certain orders or quotes if the price
of the order is dislocated from the intrinsic value of the option by a
certain Exchange-defined specified threshold.\131\
---------------------------------------------------------------------------
\129\ See proposed Rule 22.260(d), which is substantively
identical to NYSE Arca Options Rule 6.41P-O.
\130\ See proposed Rule 22.260(d)(2), which is substantively
identical to NYSE Arca Options Rule 6.41P-O(b).
\131\ See proposed Rule 22.260(d)(3), which is substantively
identical to NYSE Arca Options Rule 6.41P-O(c). IEX notes that like
NYSE Arca Options, the term ``Automated Breach Action'' is used in
two of its risk controls with different meanings: first with respect
to the intrinsic value risk checks for market makers, see NYSE Arca
Options Rule 6.40P-O(d) and proposed Rule 22.260(d)(3)(E); and also
with respect to activity based risk controls. See NYSE Arca Options
Rule 6.41P-O(d) and proposed Rule 22.250(c).
---------------------------------------------------------------------------
Drill-Through Protection. Another proposed price protection
mechanism is drill-through protection, which will prevent an order from
executing beyond a ``buffer amount'' determined based on a drill-
through price.\132\ This rule is based upon and substantially similar
to C1 Rule 5.34(a)(4), with the distinction that IEX's Drill-Through
Protection will have a finite, Exchange-defined number of iterations,
that are communicated by a Trading Alert with at least 30 days prior
notice.\133\ IEX notes that other exchanges have also set a finite
number of iterations for their Drill-Through Protection.\134\
---------------------------------------------------------------------------
\132\ See proposed Rule 22.260(e).
\133\ IEX notes that other exchanges also have the ability to
change any exchange-determined parameters with a trading alert. See,
e.g., C1 Rule 1.5.
\134\ See, e.g., Securities Exchange Act Release No. 86923
(September 10, 2019), 84 FR 48664 (September 16, 2019) (SR-CBOE-
2019-057) with respect to C1 prior functionality.
---------------------------------------------------------------------------
Options Risk Parameter. In order to provide additional protection
to Market Makers to address structural challenges \135\ they face in
the listed options market, IEX proposes to offer an optional quote
parameter that would augment the standard risk tools that will be
available to Options Market Makers referred to as the Options Risk
Parameter (``ORP''). As proposed, the ORP will be a parameter that can
be applied to a quotation that rests on the Order Book at the price
designated by the Market Maker that entered the quotation. When the ORP
is triggered based on pre-defined criteria, the relevant quotation(s)
will be adjusted in a manner specified transparently in IEX's rules and
related Trading Alerts, as described below.\136\
---------------------------------------------------------------------------
\135\ See infra note 150.
\136\ See proposed IEX Rule 23.150(h).
---------------------------------------------------------------------------
The ORP would leverage IEX's proprietary mathematical formula--the
Options Quote Indicator (the ``Indicator'')--which is based on the
preeminent Black-Scholes options pricing model. This Nobel-Prize-
winning approach for evaluating the price of an options contract has
been studied extensively, and is widely considered as a primary
starting point for both academic and industrial options pricing
applications.\137\
---------------------------------------------------------------------------
\137\ See Revolutionary Black-Scholes Option Pricing Model is
Published by Fischer Black, Later a Partner at Goldman Sachs,
available at <a href="https://www.goldmansachs.com/our-firm/history/moments/1973-black-scholes">https://www.goldmansachs.com/our-firm/history/moments/1973-black-scholes</a>.
---------------------------------------------------------------------------
Proposed Rule 23.150(h) sets forth the application of the Indicator
and optional ORP.\138\ As with the standard risk checks, the ORP is
designed to enable Market Makers to provide tighter and deeper quotes
on IEX by providing protection from execution against stale quotes by
identifying when the best Protected Bid or best Protected Offer of the
Away Markets (as defined in Proposed Rule 22.160(a)(8)) in a particular
options series is sufficiently dislocated from the price of the
underlying security to indicate that the best Protected Bid or best
Protected Offer of the Away Markets in the options series is likely in
transition. The Exchange will determine on a class-by-class basis
whether to make the ORP available, which determination will be
communicated by Trading Alert.\139\ Offering the Indicator on a class-
by-class basis would enable the Exchange to utilize the ORP for classes
with a high potential for adverse selection, while excluding classes
presenting lower risk of adverse selection (such as classes with
relatively lower volumes). This flexibility will therefore allow the
Exchange to ensure the ORP is available for those classes where its use
will achieve its intended purpose, while excluding its use where it
would likely provide little additional value and could introduce
unnecessary complexity (for example, for classes that are subject to a
pending corporate action or other nonstandard characteristic).\140\
---------------------------------------------------------------------------
\138\ The quote instability calculation is set forth in
Supplementary Material .04 to proposed Rule 23.150(h); the
calculation of implied volatility is set forth in Supplementary
Material .05 to proposed Rule 23.150(h).
\139\ See proposed IEX Rule 23.150(h)(1).
\140\ The Exchange notes that it is not an equities listing
exchange. The Exchange does not believe that making class-by-class
determinations in this context or otherwise creates a conflict of
interest.
---------------------------------------------------------------------------
As proposed, the Exchange will utilize the Indicator, which is a
fixed formula specified transparently in IEX's rules and related
Trading Alerts, to assess the probability of an imminent change to the
current best Protected Bid \141\ of the Away Markets to a lower price
or of an imminent change to the
[[Page 12904]]
current best Protected Offer \142\ of the Away Markets to a higher
price for a particular listed options series (i.e., an imminent adverse
price change).\143\
---------------------------------------------------------------------------
\141\ See supra note 77 at 39370.
\142\ Id.
\143\ See proposed IEX Rule 23.150(h).
---------------------------------------------------------------------------
As discussed above, the Exchange will periodically determine two
aspects of the formula--the frequency of calculation of implied
volatility \144\ and the quote instability threshold.\145\ In
determining the frequency of the implied volatility calculation and the
quote instability threshold, the Exchange will consider the
distribution of quote instability determinations, the precision of
quote instability determinations, system capacity and performance, and
client feedback. The Exchange believes that these factors are relevant
to setting the initial values. Once the Options Trading System begins
operation (subject to Commission approval of this rule proposal), the
Exchange expects to also consider attributes like fill rates (resting
and taking) \146\ and markout data,\147\ as well as other factors it
determines are relevant based on operational experience in order to
optimize how both variables are set. In periodically adjusting each
variable, the Exchange will consider each variable with a view towards
appropriately balancing the interests of both liquidity takers and
makers, as well as the need to optimize system capacity and
performance. The Exchange will communicate any changes to the quote
instability threshold and the implied volatility calculation frequency
by Trading Alert with at least 30 days' notice.
---------------------------------------------------------------------------
\144\ See proposed IEX Rule 23.150(h)(1) Supplementary Material
.05.
\145\ See proposed IEX Rule 23.150(h)(1) Supplementary Material
.04(2)(e). The quote instability threshold will be within a range of
0-1. For example, a quote instability threshold of 1 would indicate
that the expected price change in the option resulting from price
movement in the underlying would be 100% of the current price of the
option.
\146\ Fill rate data measures the degree to which incoming
orders are able to execute against a resting order on a venue and
are a measure of the percent of shares of an order that are filled
(or executed) by such venue, adjusting for factors such as the size
of the order compared to the size of a venue's displayed quote. The
maximum fill rate for an order is 100%.
\147\ Markouts measure the direction and degree to which the
market moved after an execution, and are often measured as the
difference between the execution price and the midpoint of the NBBO
at various time intervals after a trade. Markouts are typically used
as a way to measure the ``quality'' of a trade. In particular,
short-term markouts of several milliseconds after the time of
execution, are often used to assess whether an order was subject to
``adverse selection'' that can occur when a liquidity providing
order is executed at a price that was about to become stale as a
result of certain speed-based trading strategies.
---------------------------------------------------------------------------
The Indicator utilizes real time relative quoting activity of
protected quotations from Signal Exchanges (as defined in IEX Rule
11.190(g)) in securities underlying each listed options series and a
proprietary mathematical calculation (the ``quote instability
calculation''), as described in more detail below, to assess the
probability of an adverse price change in a particular options series.
When the quote instability calculation identifies an imminent adverse
price change to the best Protected Bid and/or best Protected Offer of
the Away Markets in a particular listed options series, it will
generate a quote instability determination. A quote instability
determination may only be generated at least 200 microseconds after a
prior quote instability determination for a particular options series
on the same side of the market (i.e., affecting resting bids or
offers). If a quote instability determination is generated for an
options series quoted by a Market Maker and the quote is above (below)
the price level of the quote instability determination, the quote will
be either cancelled or repriced to the price level of the quote
instability determination, as instructed by the Market Maker.
IEX believes that offering this optional risk protection for market
makers is particularly important in the options markets where market
makers are exposed to added risk given their continuous quoting
obligations. Although equities and options exchanges share a number of
similarities, a meaningful difference is that in the listed options
market, liquidity is available only on-exchange and is primarily
displayed and derived from market maker quotes, and options markets,
when compared to equities markets, have a much higher quote to trade
ratio.\148\ Exchange market makers in the listed options market play an
essential role in providing liquidity. Moreover, given the sheer
difference in magnitude of tradeable instruments in listed options as
compared to equities (approximately 1.5 million listed options series
compared to approximately 11,000 listed equity securities), the options
exchanges often do not have the same sources of natural liquidity of
buyers and sellers for each tradeable instrument as is generally the
case for equities exchanges. Thus, options market makers are tasked
with affirmative obligations to support the provision of liquidity to
options exchanges through continuous two-sided quotes in large numbers
of listed options series. As a result, IEX understands that options
market makers can be subject to excessive risk of one or more quotes
being executed at stale prices compared to equities market makers or
other liquidity providers.\149\ Because options market makers maintain
hundreds (and sometimes thousands) of quotes on options for a given
underlying security at any one time, a sudden market move in the
underlying security can leave an options market maker vulnerable to
being executed across multiple quotes that are stale and dislocated
from the price of the underlying securities. Liquidity takers can
target one or more of these stale quotes, with limited risk should they
fail to execute (i.e., lost opportunity vs. trading at a stale price),
before the Market Makers are able to move their quotes (often hundreds
or more for a given underlying) to reflect the price change in the
underlying securities, thereby exposing those Market Makers to
potentially major losses.
---------------------------------------------------------------------------
\148\ See Staff Report on Equity and Options Market Structure
Conditions in Early 2021, (Oct. 14, 2021) at 4 (explaining that
options market structure is broadly similar to equities market
structure and noting a key difference that displayed liquidity is
primarily derived from market maker quotes), available at <a href="https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf">https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf</a>; see also Lehoczky, Sandor and Woods,
Ellen and Russell, Matthew and Nguyen, Mina and Somers, James, Dead
Man's Switch: Making Options Markets Safer with Active Quote
Protection (May 2020) at 2 (explaining that options markets ``depend
especially on market makers--who account for 99.9% of open orders--
to connect buyers and sellers, due to a combinatorial explosion of
expirations and strike prices''), available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3675849">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3675849</a>.
\149\ See, e.g., Protecting Liquidity in Options Markets, Market
Structure, Optiver, July 12, 2023 (concluding that ``liquidity
protection improves options markets'' by safeguarding market makers
against ``excessive risk'' that results from ``liquidity providers
maintain[ing] hundreds of quotes on a given underlying at any one
time [and] a sudden market move can leave them vulnerable to showing
stale, or outdated, quotes,'' thereby ``exposing them to potentially
major losses'' if unable to amend or cancel quotes before executed),
available at <a href="https://optiver.com/insights/protecting-liquidity-in-options-markets/">https://optiver.com/insights/protecting-liquidity-in-options-markets/</a>.
---------------------------------------------------------------------------
Without robust liquidity protection mechanisms to protect against
these risks, Market Makers may be forced to widen their spreads, show
less liquidity, or simply exit the market. Overall market quality could
deteriorate as a result, and investors would suffer when it becomes too
expensive to transact, or when there is insufficient liquidity to
enable transacting altogether. Accordingly, liquidity protection
mechanisms for Market makers, which all options exchanges offer, and
IEX proposes to offer, are vital for achieving a healthy balance
between market makers and liquidity takers in the listed
[[Page 12905]]
options market. These include, but are not limited to, activity-based
risk controls, price reasonability checks, and functionality (such as
bulk quoting and purge ports) to facilitate timely quoting, quote
updates, and quote cancellation.
For each options series, the Trading System will maintain a real-
time estimate of the sensitivity of the series to changes in the
midpoint of the best Protected Bid and best Protected Offer of the
Signal Exchanges for the underlying security (based on a Black-Scholes
assessment). When there is a change in the best Protected Bid or best
Protected Offer of the Signal Exchanges for the underlying security,
the Trading System will use the quote instability calculation formula
set forth in proposed IEX Rule 23.150(h) to calculate whether to
generate a quote instability determination for each options series
overlying the underlying security. The Trading System independently
assesses whether to generate a quote instability determination
affecting resting bids or offers for each options series. A quote
instability determination is generated by the Trading System when,
pursuant to the quote instability calculation, the quote instability
factor is greater than the defined quote instability threshold and the
delta absolute value is within the delta bound band.\150\ As proposed,
the delta bound band would be uniformly applied across all options in
order to more narrowly tailor deployment of the ORP to options series
at the greatest risk of adverse selection based on the Exchange's
assessment of relevant factors.
---------------------------------------------------------------------------
\150\ As specified in Supplementary Material .04(1)(q) to
proposed Rule 23.150(m), the delta bound band will be set at a value
that is periodically determined by the Exchange to be at or within a
range of 0-1, which determination will be communicated by Trading
Alert.
---------------------------------------------------------------------------
If a Market Maker has opted to utilize the ORP and its quote in an
options series that was the subject of a quote instability
determination is at or above (below) the price level of the quote
instability determination the Trading System will either cancel the
Market Maker's quote or reprice it to the price level of the quote
instability determination, pursuant to the Market Maker's
instruction.\151\ Regardless of whether it chooses to use the ORP, a
Market Maker will be able to adjust the price of its quote in the same
manner as other Market Makers' quotes that have not opted to use the
ORP.
---------------------------------------------------------------------------
\151\ See proposed IEX Rule 23.150(h)(1)(c).
---------------------------------------------------------------------------
One Second Exposure Period. Proposed Rule 23.200 would require
Options Members to expose their customers' orders on the Exchange for
at least one second under certain circumstances before trading against
such orders. During this one second exposure period, other Options
Members will be able to enter orders to trade against the exposed
order. In adopting a one second order exposure period, the Exchange is
proposing a requirement that is consistent with the rules of other
options exchanges.\152\ Thus, the exposure period will allow Options
Members that are members of other options exchanges to comply with
proposed Rule 23.200 without programming separate time parameters into
their systems for order entry or compliance purposes. The Exchange
believes that market participants are sufficiently automated that a one
second exposure period allows an adequate time for market participants
to electronically respond to an order. Also, it is possible that market
participants might wait until the end of the exposure period, no matter
how long, before responding. Thus, the Exchange believes that any
longer than one second would not further the protection of investors or
market participants, but rather, would potentially increase market risk
to investors and other market participants by creating a longer period
of time for the exposed order to be subject to market risk.
---------------------------------------------------------------------------
\152\ See, e.g., MEMX Rule 22.11; C1 Rule 5.9; and MIAX Options
Rule 520(b).
---------------------------------------------------------------------------
Options Order Protection and Locked/Crossed Market Plan Rules
The Exchange will participate in the Options Order Protection and
Locked/Crossed Market Plan (the ``Plan''),\153\ and therefore will be
required to comply with the obligations of Participants under the Plan.
The Exchange proposes to adopt rules relating to the Plan that are
substantially similar to the rules in place on all of the options
exchanges that are Participants to the Plan. The Plan essentially
applies the Regulation NMS price-protection provisions to the options
markets. Similar to Regulation NMS, the Plan requires the Plan
Participants to adopt rules ``reasonably designed to prevent Trade-
Throughs'', while exempting ISOs from that prohibition. The Plan's
definition of an ISO is essentially the same as under Regulation NMS.
The remaining exceptions to the trade-through prohibition, discussed
more specifically below, either track those under Regulation NMS or
correspond to unique aspects of the options market, or both.
---------------------------------------------------------------------------
\153\ See supra note 77.
---------------------------------------------------------------------------
The proposed rules in Chapter 28 (Options Order Protection and
Locked and Crossed Markets Rules) conform to the requirements of the
Plan. Proposed Rule 28.100 sets forth the defined terms for use under
the Plan. Proposed Rule 28.110 prohibits trade-throughs and exempts
ISOs from that prohibition. Proposed Rule 28.110 also contains
additional exceptions to the trade-through prohibition that track the
exceptions under Regulation NMS or correspond to unique aspects of the
options market, or both.
Proposed Rule 28.120 sets forth the general prohibition against
locking/crossing other eligible exchanges as well as certain enumerated
exceptions that permit locked markets in limited circumstances; such
exceptions have been approved by the Commission for inclusion in the
rules of other options exchanges. Specifically, the exceptions to the
general prohibition on locking and crossing occur when: (1) the locking
or crossing quotation was displayed at a time when the Exchange was
experiencing a failure, material delay, or malfunction of its systems
or equipment; (2) the locking or crossing quotation was displayed at a
time when there is a Crossed Market; (3) the Options Member
simultaneously routed an ISO to execute against the full displayed size
of any locked or crossed Protected Bid or Protected Offer; or (4) with
respect to a locking quotation, the order entered on the Exchange that
will lock a Protected Bid or Protected Offer, is: (i) not a Customer
order, and the Exchange can determine via identification available
pursuant to the OPRA Plan that such Protected Bid or Protected Offer
does not represent, in whole or in part, a Customer order; or (ii) a
Customer order, and the Exchange can determine via identification
available pursuant to the OPRA Plan that such Protected Bid or
Protected Offer does not represent, in whole or in part, a Customer
order, and, on a case-by-case basis, the Customer specifically
authorizes the Member to lock such Protected Bid or Protected
Offer.\154\
---------------------------------------------------------------------------
\154\ See proposed Rule 28.120(b).
---------------------------------------------------------------------------
The Exchange notes that the proposed rules in Chapter 28 (Options
Order Protection and Locked and Crossed Markets Rules) are
substantively identical to the rules of MEMX Options.\155\
---------------------------------------------------------------------------
\155\ See MEMX Rule 27.1, 27.2, and 27.3.
---------------------------------------------------------------------------
Securities Traded on IEX Options
General Listing Standards. The Exchange proposes to adopt listing
standards for options traded on IEX Options as described in Chapter 20
(Securities Traded on IEX Options), which are substantively identical
to the
[[Page 12906]]
equivalent MEMX Options rules,\156\ with the exception of: (i) some
language in Supplementary Material .02 to proposed Rule 20.140
concerning the $1 strike price program which is not included in the
equivalent MEMX rule, and therefore borrowed from the equivalent MIAX
rule; \157\ and (ii) the addition of language allowing the Exchange to
list for closing transactions an Options series that is listed but
restricted to closing transactions on another exchange.\158\ The
Exchange will join the Options Listings Procedures Plan and will list
and trade options already listed on other options exchanges. The
Exchange will gradually phase-in its trading of options, beginning with
a selection of actively traded options.
---------------------------------------------------------------------------
\156\ See MEMX Rules, Chapter 19. IEX notes that the MEMX Rules
include Chapter 29: Index Rules. IEX is not proposing to adopt
similar rules at this time, and any references to index options in
MEMX Chapter 19 are not in proposed IEX Chapter 20.
\157\ See MIAX Rule 404 Interpretation and Policy .01.
\158\ See Supplementary Material .01 to proposed Rule 20.130,
which mirrors MIAX Rule 403 Interpretation and Policy .01.
---------------------------------------------------------------------------
Conduct and Operational Rules for Options Members
The Exchange proposes to adopt rules in Chapter 19 for IEX Options
that are substantively identical to the rules of MEMX Options
regarding: exercises and deliveries as described in Chapter 24
(Exercises and Deliveries); records, reports and audits as described in
Chapter 25 (Records, Reports and Audits); minor rule violations as
described in Chapter 26 (Discipline and Summary Suspensions); doing
business with the public as described in Chapter 27 (Doing Business
With the Public); and margin as described in Chapter 29 (Margin
Requirements).\159\ The Exchange also proposes to adopt rules that are
substantively similar to most of MEMX's Chapter 18 (Business Conduct),
with the exception of proposed Rules 19.160 (Position Limits), 19.170
(Exemptions from Position Limits), 19.180 (Exercise Limits) that are
substantively similar to MIAX Rules 307, 308, and 309, respectively.
IEX proposed to adopt MIAX's versions of these rules because they
provided specificity about the types of position limits the Exchange
will apply to Options Members (as opposed to the MEMX rules, which rely
on position limits set by other exchanges).
---------------------------------------------------------------------------
\159\ See MEMX Rules, Chapters 23, 24, 25, 26 and 28.
---------------------------------------------------------------------------
National Market System
IEX Options will operate as a full and equal participant in the
national market system for options trading established under Section
11A of the Exchange Act.\160\ IEX Options will become a member of the
Options Price Reporting Authority (``OPRA''), the Options Linkage
Authority (``OLA''), the Options Regulatory Surveillance Authority
(``ORSA''), and the Options Listing Procedures Plan (``OLPP''). The
Exchange expects to participate in those plans on the same terms
currently applicable to current members of those plans. The Exchange is
in the process of contacting the leadership of each options-related
national market system plan to begin the membership process.
---------------------------------------------------------------------------
\160\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------
Regulation
The Exchange will leverage many of the structures it established to
operate a national securities exchange trading NMS equities securities,
in compliance with Section 6 of the Exchange Act.\161\ As described in
more detail below, there will be three elements of that regulation: (1)
the Exchange will join the existing options industry agreements
pursuant to Section 17(d) of the Exchange Act prior to commencing
operations,\162\ as it did with respect to equities; (2) the Exchange's
Regulatory Services Agreement (``RSA'') with FINRA will be amended
prior to commencing operations to provide that FINRA will perform
regulatory surveillance, investigation, disciplinary and hearing
services of options trading on IEX subject to oversight by IEX
Regulation, just as it does for equities regulation; and (3) the
Exchange will perform options listing regulation, as well as authorize
Options Members to trade on IEX Options. Section 17(d) of the Exchange
Act and the related Exchange Act rules permit SROs to allocate certain
regulatory responsibilities to avoid duplicative oversight and
regulation. Under Exchange Act Rule 17d-1,\163\ the SEC designates one
SRO to be the Designated Examining Authority, or DEA, for each broker-
dealer that is a member of more than one SRO. The DEA is responsible
for the financial aspects of that broker-dealer's regulatory oversight.
Because IEX Options Members also must be members of at least one other
SRO, the Exchange would generally not expect to be designated as the
DEA for any of its members.\164\
---------------------------------------------------------------------------
\161\ 15 U.S.C. 78f.
\162\ 15 U.S.C. 78q(d).
\163\ 17 CFR 240.17d-1.
\164\ If IEX were to be designated as the DEA for any of its
members, FINRA would perform the DEA functions on behalf of IEX
pursuant to the RSA.
---------------------------------------------------------------------------
Exchange Act Rule 17d-2 \165\ permits SROs to file with the
Commission plans under which the SROs allocate among each other the
responsibility to receive regulatory reports from, and examine and
enforce compliance with specified provisions of the Exchange Act and
rules thereunder and SRO rules by, firms that are members of more than
one SRO (``common members''). If such a plan is declared effective by
the Commission, an SRO that is a party to the plan is relieved of
regulatory responsibility as to any common member for whom
responsibility is allocated under the plan to another SRO.
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\165\ 17 CFR 240.17d-2.
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All of the options exchanges, FINRA, and NYSE have entered into the
Options Sales Practices Agreement, a Rule 17d-2 agreement, and the
Exchange intends to join this agreement prior to the commencement of
operations for IEX Options. Under this Agreement, the examining SROs
will examine firms that are common members of the Exchange and the
particular examining SRO for compliance with certain provisions of the
Exchange Act, certain of the rules and regulations adopted thereunder,
certain examining SRO rules, and certain proposed IEX Options rules. In
addition, the proposed IEX Options rules contemplate participation in
this Agreement by requiring that any Options Member also be a member of
at least one of the examining SROs. The Exchange and FINRA are also
party to a bilateral Rule 17d-2 agreement that requires minor
modifications due to the proposed launch of IEX Options. The Exchange
intends to modify and seek Commission approval of the modified
bilateral Rule 17d-2 agreement prior to commencing of operations for
IEX Options. Additionally, all of the options exchanges and FINRA have
entered into the Options-Related Market Surveillance Agreement, a Rule
17d-2 agreement, and the Exchange intends to join this agreement prior
to the commencement of operations for IEX Options.
For those regulatory responsibilities that fall outside the scope
of any Rule 17d-2 agreements, the Exchange will retain full regulatory
responsibility under the Exchange Act. However, the Exchange has
entered into an RSA with FINRA, as discussed above, pursuant to which
FINRA personnel operate as agents for the Exchange in performing
certain of these functions. The Exchange and FINRA will continue to
operate under the RSA that is currently in place but with modifications
as necessary to accommodate the expanded scope of the
[[Page 12907]]
relationship. The necessary modifications will be implemented prior to
the commencement of operations of IEX Options. As is the case with the
Exchange's equities market, the Exchange will oversee FINRA and
continue to bear ultimate regulatory responsibility with respect to
regulatory functions not subject to allocation to FINRA or another SRO
pursuant to a Rule 17d-2 Agreement for the IEX Options Exchange.
Consistent with the Exchange's existing regulatory structure, the
Exchange's Chief Regulatory Officer, reporting to the Regulatory
Oversight Committee of the Exchange's board of directors, shall have
general supervision of the regulatory operations of IEX Options,
including responsibility for overseeing the surveillance, examination,
and enforcement functions and for administering all regulatory services
agreements applicable to IEX Options. Similarly, the Exchange's
existing Regulatory Oversight Committee will be responsible for
overseeing the adequacy and effectiveness of Exchange's regulatory and
self-regulatory organization responsibilities, including those
applicable to IEX Options.
As it does with equities, the Exchange will monitor trading on IEX
Options, both through internal reports and FINRA surveillances for the
purpose of maintaining a fair and orderly market. As it does with its
equities trading, the Exchange will monitor IEX Options to identify
unusual trading patterns and determine whether particular trading
activity requires further regulatory investigation by FINRA.
Finally, the Exchange will oversee the process for determining and
implementing trade halts, identifying and responding to unusual market
conditions, and administering the Exchange's process for identifying
and remediating ``obvious errors'' by and among its Options
Members.\166\ The proposed rules in Chapter 21 (Regulation of Trading
on IEX Options) regarding halts,\167\ unusual market conditions,
extraordinary market volatility, obvious errors, audit trail, and rules
regarding prohibited and permissible transfers of options positions off
the Exchange are substantively identical to the approved rules of MEMX
Options.\168\
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\166\ IEX notes that like MEMX Rule 20.6, proposed Rule 21.150
authorizes the proposed Error Panel to review decisions made under
this rule, which includes decisions to classify a transaction as a
Catastrophic Error.
\167\ Proposed Rule 21.120(b) states that during a trading halt,
the Exchange shall process new and existing orders and quotes in a
series in accordance with proposed Rule 22.160(g). Proposed Rule
22.160(g), which is substantively identical to NYSE Arca Options
Rule 6.64P-O(g), states that during a trading halt, the Exchange
will cancel all resting Market Maker quotes.
\168\ See MEMX Rules, Chapter 20.
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Minor Rule Violation Plan
The Exchange's disciplinary rules, including Exchange Rules
applicable to ``minor rule violations,'' are set forth in Chapter 9 of
the Exchange's current Rules. Such disciplinary rules will apply to
Options Members and their associated persons.
The Commission approved the Exchange's Minor Rule Violation Plan
(``MRVP'') in 2016.\169\ The Exchange's MRVP specifies the uncontested
minor rule violations that are included in the MRVP and have sanctions
not exceeding $2,500. Any violations that are resolved under the MRVP
would not be subject to the provisions of Rule 19d-1(c)(1) under the
Act \170\ requiring that an SRO promptly file notice with the
Commission of any final disciplinary action taken with respect to any
person or organization.\171\ The Exchange's MRVP includes the policies
and procedures included in Exchange Rule 9.216(b) and the violations
included in Rule 9.218.
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\169\ See Securities Exchange Act Release No. 78474 (August 3,
2016), 81 FR 52717 (August 9, 2016) (Order Declaring Effective a
Minor Rule Violation Plan) (File No. 4-701).
\170\ 17 CFR 240.19d-1(c)(1).
\171\ The Commission adopted amendments to paragraph (c) of Rule
19d-1 to allow SROs to submit for Commission approval plans for the
abbreviated reporting of minor disciplinary infractions. See Release
No. 34-21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any
disciplinary action taken by an SRO against any person for violation
of a rule of the SRO which has been designated as a minor rule
violation pursuant to such a plan filed with and declared effective
by the Commission will not be considered ``final'' for purposes of
Section 19(d)(1) of the Act if the sanction imposed consists of a
fine not exceeding $2,500 and the sanctioned person has not sought
an adjudication, including a hearing, or otherwise exhausted his
administrative remedies.
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Under Rule 9.216(b), the Exchange may impose a fine (not to exceed
$2,500) and/or a censure on any Member or associated person with
respect to any rule listed in IEX Rule 9.218. If the Financial Industry
Regulatory Authority Department of Enforcement or the Department of
Market Regulation, on behalf of the Exchange, has reason to believe a
violation has occurred and if the Member or associated person does not
dispute the violation, the Department of Enforcement or the Department
of Market Regulation may prepare and request that the Member or
associated person execute a minor rule violation plan letter accepting
a finding of violation, consenting to the imposition of sanctions, and
agreeing to waive the Member's or associated person's right to a
hearing before a Hearing Panel or, if applicable, an Extended Hearing
Panel, and any right of appeal to the IEX Appeals Committee, the Board,
the Commission, and the courts, or to otherwise challenge the validity
of the letter, if the letter is accepted. The letter must describe the
act or practice engaged in or omitted, the rule, regulation, or
statutory provision violated, and the sanction or sanctions to be
imposed. Unless the letter states otherwise, the effective date of any
sanction imposed will be a date to be determined by IEX Regulation
staff. In the event the letter is not accepted by the Member or
associated person, or is rejected by the Office of Disciplinary
Affairs, the matter can proceed in accordance with the Exchange's
disciplinary rules, which include hearing rights for formal
disciplinary proceedings.
The Exchange proposes to amend its MRVP and Exchange Rule 9.218 to
add certain rules relating to Options as set forth in proposed Rule
26.120 (Penalty for Minor Rule Violations) to the list of rules
eligible for Minor Rule Violation Plan treatment.\172\ The rules
included in proposed Rule 26.120, as appropriate for disposition under
the Exchange's MRVP, are: (a) position limit and exercise limit
violations; (b) violations regarding the failure to accurately report
position and account information; (c) Market Maker quoting obligations;
(d) violations regarding expiring exercise declarations; (e) violations
relating to the failure to respond to the Exchange's requests for the
submission of trade data; and (f) violations relating to noncompliance
with the Consolidated Audit Trail Compliance Rule requirements. The
rule violations included in proposed Rule 26.120 are the same as the
rule violations included in the MRVPs of other options exchanges.\173\
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\172\ In its proposal to adopt the MRVP, the Exchange requested
that, going forward, to the extent that there are any changes to the
rules applicable to the Exchange's MRVP, the Exchange requests that
the Commission deem such changes to be modifications to the
Exchange's MRVP.
\173\ See, e.g., MEMX Rules, Chapter 25.
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Upon implementation of this proposal, the Exchange will include
violations of the enumerated options trading rules, if any, in an
applicable Exchange's quarterly report of any actions taken on minor
rule violations under the MRVP.\174\ A quarterly report would include:
the Exchange's internal file number for the case, the name of the
[[Page 12908]]
individual and/or organization, the nature of the violation, the
specific rule provision violated, the sanction imposed, the number of
times the rule violation has occurred, and the date of disposition. The
Exchange's MRVP, as proposed to be amended herein, is consistent with
Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in
part, that an exchange have the capacity to enforce compliance with,
and provide appropriate discipline for, violations of the rules of the
Commission and of the exchange, 6(b)(6) provides that members and
persons and associated members shall be appropriately disciplined for
violation of the provisions of the rules of the exchange, by expulsion,
suspension, limitation of activities, functions and operations, fine,
censure, being suspended or barred from being associated with a member,
or any other fitting sanction.\175\ Rule violations listed in proposed
Rule 26.120 are minor in nature and will be more appropriately
disciplined through the Exchange's MRVP and therefore proposes to add
them to the list of rules eligible for minor rule fine disposition
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\174\ To date, the Exchange has not taken any minor rule
violation actions.
\175\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
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In addition, because Rule 9.216(b) offers procedural rights to a
person sanctioned for a violation listed in proposed Rule 26.120, the
Exchange will provide a fair procedure for the disciplining of members
and associated persons, consistent with Section 6(b)(7) of the
Act.\176\
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\176\ 15 U.S.C. 78f(b)(7). Rule 9.216(b) does not preclude an
Options Member or person associated with an Options Member from
contesting an alleged violation and receiving a hearing on the
matter with the same procedural rights through a litigated
disciplinary proceeding.
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This proposal to include the rules listed in proposed Rule 26.120
in the Exchange's MRVP is consistent with the public interest, the
protection of investors, or otherwise in furtherance of the purposes of
the Act, as required by Rule 19d-1(c)(2) under the Act,\177\ because it
should strengthen the Exchange's ability to carry out its oversight and
enforcement responsibilities as an SRO in cases where full disciplinary
proceedings are unsuitable in view of the minor nature of the
particular violation. In requesting the proposed change to the MRVP,
the Exchange in no way minimizes the importance of compliance with
Exchange Rules and all other rules subject to the imposition of fines
under the MRVP. Minor rule fines provide a meaningful sanction for
minor or technical violations of rules when the conduct at issue does
not warrant stronger, immediately reportable disciplinary sanctions.
The inclusion of a rule in the Exchange's MRVP does not minimize the
importance of compliance with the rule, nor does it preclude the
Exchange from choosing to pursue violations of eligible rules through
the Exchange's disciplinary rules if the nature of the violation or
prior disciplinary history warrants more significant sanctions.
However, the MRVP provides a reasonable means of addressing rule
violations that do not rise to the level of requiring formal
disciplinary proceedings, while providing greater flexibility in
handling certain violations.\178\ The Exchange will continue to conduct
surveillance with due diligence and make a determination based on its
findings, on a case-by-case basis, whether a fine of more or less than
the recommended amount is appropriate for a violation under the MRVP or
whether a violation requires a formal disciplinary action.
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\177\ 17 CFR 240.19d-1(c)(2).
\178\ See supra note 176.
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Section 36 Exemption Request
The Exchange proposes to incorporate by reference as IEX Options
rules certain rules of the Cboe Exchange, Inc. (``CBOE''), the New York
Stock Exchange (``NYSE''), and FINRA. Specifically, proposed Rule
27.250 proposes to incorporate by reference the applicable rules of
FINRA with respect to Communications with Public Customers, and
proposed Rule 29.120 proposes to incorporate by reference initial and
maintenance margin requirements of either CBOE or NYSE. Thus, for
certain IEX Options rules, Exchange members will comply with a IEX
Options rule by complying with the CBOE, NYSE, or FINRA rule
referenced. Using its authority under Section 36 of the Act, the
Commission has previously exempted certain SROs from the requirement to
file proposed rule changes under Section 19(b) of the Act when
incorporating another SRO's rules by reference.\179\ Each such exempt
SRO has agreed to be governed by the incorporated rules, as amended
from time to time, but, has not been required to file a separate
proposed rule change with the Commission each time the SRO whose rules
are incorporated by reference seeks to modify its rules. In addition,
each SRO incorporated by reference only regulatory rules (e.g., margin,
suitability, arbitration), not trading rules, and incorporated by
reference whole categories of rules (i.e., did not ``cherry-pick''
certain individual rules within a category). Last, each exempt SRO had
reasonable procedures in place to provide written notice to its members
each time a change is proposed to the incorporated rules of another SRO
in order to provide its members with notice of a proposed rule change
that affects their interests, so that they would have an opportunity to
comment on it.
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\179\ See, e.g., Securities Exchange Act Release No. 49260
(February 17, 2004), 69 FR 8500 (February 24, 2004). See also
Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR
14521, 14539-40 (March 18, 2008) (order approving SR-NASDAQ-2007-004
and SR-NASDAQ-2007-080) and 53128 (January 13, 2006), 71 FR 3550,
3565-66 (January 23, 2006) (File No. 10-131) (approving The NASDAQ
Stock Market LLC's exchange application).
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In connection with this proposal, the Exchange respectfully
requests, pursuant to Rule 240.0-12 under the Act,\180\ an exemption
under Section 36 of the Act from the rule filing requirements of
Section 19(b) of the Act for changes to those IEX Options rules that
are effected solely by virtue of a change to a cross-referenced CBOE,
NYSE, or FINRA rule. The Exchange proposes to incorporate by reference
categories of rules (rather than individual rules within a category)
that are not trading rules. The Exchange also agrees to provide written
notice to Options Members prior to the launch of IEX Options of the
specific CBOE, NYSE, and FINRA rules that it will incorporate by
reference. In addition, the Exchange will notify Options Members
whenever CBOE, NYSE, or FINRA proposes a change to a cross-referenced
CBOE, NYSE, or FINRA rule.\181\ For the foregoing reasons, the Exchange
believes that its request for exemptive relief is consistent with prior
requests for, and provision of, similar exemptive relief.
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\180\ 17 CFR 240.0-12.
\181\ The Exchange will provide such notice through a posting on
the same website location where the Exchange will post its own rule
filings pursuant to Rule 19b-4(l) under Act, within the time frame
required by that rule. The website posting will include a link to
the location on the CBOE, NYSE, or FINRA websites where the proposed
rule change is posted.
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Amendments to Existing Exchange Rules
In addition to the rules of IEX Options proposed above, the
Exchange proposes to amend certain of its existing Exchange Rules that
currently apply to the Exchange's equities market in order to reflect
the Exchange's proposed operation of IEX Options.
First, the Exchange proposes to amend Rule 2.160(i), which
generally requires each Member to register at least two Principals with
the Exchange subject to certain exceptions described therein, to
provide that such paragraph (i) shall not apply to a Member that solely
conducts business on the
[[Page 12909]]
Exchange as an Options Member, however, Options Members must comply
with the registration requirements set forth in proposed Rule 18.110.
The Exchange notes that proposed Rule 18.110(h), which provides that
every Options Member shall have at least one Options Principal and sets
forth the Exchange's Options Principal registration requirements, is
identical to MEMX Rule 17.2(g). In connection with this proposed
change, the Exchange also proposes to amend Rule 2.160(n) to include
Options Principal as a registration category and to set forth the
Exchange's qualification requirements for an Options Principal, which
are the same as those for an Options Principal on MEMX Options.
Additionally, the Exchange proposes to amend Rule 2.160(p)(a)(4) to set
forth the appropriate regulatory element continuing education module
for reregistration as an Options Principal.
The Exchange also proposes to make three modifications to Rule
2.220 (IEX Services LLC as Outbound Router). First, IEX proposes to
remove the word ``directly'' from the first sentence of subparagraph
(a), because IEX Services will continue to route orders to away
markets, but as described above, with respect to options routing, it
will not route those order ``directly'' to the away markets. Second,
consistent with the first change, IEX proposes to insert a new second
sentence in subparagraph (a) that reads: ``When routing options orders,
as set forth in Rule 22.180, IEX Services will transmit such orders to
one or more routing brokers that are not affiliated with the Exchange;
the routing brokers will in turn route the applicable options orders to
other securities exchanges that trade options.'' IEX proposes to make
this change to reflect the different nature of how IEX Services will
handle routing options orders from equities orders. And third, IEX
proposes to modify subparagraph (a)(8) of this rule, which states that
IEX Services shall maintain an error account for the purpose of
addressing positions that are the result of an execution or executions
that are not clearly erroneous under Rule 11.270 and result from a
technical or systems issue at IEX Services, the Exchange, a routing
destination, or a non-affiliate third-party routing broker that affects
one or more orders (``Error Positions''). The proposed change to Rule
2.220(a)(8) would add a reference to the comparable provision to that
which governs review and resolution of clearly erroneous equities
transactions (i.e., Rule 11.270) but for options transactions, namely
Rule 21.150, which governs review and resolution of options
transactions that may qualify as obvious errors.
The Exchange also proposes to adopt Rule 21.220 (Limitation of
Liability), which is almost identical to the Rule 11.260, the
Limitation of Liability rule in IEX's equities trading rules. The only
difference is to reflect that proposed Rule 21.220 applies to IEX
Options and options trading.
Lastly, the Exchange proposes to amend Rule 9.218 (Violations
Appropriate for Disposition Under Plan Pursuant to Exchange Act Rule
19d-1(c)(2)), which contains the list of Exchange Rule violations and
recommended fine schedule, to include a new paragraph (k) referencing
proposed Rule 26.120 for the recommended fines for minor rule
violations of the Exchange Rules appliable to IEX Options, which the
Exchange notes are the same as those of MEMX Options.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \182\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \183\ in particular, in that
it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest;
and is not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
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\182\ 15 U.S.C. 78f(b).
\183\ 15 U.S.C. 78f(b)(5).
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As described above, the Exchange proposes to operate its options
market much as it operates its equities market today and in a manner
similar to that of other options exchanges, while leveraging IEX's
experience and expertise in understanding the needs of market makers to
offer them additional tools designed to better manage risk and drive
performance. As discussed in the Purpose section, IEX believes that the
proposed enhanced liquidity protection mechanisms will result in market
makers providing more competitive quotes which will benefit all market
participants and thereby support the protection of investors and the
public interest. Also as discussed in the Purpose section, most of the
proposed IEX Options rules are based on the rules of other options
exchanges, primarily MEMX, C1, MIAX, NYSE Amex, and NYSE Arca.
Therefore, the Exchange does not believe these aspects of the proposed
rule change that are substantively identical to other exchanges' rules
raise any new or novel issues that have not been previously considered
by the Commission. Moreover, the Exchange believes that the proposed
functionality is consistent with Section 6(b)(5) of the Act because the
Trading System is designed to be efficient and its operation
transparent, thereby facilitating transactions in securities, removing
impediments to and perfecting the mechanisms of a free and open
national market system. As described above, the Exchange's proposed
rules, including the proposed Order Types and Handling Instructions,
opening procedures, routing services, and order matching process are
designed to provide a simplified suite of conventional features and to
comply with all applicable regulatory requirements, including the
obligations of the Options Order Protection and Locked/Crossed Market
Plan.\184\
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\184\ See supra note 77.
---------------------------------------------------------------------------
As discussed in the Purpose section, IEX's proposal includes a de
minimis latency mechanism (or speedbump) on incoming order and quote
messages designed to enable IEX to update its view of the market prior
to processing orders and quotes, and a robust suite of risk
protections, including the ORP, which is designed to protect market
makers from excessive risk due to execution of stale quotes. IEX
believes that the proposed latency mechanism will protect investors and
the public interest in several respects. First, by enabling IEX to
update its view of market data prior to executing an order or quote, it
thereby would support IEX's ability to accurately account for
contemporaneous market data. IEX notes that this aspect of its
functionality is designed to facilitate market participants executing
at current (i.e., not ``stale'') prices. Second, by enabling the
Trading System to perform the Indicator calculation with current market
data, it supports operation of the ORP (as discussed herein), which is
designed to provide Market Makers with an optional tool to avoid
excessive risk that can arise from execution of a stale quote. As
discussed in detail above, IEX believes that this protection will
encourage market makers to post aggressively priced and/or deeper
quotes on the Exchange which will benefit all market participants.
Thus, from a functional perspective, IEX believes that the operation of
the latency
[[Page 12910]]
mechanism is consistent with the Act. Further, and as explained below,
the proposed latency mechanism of 350 microseconds is well within the
geographic delays that exist among and between the data centers that
IEX Options Members and other options exchanges use \185\ and is
consistent with the naturally occurring time indeterminism that exists
in order processing.\186\
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\185\ See <a href="https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf">https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf</a> for a description of latencies
between various data centers.
\186\ Accounting for the latency mechanism or speedbump is no
different than accounting for other geographical distances between
exchanges. See Securities Exchange Act Release No. 78101 (June 17,
2016), 81 FR 41142, 41161 (June 23, 2016) (``2016 SEC Approval
Order'') (approving IEX's 350 microsecond speed bump in the
registration of the IEX Exchange as ``well within the range of
geographic and technological latencies that market participants
experience today'' such that ``latency to and from IEX will be
comparable to--and even less than--delays attributable to other
markets that currently are included in the NBBO,'' and finding the
delay to be de minimis, i.e., so short as to not frustrate the
purposes of the Exchange Act by impairing fair and efficient access
to IEX's quotation); see also Securities and Exchange Act Release
No. 34-89686 (August 26, 2020) (``2020 SEC Approval Order'') at 15
(determining that IEX's de minimis speed bump when routing displayed
equity orders is ``just like accounting for any other technological
or geographic latency'' and doing so is consistent with applicable
rules and regulations); see also Citadel Securities LLC v.
Securities and Exchange Commission, 45 F.4th 27, 37 (D.C. Circuit
2022) (July 29, 2022) (ruling in favor of the SEC's approval of
IEX's displayed equity order that traverses a speedbump and holding
that IEX's displayed equity order's delay are ``similar to the delay
that traders' communications already experience when traveling
between various other exchanges across the country.'').
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IEX also believes that the latency mechanism is consistent with the
Commission Interpretation Regarding Automated Quotations Under
Regulation NMS (``de minimis delay interpretation'').\187\ Although
options markets do not have the same automated quotation requirements
as in equities, even if they were to apply, the Commission's reasoning
in the de minimis delay interpretation in the context of NMS automated
quotations is instructive, as the latency mechanism IEX is proposing
for the options exchange is a de minimis delay that does not impair
fair and efficient access to an exchange's quotation. Specifically, the
Commission stated in issuing its interpretation that intentional delays
that are well within the geographic and technological latencies
experienced by market participants when routing orders are de minimis
to the extent they would not impair a market participant's ability to
access a displayed quotation consistent with the goals of NMS Rule
611.\188\ The Commission also noted that an intentional delay of any
duration must be fully disclosed and codified in a written rule of the
exchange, which, as described below, the latency mechanism will be
fully disclosed and codified in IEX's written rules.\189\
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\187\ See Commission Interpretation Regarding Automated
Quotations Under Regulation NMS, Exchange Act Release No. 34-78102,
81 FR 40,785, 40,792 (June 23, 2016).
\188\ Id.
\189\ Id.
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IEX believes that its proposed latency mechanism of 350
microseconds is fully consistent with the reasoning in the Commission's
de minimis delay interpretation.\190\ First, the delay is less than the
existing geographic latencies experienced by market participants when
routing orders. For example, latency between and among the data centers
located in New Jersey range up to several hundred microseconds, with
additional latency introduced by technology processing on both sides of
an order or quote route between these data centers.\191\ Accordingly,
the proposed latency mechanism is consistent with this aspect of the
Commission's de minimis interpretation.
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\190\ IEX notes that the D.C. Circuit Court also agreed with the
Commission's interpretation. The Court ruled entirely in favor of
the SEC's approval of IEX's system that includes applying a
speedbump and quote indicator to displayed equity orders. See
Citadel Securities, 45 F.4th at 36 (concluding the SEC's approval of
a 350 microseconds intentional access delay for displayed orders to
be ``de minimis--i.e., a delay so short as to not frustrate the
purposes of Rule 611 by impairing fair and efficient access to an
exchange's quotations''); see also id. (``The SEC's conclusion that
mere de minimis delays do not cause an order to violate Regulation
NMS's immediacy requirement was therefore reasonable.'')
\191\ See <a href="https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf">https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf</a>.
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The proposed latency mechanism also meets the additional prongs of
the de minimis interpretation, that it be fully disclosed and codified
in a written rule of the exchange that has become effective pursuant to
Section 19 of the Act; and that the exchange articulates how the
purpose, operation, and application of the delay is consistent with the
Act and the rules and regulations thereunder applicable to the
exchange. The latency mechanism's operation, as proposed, would be
disclosed and codified in detail in IEX Rules 22.100(n) and 22.170(g).
Those provisions specify that the latency mechanism shall mean a delay
of 350 microseconds that is added to each incoming order and quote
message from a User prior to processing by the Trading System, and that
will not apply to other communications between the Exchange and Users,
Away Markets, data feeds, order processing and order execution on the
IEX Options Book, and outbound communications to the Exchange's
proprietary data feeds and OPRA. As discussed above, the purpose of the
latency mechanism is to provide adequate time for the IEX Trading
System to update its view of market data to enable it to accurately
price orders as well as to perform the Indicator calculation with
current market data.
Consequently, based on the foregoing, the Exchange believes that
the latency mechanism is both de minimis and otherwise consistent with
the Act.
The Exchange believes that the proposed ORP is consistent with
Section 6(b) of the Act \192\ in general, including furthering the
objectives of Section 6(b)(5) of the Act,\193\ as the proposed optional
risk protection mechanism would remove impediments to and perfect the
mechanism of a free and open market and a national market system and
promote just and equitable principles of trade by providing an optional
quote parameter, available to all IEX Options Market Makers, that is
designed to assess the probability of an adverse price change in a
particular options series so that the Trading System can effectuate the
advance trading instructions provided by the Market Maker to cancel or
reprice its quote to the price level of the quote instability
determination, as selected by the Market Maker. The ORP is an optional,
narrowly tailored approach designed to provide protection from
excessive risk of execution of stale quotes and thereby enable market
makers to make tighter and larger quotes (i.e., quotes at narrower
spreads with greater size) thus enhancing the quality of the IEX
Options market, to the benefit of all market participants. The Exchange
believes it is appropriate to provide market makers with the choice to
utilize this reasonable quote protection, particularly given the
continuous quoting obligations specific to market makers and their
importance in providing liquidity in the listed options market. The
Exchange further believes this risk functionality will encourage market
makers to provide additional depth and liquidity to the Exchange's
markets, thereby removing impediments to and perfecting the mechanisms
of a free and open market and a national market system and, in general,
protecting investors and the public interest.
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\192\ 15 U.S.C. 78f(b).
\193\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the ORP supports the protection of
investors and public interest goals of the Act. As described in the
Purpose section, based on the structural differences between
[[Page 12911]]
equities and listed options markets, the options exchanges often do not
have the same natural liquidity of buyers and sellers for each
tradeable instrument (i.e., options series) as is generally the case in
equities. As a result, market makers with affirmative obligations play
a central role in providing liquidity to options exchanges through
continuous two-sided quotes in large numbers of listed options series,
thereby enabling investors to transact in listed options in accordance
with their investment objectives. Because options market makers are
required to maintain hundreds (and sometimes thousands) of quotes on
options overlying underlying securities at any one time, a sudden
market move in the underlying security can leave them vulnerable to
being executed on quotes that are stale and dislocated from the price
of the underlying security.\194\ Liquidity takers can target these
stale quotes, with limited risk should they fail, before the market
maker has time to move its quotes to reflect the price change in the
underlying security exposing them to potentially major losses.
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\194\ See, e.g., Lehoczky, Sandor and Woods, Ellen and Russell,
Matthew and Nguyen, Mina and Somers, James, Dead Man's Switch:
Making Options Markets Safer with Active Quote Protection (May 2020)
at 2-3, 6, available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3675849">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3675849</a> (discussing the need for quote
protection for market makers to allow for a deep and liquid listed
options market and explaining that ``race conditions'' negatively
impact pricing efficiency, ``as market makers have been shown to
quote wider spreads or step back instead of continually updating
with price moves for fear of being ``picked off.''); see also
Citadel Securities, Market Lens, July 2020, available at <a href="https://www.citadel.com/securities/wp-content/uploads/sites/2/2020/07/Market-Lens-Order-Cancellation-White-Paper_FINAL.pdf">https://www.citadel.com/securities/wp-content/uploads/sites/2/2020/07/Market-Lens-Order-Cancellation-White-Paper_FINAL.pdf</a> (explaining the
need for risk management in electronic trading given that ``traders
who place limit orders--the foundation of public price discovery--
are exposed to the risk that their quotations will be executed at an
inopportune time, leading to potential losses'' and that the
``greater the risk of an inopportune execution, the more
compensation is required, which leads to wider bid-ask spreads.
Conversely, anything the trader can do to lower the risk of an
inopportune execution will lower the compensation required, which
leads to narrower bid-ask spreads.'').
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The ORP is designed to supplement the standard proposed risk checks
to provide augmented protection to address the inherent risks faced by
market makers. IEX believes that the operation of the ORP is similar to
activity-based and price reasonability risk checks offered by other
options exchanges (and proposed by IEX herein), in terms of its
objective and impact on a resting quote.\195\ Each of these risk
controls will cancel an order when the control is triggered based on a
determination that the price of the market maker's quote is
``unreasonable'' because it is no longer reflective of the price of the
underlying security and therefore likely stale (price reasonability
check) or that the execution activity of a market maker's quotes
exceeds the market maker's risk tolerance (activity-based controls).
Additionally, the trading collar and limit order protection rules of
other options exchanges and those similarly proposed by IEX provide for
orders to be repriced.
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\195\ See, e.g., Market-Maker Protections, Market Structure,
Optiver, July 17, 2023, available at <a href="https://optiver.com/insights/market-maker-protections/">https://optiver.com/insights/market-maker-protections/</a> (explaining that exchanges implement
robust market-maker protections to ``assist market makers in coping
with the risks of posting continuous, two-sided quotes in thousands
of financial instruments'' and to provide the ability to
automatically pull or amend their quotes so that ``all quotes
falling within the scope of protection still resting on the book are
prohibited from further execution'').
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However, IEX notes that the proposed ORP would be more transparent
than the activity-based controls in determining when a market maker
quote is potentially subject to cancelation (or adjustment) because it
is based on a transparent formula specified in IEX's rules and related
Trading Alerts. In contrast, those triggers for an activity-based
control are nonpublic and set by each exchange member.
As discussed above, because of the lack of natural sources of
liquidity across the multitude of listed options series, market makers
are subject to affirmative obligations to maintain continuous two-sided
quotes on hundreds or thousands of individual options series. While IEX
proposes to offer bulk quoting and purge port functionality to market
makers (in the same manner as other options exchanges), in a fast-
moving market, their quotes can nonetheless become stale almost
instantaneously. In those times, a sophisticated liquidity taker can
target one or more stale market maker quotes before the market maker
can update its quotes, thereby exposing the market maker to potentially
major losses. The ORP is designed to assist market makers with an
option to manage this risk, similar to the other risk controls. While
some overlap is expected, IEX believes that the Indicator would
potentially identify additional instances of stale quotes beyond those
identified by the other price reasonability checks.
Further, IEX notes that the operation of the Indicator is similar
to the manner in which IEX's equities market (the ``Equities System'')
utilizes a ``crumbling quote indicator'' to encourage the provision of
displayed liquidity by providing reasonably tailored protections
against adverse executions.\196\ As with the crumbling quote indicator,
the Indicator will be a transparent formula based on a pre-determined
objective set of circumstances that will be specified in IEX's rules to
identify when the Protected Bid and/or Protected Offer in a particular
options series is likely to move to a less aggressive price.
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\196\ In 2016, IEX received SEC approval of the IEX's exchange
system that provides a similar quote indicator for equities. See
2016 SEC Approval Order (approving IEX's exchange system in its
registration as a national securities exchange, which included the
approval of IEX's crumbling quote indicator that assesses quote
instability by utilizing a real-time, based on pre-determined,
objective set of conditions that protects orders from unfavorable
executions when the market is moving against them). In 2020, IEX
received SEC approval to apply the quote indicator to displayed
orders in equities. See 2020 SEC Approval Order, supra note 189, at
6-7 (receiving unanimous support and concluding that the Exchange's
displayed order proposal that included a similar quote indicator is
consistent with the requirements of the Exchange Act and the rules
and regulations thereunder applicable to a national securities
exchange and that is designed to improve market quality, enhance
price discovery, and promote just and equitable principles of
trade).
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Moreover, the Options Trading System will use the ORP in a manner
similar to the way in which the Equities System applies the crumbling
quote indicator to resting displayed liquidity, which reprices the
applicable order or quote. The functional differences between the
crumbling quote indicator and the Indicator reflect that options
pricing is derivative.\197\ Thus, the Indicator will trigger when it
identifies that a Protected Bid or Protected Offer is likely to move to
a less aggressive price, based on a price change in the underlying
security, thereby exposing the market maker to excessive risk, but,
unlike the crumbling quote indicator, would reprice the quote to the
price level of the quote instability determination or cancel the
impacted quote and not remain ``on'' for a period of time after
triggering. IEX believes that this approach is appropriate in view of
the derivative pricing of options and that it will contribute to more
displayed liquidity through improved execution quality, enhance the
public price discovery process, and promote just and equitable
principles of trade.\198\
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\197\ Because of this difference, the Indicator is designed to
identify when the Protected Bid and/or Protected Offer in an option
series is dislocated from the price of the underlying based on a
price change in the underlying and therefore likely to be in
transition to a less aggressive price, while the crumbling quote
indicator utilizes changes in the protected quote in the security
itself to make such a prediction.
\198\ See, e.g., 2020 SEC Approval Order, supra note 189, at 19
(concluding that IEX's exchange functionality protects against
adverse selection and incentivizes more displayed liquidity through
improved execution quality for liquidity providers, which
contributes ``to fair and orderly markets'' and supports ``the
public price discovery process''); at 26 (finding that the
Exchange's speedbump and crumbling quote indicator promotes the
interest of long term investors and inures to the ``benefit of
displayed markets, leading to increased displayed liquidity from
which all market participants ultimately will benefit''); at 52
(concluding that the Exchange's order protection functionality ``is
designed to encourage market participants to post more priced limit
orders, including displayed orders, on IEX, and thereby promotes
just and equitable principles of trade, removes impediments to and
perfects the mechanism of a free and open market and a national
market, and, in general, protects investors and the public
interest.'').
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[[Page 12912]]
Further, the ORP would be available, as a quote parameter, only to
market makers and on an optional basis, because the Exchange believes
that it is most appropriate as a tool to address market maker risk. IEX
believes that this approach is appropriate because market makers are
subject to affirmative obligations to provide continuous two-sided
quotes and cannot back away or unduly widen their quotes during periods
of price volatility, as can other liquidity providers.\199\ By offering
market makers this narrowly-tailored, optional tool, IEX believes it
will attract additional displayed liquidity that will be available to
all market participants.
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\199\ See, e.g., Protecting Liquidity in Options Markets, Market
Structure, Optiver, July 12, 2023, available at <a href="https://optiver.com/insights/protecting-liquidity-in-options-markets/">https://optiver.com/insights/protecting-liquidity-in-options-markets/</a> (explaining that
without robust liquidity protection mechanisms for market makers to
protect against the risks of displaying stale or outdated quotes,
``market makers may be forced to widen their spreads, show less
liquidity or simply exit the market'' and overall ``market quality
can deteriorate'' with the result of investors suffering).
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IEX also believes that use of the Indicator in determining when to
trigger the ORP is consistent with the protection of investors and the
public interest because the Indicator is based on the well-recognized
Black-Scholes options pricing model, which IEX believes is an
appropriate methodology to identify when a Market Maker's quote in an
option is dislocated from the price of the underlying security based on
the mathematical relationship between the price of the underlying
security and the overlying options. Moreover, IEX believes that the
latency mechanism \200\ (as discussed above) will serve to enhance the
accuracy of the Indicator by providing adequate time for the IEX
Trading System to update its Indicator calculation with current market
data. In this regard, as discussed earlier, IEX notes that the proposed
latency of 350 microseconds is well within the geographic delays that
exist among and between the data centers that IEX Options Members, and
other options exchanges, use and is consistent with the naturally
occurring time indeterminism that exists in order processing.
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\200\ See proposed IEX Rule 22.170(g).
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Further, IEX believes that limiting the availability of the ORP to
resting market maker quotes is consistent with the Act for several
reasons. As discussed in depth above, market makers are integral to
providing liquidity on options exchanges, and at the same time subject
to a potentially excessive level of risk from execution of one or more
stale quotes. Additionally, Market Makers' obligations apply across all
series in their appointed class. Other liquidity providers are free to
concentrate their efforts in a select number of series. Thus, Market
Makers have greater exposure to latency arbitrage, take on greater
risk, and incur more related capital charges than other liquidity
providers. IEX determined to apply the functionality to resting quotes
only as this approach will best achieve the purpose of protecting
market markets from the excessive risk of executions at stale prices
without disrupting market makers' ability to update their quotations.
The Exchange also believes that applying the Indicator on a class-
by-class basis would remove impediments to, and perfect the mechanism
of, a free and open market and a national market system and promote
just and equitable principles of trade. As discussed in the Purpose
section, applying the Indicator on a class-by-class basis would enable
the Exchange to appropriately utilize the ORP for classes with a high
potential for adverse selection, while excluding classes presenting
lower risk of adverse selection (such as classes with relatively lower
volumes). This flexibility will therefore allow the Exchange to ensure
the ORP is available for those classes with a high potential for
adverse selection and where its use will achieve its intended purpose,
while excluding its use where it would likely provide little additional
value and could introduce unnecessary complexity (for example, for
classes that are subject to a pending corporate action or other
nonstandard characteristic).
Moreover, IEX notes that the Commission has previously recognized
the utility of IEX providing protection to liquidity providers through
order types that leverage its crumbling quote indicator to
appropriately protect market participants from the risks of transacting
when the market is in transition and thereby incentivize the entry of
liquidity providing orders. The Exchange believes that the proposed ORP
is consistent with this history and is in furtherance of driving
tighter and deeper displayed markets to the benefit of investors.\201\
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\201\ See supra notes 201 and 203 and accompanying text.
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IEX also believes that the proposal is consistent with the firm
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation
NMS.\202\ Specifically, any marketable interest that is executable
against a market maker's quote that has been received by the Trading
System prior to the time that a quote instability determination is
received by Trading System will be automatically executed, subject to
processing of any prior messages, at the price and up to the size of
the market maker's quote.
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\202\ See proposed IEX Rule 23.140(d).
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IEX believes that the proposed ORP is consistent with the
protection of investors and the public interest, and is consistent with
the Exchange Act, including furthering the objectives of Section
6(b)(5) of the Act,\203\ because it is a narrowly-tailored approach
designed to appropriately balance the risks faced by market makers with
the legitimate objectives of liquidity takers by providing additional
optional risk protection to market makers and thereby encourage
aggressive quoting. The Exchange further believes that offering more
risk management protections to Market Makers would mitigate their
exposure to excessive risk. As discussed in detail above, Market Makers
are required to continuously provide two-sided quotes in substantial
numbers of listed options series that can create large, unintended
positions exposing market makers to excessive risk. Market Maker quotes
are critical to provide liquidity to the market and contribute to price
discovery for investors. Without robust liquidity protection, market
makers may be forced to widen their spreads, show less liquidity or
simply exit the market, which can result in deterioration of market
quality and adversely impact investors' and other liquidity takers'
ability to transact in the options markets. In sum, liquidity
protection for options market makers is vital for achieving a healthy
balance between liquidity providers and liquidity takers in the options
market that will promote more displayed liquidity from which all market
participants ultimately will benefit.
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\203\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the notice requirements specified for
the variable values related to operation of the ORP and the Indicator
formula appropriately differentiate those values that require the
Exchange to respond to rapidly changing market conditions or system
[[Page 12913]]
issues (i.e., determination of delta bound bands and class-by-class
determinations) from those for which rapid Exchange decision-making is
not necessary and for which more advance notice can be provided (i.e.,
quote instability threshold and frequency of calculation of implied
volatility), thereby removing impediments to and perfecting the
mechanisms of a free and open market and a national market system and,
in general, protecting investors and the public interest.\204\ The
Exchange believes that the proposed rules of IEX Options, as well as
the proposed method of monitoring for compliance with and enforcing
such rules is also consistent with the Act, particularly Sections
6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in part, that
an exchange have the capacity to enforce compliance with, and provide
appropriate discipline for, violations of the rules of the Commission
and of the exchange. The Exchange has proposed to adopt rules necessary
to regulate Options Members that are nearly identical to the approved
rules of other options exchanges, as described above. The Exchange
proposes to regulate activity on IEX Options in the same way it
regulates activity on its equities market (and comparable to other
options exchanges), through various Exchange specific functions, an RSA
with FINRA, as well as participation in industry plans, including plans
pursuant to Rule 17d-2 under the Exchange Act.
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\204\ The Exchange further notes that other options exchanges
specify various rule-based values by similar publication approaches,
see, e.g., NYSE Amex Rule 994NY (providing that the exposure period
for its Broadcast Order Liquidity Delivery Mechanism is determined
and released by the exchange); see also MIAX Rule 515(c)(1)
(providing price protections where certain minimum price variations
are determined by MIAX within a specified range and announced
through regulatory circulars); see also Nasdaq Stock Market LLC
D
[…truncated; see source link]Indexed from Federal Register on March 19, 2025.
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