Notice2025-18380
Self-Regulatory Organizations; Investors Exchange LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 3, 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
September 23, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 182 (Tuesday, September 23, 2025)</title>
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[Federal Register Volume 90, Number 182 (Tuesday, September 23, 2025)]
[Notices]
[Pages 45861-45886]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-18380]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103998; File No. SR-IEX-2025-02]
Self-Regulatory Organizations; Investors Exchange LLC; Order
Approving a Proposed Rule Change, as Modified by Amendment No. 3, To
Adopt Rules To Govern the Trading of Options on the Exchange for a New
Facility Called IEX Options
September 18, 2025.
I. Introduction
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 (``IEX Options''). 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 approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to disapprove the
proposed rule change.\4\ On March 12, 2025, the Exchange filed
Amendment No. 1 to the proposed rule change, which superseded and
replaced the original proposal in its entirety.\5\ The proposed rule
change, as modified by Amendment No. 1, was published for comment in
the Federal Register on March 19, 2025.\6\ On April 21, 2025, the
Commission instituted proceedings to determine whether to approve or
disapprove the proposed rule change, as
[[Page 45862]]
modified by Amendment No. 1.\7\ On June 13, 2025, the Exchange filed
Amendment No. 2 to the proposed rule change, which superseded and
replaced Amendment No. 1 in its entirety. On June 17, 2025, the
Exchange withdrew Amendment No. 2 and filed Amendment No. 3, which
replaced and superseded Amendment No. 1 in its entirety. The proposed
rule change, as modified by Amendment No. 3, was published for comment
in the Federal Register on June 24, 2025.\8\ On July 17, 2025, the
Commission designated a longer period within which to approve or
disapprove the proposed rule change.\9\ The Commission has received
comments on the proposal.\10\ This order approves the proposed rule
change, as modified by Amendment No. 3.
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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 Apr. 21, 2025, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\5\ See infra note 6 (citing the release that published notice
of Amendment No. 1, which includes a description of Amendment No.
1).
\6\ See Securities Exchange Act Release No. 102663 (Mar. 13,
2025), 90 FR 12890 (``Amendment No. 1'').
\7\ See Securities Exchange Act Release No. 102895, 90 FR 17474
(Apr. 25, 2025).
\8\ See Securities Exchange Act Release No. 103290 (June 18,
2025), 90 FR 26865 (``Amendment No. 3''). Amendment No. 3 is
identical to withdrawn Amendment No. 2 except Amendment 3 corrects
the nonsubstantive pagination issue in Amendment No. 2. Amendment
No. 3, among other things, codified in proposed Rule 23.150(h),
Supplementary Material .04 (1)(q), the initial Delta Bound Band of
0-1 and in proposed Rule 23.150(h), Supplementary Material .04
(2)(e), the initial Quote Instability Threshold of 0.1%; stated that
if IEX seeks to change either of these values within the ranges
stated in the proposed rules, it will file with the Commission a
proposed rule change; and provided analysis demonstrating that the
proposed Options Risk Parameter will only have a de minimis impact
on market maker quotes on IEX.
\9\ See Securities Exchange Act Release No. 103480, 90 FR 34532
(July 22, 2025). The Commission designated Sept. 18, 2025, as the
date by which the Commission shall approve or disapprove the
proposed rule change.
\10\ 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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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 3 <SUP>11</SUP>
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\11\ Capitalized terms not defined in this order are defined in
Amendment No. 3, supra note 8.
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The Exchange's proposal sets forth rules in connection with its
launch of IEX Options, which will be ``a fully automated trading system
built on the core functionality of the Exchange's approved equities
platform'' for the listing and trading of options issued by the Options
Clearing Corporation.\12\ As discussed in the proposal, as modified by
Amendment No. 3, the Exchange proposes to operate IEX Options as a pro-
rata options market with a latency mechanism.\13\ Specifically, IEX
proposes ``to utilize a de minimis delay on incoming order and quote
messages designed to enable IEX to obtain the most accurate view of the
market prior to processing orders and quotes'' (``access delay'') to
support an optional Options Risk Parameter (``ORP'') that is ``designed
to protect [registered market makers on IEX] from excessive risk due to
execution of quotes at stale prices . . . .'' \14\
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\12\ Amendment No. 3, supra note 8, at 26866.
\13\ See id. See also infra notes 46-48 and accompanying text
(discussing pro-rata priority).
\14\ Amendment No. 3, supra note 8, at 26866.
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The Exchange's rules applicable to the IEX equities market,
contained in Chapters 1 through 16 of its rulebook, will apply to
Options Members unless a proposed rule in proposed Chapters 17 through
29, applicable to the IEX Options market, applies or the context
otherwise requires.\15\ With the exception of the access delay and ORP,
the proposed rules for IEX Options are all substantially similar or
substantively identical to the rules of other options exchanges.\16\
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\15\ See, e.g., Exchange Rules 2.160 and 2.220.
\16\ Specifically, the proposed rules for IEX Options are
substantially similar or substantively identical to rules of MEMX
LLC (``MEMX Options''), Cboe Exchange, Inc. (``Cboe''), Miami
International Securities Exchange, LLC (``MIAX''), NYSE American LLC
(``NYSE Amex'') and NYSE Arca, Inc. (``NYSE Arca'') options
exchanges, with material differences discussed in Amendment No. 3.
In the proposal, as modified by Amendment No. 3, when the Exchange
describes a proposed rule as being ``substantively identical'' to a
rule of another exchange, the Exchange states that it 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. See Amendment No. 3, supra note
8, at 26866, n.21. When it describes a proposed rule as
``substantially similar'' to a rule of another exchange, the
proposal describes the relevant differences. See id.
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Definitions
The Exchange proposes to define relevant terms in proposed Rule
17.100, which terms are either identical or substantially similar to
definitions included in MEMX Options Rule 16.1 or rules of Cboe, MIAX,
or NYSE Amex.\17\
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\17\ In Amendment No. 3, IEX sets forth all defined terms and
notes the rule(s) from MEMX Option, Cboe, MIAX, and/or NYSE Amex
from which the proposed definition is derived. See id. at 26869-72.
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Chapters 18 Through 21
In Chapter 18, the Exchange proposes to set forth rules governing
participation on IEX Options.\18\
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\18\ See id. at 26867.
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Specifically, the Exchange will authorize any Exchange Member that
meets certain qualifications and their Sponsored Participants to obtain
access to and transact business on IEX Options.\19\ To accomplish this,
the Exchange is adding new categories of trading permits for a new type
of member called ``Options Member'' that can participate as an Options
Order Entry Firm, Options Market Maker, or Clearing Member.\20\ An
Options Member that represents Customer Orders as agent on IEX Options
or that conducts proprietary trading as a non-Options Market Maker will
be referred to as an Options Order Entry Firm (``OEF'').\21\ Options
Market Makers are Options Members registered, pursuant to Rule 23.100,
as either a ``Registered Market Maker'' or a ``Specialist.'' \22\
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\19\ See proposed Rules 18.100, 18.110, 18.120, 18.130, and
18.140. In Amendment No. 3, IEX describes these proposed rules. See
Amendment No. 3, supra note 8, at 26867.
\20\ See proposed Rule 17.100 (defining ``Options Member''). See
also proposed Rule 18.140 and proposed Rule 17.100 (defining
``Trading Permit''). Clearing Members will be those Options Members
that have been admitted to membership in the Options Clearing
Corporation pursuant to the provisions of the Rules of the Options
Clearing Corporation and are self-clearing or that clear IEX Options
Transactions for other Options Members. See proposed Rule 17.100
(defining ``Clearing Member'').
\21\ See proposed Rule 17.100 (defining ``Customer'' as a Public
Customer or a broker-dealer; defining ``Public Customer'' as a
person that is not a broker or dealer in securities; defining
``Customer Order'' as an agency order for the account of a Customer;
and defining ``Options Order Entry Firm, Order Entry Firm, and OEF''
to mean those Options Members representing as agent Customer Orders
on IEX Options and those non-Market Maker Members conducting
proprietary trading).
\22\ See proposed Rule 17.100 (defining ``Market Makers (and
Options Market Makers)''). 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. 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.
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Only Options Members and their Sponsored Participants \23\ may
transact business on IEX Options via IEX Options' trading system (the
``System'').\24\ Options Members may trade options for their own
proprietary accounts or, if authorized to do so under applicable law,
and consistent with these Rules and with applicable law and SEC rules
and regulations, may conduct business on behalf of Customers.\25\
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\23\ See Amendment No. 3, supra note 8, at 26869. See also IEX
Rule 11.130.
\24\ See proposed Rule 18.100(a).
\25\ Id.
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The Exchange will authorize any Exchange Member that meets certain
enumerated qualification requirements and any Options Member's
Sponsored Participants to obtain access to, and transact business on,
IEX Options.\26\ Among other things, OEFs and other Options Members
that transact business with Public Customers must be
[[Page 45863]]
members of the Financial Industry Regulatory Authority (``FINRA'').\27\
An Options Member also must maintain membership in another registered
options exchange that is not registered solely under Section 6(g) of
the Act (15 U.S.C. 78f(g)) or in FINRA.\28\ Every Options Member also
will be required to have at least one registered Options Principal with
responsibility for the overall oversight of the Options Member's
options-related activities on the Exchange.\29\ Proposed Rules 18.100,
18.110, 18.120, 18.130 are substantially similar to the analogous rules
on MEMX Options, and proposed Rule 18.140 is similar to the analogous
rule on Cboe.\30\
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\26\ See Amendment No. 3, supra note 8, at 26867. See also
proposed Rules 18.100, 18.110, 18.120, and 18.130.
\27\ See proposed Rule 18.110(g).
\28\ See proposed Rule 18.110(g).
\29\ See proposed Rule 18.110(h).
\30\ See Amendment No. 3, supra note 8, at 26867. According to
the Exchange, a broker-dealer applying to be a Trading Permit Holder
on Cboe must qualify as a participant or member of that exchange.
IEX explains that its proposed rule differs from Cboe Rule 3.1
because the proposed rule does not include the membership
qualification-related provisions that are addressed elsewhere in
proposed Chapter 18. In addition, Cboe's rule includes limitations
on the number of trading permits that Cboe may issue, while IEX has
not proposed to adopt such limitations. Id. at 26867, n.34.
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In addition, the Exchange proposes to adopt rules in Chapter 19
regarding business conduct that are substantively identical to MEMX
Options rules.\31\
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\31\ See proposed Rules 19.100, 19.110, 19.120, 19.130, 19.140,
19.150, 19.160, 19.170, 19.180, 19.190, 19.200, 19.210, 19.220, and
19.230. See also Amendment No. 3, supra note 8, at 26881-82.
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In Chapter 20, the Exchange proposes to adopt rules regarding
listing standards for options traded on IEX Options that are
substantively identical to MEMX Options rules \32\ and in Chapter 21,
to adopt rules that are substantially similar to MEMX Options rules
regarding regulation of trading, including rules addressing halts,
unusual market conditions, extraordinary market volatility, obvious
errors, audit trail, and rules regarding prohibited and permissible
transfers of options positions off the Exchange.\33\
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\32\ See proposed Rules 20.100, 20.110, 20.120, 20.130, 20.140,
20.150, and 20.160. See also Amendment No. 3, supra note 8, at
26881. Proposed Rule 20.130, Supplementary Material .01, and
proposed Rule 20.140, Supplementary Material .02, are based on MIAX
rules.
\33\ See proposed Rules 21.100, 21.110, 21.120, 21.130, 21.140,
21.150, 21.160, 21.170, 21.180, 21.190, 21.200, 21.210, and 21.220.
See also Amendment No. 3, supra note 8, at 26883.
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Chapter 22--Trading Systems
The Exchange proposes to adopt rules in Chapter 22 regarding the
System.\34\ IEX Options will not have a physical trading floor.
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\34\ See proposed Rules 22.100, 22.110, 22.120, 22.130, 22.140,
22.150, 22.160, 22.170, 22.180, 22.190, 22.200, 22.210, 22.220,
22.230, 22.240, 22.250, 22.260, and 22.270. The proposed rule
change, as modified by Amendment No. 3, replaces the proposed
definition of ``Trading System'' with the proposed definition of
``System'' which is ``the automated trading system used by IEX
Options for the trading of options contracts, as described in Rule
22.100(a).'' See proposed Rule 17.100 (defining ``System''). The
proposed definition of ``Trading System'' and the proposed
definition of ``System'' are identical. Additionally, references
throughout the proposed rule change to ``Trading System'' were
changed to ``System'' by Amendment No. 3. In addition, in Amendment
No. 3, IEX explains the operation of Chapter 22 and notes the
rule(s) from MEMX Options, NYSE Amex, NYSE Arca, Cboe, and MIAX from
which the proposed rules in Chapter 22 are derived. See Amendment
No. 3, supra note 8, at 26872-78.
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IEX Options will be open on normal business days and will accept
orders and quotes beginning at 8:00 a.m. Eastern time until 4:00 p.m.
except for options contracts on Fund Shares and options contracts on
exchange-traded notes including Index-Linked Securities, which may
close as of 4:15 p.m.\35\ IEX Options will accept quotes, Market
orders, and Limit orders with a Time-in-Force (``TIF'') of Day for
inclusion in the opening process.\36\ The Exchange will conduct its
opening auction for each series after the primary market for the
underlying security first disseminates both a two-sided quote and a
trade of any size at or within the quote (or, after a Regulatory Halt,
notification that the underlying stock is no longer halted), after
which it will transition to continuous trading.\37\
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\35\ See proposed Rule 22.110(a).
\36\ See proposed Rule 22.160(a)(13).
\37\ See proposed Rule 22.160. The participation entitlements to
a Directed Market Maker or Specialist specified in proposed Rule
22.170(f)(2)-(3) will not be available during an Auction. See
proposed Rule 22.160(b)(3). The proposed market opening procedures
are substantially similar to the market opening procedures specified
in NYSE Arca Options Rule 6.64P-O, except that any imbalance would
be allocated on a pro rata basis (see proposed Rule 22.160(b)); IEX
will begin accepting orders for the opening auction at 8:00 a.m.
compared to 6:00 a.m. for NYSE Arca (see proposed Rule
22.160(a)(13)(A) and NYSE Arca Options Rule 6.64P-O(a)(12)(A)); IEX
will begin disseminating Auction Imbalance Information at 8:30 a.m.
compared to 8:00 a.m. for NYSE Arca (see proposed Rule 22.160(c)(1)
and NYSE Arca Options Rule 6.64P-O(c)(1)); and IEX does not have a
Far Clearing Price because it does not propose to have Auction Only
orders to which the Far Clearing Price relates.
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The Exchange's minimum quotation and trading increment will be the
same as on other exchanges \38\ and the minimum trading increment will
be one cent for all series.\39\ In addition, the Exchange's Penny
Interval Program is substantially similar to the penny programs of
other exchanges, which includes minimum quoting requirements for
options classes listed under the Penny Interval Program.\40\
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\38\ See proposed Rule 22.140. See also, e.g., MEMX Options
Rules 21.5(a) and (b). Specifically, the Exchange will have the
following standard quotation increments: 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, ten (10) cents; and 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.
\39\ See proposed Rule 22.140(b).
\40\ See proposed Rule 22.140(c) and Amendment No. 3, supra note
8, at 26873.
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IEX Options will offer standard order types and handling
instructions including Book Only, Post Only, and Intermarket Sweep
Orders.\41\ In addition, for certain processes, IEX Options may allow a
User \42\ to optionally mark an order as ``attributable'' to that
User's MPID, resulting in the order displaying the User's MPID for
purposes of trading on the Exchange.\43\
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\41\ See proposed Rule 22.100(e). See also Amendment No. 3,
supra note 8, at 26873.
\42\ The proposed rule change, as modified by Amendment No. 3,
defines a ``User'' as ``any Options Member or Sponsored Participant
who is authorized to obtain access to the System pursuant to Rule
11.130 (Access).'' See proposed Rule 17.100 (defining ``User'').
\43\ See Amendment No. 3, supra note 8, at 26873; proposed Rule
22.100(d)(3). 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 will be available. An MPID is a unique market participant
identifier assigned to an Options Member. See proposed Rule 17.100
(defining ``MPID'').
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IEX Options will allow Users to specify TIF designations on their
orders and quotes of Immediate or Cancel (``IOC'') or Day.\44\ Like
other options exchanges, IEX Options will offer a re-pricing Price
Adjust mechanism to comply with applicable order protection and trade
through restrictions that will offer a single price adjustment.\45\ As
with its equities market, the Exchange will allow Users to use certain
Anti-Internalization Qualifier (``AIQ'') modifiers to prevent execution
of orders originating from the same identifier including: AIQ Cancel
Newest, AIQ Cancel Oldest, AIQ Cancel Both, and AIQ Cancel
Smallest.\46\
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\44\ See proposed Rule 22.100(g). Unless cancelled earlier, once
these time periods expire, the order (or the unexecuted portion
thereof) is returned to the entering party. The Exchange states that
its proposed TIF designations are substantially similar to what MEMX
offers, except MEMX allows bulk messages to have a TIF of IOC while
IEX will only allow bulk messages to have a TIF of Day so that they
do not take liquidity when entered. See Amendment No. 3, supra note
8, at 26873-74 and proposed Rule 22.100(l)(3) (stating that ``bulk
messages are implicitly designated as Post Only'').
\45\ See proposed Rule 22.100(i); MEMX Rule 21.1(i); and Cboe
Rule 5.32(b)(2)(A) (single price adjust).
\46\ See proposed Rule 22.100(h) and MEMX Rule 21.1(h) (Match
Trade Prevention). The first three AIQ modifiers are substantially
similar to the modifiers available on MEMX Options, except IEX will
not allow AIQ modifiers on bulk messages because they cannot remove
liquidity. See proposed Rule 22.100(l)(3). MEMX does not offer an
AIQ Cancel Smallest modifier, but it is offered by other exchanges
such as Cboe. See Cboe Rule 5.6 (Match Trade Prevention Modifier--
MTP Cancel Smallest).
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[[Page 45864]]
IEX Options will have a pro-rata allocation model with execution
priority dependent on the size and capacity of an order.\47\ Resting
quotes and orders will be prioritized according to price, after which
contracts will be allocated proportionally according to size (in a pro-
rata fashion), rounded down to the nearest whole contract.\48\ Residual
options contracts will be filled one at a time based on price-size-time
priority.\49\
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\47\ See Amendment No. 3, supra note 8, at 26872. The proposed
pro-rata model is similar to the MIAX and NYSE Amex options
exchanges. See id.
\48\ See id. at 26875.
\49\ See id.
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IEX Options will support priority overlays, which the Exchange may
make available on a class-by-class basis.\50\ The Priority Customer
overlay will provide resting interest from Priority Customers with
priority over all non-Priority Customer interest at the same price and
will always take priority over all other priority overlays.\51\ The
Specialist Participation Entitlement overlay will provide a Specialist
with priority over interest from other non-Priority Customers for a
certain percentage of contracts allocated at the same price (entitling
Specialists to a 60% allocation if there is one other non-Priority
Customer at the National Best Bid or National Best Offer (``NBBO'') or
40% if there are two or more other non-Priority Customers at the NBBO
\52\) when quoting at the NBBO, inclusive of the case in which the
order is directed to Specialists.\53\ The Directed Market Maker
Participation Entitlement overlay \54\ will provide 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 Directed Market Maker to a 60% allocation if there is
one other non-Priority Customer at the NBBO or 40% if there are two or
more other non-Priority Customers at the NBBO \55\) 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.\56\ The Small-
Size Order Entitlement overlay \57\ will provide a Specialist quoting
at the NBBO with 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. However, if an
order that is 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.\58\ 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.\59\
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\50\ See proposed Rule 22.170(f); Amendment No. 3, supra note 8,
at 26876.
\51\ See proposed Rule 22.170(f)(1).
\52\ These allocation entitlements are based on MIAX Rule
514(h)(1), after accounting for the additional priorities afforded
to market makers on MIAX, as set forth in MIAX Rule 514(e). See
Amendment No. 3, supra note 8, at 26876, n.113.
\53\ 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).
\54\ 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).
\55\ See supra note 52.
\56\ Prioritizing the Directed Market Maker 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).
\57\ See proposed Rule 22.170(f)(3).
\58\ See proposed Rule 22.170(f)(3)(A). Proposed Rule 22.170(f)
is substantially similar to Cboe Rule 5.32(a)(2), except that,
unlike Cboe, in the event that a small-size order is directed to a
Specialist, it 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. See Amendment No. 3, supra note 8, at 26876, n.110.
\59\ 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 Amendment No. 3, supra
note 8, at 26876; NYSE Amex Options Rule 965NYP(h)(2)(B).
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IEX Options will offer an optional Step Up Mechanism (``SUM'') in
designated classes that is substantively identical to functionality
offered by Cboe, except that IEX will not offer all or none orders.\60\
If elected, SUM will expose a routable order and initiate an auction
when the order is not immediately eligible for execution on IEX because
IEX is not at the NBBO.\61\ Any remaining portion of the order will be
routed to other exchanges.\62\
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\60\ See proposed Rule 22.270 and Amendment No. 3, supra note 8,
at 26876.
\61\ See proposed Rule 22.270.
\62\ See id.
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To facilitate compliance with applicable regulations, including the
Options Order Protection and Locked/Crossed Market Plan, IEX Options
will offer an optional service to route orders to away exchanges when
the Exchange is not at the NBBO via IEX Services LLC (``IEX
Services''), which is subject to regulation as a facility of the
Exchange. IEX Services will transmit such orders to other options
exchanges via one or more routing brokers that are not affiliated with
the Exchange (``Routing Services'').\63\ Users that do not wish to use
Routing Services can designate their orders as not available for
routing.\64\ Orders that have been routed by the System to other
options exchanges are not ranked and maintained in the IEX Options
Book. If a routed order is subsequently returned, in whole or in part,
that order, or its remainder, will receive a new time stamp reflecting
the time of its return to the System.\65\
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\63\ See proposed Rule 22.180(d) and Amendment No. 3, supra note
8, at 26875.
\64\ See proposed Rule 22.180(d).
\65\ See proposed Rule 22.180(b). See also proposed Rule
22.180(e) (concerning IEX Services' policies and procedures to
mitigate the financial and regulatory risks associated with Routing
Services) and MEMX Rule 21.9(f) (concerning market access for MEMX
Execution Services).
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The Exchange will offer three proprietary data feeds: (1) IEX
Options DEEP (depth of book quotations and execution information based
on options orders entered into the System); (2) IEX Options TOPS (top
of book quotations and execution information based on options orders
entered into the System); and (3) DROP (regarding the options trading
activity of a User).\66\
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\66\ See proposed Rule 22.240(b).
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The proposed rules in Chapter 22 are substantially similar or
substantively identical to rules from MEMX Options, NYSE Amex, NYSE
Arca, Cboe, and MIAX.
Chapter 23--Market Participants
Chapter 23 will govern registration and obligations of market
participants.\67\
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\67\ See proposed Rules 23.100, 23.110, 23.120, 23.130, 23.140,
23.150, 23.160, 23.170, 23.180, 23.190, and 23.200. See generally
Amendment No. 3, supra note 8, at 26868-69.
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An Options Member will be able to apply to register with the
Exchange as an Options Market Maker (or ``Market Maker'') for the
purpose of making transactions as a dealer-specialist in one or more
classes of options.\68\ A Market Maker can participate as a Registered
Market Maker or seek an appointment as a Specialist in a particular
class by qualifying through the Exchange's
[[Page 45865]]
Specialist Qualification Process.\69\ While the Exchange may appoint
multiple Registered Market Makers to a particular class of options
contracts,\70\ only one Specialist will be appointed to an options
class.\71\
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\68\ See proposed Rule 23.100(a) and proposed Rule 17.100
(defining ``Market Makers (and Options Market Makers)'' as referring
collectively to Options Members registered as either a Registered
Market Maker or as a Specialist).
\69\ See proposed Rule 23.130(b)(1). See also proposed Rule
17.100 (defining ``Registered Market Maker''; defining
``Specialist''), and proposed Rule 23.130(b)(1) (governing
Specialists).
\70\ 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 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.
See Amendment No. 3, supra note 8, at 26868.
\71\ See proposed Rule 23.130(g)(1)(A).
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Each Options Market Maker must employ Registered Options Traders
(``ROTs'') to submit Options Market Maker quotations and orders to the
System solely for the account of the Market Maker with which it is
associated. ROTs may be individual Options Members registered with the
Exchange as Market Makers, or officers, partners, employees, or
associated persons of Options Members that are registered with the
Exchange as Market Makers.\72\
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\72\ See proposed Rule 23.110(a) and (b).
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Quotations may only be entered by a Market Maker and only in its
appointed classes.\73\ Market Makers can submit ``bulk messages'' in
their appointed classes, which are a single electronic message to
enter, modify, or cancel up to a specified number of bids and offers.
The System handles a bulk message in the same manner as it handles an
order or quote, unless the Exchange Rules specify otherwise. Bulk
messages will have a default TIF of Day and a default designation of
Post Only. As proposed, the 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 away best offer (away best bid).\74\
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\73\ See proposed Rule 23.150(a). Market Makers may submit
orders in classes of options contracts to which the Market Makers
are appointed, which shall constitute quotes. 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). Market Makers with an OEF trading permit may submit
orders in classes to which they are not appointed provided that the
total number of such orders executed by a Market Maker does not
exceed 25% of all contracts the Market Maker executes on the
Exchange in any calendar quarter. See proposed Rule 23.150(g).
\74\ See proposed Rule 22.100. See also, e.g., MEMX Rule
21.1(l). IEX states that the ability of the 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 away best offer
(away best bid) is substantively identical to MEMX Rule 21.1(l)(3).
IEX will also allow the 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 away best offer (away best bid), which
is substantively identical to the functionality in Cboe Rule
5.32(b)(1)(B). See Amendment No. 3, supra note 8, at 26874, n.93.
---------------------------------------------------------------------------
Both Registered Market Makers and Specialists will be vested with
certain rights and responsibilities and will be required to
electronically engage in a course of dealing reasonably calculated to
contribute to the maintenance of fair and orderly markets.\75\
Specialists will be subject to obligations in addition to those
applicable to Registered Market Makers.\76\
---------------------------------------------------------------------------
\75\ See proposed Rule 23.140(a).
\76\ See Amendment No. 3, supra note 8, at 26868-69. See also
proposed Rule 23.150(c).
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Among other things, a Registered Market Maker must provide
continuous two-sided quotations throughout the trading day in its
appointed issues for 60% of the time the Exchange is open for trading
in each issue,\77\ while a Specialist must provide continuous two-sided
quotations throughout the trading day in its appointed issues for 90%
of the time the Exchange is open for trading in each issue,\78\
provided in both instances that the options classes have a time to
expiration of less than nine months.\79\ In addition, Market Maker
quotes must be firm quotes that comply with enumerated price and size
rules \80\ and Market Makers must maintain minimum net capital in
accordance with applicable rules.\81\
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\77\ See proposed Rule 23.150(e)(2)(A).
\78\ See proposed Rule 23.150(e)(1)(A).
\79\ See proposed Rule 23.150, Supplementary Material .01;
Amendment No. 3, supra note 8, at 26868. In their appointed issues,
a Registered Market Maker and a Specialist must also: engage, to a
reasonable degree under the existing circumstances, in dealings for
his own account when there exists, or it is reasonably anticipated
that there will exist, a lack of price continuity, a temporary
disparity between the supply of and demand for a particular options
contract, or a temporary distortion of the price relationships
between options contracts of the same class; compete with other
Market Makers to improve the market in all series of options classes
to which the Market Maker is appointed; make markets that, absent
changed market conditions, will be honored for the number of
contracts entered into the System in all series of options classes
to which the Market Maker is appointed; update market quotations in
response to changed market conditions in all series of options
classes to which the Market Maker is appointed; and price options
contracts fairly by, among other things, bidding and offering so as
to create differences of no more than $5 between the bid and offer
(``bid/ask differentials'') following the opening rotation in an
equity options contract (with certain exceptions). See proposed Rule
23.140(b).
\80\ See proposed Rule 23.150(b) and (d).
\81\ 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 NYSE Amex Options Rule 927NY(c)(10).
---------------------------------------------------------------------------
Both Specialists and Registered Market Makers may also participate
as Directed Market Makers that can receive Directed Orders \82\ entered
into the System on behalf of Priority Customers.\83\ Directed Market
Makers will be subject to enhanced quoting obligations compared to
Registered Market Makers.\84\
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\82\ A Directed Order is an order entered on behalf of a
Priority Customer that is entered into the System by an Options
Member with a designation for a Market Maker in that class (the
Directed Market Maker). See proposed Rule 17.100 (defining
``Directed Order''). A Priority Customer is any person or entity
that is neither a broker or dealer in securities nor a Professional.
See proposed Rule 17.100 (defining ``Priority Customer and Priority
Customer Order''). A Professional is 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). See proposed Rule 17.100
(defining ``Professional'').
\83\ See proposed Rule 17.100 (defining ``Directed Order'').
\84\ See Amendment No. 3, supra note 8, at 26867, n.32. While a
Registered Market Maker must provide continuous two-sided quotations
throughout the trading day in its appointed issues for 60% of the
time the Exchange is open for trading in each issue, a Directed
Market Maker must provide continuous two-sided quotations throughout
the trading day in issues for which it receives Directed Orders for
90% of the time the Exchange is open for trading in each issue. This
is different from the Specialist quoting obligation as a Specialist
must provide continuous two-sided quotations throughout the trading
day in its appointed issues for 90% of the time the Exchange is open
for trading in each issue. See proposed Rule 23.150(e)(1), (2) and
(3).
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In exchange for accepting these obligations, Registered Market
Makers, Specialists, and Directed Market Makers are provided certain
benefits such as credit from lenders 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.\85\
Another benefit is that Specialists and Directed Market Makers will be
granted participation entitlements. As discussed above, Specialists
will receive the Specialist Participation Entitlement overlay \86\ and
the Small-Size Order Entitlement priority overlay,\87\ and Directed
Market Makers will receive the Directed Market Maker Participation
Entitlement overlay, subject to certain conditions.\88\
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\85\ See Amendment No. 3, supra note 8, at 26869.
\86\ See supra notes 52-53 and accompanying text.
\87\ See supra notes 57-59 and accompanying text.
\88\ See supra notes 54-56 and accompanying text.
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The Exchange will periodically evaluate Options Market Makers to
determine whether each has fulfilled the Exchange's performance
standards for Registered Market Makers or Specialists,
[[Page 45866]]
as applicable.\89\ Substantial or continued failure by a Registered
Market Maker to meet any of its obligations and duties may subject the
Registered Market Maker to disciplinary action, suspension, or
revocation of its registration as such or its appointment in one or
more of its appointed options classes.\90\ For Specialists, a finding
by the Exchange that a Specialist has failed to meet minimum
performance standards may result in one or more of the following
actions: a moratorium on the allocation of new options issues, a
reallocation of existing options, and other disciplinary actions as
deemed appropriate under the rules of the Exchange.\91\
---------------------------------------------------------------------------
\89\ See proposed Rule 23.120(f); proposed Rule 23.130(f).
\90\ See proposed Rule 23.120(f) and Amendment No. 3, supra note
8, at 26869. See also IEX Rule Series 9.500 (concerning procedures
for persons aggrieved by adverse action).
\91\ See proposed Rule 23.130(f). See also proposed Rule
23.130(b)(2), (f)(3)(A), and (g)(2)(B); IEX Rule Series 9.500.
---------------------------------------------------------------------------
Options Risk Parameter
The Exchange will offer the ORP as an additional optional risk tool
in addition to the standard risk tools it will make available to
Options Market Makers.\92\ According to IEX, ``[t]he ORP is designed to
enable Market Makers to provide tighter and deeper quotes on IEX by
providing protection from execution against quotes at stale prices 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.'' \93\ The Exchange will offer the ORP on a class-by-class
basis and may not offer the ORP in all classes.
---------------------------------------------------------------------------
\92\ See Amendment No. 3, supra note 8, at 26878-81.
\93\ Id. at 26879.
---------------------------------------------------------------------------
To support the ORP, IEX Options will employ a hardware-based
latency mechanism that adds 350 microseconds of additional latency to
each incoming order and quote message from any User, like it does for
its equities platform.\94\ This latency mechanism provides the Exchange
with a very short amount of time to ``obtain the most accurate view of
the market prior to processing orders and quotes'' as it takes in
current market data, performs the calculations that inform the ORP, and
then cancels or adjusts quotes that have elected to use the ORP.\95\
---------------------------------------------------------------------------
\94\ See id. at 26872. See also proposed Rule 22.100(n). As it
does for equities, the Exchange will use coiled optical fiber for
the access delay latency mechanism. See Rule 11.510(a). See also
Amendment No. 3, supra note 8, at 26872, n.78; and IEX Rule 11.510
Supplementary Material .02 (concerning force majeure events and acts
of third parties).
\95\ See Amendment No. 3, supra note 8, at 26872. See also infra
notes 97-99 and accompanying text for a discussion of the quote
instability calculation.
---------------------------------------------------------------------------
The ORP will be informed by the Options Quote Indicator
(``Indicator'') based on the Black-Scholes options pricing model, which
will ``assess the materiality of an imminent change to the current best
Protected Bid of the Away Markets to a lower price or of an imminent
change to the current best Protected Offer of the Away Markets to a
higher price for a particular listed options series (i.e., an imminent
adverse price change).'' \96\ To perform this assessment, the Indicator
will use both real time relative quoting activity of protected
quotations from eleven exchanges \97\ and a proprietary quote
instability calculation.\98\
---------------------------------------------------------------------------
\96\ See Amendment No. 3, supra note 8, at 26872.
\97\ IEX refers to these exchanges as ``Signal Exchanges.'' See
IEX Rule 11.190(g).
\98\ See Amendment No. 3, supra note 8, at 26879.
---------------------------------------------------------------------------
According to the Exchange, 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''
that ``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).''
\99\ The 200-microsecond waiting period ensures that the ORP does not
trigger repeatedly in rapid succession, which helps to narrowly tailor
the effect that the ORP could have when it cancels or reprices
quotes.\100\ Once triggered, ``[i]f 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'' in advance on its quote.\101\
---------------------------------------------------------------------------
\99\ Id.
\100\ See Amendment No. 3, supra note 8, at 26887 (explaining
that, unlike the crumbling quote indicator on its equities platform,
the ORP ``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.'').
\101\ Id.
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Subject to a proposed rule change filing, the Exchange can adjust
within prescribed ranges three aspects of the Indicator's formula--the
frequency of calculation of implied volatility,\102\ the Quote
Instability Threshold,\103\ and the Delta Bound Band that determines
which series are eligible for the ORP.\104\ For each of these three
aspects, the Exchange specifies in the rule text the possible ranges or
values it may use and also specifies in the rule text the applicable
range or value that is in effect.\105\ The applicable rule text
reflects that the Exchange will submit a proposed rule change under
Rule 19b-4 for any changes to the applicable ranges or values that are
in effect.\106\ When determining to modify values within the specified
range for the Quote Instability Threshold and the Delta Bound Band, the
Exchange states that it would consider ``the distribution of quote
instability determinations, the precision of quote instability
determinations, system capacity and performance, fill rates, markout
data, and client feedback.'' \107\
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\102\ See proposed Rule 23.150(h)(1), Supplementary Material
.05. The frequency of calculation of implied volatility, which is
used to calculate the delta, will be calculated each half-hour of
system operation. See Amendment No. 3, supra note 8, at 26879.
\103\ See proposed Rule 23.150(h)(1), Supplementary Material
.04(2)(e). As proposed, the possible Quote Instability Threshold
range will be within a range of 0%-100%. If the Quote Instability
Threshold is set at 100%, the expected change in the national best
bid (``NBB'')/national best offer (``NBO'') of the option resulting
from price movement in the underlying must be at least 100% of the
current value of the NBB/NBO of the option for the ORP to trigger.
If the Quote Instability Threshold is set at 0%, the ORP would
trigger if there is any expected change to the NBB/NBO of the option
resulting from price movement in the underlying. As proposed, the
initial value for the Quote Instability Threshold would be 0.1%.
When triggered, the ORP will only result in the repricing or
cancellation of quotes if the change to the NBB/NBO of the option
resulting from price movement in the underlying is to a different
price level than the current NBB/NBO after rounding to the nearest
minimum price variation. See Amendment No. 3, supra note 8, at
26879, n.159.
\104\ See proposed Rule 23.150(h)(1), Supplementary Material
.04(1)(q). Delta is a key metric in options trading that measures
the sensitivity of an option's price to changes in the price of the
underlying asset. As proposed, the Delta Bound Band would restrict
the ORP from triggering unless the option's delta is within the
specific band. The initial value for the Delta Bound Band would be
between 0-1, with the possible range of values between 0-1. See
Amendment No. 3, supra note 8, at 26879, n.158.
\105\ See Amendment No. 3, supra note 8, at 26879.
\106\ See id.
\107\ Id.
---------------------------------------------------------------------------
The Exchange also proposes to require Options Members to expose
their customers' orders on the Exchange for at least one second under
certain circumstances before trading against such orders. The Exchange
explains that this is consistent with the rules of other
[[Page 45867]]
options exchanges \108\ and therefore would allow members of such other
options exchanges to comply with proposed Rule 23.200 without having to
program separate time parameters into their systems for compliance or
order entry purposes.\109\
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\108\ See, e.g., MEMX Rule 22.11; Cboe Rule 5.9; and MIAX
Options Rule 520(b).
\109\ See Amendment No. 3, supra note 8, at 26881.
---------------------------------------------------------------------------
The proposed rules within Chapter 23 are substantially similar or
substantively identical to rules from MIAX, NYSE Amex, MEMX Options,
and Cboe, with the exception of the proposed ORP.
Chapters 24 Through 29
The Exchange also proposes to adopt the following chapters: (i)
Chapter 24 regarding exercises and deliveries; \110\ (ii) Chapter 25
regarding records, reports, and audits; \111\ (iii) Chapter 26
regarding discipline and summary suspension; \112\ (iv) Chapter 27
regarding doing business with the public; \113\ (v) Chapter 28
regarding options order protection and locked and crossed markets;
\114\ and (vi) Chapter 29 regarding margin requirements.\115\ The
proposed rules within these chapters are substantively identical to
MEMX Options rules.
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\110\ See proposed Rules 24.100, 24.110, and 24.120. See also
Amendment No. 3, supra note 8, at 26881.
\111\ See proposed Rules 25.100, 25.110, 25.120, 25.130, 25.140,
and 25.150. See also Amendment No. 3, supra note 8, at 26881.
\112\ See proposed Rules 26.100, 26.110, and 26.120. See also
Amendment No. 3, supra note 8, at 26881.
\113\ See proposed Rules 27.100, 27.110, 27.120, 27.130, 27.140,
27.150, 27.160, 27.170, 27.180, 27.190, 27.200, 27.210, 27.220,
27.230, 27.240, 27.250, and 27.260. See also Amendment No. 3, supra
note 8, at 26881.
\114\ See proposed Rules 28.100, 28.110, and 28.120. See also
Amendment No. 3, supra note 8, at 26881.
\115\ See proposed Rules 29.100, 29.110, 29.120, and 29.130. See
also Amendment No. 3, supra note 8, at 26881.
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Other Provisions
Before commencing operations, IEX Options will become a member of
the Options Price Reporting Authority (``OPRA'').\116\ As a member of
OPRA, IEX Options will disseminate to OPRA its highest bid and its
lowest offer and aggregate quotation size in accordance with Rule 602
of Regulation NMS.\117\ IEX Options also will become an exchange member
of the Options Clearing Corporation (``OCC'') and will be linked to OCC
to transmit locked-in trades for clearance and settlement.
---------------------------------------------------------------------------
\116\ See Amendment No. 3, supra note 8, at 26882.
\117\ 17 CFR 242.602. See also proposed Rule 22.240(a).
---------------------------------------------------------------------------
With respect to options regulation, the Exchange's Chief Regulatory
Officer, who reports to the Regulatory Oversight Committee of the
Exchange's board of directors, will supervise the regulatory operations
of IEX Options, including surveillance, examination, and enforcement
functions and will administer regulatory services agreements applicable
to IEX Options. The Exchange's existing Regulatory Oversight Committee
will be responsible for overseeing the adequacy and effectiveness of
the Exchange's regulatory and self-regulatory organization
responsibilities, including those applicable to IEX Options. The
Exchange proposes to amend its Minor Rule Violation Plan (``MRVP'') to
add rules related to the operation of IEX Options consistent with other
options exchanges.\118\
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\118\ See Amendment No. 3, supra note 8, at 26881, 26883-84
(providing a discussion of the MRVP program and noting that it
specifies the uncontested minor rule violations that have sanctions
not exceeding $2,500).
---------------------------------------------------------------------------
As discussed in more detail in its filing, the Exchange will join
the Options Order Protection and Locked/Crossed Market Plan, the
multiparty plans under Rule 17d-2 applicable to options, a bilateral
Rule 17d-2 plan with FINRA as well as a Regulatory Services Agreement
with FINRA, the Options Regulatory Surveillance Authority (``ORSA''),
and the Options Listing Procedures Plan (``OLPP'').\119\
---------------------------------------------------------------------------
\119\ See Amendment No. 3, supra note 8, at 26882.
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Finally, the Exchange proposes to modify several existing rules to
accommodate IEX Options including Exchange Rule 2.160(i) (concerning
registration of Principals), Exchange Rule 2.220 (concerning routing by
IEX Services), and Exchange Rule 9.208 (concerning minor rule
violations) as well as adopt new Rule 21.220 (concerning limitation of
liability) into the options portion of its rulebook that corresponds to
Rule 11.260 in the equities portion of its rulebook. These rule
amendments are designed to accommodate options trading on IEX Options
in a manner similar to existing options exchanges.\120\
---------------------------------------------------------------------------
\120\ See id. at 26884.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal, as modified by Amendment No. 3, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\121\ In particular, the
Commission finds that the proposed rule change, as modified by
Amendment No. 3, is consistent with Section 6 including, among others,
Sections 6(b)(1),\122\ 6(b)(5),\123\ and 6(b)(8) \124\ of the Act.
Section 6(b)(1) of the Act requires that an exchange be so organized
and have the capacity to be able to carry out the purposes of the Act
and to comply and enforce compliance by its members and persons
associated with its members with the provisions of the Act, the rules
and regulations thereunder, and the rules of the Exchange. Section
6(b)(5) of the Act requires that the rules of a national securities
exchange be designed, among other things, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system and, in general,
to protect investors and the public interest, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers. Section 6(b)(8) of the Act requires that the rules of a
national securities exchange not impose any burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act.\125\
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\121\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\122\ 15 U.S.C. 78f(b)(1).
\123\ 15 U.S.C. 78f(b)(5).
\124\ 15 U.S.C. 78f(b)(8).
\125\ One commenter stated that IEX's proposal did not comply
with the Exchange Act. See Letter from Stephen John Berger, Managing
Director, Citadel, dated Aug. 12, 2025 (``Citadel Letter II''), at
8. First, the commenter criticized the filing of Amendment No. 3 and
claimed the amendment contained ``material modification[s],''
including ``revisions to how key variables in its quote cancellation
are determined'' which should necessitate withdrawal of the
proposal. Amendment No. 3 did not contain material revisions to
variables in the ORP formula. Rather, it codified in the rule text
the initial value for each of the three variables used in the ORP:
Delta Bound Band; Quote Instability Threshold; and the frequency of
the calculation of implied volatility. It also specified that if IEX
determines to change any of the codified values within the specified
ranges or values, it will do so by submitting a proposed rule change
filing. Exchanges may amend open filings, which is common, and IEX
has complied with all applicable filing requirements in doing so.
Second, the commenter questioned whether the Commission ``reversed''
an effort by IEX to withdraw the filing. See id. Exchanges may
withdraw open filings or amendments thereto solely at their
discretion. IEX filed Amendment No. 3 on June 17 after withdrawing
Amendment No. 2 because of a technical page formatting issue. The
Commission's website momentarily displayed an incorrect notation of
withdrawal (only Amendment No. 2 was withdrawn, not the entire
proposal), which was promptly corrected and had no effect on the
status of the filing. Finally, the commenter urges the Commission to
``not rush to approve'' the proposal ``without first ensuring that
the procedural and substantive requirements of the Exchange Act and
Administrative Procedure Act are fully satisfied.'' Id. at 9. The
Commission is acting on IEX's proposal at the end of the 240-day
statutory review period after noticing the proposal, instituting
proceedings, noticing Amendment No. 3, and conducting three rounds
of comment that attracted many comment letters. The Commission has
followed all procedural and substantive requirements and is taking
final action as required by the Act. See also Letter from John
Ramsay, Chief Market Policy Officer, IEX, dated Aug, 20, 2025
(stating that the commenter's procedural arguments ``lack merit'')
(``IEX Response II'').
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[[Page 45868]]
As detailed above, most of IEX Options' proposed rules are
substantially similar or substantively identical to those of other
exchanges and do not raise any novel issues.
The proposed ORP, together with the access delay that effectuates
it, are novel for an options exchange and were the focus of commenters.
However, as discussed below, an access delay paired with a mechanism to
cancel or reprice orders is not novel for trading on an exchange in
general as IEX already operates its equities market with the exact same
access delay and an order type (D-Limit order) that can be repriced or
cancelled by the Exchange.
As discussed below, the ORP is a new type of options market maker
risk protection designed to protect options market makers from latency
arbitrage when they need to update their option quotes following a
change in the price of the security underlying the option. Options
exchanges commonly offer optional risk mitigation functionality (also
called risk controls) that allow market makers and others to have the
exchange automatically cancel their quotes and orders when certain
triggers specified by the market participant are met.\126\ The material
differences between existing options risk mitigation functionality and
the ORP, discussed further below, are that (1) the ORP can reprice a
quote whereas existing risk mitigation functionality will only cancel
quotes and orders and (2) the ORP is effectuated by a de minimis access
delay on all incoming messages and orders to enable the Exchange to
operate it during periods where latency arbitrage may be present.
---------------------------------------------------------------------------
\126\ For example, an exchange might cancel quotes based on
preexisting instructions from a market maker when a certain number
of executions occur against its quotes. See, e.g., Nasdaq Phlx Rule
Options 3, section 15(c); MIAX Rule 612; MEMX Rule 21.16; Nasdaq
GEMX Rule Options 3, section 15(a)(3).
---------------------------------------------------------------------------
The same reasons the Commission approved the D-Limit order type
effectuated by the 350-microsecond access delay for the IEX equities
market also apply to the options context for the ORP effectuated by an
identical 350-microsecond access delay, as explained below.\127\ Those
reasons are even more appropriate in the options context, as discussed
below.
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\127\ See Securities Exchange Act Release No. 89686 (Aug. 26,
2020), 85 FR 54438 (Sept. 1, 2020) (SR-IEX-2019-15) (``D-Limit
Approval Order''). See also Citadel Sec. LLC v. SEC, 45 F.4th 27,
458 U.S. App. DC 268 (D.C. Cir. 2022), available at <a href="https://media.cadc.uscourts.gov/opinions/docs/2022/07/20-1424-1956972.pdf">https://media.cadc.uscourts.gov/opinions/docs/2022/07/20-1424-1956972.pdf</a>.
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A. Exchange Members
As described above, only Options Members and their Sponsored
Participants will be permitted to transact on the System.\128\ The
Exchange also proposes rules governing member operations and member
conduct, all of which are substantively identical to the rules of other
exchanges, including MEMX Options. Those rules include recordkeeping
and reporting requirements,\129\ discipline,\130\ margin
requirements,\131\ and requirements applicable to doing business with
the public.\132\
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\128\ See proposed Rule 18.100(a).
\129\ See proposed Chapter 25 (Records, Reports and Audits).
\130\ See proposed Chapter 26 (Discipline and Summary
Suspensions).
\131\ See proposed Chapter 29 (Margin Requirements).
\132\ See proposed Chapter 27 (Doing Business with the Public).
---------------------------------------------------------------------------
The rules applicable to qualification, registration, member
operations, and use of IEX Options are substantially similar to those
of other options exchanges. For the same reasons provided by the
Commission in its order approving MEMX Options,\133\ the proposed
qualification, registration, member operations, and use of IEX Options
requirements provide the Exchange with the capacity to carry out the
purposes of the Exchange Act and enforce compliance by its members and
persons associated with its members with the provisions of the Exchange
Act, the rules and regulations thereunder, and the rules of the
Exchange, provide that registered broker-dealers can become members and
have access to IEX Options, and ensure that Options Members and their
associated persons can be appropriately disciplined for violations of
the Act, the rules and regulations thereunder, and Exchange rules.\134\
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\133\ See Securities Exchange Act Release No. 95445 (Aug. 8,
2022), 87 FR 49894, 49902 (Aug. 12, 2022) (approving rules governing
MEMX Options) (``MEMX Options Order'').
\134\ See 15 U.S.C. 78f(b)(1), (b)(2) and (b)(6).
---------------------------------------------------------------------------
Additionally, for the same reasons provided by the Commission in
its order approving the MIAX exchange registration application,\135\
the proposed Options Market Maker registration and qualification
requirements provide an objective process by which an Options Member
could become a Market Maker on IEX, and provide for continued oversight
by the Exchange to monitor for continued compliance by Market Makers
with the terms of their application for such status.\136\ The proposed
registration and qualification requirements are also substantially
similar to those of other options exchanges, such as MIAX and NYSE
Amex.\137\
---------------------------------------------------------------------------
\135\ See Securities Exchange Act Release No. 68341 (Dec. 3,
2012), 77 FR 73065, 73075 (Dec. 7, 2012).
\136\ See supra notes 67-70 and 88-90 and accompanying text. See
also Amendment No. 3, supra note 8, at 26867-68.
\137\ See MIAX Rules 600, 602; NYSE Amex Rule 927.1NY.
---------------------------------------------------------------------------
The proposed Options Market Maker participation requirements
provide that Market Makers receive certain benefits for carrying out
their responsibilities.\138\ At the same time, the proposed IEX Options
Market Maker participation requirements impose affirmative obligations
on Market Makers that balance the benefits afforded to such
participants.\139\ In addition, the continuous quoting obligations for
Market Makers are designed to contribute to the maintenance of a fair
and orderly market. Further, IEX Options' Market Maker participation
requirements are substantially similar to the participation
requirements of other exchanges that the Commission has previously
approved.\140\
---------------------------------------------------------------------------
\138\ See supra notes 85-88 and accompanying text. See also
Amendment No. 3, supra note 8, at 26868-69.
\139\ See supra notes 75-86 and accompanying text.
\140\ See MIAX Rules 603-604; NYSE Amex Options Rule 927NY. The
benefit the ORP conveys to Market Makers is discussed below in
section III.B.1.e.
---------------------------------------------------------------------------
B. IEX Options Market Structure and Trading Rules
With the exception of the ORP and the access delay that effectuates
it, the functionalities and features of IEX Options are based on the
functionalities and features previously approved for other options
exchanges and do not raise novel issues. Among other things, IEX's
proposed rules provide for a simple, orderly opening process for an
exchange that only trades multiply listed options and an orderly re-
opening process following the conclusion of a trading halt. Further,
the rules provide for the electronic display and execution of orders
using a pro-rata allocation model with execution priority dependent on
the size and capacity of an order. IEX Options will only utilize the
two industry standard order types (Limit orders and Market orders) and
will offer a limited suite of order handling instructions that are
substantially similar to the rules of other options exchanges, all of
which are well-established in both the equities and
[[Page 45869]]
options markets. The rules also provide an optional SUM that would
initiate an auction for orders that are not immediately executable on
the Exchange.\141\ For the same reasons provided by the Commission in
its orders approving other similar options exchange rules, the proposed
execution priority rules and order types are designed to promote just
and equitable principles of trade and are not designed to permit unfair
discrimination between customers, issuers, brokers or dealers.\142\
---------------------------------------------------------------------------
\141\ See supra notes 60-62 and accompanying text.
\142\ See Securities Exchange Act Release No. 100539 (July 15,
2024), 89 FR 58848, 58859-60 (July 19, 2024) (registration of MIAX
Sapphire) and MEMX Options Order, supra note 133, at 49902-03.
---------------------------------------------------------------------------
1. Access Delay and the Options Risk Parameter
As it does for equities, IEX will operate IEX Options subject to a
physical latency mechanism that applies an access delay of 350
microseconds on all incoming quote and order messages from all Users.
IEX explains that the delay is intended to ``support IEX's ability to
accurately account for contemporaneous market data'' by providing a de
minimis amount of time for ``IEX to obtain the most accurate view of
market data prior to executing an order or quote.'' \143\ Specifically,
the delay ``supports operation of the ORP'' by providing ``adequate
time for the IEX System to obtain the most accurate view of market data
to enable it to accurately price orders as well as to perform the
Indicator calculation with current market data.'' \144\
---------------------------------------------------------------------------
\143\ Amendment No. 3, supra note 8, at 26885.
\144\ Id. at 26886.
---------------------------------------------------------------------------
The ORP is an optional risk parameter available to Market Makers
for their displayed quotes in certain classes. The ORP will identify
when the price of an option on specified Away Markets \145\ ``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.'' \146\ An
options quote would be sufficiently dislocated from the price of its
underlying stock if, e.g., the stock price moved by a large enough
amount that the price of the option on it is now mispriced or ``stale''
(i.e., not yet updated to reflect the current market price of the
underlying security). When the quote instability calculation identifies
an unstable quote for a specific options series where a Market Maker is
quoting and has the ORP enabled for its quote, IEX will effectuate the
Market Maker's preexisting instructions to either: (1) cancel the quote
or (2) reprice the quote to the price level of the quote instability
determination.\147\ The access delay, which enables the System to
perform the Indicator calculation with current market data, supports
the ORP. IEX believes that this protection will ``encourage market
makers to post aggressively priced and/or deeper quotes on [IEX
Options] which will benefit all market participants'' who will have
access to that liquidity.\148\
---------------------------------------------------------------------------
\145\ See proposed Rule 22.160(a)(8).
\146\ Amendment No. 3, supra note 8, at 26879.
\147\ See proposed Rule 23.150(h)(1)(C).
\148\ Amendment No. 3, supra note 8, at 26885.
---------------------------------------------------------------------------
IEX may not offer the ORP in all options classes. Rather, it will
determine on a class-by-class basis whether to make the ORP
available.\149\ Specifically, the Exchange will ``focus its technology
resources in an impactful manner'' by offering the ORP in classes where
it is likely to ``achieve its intended purpose, while excluding its use
where it would likely provide minimal incremental value (for example,
for classes with nonstandard characteristics).'' \150\ Additionally,
the ORP is optional. For the ORP to apply, a Market Maker has to
designate which quotes will be subject to the ORP.\151\ Thus, not all
quotes on IEX will be subject to being cancelled or repriced by the ORP
as some classes may not be eligible for the ORP and a Market Maker may
or may not elect to use the ORP when it is available.
---------------------------------------------------------------------------
\149\ See proposed Rule 23.150(h)(1). The Exchange will
communicate its determination by Trading Alert. See id. Other
exchanges also make certain determinations pursuant to their rules
on a class-by-class basis. See, e.g., Cboe Chapter 1, section B,
Rule 1.5 (Exchange Determinations) and Cboe Rule 5.32(a) (concerning
determining base allocation algorithms and overlays on a class-by-
class basis).
\150\ Amendment No. 3, supra note 8, at 26889.
\151\ See id. at 26880-81. See also proposed Rule 23.150(h).
---------------------------------------------------------------------------
Some commenters oppose the proposed access delay and the ORP for
the reasons discussed below while other commenters support the
proposal, as also discussed below.\152\
---------------------------------------------------------------------------
\152\ See infra sections III.B.1.a-i.
---------------------------------------------------------------------------
a. Quote Fading Concerns
From the perspective of the liquidity taker, quote fading refers to
the lack of ability to execute against a displayed quote. The ability
of any market participant to successfully execute against any
particular displayed quote is subject to a number of factors and is not
guaranteed on any market, as at any time any market participant can be
seeking to execute against an order that is being repriced, changed,
cancelled, or executed by a different market participant.\153\
---------------------------------------------------------------------------
\153\ See D-Limit Approval Order, supra note 127, at 54445.
---------------------------------------------------------------------------
Several commenters expressed concern that the ORP together with the
access delay will lead to quote fading that could affect liquidity
takers.\154\ For example, one commenter expressed concern that the ORP
``will lead to increased quote fading and a less reliable displayed
NBBO'' and stated that it ``believe[s] that designating intentionally
delayed quotes as protected and requiring market participants to route
orders to a delayed exchange whenever that exchange displays the best
price--including when such price is stale and no longer accessible,
results in inferior executions.'' \155\ Another commenter characterized
quotes subject to the ORP as ``maybe quotations'' that would be
``inaccessible'' and stated that IEX failed to back up with data its
assertion that the ORP would be narrowly tailored.\156\ Similarly, one
commenter stated that the proposal could result in order routers
experiencing more cancels and lower fill rates because ``firms will be
forced to route to IEX as if it were a typical firm quote to avoid
trade-through and best execution violations.'' \157\ The commenter
distinguished the ORP from other options risk protection mechanisms,
stating that ``ORP is designed to protect the IEX market maker from
market movements by not requiring the market maker to be firm. . . .''
\158\
---------------------------------------------------------------------------
\154\ See Letter from Joanna Mallers, Secretary, FIA Principal
Traders Group, dated Feb. 26, 2025 (``FIA PTG Letter''), at 1-2;
Letter from Adrian Griffiths, Head of Market Structure, MEMX LLC,
dated May 14, 2025 (``MEMX Letter''), at 1, 2-3, 5, 6; Letter from
Angela Dunn, Principal Associate General Counsel, Nasdaq, dated May
20, 2025 (``Nasdaq Letter''), at 3, 5. See also D-Limit Approval
Order, supra note 127, at 54445-47 (discussing quote fading and
phantom liquidity, which refers to the ability of the liquidity
taker to successfully execute against any particular displayed quote
without the liquidity provider ``fading'' (i.e., cancelling or
repricing to a worse price) the quote).
\155\ FIA PTG Letter at 1-2. The commenter mentioned its
previously stated opposition to IEX's equities access delay. The
commenter pointed out that, unlike equities, standardized listed
options must execute on an exchange.
\156\ MEMX Letter at 1, 2-3, 5, 6. See infra section III.B.1.i
for a discussion of the data IEX provided in Amendment No. 3.
\157\ Nasdaq Letter at 3.
\158\ Id. at 5. The commenter also stated that the access delay
will result in IEX displaying stale quotes. The commenter stated
that the access delay ``may result in a less reliable displayed
NBBO'' due to ``a delay in transmitting quotation updates to
[OPRA]'' and that IEX may thus find itself alone at the NBBO as its
``quotes become stale due to'' the access delay. Nasdaq Letter at 3.
However, IEX states in its filing that it ``will not apply [the
inbound delay] 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.'' Amendment No. 3,
supra note 8, at 26886. The purpose of the access delay and ORP is
to allow IEX to update or cancel a quote as quickly as possible to
protect Market Makers against latency arbitrage to avoid their
quotes on IEX becoming stale after the price of the underlying
security has moved and the option, by its nature as a derivative
security, is expected to follow.
---------------------------------------------------------------------------
[[Page 45870]]
Other commenters stated that the ORP and the access delay would not
cause quote fading.\159\ For example, one commenter stated that the ORP
``in no way offers a `last look' or opportunity for market makers to
`change their mind' about a quote by examining inbound orders in some
nefarious way. . . .'' but rather ``[t]he chance of missing a fill by
the blink of an eye has always--and will always--exist.'' \160\ The
commenter stated that options risk mitigation functionality offers
``irrefutable precedent'' for similar mechanisms that ``have been in
place for about 20 years'' where exchange functionality ``prevent[s]
execution of otherwise-marketable orders that may already be in flight
to the exchange, or even already queued up for execution in the
exchange matching engine.'' \161\ Another commenter stated that ``the
concept of absolute quote firmness that opponents invoke simply does
not reflect current practice in modern options markets'' because
``[o]ptions markets are characterized by ubiquitous repricing and
canceling, with market makers employing sophisticated risk controls
precisely because the alternative--maintaining stale quotes in rapidly
moving markets--would be economically ruinous.'' \162\ Another
commenter stated that ``[o]rders sent to every exchange are always at
risk of missing the market due to a cancel that may already be in
flight . . . or an order update from another participant with a faster
connection . . . or a shorter geographic distance to the relevant
exchange data center.'' \163\ One commenter stated that ``[t]he markets
disseminated by IEX Options will be fully available for end users to
trade, with the exception of the few fractions of a second after the
underlying changes while market-maker quotes are being cancelled/
updated. These few fractions of a second when quotes are displayed in
the NBBO but are unavailable for trading happen regularly on every
market, even today.'' \164\ Another commenter, a former US equity
options market making firm, stated that ``[q]uote availability is
already limited by frequent and necessary bulk cancellations as a means
of risk control. Market makers regularly cancel entire swaths of quotes
in response to volatility or systemic risk.'' \165\ The commenter also
stated that, with respect to quote availability, ``quote fragmentation,
latency asymmetries, and differing exchange protocols contribute to
periods of unavailability. These issues are well known to practitioners
and are exacerbated during volatile market conditions.'' \166\
---------------------------------------------------------------------------
\159\ See Letter from Steve Crutchfield, Head of Business
Development, CTC, LLC, dated June 28, 2025 (``CTC Letter''), at 3-4,
5. See also Letter from J.W. Verret, Associate Professor, George
Mason University Antonin Scalia Law School, dated June 24, 2025
(``Verret Letter''), at 3.
\160\ CTC Letter at 5.
\161\ Id. at 3-4.
\162\ Verret Letter at 3.
\163\ CTC Letter at 5.
\164\ See Letter from James Cosentino, Head of Trading, Chicago,
Maven Securities, dated Aug. 14, 2025 (``Maven Letter''), at 3.
\165\ See Letter from Brian P. Donnelly, Founder, Volant
Trading, dated Aug. 8, 2025 (``Volant Letter''), at 2.
\166\ Id.
---------------------------------------------------------------------------
In response to comments, IEX stated that the ORP would not prevent
investors from accessing liquidity on IEX Options because the ORP would
operate to protect resting orders in microsecond increments that would
``add up to a miniscule percentage of the trading day'' and since
``investors are not attempting to time their orders in the way latency
arbitrageurs do, they will be able to access IEX quotes that are
subject to the ORP to the same extent as any other exchange quotes.''
\167\ IEX estimated that the ORP would affect quotes less than 0.001%
of the trading day, on average,\168\ and stated that ``because market
makers' systems are designed to react as quickly as possible to price
changes in underlying stocks, any moments in which their quotes are
substantially misaligned from these prices are necessarily extremely
ephemeral, i.e., lasting microseconds.'' \169\ According to IEX, the
commenters that argued that the ORP would make quotes inaccessible or
undermine the integrity of the NBBO lack support for their allegations
and repeat similar arguments made when IEX's D-Limit order type was
proposed, and ultimately approved by the Commission, for its equities
market.\170\ IEX also cited as precedent options purge ports that
provide an expedited way for market makers to ``mass cancel'' their
quotes in bulk across classes and series simultaneously as well as
options risk mitigation functionality in place at most options
exchanges--activity-based risk limits, arbitrage checks, and intrinsic
value checks--that allow market makers to direct an exchange to cancel
their quotes or reject orders based on various triggers, and that such
risk controls ``have never been viewed as allowing `quote fading' by an
exchange or the market makers that choose to use them.'' \171\ In
contrast to these existing exchange risk controls, IEX stated that the
ORP is transparent and predictable as it is triggered by price changes
in the underlying securities, while ``the circumstances in which other
risk limits will be employed may be known only by the market maker and
are not transparent to the broader market.'' \172\ IEX further states
that it is ``providing a very high level of transparency to all aspects
of the ORP.'' \173\
---------------------------------------------------------------------------
\167\ See Letter from John Ramsay, Chief Market Policy Officer,
IEX, dated June 19, 2025 (``IEX Response I''), at 3.
\168\ IEX Response I at 20. See also infra section III.B.1.i
(discussing the data provided in Amendment No. 3).
\169\ IEX Response I at 12.
\170\ See id. at 14. See also D-Limit Approval Order, supra note
127.
\171\ IEX Response I at 10.
\172\ Id.
\173\ Id. at 12. IEX provides a summary of how the ORP is
narrowly tailored to meet its purpose as well as the data IEX
analyzed to further validate that the ORP will be narrowly tailored,
which IEX notes is also described in Amendment No. 3. See id. at 11-
13.
---------------------------------------------------------------------------
For the same reasons the Commission found that IEX's D-Limit order
for equities will not impair access to IEX's quotation, the ORP and the
access delay that effectuates it will not impair access to IEX Options'
quotation.\174\
---------------------------------------------------------------------------
\174\ See D-Limit Approval Order, supra note 127, at 54446-47.
---------------------------------------------------------------------------
Unlike equities, options are derivative securities, which means
their quoted price is derived in substantial part from the price of the
underlying security or securities upon which they are based.\175\
Options quotes are primarily provided by options market makers who are
the primary liquidity providers of displayed quotes for options because
the large number of quoted options products, compared to equities,
makes natural liquidity from other market participants less common
across the many series across so many options classes.\176\ In those
moments when the price of an underlying equity security has changed,
[[Page 45871]]
a race condition exists between a market maker that needs to update and
reprice its option quotes to reflect the changed market price of the
underlying security and high-speed liquidity takers that seek the short
term opportunity presented by trading against those option quotes
before the market maker's quote update can occur.\177\ Some liquidity
takers that are technologically sophisticated are able to minimize
latencies in seeing and reacting to market data through use of low-
latency systems and technology, as well as connectivity and proprietary
market data purchased from exchanges, may, as a result, be able to
react faster to changing market prices than others (including the
market maker that posted the quote) that have not purchased those same
low-latency systems, connectivity, and data sources, which can be
expensive.\178\ This scenario is ``latency arbitrage'' and results in
economic losses for options market makers when they are unable to
update the quoted price of their options derivative securities to
correspond to a change in the price of the underlying security because
a faster market participant is able to execute against the old
``stale'' price before the market maker can update it.
---------------------------------------------------------------------------
\175\ See, e.g., Investor Bulletin: An Introduction to Options,
available at: <a href="https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-63">https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-63</a>; and Derivatives, available at: <a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/derivatives">https://www.investor.gov/introduction-investing/investing-basics/glossary/derivatives</a>
(defining ``derivatives'').
\176\ Amendment No. 3, supra note 8, at 26880 (noting the
affirmative obligations of market makers to provide two-sided
options quotes and 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)'').
\177\ See generally D-Limit Approval Order, supra note 127, at
54442 (discussing the race condition between liquidity providers and
liquidity takers).
\178\ See id. at 54449 (discussing latency arbitrage).
---------------------------------------------------------------------------
To help minimize the risk that its option quote may trade
immediately following a price change in the underlying equity security
before it is able to update its options quote, a market maker may find
utility in an exchange risk protection tool that enables it to more
efficiently and expeditiously effectuate options quote updates or take
down a quote without the delay that results from it having to send in
additional separate messages to instruct the exchange to do so. While
some market makers may not need or want such exchange-offered risk
protections because they have their own cutting-edge systems,
connectivity, and data to minimize latencies and model price movements,
other market makers that lack those items might benefit from
functionality that minimizes latencies in effectuating quote updates.
Updating or cancelling options quotes in response to a change in the
price of the underlying equity security is part of the price discovery
process for options and activity that a market maker is constantly
doing as part of its continuous quoting requirement. The access delay
and the ORP together speed up that quote update or cancel process by
fractions of a millisecond (because the market maker will not have to
send in a separate message to update or cancel its quote) while
simultaneously slowing down by those same fractions of a millisecond a
market participant attempting to access that quote while the Exchange
updates or cancels it.\179\ On account of that small delay, after which
a quote could be repriced or cancelled, some commenters assert that the
ORP will lead to quote fading because a market participant may not be
able to successfully execute against the quote it had seen and thus
from the market participant's perspective it may appear as if the quote
had faded or disappeared.
---------------------------------------------------------------------------
\179\ The IEX Options access delay will be 350 microseconds.
There are 1 million microseconds in a second and 1,000 microseconds
in a millisecond.
---------------------------------------------------------------------------
First, not all classes will be eligible for the ORP and, for those
classes that are eligible, some Market Makers may choose not to use it.
When it is used, based on the data provided by IEX discussed in detail
below, IEX states that the ORP will infrequently result in the
cancelling or repricing of a displayed quote on IEX in response to a
very targeted and specific pre-defined signal that suggests a high
potential for latency arbitrage--considerably less than 1% of regular
trading hours.\180\ This is because the ORP is narrowly tailored to
only take action when there is a sufficient dislocation between the
price of the underlying stock and the price of the option. When the ORP
is not repricing or cancelling a quote, which is virtually the entire
regular trading hours session, an options quote subject to the ORP will
be as equally accessible as any other quote or order on IEX Options.
For the small part of the day when the ORP does reprice or cancel a
quote, market participants that are not engaging in latency arbitrage
trading strategies are unlikely to be seeking to trade with the quote
precisely when it is in the process of being repriced. As noted by
several commenters, investors do not typically trade in microseconds
and even sophisticated market makers face challenges when competing
with the small number of firms that purchase the necessary systems,
connectivity, and exchange proprietary market data to target their
trading to those precise periods options quotes are temporarily
mispriced.\181\
---------------------------------------------------------------------------
\180\ See infra section III.B.1.i (discussing an analysis
provided by IEX demonstrating the expected ORP activation
frequency).
\181\ See, e.g., Letter from Stephen Sikes, CEO of Open to the
Public Investing, Inc., dated July 9, 2025; Letter from Kelli
McMorrow, Chief Advocacy Officer, American Securities Association,
dated July 9, 2025; and Letter from Gregory Bayard, Electronic
Options Market Making, HAP Trading LLC, dated June 16, 2025 (``HAP
Trading Letter''), at 3.
---------------------------------------------------------------------------
The ORP attempts to address the latency arbitrage impact on options
market makers using a predetermined, transparent, and codified rules-
based optional tool.\182\ That tool will cancel or update a quote after
the underlying security changes price to reflect that price change. By
their nature as derivative securities, options prices are derived in
substantial part from the price of the security underlying the option,
so market participants expect the price of a derivative to be
determined in substantial part by the price of the underlying
security.\183\ In the absence of the ORP, when the underlying security
changes price, Market Makers quoting the option will correspondingly
update their options quote to maintain that derivative pricing
relationship. IEX's ORP, if available and opted into, will allow the
options quote update process to take effect more promptly than if the
Market Maker had to send in separate messages to effect that change
itself. While one commenter stated that for ``the first time, an
exchange will adjust prices of a quote in one asset class using inputs
from another asset class,'' \184\ that fact simply reflects that
options are derivative securities whose prices are substantially and
directly correlated with the price of their underlying security. Since
the ORP is designed to reprice (or cancel) a quote to minimize latency
arbitrage, IEX needs to use the security price for an input. The ORP
will not offer a ``last look'' to a Market Maker by allowing it to back
away from a quote when presented with an incoming order, as one
commenter claimed.\185\ The Market Maker will have no ability to
influence the operation of the ORP (other than to opt into it or not
for each quote it submits to IEX) or to choose which incoming orders to
execute against (or not execute against), and IEX will effectuate the
ORP without exercising subjective judgment or taking into account the
interests of the Market Maker. The ORP is designed to avoid stale
quotes by updating or cancelling quotes when latency arbitrage
conditions are present following a price change in the underlying
security and does not offer Market Makers control over who they execute
against or when.
---------------------------------------------------------------------------
\182\ IEX has encoded the totality of the ORP's operation in its
rulebook and any changes to it will require IEX to submit a proposed
rule change under section 19(b) of the Act. 15 U.S.C. 78s(b).
\183\ See, e.g., CTC Letter at 7 (``It is an undisputed fact
that equities market activity is the underlying driver of the entire
options market. . . .'').
\184\ FIA PTG Letter at 2.
\185\ See Citadel Letter II at 2.
---------------------------------------------------------------------------
As discussed above, the ORP assesses the probability and
materiality of an imminent adverse price change to the
[[Page 45872]]
options quoted NBBO for each individual series using a formula (the
``Indicator''). When the formula generates this ``quote instability''
determination for an options series, it calculates the appropriate
price for the options in light of the new price for the underlying
security based on the Black-Scholes options pricing model. IEX then
looks to see if the Market Maker's quote for that series (when the
Market Maker elected to use the ORP) is above (below) that price level.
If it is, IEX will either cancel the quote or reprice it to the level
of the quote instability determination (as instructed in advance by the
Market Maker). Also, as discussed above, the formula contains a few
variables that are set by IEX and can be changed only through a
proposed rule change filing, including the Quote Instability Threshold
and the Delta Bound Band. The Quote Instability Threshold, set within a
range of 0% to 100%, will trigger the ORP to reprice or cancel a quote.
The initial value is set at 0.1% meaning the ORP will trigger to cancel
or reprice a specific quote when the expected change in the options
NBB/NBO is 0.01% of the current value of the NBB/NBO (rounded to the
nearest minimum price variation).\186\ The Delta Bound Band, with a
range of 0 to 1, reflects an option's delta, which refers to the
sensitivity of the options price to changes in the price of the
underlying security with higher values indicating greater
sensitivity.\187\ The Exchange has no discretion to determine whether
it will cancel or reprice a quote subject to the ORP, as the entire
process is governed by the formula and methodology contained in the
rulebook which is fully transparent to the public and can only be
changed through a proposed rule change filing. Because the formula is
codified in IEX's rulebook, it is fully transparent and commenters had
the opportunity to review IEX's material and critique it and submit
their own analysis.
---------------------------------------------------------------------------
\186\ See Supplementary Material .04(2)(e) to proposed Rule
23.150(h).
\187\ See Supplementary Material .04(1)(q) to proposed Rule
23.150(h).
---------------------------------------------------------------------------
In general, market participants have no guarantee that they will be
successful in trading with a quote they see because intervening factors
are always present, such as another broker-dealer being faster to
access the quote or the market maker that posted it may already have
cancelled or repriced it.\188\ The fastest market participants with the
most latency sensitive systems, connectivity, and data needed to
achieve the necessary speed to act upon the information asymmetries
that underlie latency arbitrage have the advantage in that speed race,
and may be accustomed to higher fill rates as a result, but those items
may be prohibitively expensive for many market participants and even
with those items the race still is a winner-take-all scenario where the
absolute fastest takes the quote. By slightly increasing the speed at
which market makers are able to update their quotes when the underlying
security changes price, the ORP will accelerate the quote update
process and therein will facilitate competition between market makers
by allowing maker makers with less access to the most latency-sensitive
technology to provide more liquidity at competitive prices alongside
those market makers that have such access.
---------------------------------------------------------------------------
\188\ See, e.g., D-Limit Approval Order, supra note 127, at
54445 (``The ability of any market participant to successfully
execute against any particular displayed quote is subject to a
number of factors and is not guaranteed on any market, as at any
time any market participant can be seeking to execute against an
order that is being repriced, changed, cancelled, or executed by a
different market participant.'').
---------------------------------------------------------------------------
If such functionality is successful and results in IEX attracting
more market makers to quote on its platform, then that additional
liquidity, at potentially better prices if a market maker decides to
quote more aggressively given the protection against latency arbitrage
the ORP provides, will be available to all investors including those
whose investment decisions are not informed by sub-millisecond
dislocations in the price of a derivative security. Even when the ORP
results in a quote being cancelled, which commonly occurs with exchange
risk mitigation functionality and purge ports as discussed above,
because market makers are subject to an obligation to provide
continuous quotes, the ORP should not result in less liquidity because
market makers will promptly reenter quotes at the updated prices.\189\
In this way, exchange-provided functionality that carries out a market
maker's instructions to cancel or reprice an options quote in specific
conditions, where such functionality is objective, transparent,
narrowly tailored, and not overbroad in its application as proposed
here, can have a beneficial effect on the options market by attracting
more market makers to make markets. The result should be an increase in
displayed liquidity at competitive prices, which facilitates fair
competition and economically efficient executions for investors.\190\
Similar to IEX's D-Limit order, the ORP will result in the repricing or
cancelling of a quote so infrequently (i.e., considerably less than 1%
of regular trading hours as discussed above) ``that only a small number
of market participants are capable of detecting and acting upon'' those
conditions that trigger it such that the ORP will ``not result in
needless missed executions for most traders, though it will make it
more difficult for a few latency arbitrage traders to profit by taking
advantage of idiosyncrasies in market structure to trade with stale-
price displayed quotes on IEX.'' \191\
---------------------------------------------------------------------------
\189\ See, e.g., proposed Rule 23.150(e) (concerning continuous
quote obligations of Market Makers).
\190\ See 15 U.S.C 78k-1. See also, e.g., D-Limit Approval
Order, supra note 127, at 54443.
\191\ D-Limit Approval Order, supra note 127, at 54444. See also
infra section III.B.1.i (discussing an analysis provided by IEX
demonstrating the expected ORP activation frequency).
---------------------------------------------------------------------------
As was the case for D-Limit, IEX's proposal identifies a legitimate
disadvantage in latency arbitrage faced by market makers that may lack
the expensive low-latency systems, connectivity, and data sources used
by those engaged in such strategies. The existence of this problem is
uncontroverted and supported by the several options market makers that
submitted comment letters saying how latency arbitrage is a problem
that negatively affects them and how IEX's proposal addresses the
problem in a manner that could result in them becoming Options Market
Makers on IEX and adding new liquidity to the market.\192\ Given how
narrowly tailored the ORP is in addressing latency arbitrage and how
infrequently it activates, it will not result in the average market
participant being unduly frustrated when trying to take liquidity on
IEX Options and thus will not contribute to inaccessible quotes or a
less reliable NBBO if IEX is at the NBB or NBO or result in inferior
executions for traders not engaged in latency arbitrage; however, as
discussed above, it will by design affect speed traders engaging in
latency arbitrage.\193\ By protecting Market Makers in this narrowly
tailored way, IEX may attract additional liquidity, including from new
market makers, which will promote more displayed liquidity that will be
available to all market participants. The ORP and the access delay are
a competitive response from IEX to mitigate competitive imbalances
between liquidity providers and latency arbitrage liquidity takers in
the same manner as IEX's D-Limit proposal, which is designed to
encourage
[[Page 45873]]
liquidity provision to the benefit of investors.\194\ Accordingly, the
ORP and the access delay that effectuates it are designed to promote
just and equitable principles of trade, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\192\ See, e.g., HAP Trading Letter; CTC Letter. See also Letter
from Benjamin Schiffrin, Director of Securities Policy, Better
Markets, Inc., dated July 18, 2025 (``Better Markets Letter''), at 2
(citing to studies that estimate the profit potential from latency
arbitrage and the cost of it to investors).
\193\ See, e.g., D-Limit Approval Order, supra note 127, at
54447.
\194\ See id. at 54451.
---------------------------------------------------------------------------
Further, while other exchanges' options risk protection mechanisms
cancel quotes when triggered, IEX's ORP allows a Market Maker to either
cancel or reprice the quote. While this is a difference for a risk
protection mechanism, a repriced quote keeps that liquidity
continuously available to the market (albeit at the new price) whereas
a cancelled quote removes that liquidity from the market temporarily
pending the market maker resubmitting a quote to comply with its
continuous quote obligations. Market participants seeking to trade with
a quote that is repriced by the ORP (instead of cancelled) can still
get a fill using a market order or an aggressively priced limit order
instead of missing an execution or being routed away if that liquidity
was entirely cancelled. Given how infrequently the ORP will likely
affect a quote, the ability to reprice in addition to cancelling should
not detract from fair and orderly markets by making IEX's quote
inaccessible or non-firm. As discussed above, long-standing options
risk protection functionality and purge port functionality, which are
non-transparent in their settings and customized by each firm compared
to the transparent and fixed-formula ORP, have never been viewed as
allowing quote fading nor have they been viewed as making quotes that
can be cancelled non-firm.\195\ Rather, they have been considered as
tools to enable market makers to better manage risk in support of their
ability to provide continuous quotes. In addition, some existing order
types on exchanges, including IEX's market maker peg order for
equities, involve an exchange continually updating quotes for market
makers based on an offset to a reference price, and those have also not
been viewed as allowing quote fading or making quotes non-firm.\196\
---------------------------------------------------------------------------
\195\ See infra note 259 and accompanying text.
\196\ See, e.g., IEX Rule 11.190(b)(17) and Nasdaq Equity 4
section 4702(b)(7)(A). One commenter stated that ``[i]f IEX's
mechanism was truly the same as longstanding risk controls on other
exchanges, then there would be no reason that IEX market makers
would be able to provide `tighter and deeper quotes' on IEX versus
other exchanges.'' Citadel Letter II at 6. The Exchange responded by
stating ``[m]arket makers set their quotes based on competitive
pressures and the need to compensate for the various risks involved
in their business. Existing risk controls can enable them to quote
at tighter spreads or in greater size than if those controls did not
exist. If the ORP reduces costs from latency arbitrage that other
controls do not address, those reduced costs can also affect the
instruments market makers quote in and how they set their quotes.''
IEX Response II at 8.
---------------------------------------------------------------------------
Accordingly, the ability of the ORP to reprice a quote is designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
b. Protected Quote Status
Several commenters opposed treating IEX Options' quotes as
protected under the Options Order Protection and Locked/Crossed Market
Plan \197\ because of the access delay that IEX will impose on all
incoming messages.\198\ One commenter stated that ``designating
intentionally delayed quotes as protected and requiring market
participants to route orders to a delayed exchange whenever that
exchange displays the best price--including when such price is stale
and no longer accessible, results in inferior executions.'' \199\
Another commenter stated that this requirement could require market
participants to route orders to IEX ``even if a market participant
believes they would achieve better execution on another exchange'' and
suggested that ``IEX may often display quotes which set the NBBO but
are routinely inaccessible, compelling all other market participants to
chase fleeting liquidity.'' \200\ One commenter stated that market
participants will be ``effectively required to route orders to
exchanges with artificial delays even if it is to their detriment.''
\201\
---------------------------------------------------------------------------
\197\ In the options markets, under the Options Order Protection
and Locked/Crossed Market Plan, a protected quotation is a bid or
offer in an options series that (a) is displayed by an exchange that
is a participant of the OCC and a party to the OPRA Plan (or a
participant in another plan that provides for comparable Trade-
Through and Locked and Crossed Market protection) (``Eligible
Exchange''); (b) is disseminated pursuant to the OPRA Plan, and (c)
is the best bid or best offer, respectively, of an Eligible
Exchange. See Options Order Protection and Locked/Crossed Market
Plan, available at: <a href="https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf">https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf</a>, at section
2 (defining ``Protected Quotation'' and `` `Protected Bid' or
`Protected Offer' '').
\198\ See, e.g., Letter from Stephen John Berger, Managing
Director, Global Head of Government & Regulatory Policy, Citadel
Securities, dated June 23, 2025 (``Citadel Letter I'') at 7-8. See
also Options Order Protection and Locked/Crossed Market Plan, supra
note 197. Among other things, section 5 (Order Protection) of that
Plan requires exchange participant members to ``establish, maintain
and enforce written policies and procedures that are reasonably
designed to prevent Trade-Throughs in that Participant's market in
Eligible Options Classes that do not fall within an exception . .
.'' Id. at section 5. The Plan defines Trade-Through as ``a
transaction in an options series, either as principal or agent, at a
price that is lower than a Protected Bid or higher than a Protected
Offer'' where Protected Bid/Offer is defined as a bid or offer
displayed and disseminated by OPRA that is the best bid/offer of an
exchange. See id. at section 2(21) and (17). The commenter stated
that ``it is notable that asymmetric intentional delays proposed by
equities exchanges have not been granted order protection'' and
cited to one proposal from the Cboe EDGA exchange. Citadel Letter II
at 2. That proposal, which differed substantially from what IEX
proposes herein and involved a 4-millisecond access delay, was
distinguished by the Commission as not raising the same issues as
IEX's access delay. See D-Limit Approval Order, supra note 127, at
54449-50.
\199\ FIA PTG Letter at 2.
\200\ See Letter from John L. Thornton, Co-Chair, Hal S. Scott,
President, and R. Glenn Hubbard, Co-Chair, Committee on Capital
Markets Regulation, dated July 8, 2025 (``Committee on Capital
Markets Letter''), at 2-3.
\201\ See Letter from Adam Nunes, Head of Risk, Hudson River
Trading LLC, dated Aug. 8, 2025, at 2.
---------------------------------------------------------------------------
Commenters that supported treating IEX Options quotes as protected
pointed out that options exchanges already protect quotes that can be
automatically and expeditiously cancelled by an exchange due to non-
transparent activity-based risk mitigation protections and bulk quote
cancel functionality, none of which are related to any observable
change in the underlying security price.\202\ One commenter explained
that ``options markets are full of risk tools exchanges use to
automatically cancel [quotes]'' but that IEX's ORP is ``more narrowly
drawn than other risk tools to focus specifically on risks from latency
arbitrage.'' \203\ Another commenter contrasted the ORP with existing
risk mitigation functionality by explaining that the ORP is
``transparent, predictable, and designed to address the specific
problem of latency arbitrage.'' \204\
---------------------------------------------------------------------------
\202\ See, e.g., HAP Trading Letter at 2; CTC Letter at 4.
\203\ See Letter from Daniel Schlaepfer, President, and Mario
Josipovic, Vice President, Regulatory Affairs and General Counsel,
Select Vantage, dated July 8, 2025 (``Select Vantage Letter''), at
2.
\204\ Verret Letter at 4.
---------------------------------------------------------------------------
In response, IEX stated that ``the argument that a quote cannot be
considered protected if it is subject to any intentional delay,
regardless of the length of the delay or its purpose or effect, should
be put to bed'' because ``[t]he Commission has rejected that argument
twice'' including in an order that was upheld by the United States
Court of Appeals for the District of Columbia Circuit.\205\ IEX also
explained that ``the debate on whether minimally-delayed equities
quotes can be protected arose entirely because of specific
[[Page 45874]]
language in the definition of `automated quotation' under Regulation
NMS, which is not used in the options definition of protected quotation
under the Options Order Protection and Locked/Crossed Market Plan.''
\206\
---------------------------------------------------------------------------
\205\ IEX Response I at 19.
\206\ Id.
---------------------------------------------------------------------------
The concept of an ``automated'' quotation that can be executed
``immediately and automatically'' in a manner that ``precludes any . .
. type of intentional device that would delay the action taken with
respect to a quotation'' is part of Regulation NMS that applies only to
equities.\207\ The Options Order Protection and Locked/Crossed Market
Plan does not contain any concept of an ``automated'' quotation or
contain any provision that addresses delays in actions taken with
respect to quotations. In 2016, the Commission addressed the
interpretation of the word ``immediate'' in the context of Regulation
NMS as ``not precluding a de minimis intentional delay--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.'' \208\ While that
interpretation does not apply by its terms to options because the
options plan does not contain the automated quotation concept, the
remaining provisions in the Options Order Protection and Locked/Crossed
Market Plan are substantially similar to the remaining provisions in
Regulation NMS such that the Commission's interpretation also is
relevant for options. As was the case for IEX's equities market, where
the Commission previously determined that IEX can maintain a protected
quotation when it approved IEX's exchange registration, the ORP and the
access delay that effectuates it are a response to the specific problem
of latency arbitrage and are designed to address that problem in a very
narrowly tailored manner that promotes competition among market makers
to the benefit of all investors without impeding fair and efficient
access to quotes as the potential for the ORP to affect an investor is
remote.\209\ IEX proposes to apply to its new options trading facility
an access delay based on a speed bump that is identical to what it uses
for its equities facility. Accordingly, IEX can maintain a ``protected
quotation'' as defined by the Options Order Protection and Locked/
Crossed Market Plan even if IEX's quote contains an individual quote
that is subject to the ORP because IEX's best bid or best offer will
meet the three conditions of the term ``protected quotation'' by (1)
IEX (a participant of the OCC and a party to the OPRA Plan) displaying
the quote, (2) IEX disseminating it pursuant to the OPRA Plan, and (3)
being the best bid or best offer of IEX. Accordingly, IEX Option's
quote will not be considered non-firm under the Plan.
---------------------------------------------------------------------------
\207\ See Securities Exchange Act Release No. 51808 (June 9,
2005) 70 FR 37496, 37534 (June 29, 2005) (``Regulation NMS Adopting
Release''). The smallest time increment for distinguishing between
manual and automated quotations suggested by commenters at the time
Regulation NMS was adopted was 250 milliseconds. See id. at 37518.
The Commission also discussed the distinction between ``automated
quotations'' and ``manual quotations'' where ``[t]he difference in
speed between automated and manual markets often is the difference
between a 1-second response and a 15-second response. . . .'' See
id. at 37500 n.21.
\208\ See Securities Exchange Act Release No. 78102 (June 17,
2016), 81 FR 40785, 40786 (June 23, 2016). Commission staff guidance
stated that ``delays of less than a millisecond are at a de minimis
level that would not impair fair and efficient access to a
quotation.'' Staff Guidance on Automated Quotations under Regulation
NMS, available at: <a href="https://www.sec.gov/rules-regulations/staff-guidance/trading-markets-frequently-asked-questions-2">https://www.sec.gov/rules-regulations/staff-guidance/trading-markets-frequently-asked-questions-2</a>. The
Commission staff guidance represent the views of the staff of the
Division of Trading and Markets. It is not a rule, regulation, or
statement of the Commission. The Commission has neither approved nor
disapproved its content. This staff statement, like all staff
statements, has no legal force or effect: it does not alter or amend
applicable law, and it creates no new or additional obligations for
any person.
\209\ See Securities Exchange Act Release No. 78102, (June 17,
2016), 81 FR 40785, 41162 (June 23, 2016) (File No. S7-03-16). See
also IEX Response I at 20 (``. . . based on the estimate that the
ORP would affect quotes less than 0.001% of the day on average, the
chance that a retail order would by chance arrive while a quote has
been affected by the ORP is less than 1 in 100,000.'') (emphasis in
original).
---------------------------------------------------------------------------
c. Options Markets Are Different
A few commenters stated that, while the Commission has previously
approved an access delay coupled with an order type that allows an
exchange to cancel or reprice orders, options markets are different
from equities markets such that the Commission should disapprove IEX's
similar proposal for options.\210\ For example, one commenter stated
that ``unlike the US equities market, all [options] orders must be
executed on exchange'' and that ``the combination of far more options
quotations (given the number of unique series) and far more repricing
opportunities (given that IEX's quote fading mechanism is based on
price movements in the underlying security) means that overall quote
fading may be far more damaging compared to equities if this type of
mechanism were implemented. . . .'' \211\
---------------------------------------------------------------------------
\210\ See, e.g., Letter from Joseph Corcoran, Managing Director
and Associate General Counsel, and Gerald O'Hara, Vice President and
Assistant General Counsel, The Securities Industry and Financial
Markets Association, dated June 30, 2025 (``SIFMA Letter''); Letter
from Andrew Stevens, Global General Counsel, IMC, Jeff Starr,
Managing Director, Head of Operations, Charles Schwab & Co., Inc.,
and Stephen John Berger, Managing Director, Global Head of
Government & Regulatory Policy, Citadel Securities, dated June 4,
2025 (``IMC Schwab Citadel Letter'').
\211\ IMC Schwab Citadel Letter at 3.
---------------------------------------------------------------------------
Other commenters stated that the benefits of an access delay
coupled with functionality that allows an exchange to cancel or reprice
orders is even more appropriate for options given the differences
between equities and options market structure. For example, one
commenter stated that ``[t]he characteristics that distinguish options
markets from equities markets make them particularly vulnerable to the
latency arbitrage that IEX's protections address.'' \212\ In
particular, the ``complete reliance on exchange-based trading means
that options markets cannot benefit from the off-exchange mechanisms
that provide some latency arbitrage protection in equities markets'' as
the options market structure ``creates a more rigid environment where
latency arbitrageurs can systematically exploit temporary pricing
dislocations without the competitive pressure that off-exchange venues
provide in equities.'' \213\ The commenter stated that ``[t]he
relationship between options prices and underlying securities creates
additional vulnerabilities that do not exist in single-asset markets''
because ``Market Makers must continuously update quotes across hundreds
or thousands of series as underlying stock prices change, creating
numerous opportunities for latency arbitrageurs to exploit temporary
pricing misalignments'' where ``[a] single movement in an underlying
stock can trigger arbitrage opportunities across multiple strikes and
expirations, multiplying the potential for systematic adverse
selection.'' \214\
---------------------------------------------------------------------------
\212\ Verret Letter at 10.
\213\ Id.
\214\ Id.
---------------------------------------------------------------------------
An options market maker commenter stated that regulatory continuous
quoting obligations across many series for each options class exposes
market makers to a risk of significant loss due to instantaneous
adverse selection across those many quotes, which results from
professional high-frequency trading firms with systems that are
``faster than a market maker's by tiny, otherwise insignificant
fractions of a second'' that ``can be a significant source of such
adverse selection'' for market maker quotes.\215\ The commenter
described this as a technological ``arms race'' between professional
traders and market makers where the ``[i]ncreased risk of instantaneous
adverse selection,
[[Page 45875]]
and the increased infrastructure cost necessary to mitigate that risk,
is therefore a direct cause of market makers' quoting wider spreads
and/or smaller size in order to generate sufficient risk-adjusted
returns--thereby increasing costs for investors.'' \216\ The commenter
stated that ``[t]hese technology expenditures by all parties serve only
to protect professional market participants from one another (and,
perhaps, to generate a profit for purveyors of market data and trading
infrastructure), and do not fill any expressed need for additional
speed on the part of end users.'' \217\
---------------------------------------------------------------------------
\215\ CTC Letter at 2.
\216\ Id.
\217\ Id.
---------------------------------------------------------------------------
Responding to comments, IEX stated that the latency arbitrage
problem ``is even more acute in options markets than in equities
because the structure of the options markets means that market makers
are even less able to protect themselves.'' \218\ The Exchange stated
that ``the fact that standardized options must be traded on exchanges
reinforces the point that in options, market makers have even more
significant need for protection from latency arbitrage strategies
because they cannot avoid them through other venues whose design limits
the effectiveness of such strategies.'' \219\ As a consequence, IEX
stated that ``competition in options markets has declined.'' \220\
Specifically, IEX stated that the ``burden on liquidity provision has
contributed to a sharp decrease over time in the number of competing
market makers'' (noting the recent exit of Morgan Stanley from the
options market making business) which has reduced competition and
``contributed to a decrease in displayed liquidity per instrument,
while market maker spreads have nearly doubled in the past decade.''
\221\ Further, ``as the number of instruments has also nearly doubled
alongside a sharp decrease in the number of market makers, risks to the
supply of liquidity in the options markets have grown.'' \222\
---------------------------------------------------------------------------
\218\ IEX Response I at 3.
\219\ Id. at 21-22. Accordingly, the Exchange stated that
``exchanges must be allowed to provide market makers a way to defend
against latency arbitrage.'' Id.
\220\ Id.
\221\ Id. at 5-6.
\222\ Id. at 6.
---------------------------------------------------------------------------
In prior orders, the Commission acknowledged the risks and costs
presented by latency arbitrage and the disincentive it imposes on some
liquidity providers.\223\ This problem is especially acute for options
compared to equities given the far greater number of quoted options
securities and the critical role that options market makers play in
providing that liquidity on multiple exchanges across a vast number of
related instruments. The differences between equities and options
(i.e., for options, the substantially greater number of securities
listed, the lack of an over-the-counter market, and the derivative
nature of an option that requires expeditious repricing when the
underlying security changes price) means the risks and costs presented
by latency arbitrage and the corresponding disincentive those risks and
costs impose on some liquidity providers may be greater for options
than for equities. Accordingly, the protections from latency arbitrage
offered by IEX Options will be appropriate and impactful for those
affected market makers to the extent they can help reduce the risks and
costs that the Market Makers experience from latency arbitrage.
Further, the narrowly tailored character of the ORP, which is expected
to impact quotes less than 1% of regular trading hours,\224\ shows how
the proposal will not be over broad in its application but rather will
offer protection against latency arbitrage to Options Market Makers
providing liquidity without being disruptive to investors seeking that
liquidity, which is supported by several commenters that represent
options market makers as well as institutions that trade on behalf of
investors. The ORP should incentivize more Market Makers to become
Options Market Makers on IEX thus adding those quotes to the national
market system, including those market makers (and some commenters on
the proposal) that may previously have been unable or unwilling to
spend the considerable amount of money needed to invest in the
technology necessary to conduct operations within microseconds-level
timeframes that are imperceptible to many market participants.
---------------------------------------------------------------------------
\223\ See, e.g., D-Limit Approval Order, supra note 127, at
54442-43, 54449.
\224\ See infra note 322 and accompanying text. See generally
section III.B.1.i for a discussion of the expected frequency at
which ORP will be triggered.
---------------------------------------------------------------------------
d. Impact on Price Improvement Auctions
A few commenters expressed concern that the ORP could harm
investors by disrupting the ability to initiate auctions on other
exchanges. For example, one commenter stated that ``[r]etail investor
orders typically receive price improvement above and beyond the market-
wide best price through `price improvement auctions' '' that require a
market participant to initiate the auction at the NBBO or better.\225\
The problem the commenter identified is that ``to the extent the
market-wide best price is set by a Market Maker on IEX (and is a better
price because of the quote fading mechanism available to the Market
Maker on IEX), liquidity providers on other exchanges will be less
likely to be willing (or able) to provide retail investors with
additional price improvement (as the market-wide best price is already
artificially aggressive). . . [a]nd yet the IEX price may not actually
be accessible in practice.'' \226\ Similarly, another commenter stated
that the proposal has ``the potential to prevent intra-day price
improvement auctions on other option exchanges as well as other
intraday auctions from commencing due to a better displayed quote on
IEX that may not be accessible once an order is routed to IEX.'' \227\
---------------------------------------------------------------------------
\225\ IMC Schwab Citadel Letter at 2.
\226\ Id.
\227\ Nasdaq Letter at 6.
---------------------------------------------------------------------------
Other commenters stated that ORP would not impact retail
investors.\228\ For example, one commenter stated that ``[r]etail
investors simply do not trade within the microsecond timeframes during
which IEX's protections operate.'' \229\ Another commenter stated that
``this argument seems to be that a tighter NBBO on one exchange would
be problematic because it means market makers will have to display
better prices elsewhere too,'' which the commenter stated ``is similar
to claiming that a company should refrain from introducing innovative
features to its products because doing so would increase competitive
pressure on its rivals.'' \230\ A large number of individual commenters
stated that certain broker-dealers (including those who commented in
opposition to IEX's proposal) do not necessarily represent their
interests especially when they give or accept payment for order
flow.\231\ Additionally, one commenter stated that the proposal would
benefit retail investors because it would protect them from high-
frequency traders who act on information faster than retail investors
and profit at their expense.\232\ The commenter stated that the
proposal would prevent a ``wealth transfer from retail investors to
high-frequency traders by reducing latency arbitrage'' so that
[[Page 45876]]
``retail investors are not left behind as high-frequency traders
prosper.'' \233\ Several pension plans and institutional investors
similarly stated that IEX's proposal ``will result in fairer and more
efficient options markets by reducing barriers to entry and encouraging
price competition,'' which will ``directly benefit[ ] investors. . .
.'' \234\
---------------------------------------------------------------------------
\228\ See, e.g., Verret Letter at 3; CTC Letter at 9; Letters
Type B.
\229\ Verret Letter at 3.
\230\ CTC Letter at 9.
\231\ See, e.g., Letters Type A; Letters Type B; Letter from
Kevin S., Norwegian retail investor; Letter from ``Bodysurf'' Dan
Ault; Letter from Edward Neill.
\232\ See Better Markets Letter at 1.
\233\ Id. at 2, 3.
\234\ See Joint Letter from Jaime Llano (Techer Retirement
System of Texas), Sam Masoudi (Wyoming Retirement System), Zachary
Paris (Janus Henderson Investors), Michael C. Viteri (Arizona State
Retirement System), Anthony W. Godonis (Copeland Capital Management,
LLC), Adam Conn (Baillie Gifford Overseas LTD), Myrian Deslandes (La
Caisse), and Kevin Duggan (Ontario Teachers' Pension Plan), dated
Sept. 3, 2025, at 2.
---------------------------------------------------------------------------
In response, IEX stated that ``the chance that a retail order would
by chance arrive while a quote has been affected by the ORP is less
than 1 in 100,000'' and so ``[t]he assertion that retail price
improvement auctions will be `disrupted' rests on the premise that any
better-priced IEX quote will not be accessible'' but ``IEX quotes will
be as fully accessible to retail orders as any better priced quotes
appearing on any other exchange.'' \235\ IEX further stated that ``[a]
retail investor stands to benefit from the availability of the ORP in
one of two ways: the investor's order can benefit if her order executes
directly against the better priced IEX quote; or, the investor will
benefit if the better-priced quote creates a better starting reference
price for the auction.'' \236\
---------------------------------------------------------------------------
\235\ IEX Response I at 20 (emphasis in original).
\236\ Id.
---------------------------------------------------------------------------
The ORP is designed to protect investors and will not materially
disrupt price improvement auctions. The ORP will make it more difficult
for latency sensitive professional traders to trade against Market
Maker quotes during the less-than-1% of the regular trading day when
the ORP may reprice or cancel those quotes.\237\ However, other than
the 1 in 100,000 chance that a retail order would arrive while a quote
has been affected by the ORP, a quote displayed on IEX Options will
still be accessible to market participants, including to retail traders
whose trading decisions typically are not informed or effected on a
microsecond timescale smaller than the technological, geographic, and
OPRA latencies that they encounter.\238\ To the extent IEX Options'
quote is alone at the NBBO, investors will have access to that better
price and will benefit either by being able to trade with it or by
having their order auctioned on another exchange at that price (or
better).
---------------------------------------------------------------------------
\237\ One commenter stated that ``[a]lthough the aggregate total
amount of time when the ORP would trigger in a single options series
may be de minimis compared with the entire trading day, the number
of quotes cancelled and the number of resulting missed contract
fills during these windows could still be meaningful depending on
when the cancellations occur (e.g., if the windows happen at the
open or close, when volumes are typically higher, or during periods
of high volatility when the ORP likely would trigger more
frequently).'' SIFMA Letter at 2. IEX presented data in Amendment
No. 3 from an analysis of several days of trading in February 2025.
Based on this data, and using aggressive assumptions, IEX
``estimates that the ORP would impact IEX Market Maker quotes on
average per series significantly less than 0.001% of the trading day
during regular trading hours.'' See infra section III.B.1.i for a
discussion of this data and the expected frequency at which ORP will
be triggered. While the ORP will infrequently cause quotes to cancel
or reprice, when it does do so it will be on account of it detecting
latency arbitrage conditions. The key feature of the ORP is to
protect Market Makers from latency arbitrage when quotes are being
repriced. Accordingly, the ORP will result in quotes being cancelled
and fills being missed because that is the objective of the ORP--to
not fill at stale prices orders from latency arbitragers. The impact
on retail and institutional investors that are not engaged in
latency arbitrage would be expected to be materially different than
the impact on professional traders that are engaged in latency
arbitrage, as shown by IEX in a table showing quote-targeting fill
rate by firm type for its equities market. IEX estimates that
institutional brokers experience fill rates around 90% (with some
around 99%) while proprietary trading firms experience fill rates
around 35%, a difference that could be explained by the likelihood--
in terms of time--of the firm attempting to take liquidity during
latency arbitrage conditions. See IEX Response I at A-3.
\238\ See, e.g., HAP Trading Letter at 1; CTC Letter at 5
(stating that ``the OPRA NBBO is already stale by more than 350
microseconds'') (emphasis in original).
---------------------------------------------------------------------------
e. Unfair Advantage for Market Makers
Some commenters stated that IEX proposes to convey a significant
benefit to its Market Makers through the ORP without requiring any new
obligations in return.\239\ One commenter explained that market makers,
the only options exchange members that can quote, are subject to
rigorous quoting obligations on options exchanges, and in return are
rewarded by exchanges with enhanced allocations and more favorable
pricing compared to other non-customer market participants who are not
subject to such obligations.\240\ The commenter stated that IEX's ORP
would protect IEX Market Makers while not requiring them to provide
firm quotes,\241\ and that ``[r]ewarding IEX market makers with
enhanced allocations for stale quotes does not align with the risk/
reward models in place at other options markets.'' \242\ The commenter
stated that ``counting quotes toward market maker obligations where the
quotes become stale due to the [access delay], or were marketable and
cancelled due to the ORP, does not meet the intent of the quoting
obligations.'' \243\ Other commenters stated that the proposal could
favor IEX Market Makers at the expense of other market
participants.\244\ One commenter suggested that, when cancelling or
repricing a quote, the ORP ``is explicitly designed to maintain queue
priority'' unlike ``purge ports'' where a market maker ``completely
loses queue priority'' when it cancels its quotes.\245\
---------------------------------------------------------------------------
\239\ See Nasdaq Letter at 4; Citadel Letter I at 9-10. See also
SIFMA Letter at 2-3.
\240\ See Nasdaq Letter at 4. See also id. at 5, nn.19-21
(describing the market maker obligations of the Nasdaq affiliate
exchanges).
\241\ See Nasdaq Letter at 5. See also supra note 157 and
accompanying text.
\242\ Nasdaq Letter at 4.
\243\ Id.
\244\ See SIFMA Letter at 2-3; Citadel Letter I at 9-10 (stating
that the proposal would promote unfair discrimination by providing
an unfair advantage for IEX Market Makers over other market
participants).
\245\ Citadel Letter II at 6. The Exchange stated that the
commenter is ``wrong on the facts'' because ``[i]f an IEX quote
using the ORP is repriced, it will be assigned a new timestamp and
will have no advantage over other orders that are already resting at
the new price. In addition, because IEX is proposing to operate as a
`pro rata' market, a feature that is clearly disclosed in the
[proposal], quotes for a given series at a single price level do not
gain priority solely based on the time they arrive. . . .'' IEX
Response II at 7.
---------------------------------------------------------------------------
Three options market maker commenters stated that the ORP will
allow a larger universe of market makers to participate on IEX and
provide liquidity on the basis of price competitiveness rather than
speed.\246\ One such commenter stated that, ``[b]y reducing the
advantage of speed, it broadens access to a wider range of liquidity
providers, resulting in deeper markets and tighter spreads'' and
``[c]rucially, it enables new market maker entrants like ourselves to
participate on the basis of price competitiveness rather than speed
alone.'' \247\ Another market maker commenter stated that options
exchanges ``continue to be characterized by a race for speed as desired
by the largest market participants to increase their internalization,
reduce existing competition, and prevent new entrants.'' \248\ The
commenter stated that it ``has firsthand experience with this market
evolution and our firm's ability to improve markets and stay on the
[[Page 45877]]
inside of the market have been reduced significantly over the last
decade.'' \249\ The commenter further stated that ``IEX is proposing a
new model which seeks to cap the technical costs of speed and encourage
new market-making participants to compete on price and size rather than
speed,'' which ``would cause us to reinvest in our competitive quoting
efforts, set more new NBBOs, and spend more time using our quote to
augment available liquidity at the inside of the market.'' \250\
Another commenter stated that the proposal is ``explicitly pro-
competitive'' in that ``[u]sing an exchange-controlled mechanism to
mitigate `pick-off' risk that could otherwise only be addressed through
massive technology expenditures will lower technological barriers to
entry and allow more firms--including those unwilling or unable to
spend giant sums to build a microsecond-latency trading platform--to
become competitive at providing liquidity, and empower many existing
liquidity providers to quote more aggressively.'' \251\ The commenter
observed that ``the two largest U.S. equities options market making
wholesalers have commented opposing the filing, while three
comparatively smaller ones (including CTC) have all commented in
support (including one international firm which we understand to be a
new entrant to US options market making)--implying the Proposal may
support/encourage more upstart competitors in the market making
space.'' \252\ The commenter further stated that the proposal ``still
allows for benefits to those who choose to invest in higher-performance
trading systems since, under the Proposal, the first liquidity-taker to
pass through the speedbump will uniquely be able to execute against the
entire remaining posted size, if desired--even if he or she beats out
other would-be takers by only a single nanosecond.'' \253\ One
commenter stated that the costs of competing with high-frequency
traders have disincentivized meaningful participation in the markets by
major market participants, which makes ``prices less reflective of
fundamental information.'' \254\ The commenter stated that the proposal
will ``level the playing field'' between high-frequency traders and
other market participants by allowing market participants to better
compete with high-frequency traders.\255\
---------------------------------------------------------------------------
\246\ See, e.g., HAP Trading Letter; CTC Letter; Letter from
Mathieu Boivin Carrier, Director, All Options USA LLC, dated June
12, 2025 (``All Options Letter''), at 1. Another options market
maker commenter stated that ``protecting passive liquidity is
essential to supporting fair and orderly markets. Doing so has the
potential to both greatly reduce the `technology tax' imposed by the
presence of latency arbitrage, as well as improve the overall
quality of the markets.'' Maven Letter at 2.
\247\ All Options Letter at 1. The commenter further stated
``[o]ur competitive edge lies in pricing proficiency, and we are
committed to delivering the best possible prices to end-investors''
and that ``[w]e believe this approach benefits the broader market,
unlike the speed race, which increases the cost of liquidity and
reduces competition.'' Id.
\248\ HAP Trading Letter at 3.
\249\ Id.
\250\ Id.
\251\ CTC Letter at 3.
\252\ Id.
\253\ Id.
\254\ See Better Markets Letter at 3-4.
\255\ Id. at 4.
---------------------------------------------------------------------------
Another commenter, a former US equity options market making firm,
stated that it was ``ultimately forced to exit the business due to the
escalating costs and arms race associated with maintaining latency
competitiveness.'' \256\ The commenter stated that ``the playing field
has increasingly tilted toward a small number of firms with the
financial and technological resources and economies of scale to operate
at the bleeding edge of latency-sensitive infrastructure. These
developments have created unsustainable barriers to entry and reduced
the diversity of liquidity providers, ultimately harming market quality
for end investors.'' \257\ The commenter further stated that ``the IEX
mechanism offers a precise, event driven tool that . . . does not
inhibit access or confer unfair advantages--it levels the playing
field. By helping reduce the dependency on expensive infrastructure and
allowing market makers to quote more competitively without being
exposed to asymmetric risks, the proposal will enhance liquidity,
improve price discovery, and ultimately benefit all investors.'' \258\
---------------------------------------------------------------------------
\256\ Volant Letter at 1. The commenter stated that latency
arbitrage ``arises from a structural mismatch while option prices
are highly sensitive to movements in their underlying equities,
there are unavoidable delays in how exchanges and market
participants receive and process those underlying price updates.''
Id. The commenter further stated that ``[s]ophisticated firms
exploit this latency gap by executing against stale option quotes
before slower market makers can adjust their prices. The result is a
one-sided dynamic where passive liquidity providers are routinely
`picked off' at prices that no longer reflect fair value. This leads
to defensive quoting behavior, wider spreads, and thinner markets.
Firms with deep expertise in option pricing and risk management--
those best positioned to provide tight spreads and meaningful size--
are often pushed out due to the steep technical demands required
merely to remain competitive.'' Id. The commenter stated that the
``costs of maintaining latency competitiveness are staggering.'' Id.
\257\ Id.
\258\ Id. at 2.
---------------------------------------------------------------------------
Finally, one commenter, an options market making firm, stated that
it has had to ``add tremendous complexity to combat predatory latency
arbitrage,'' and that ``if our systems are too slow (for example, more
than a millionth of a second reaction time), then our quotes are traded
before the exchange can process our updates. . . these trades happen
very frequently and, in the aggregate, are very costly.'' \259\ The
commenter stated that defending against latency arbitrage ``requires
annual investments in the area of $5 million, which we project will at
least double once we complete our expansion to the remaining US equity
option exchanges'' to merely reduce, but not eliminate, ``pickoff''
trades from latency arbitrageurs.\260\ The commenter stated that all
market makers need this technology at a minimum, describing this as
``avoidable barriers to entry'' that ``grow ever larger.'' \261\ The
commenter added that retail and institutional end users are ``paying
the price in the form of wider than necessary spreads and less
available liquidity.'' \262\ The commenter stated that the proposal
would likely result in a tightened NBBO on IEX Options by Market Makers
protected by the access delay and the ORP.\263\
---------------------------------------------------------------------------
\259\ Maven Letter at 1-2.
\260\ Id. at 2.
\261\ Id.
\262\ Id.
\263\ Id. at 3-4.
---------------------------------------------------------------------------
Responding to comments, the Exchange stated that the ORP is
``narrowly-targeted'' to ``limit costs from latency arbitrage,'' which
``can help to induce market makers to compete in more options classes,
potentially with greater size and tighter spreads.'' \264\ In turn, the
Exchange stated that ``[t]hese are all effects that benefit public
investors and other participants by increasing liquidity and improving
price and choice in options markets.'' \265\
---------------------------------------------------------------------------
\264\ IEX Response I at 9.
\265\ Id.
---------------------------------------------------------------------------
The ORP is a new type of optional risk mitigation protection and
thus will confer a benefit to Market Makers trading on the Exchange in
their assigned classes when they elect to use it. IEX has not, however,
proposed to subject Market Makers to additional quoting requirements as
a condition for using the ORP. Other exchanges offer risk mitigation
functionality to members, including to market makers, some of which is
far broader in its application than the ORP, and similarly do not
impose additional quoting requirements on market makers as a condition
for using it.\266\ In particular, the ORP is more narrowly tailored
than other options risk mitigation functionality because it will only
reprice or cancel a specific series in a class whereas options risk
mitigation functionality typically will cancel all quotes and orders in
all series across a class.
---------------------------------------------------------------------------
\266\ See, e.g., Nasdaq Phlx Rule Options 3, section 15 (Simple
Order Risk Protections). Paragraph (c)(2) of that rule (called
``Automated Quotation Adjustments'') provides exchange functionality
that market makers use to cancel all quotes in all series in a class
(not just for a single series like ORP) over a period not to exceed
15 seconds. See Nasdaq Phlx Rule Options 3, section 15(c)(3). That
provision is only available for use by market makers and does not
impose any heightened quoting standards on market makers in return
for its use. See also MIAX Options Rule 612 and Interpretations and
Policies .02 to MIAX Options Rule 612.
---------------------------------------------------------------------------
[[Page 45878]]
Only market makers are subject to continuous quoting requirements,
and they take on considerable financial risk when they quote large
numbers of series simultaneously.\267\ While the ORP will provide a
valuable protection to Market Makers, it is narrowly tailored to affect
quotes during an exceptionally small portion of the trading day. While
that effect occurs at important points when options prices are in
transition and orders from high frequency traders may attempt to take
quotes before they can be repriced, the ORP is ``off'' (i.e., not
cancelling or repricing a quote) over 99% of regular trading hours
where IEX will not cancel or reprice Market Maker quotes during that
time. In contrast, risk mitigation functionality and bulk cancel
functionality is not so narrowly tailored and can more frequently
result in cancelled quotes across all series in a class at any point
during trading hours based on non-transparent settings specific to each
individual market-maker using the functionality.\268\ Yet other
exchanges do not impose additional obligations on market makers in
return for the benefits conferred to market makers when they use their
risk mitigation and bulk cancel functionality.\269\
---------------------------------------------------------------------------
\267\ Unlike a single stock for which an equities market maker
maintains a single quote, an options market maker quoting options on
that same stock may be quoting dozens of series. When the market
moves, the stock market maker only has to update one quote, but the
options market maker needs to update many quotes and is exposed to
risk of loss across more products as a result.
\268\ For example, if a class has 100 series, a risk mitigation
functionality might cancel all 100 series in response to a
triggering event. In contrast, the ORP would only cancel those
series that are impacted, thus having no effect on the remaining
series in the class.
\269\ See, e.g., Securities Exchange Act Release No. 94072 (Jan.
26, 2022), 87 FR 5592 (Feb. 1, 2022) (SR-NYSEARCA-2021-47).
---------------------------------------------------------------------------
While the ORP will confer a direct benefit to Market Makers and not
other types of market participants that post orders on IEX Options,
that protection contributes to fair and orderly markets and the
protection of investors through increased competition and liquidity
provision by the primary source of options liquidity to the
market.\270\ Market Makers are continuously managing the risk
associated with their continuous quoting and thus are particularly
focused on very short term movements in prices and the dislocations
they can cause for derivatively-priced securities like options.\271\ As
the Exchange stated in the filing, options market makers must
``maintain hundreds (and sometimes thousands) of quotes on options for
an underlying security at any one time'' and sudden market moves in the
securities underlying their quoted options can leave them vulnerable to
latency arbitrage if they cannot adjust quotes quickly enough to
reflect the price changes of the underlying securities.\272\ This
potential for major losses resulting from latency arbitrage can cause
options market makers to be less willing to quote their best possible
price in the largest number of contracts they might otherwise display
and that aversion to loss and inability to compete with the most
technologically sophisticated firms can lead to market makers
decreasing the number of options classes that they quote or leaving the
business entirely.\273\ Because the options markets are quote-driven,
they are dependent on options market makers to set prices and provide
liquidity, and therefore it is crucial for options market quality to
encourage options market makers to continue to quote and provide
liquidity so that market participants, including retail investors, have
access to liquidity at favorable prices. Limiting the ORP to Market
Makers is commensurate with the risk uniquely undertaken by Market
Makers by the continuous quoting obligations that apply to the
multitude of series within each assigned class, which risk is not
present for other market participants when they only post one or a few
limit orders in specific series and are not required to provide
continuous quotes as are market makers. The protections afforded to
market makers through risk mitigation functionality, including the ORP,
are intended to incentivize market makers to quote with additional
depth at potentially improved prices, which directly benefits all
market participants when that liquidity is available to the market.
---------------------------------------------------------------------------
\270\ IEX states that ``Market makers play a central role in the
options market and account for over 99% of all open orders and
quotes.'' Amendment No. 3, supra note 8, at 26888.
\271\ See id. (stating that ``market makers typically manage
their financial exposure risks resulting from their continuous
quoting obligations in very short-term time frames, often measured
in micro-seconds'').
\272\ See id. at 26880.
\273\ Id.
---------------------------------------------------------------------------
Accordingly, the benefits provided to Market Makers by IEX's
proposal are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. Those benefits are focused and
not overbroad and are intended to specifically address the disincentive
to be a market maker that latency arbitrage can present to many firms.
Further, those benefits are commensurate with the benefits provided to
market makers by other risk mitigation functionality and is consistent
with prior precedent with other exchange options risk mitigation rules
that have not imposed additional requirements on market makers for
using risk mitigation functionality.\274\ The benefits provided to
Market Makers by IEX's proposal also do not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\275\
---------------------------------------------------------------------------
\274\ See supra note 266 and accompanying text.
\275\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
f. Intermarket Competition
Several commenters stated that the proposal would impose a burden
on competition between IEX Options and other options exchanges.\276\
One commenter stated that intra-day auctions on other options exchanges
would be unable to commence if there were a better displayed quote on
IEX that, due to the ORP, may be a stale quote or a quote that is
cancelled by the ORP in the interim.\277\ The commenter stated that
``[p]reventing other options markets from commencing auctions by
displaying liquidity that isn't firm or accessible creates an inter-
market burden on competition.'' \278\ Another commenter stated that
``the speed bump would incentivize market participants to interact with
IEX first before trading on other markets triggers IEX to fade its
existing quote.'' \279\ One commenter stated that ``the ORP mechanism
would also have significant implications for competing exchanges as
firms are forced to direct their orders to IEX Options when better
execution opportunities may in fact exist on other exchanges.'' \280\
---------------------------------------------------------------------------
\276\ See, e.g., Nasdaq Letter at 1; MEMX Letter at 3; Letter
from Jaime Klima, General Counsel, New York Stock Exchange, dated
June 17, 2025 (``NYSE American and NYSE Arca Letter''), at 2.
\277\ See Nasdaq Letter at 1, 6. The commenter also objected to
a representation by IEX that most of its proposed rulebook is
``substantially similar'' to the rules of other options exchanges
because those other options exchanges do not have an access delay on
incoming messages, so the commenter recommended that IEX analyze the
impact of the delay on these rules and on other options exchanges.
See id. at 3. The access delay affects the System as discussed
herein, but does not affect other rules like membership rules,
member conduct rules, or listing rules.
\278\ Nasdaq Letter at 6.
\279\ NYSE American and NYSE Arca Letter at 2.
\280\ MEMX Letter at 3.
---------------------------------------------------------------------------
Responding to the comments about burdens on competition with other
exchanges, IEX stated that the ORP ``promotes fair competition among
trading venues, consistent with the Commission's prior approvals, by
allowing an exchange to innovate to provide a specific solution to a
specific problem.'' \281\ IEX also stated that IEX
[[Page 45879]]
Options' quotes would be accessible and reiterated that the point of
the ORP is to reduce stale quotes so that IEX quotes would be just as
current as quotes on other exchanges.\282\ Additionally, IEX stated
that the ORP is intended to ``counteract orders sent as part of latency
arbitrage strategies and is designed not to impact other orders seeking
to access market maker quotes.'' \283\ Finally, IEX stated that
``participants can easily account for the speed bump in routing to
IEX's equities market'' so ``there is no reason to expect they would
have any greater difficulty accounting for the identical speed bump
when routing to the IEX Options market.'' \284\
---------------------------------------------------------------------------
\281\ IEX Response I at 7.
\282\ See id. at 21.
\283\ Id.
\284\ Id. at 16. IEX added that ``[t]his is especially so
because options participants are already accustomed to the potential
for mass cancelation of market maker quotes in circumstances that
are not related to observable differences in equities prices.'' Id.
---------------------------------------------------------------------------
The proposal, including the ORP and the access delay that
effectuates it, does not impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Act.\285\
Consistent with the Commission's approval of IEX's exchange
registration, the proposed access delay for options ``is designed to
ensure that [quotes] on IEX operate as designed and as reflected in
IEX's rules'' and that Market Makers on IEX can better achieve their
goals when their quotes operate efficiently.\286\ Similarly, options
market participants will not necessarily need to interact with IEX
first to avoid triggering the ORP (which reacts to changes in the
underlying security). As with the IEX equities market, order routing
that seeks ``to achieve simultaneous arrival and executions across
multiple exchanges in a coordinated manner'' does not require a broker-
dealer to preference any particular exchange over another because
broker-dealers can and generally do account for geographic differences
when routing and these ``routing adjustments do not constitute
`preferencing' of IEX because the adjustments do not mean a market
participant has to arrive and trade first on IEX.'' \287\
---------------------------------------------------------------------------
\285\ 15 U.S.C. 78f(b)(8).
\286\ Securities Exchange Act Release No. 78101 (June 17, 2016),
81 FR 41142, 41157 (June 23, 2016) (File No. 10-222). As the
Commission explained when it granted IEX's exchange registration, to
ensure that certain order types that are designed to reprice operate
as designed and as reflected in IEX's rules, IEX slows down incoming
order messages by 350 microseconds to allow IEX to take in current
market data and update certain orders based on that data when the
NBBO changes to ensure that those orders accurately reflect the
current market as they are designed to do. See id. at 41157.
\287\ D-Limit Approval Order, supra note 127, at 54441.
---------------------------------------------------------------------------
Further, the Exchange's proposal does not impede the ability of
other exchanges to compete through functionality, fees, or otherwise.
As occurred following the adoption of the access delay on the IEX
equities market, at least one other exchange adopted its own access
delay.\288\ IEX's equities exchange market share is around 3%,
indicating that other exchanges are successfully competing for
volume.\289\ Given the identical access delay on both the IEX equities
and options markets, and the similar functionality that utilizes it to
cancel or update quotes as a protection against latency arbitrage on
both markets, the ORP and options access delay will not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act as this same structure has not done so in the
case of the IEX equities market.
---------------------------------------------------------------------------
\288\ See, e.g., Securities Exchange Act Release No. 80700 (May
16, 2017), 82 FR 23381 (May 22, 2017) (SR-NYSEMKT-2017-05) (order
approving a 350-microsecond access delay for NYSE MKT).
\289\ Current market share statistics are available at <a href="https://www.cboe.com/us/equities/market_share/">https://www.cboe.com/us/equities/market_share/</a>.
---------------------------------------------------------------------------
In denying a petition challenging the Commission's approval of
IEX's D-Limit order type for equities, the United States Court of
Appeals for the District of Columbia Circuit summarized the core issue
as whether the Commission ``may allow IEX to innovate . . . in a way
that offers new opportunities to long-term investors.'' \290\ IEX
Options presents that same core issue. The ORP and access delay that
effectuates it are narrowly tailored to address latency arbitrage when
options reprice based on changes in the underlying stock price. The ORP
will only infrequently cancel or reprice quotes so market participants
not engaged in latency arbitrage will rarely be impacted by it.\291\
All market participants may benefit if IEX Options attracts more firms
to become Options Market Makers and provide more liquidity, potentially
at improved prices, and investors will have fair and efficient access
to those quotes.\292\ Because IEX Options presents the same issues that
the Commission and the United States Court of Appeals for the District
of Columbia Circuit addressed in the IEX D-Limit matter, and because
the ORP and access delay for IEX Options addresses those same issues in
the same narrowly tailored manner, there is substantial evidence to
find that IEX's proposal does not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\290\ See Citadel Sec. LLC v. SEC, 45 F.4th 27, 458 U.S. App. DC
268 (D.C. Cir. 2022), available at <a href="https://media.cadc.uscourts.gov/opinions/docs/2022/07/20-1424-1956972.pdf">https://media.cadc.uscourts.gov/opinions/docs/2022/07/20-1424-1956972.pdf</a>.
\291\ See infra section III.B.1.i (discussing IEX's data
analysis on the expected frequency with which it estimates that the
ORP would impact a quote on IEX).
\292\ See supra note 190 and accompanying text.
---------------------------------------------------------------------------
g. Length of the Delay
One commenter objected to the length of the proposed access delay,
explaining that, although the Commission approved a 350-microsecond
delay for IEX's equities market in 2016, applying the same length delay
today for options is inappropriate, unfairly discriminatory, and
inconsistent with the Act, because the markets operate faster now due
to changes in market technology and options market structure.\293\
---------------------------------------------------------------------------
\293\ See Nasdaq Letter at 2, 7.
---------------------------------------------------------------------------
Other commenters stated that a 350 microsecond delay is still
presently de minimis and within or less than other technical and
geographic latencies experienced today.\294\ One commenter stated that
``geographical latencies have not changed. . . .'' \295\ That commenter
also stated that `` `jitter' or random noise in exchange matching
engines and market data technology routinely exceeds the duration of
the proposed speedbump'' and mentioned as an example ``the difference
between reported OPRA 10th and 99th percentile latencies has ranged
from hundreds of microseconds to over 2,870 microseconds since 2021.''
\296\ The commenter also stated that ``the OPRA NBBO is already stale
by more than 350 microseconds'' and that ``the aggregation,
calculation, and round-trip transmission times to (for example)
Nasdaq's data center'' are approximately 500 microseconds.\297\
---------------------------------------------------------------------------
\294\ See, e.g., HAP Trading Letter at 1; CTC Letter at 9.
\295\ CTC Letter at 9.
\296\ Id. at 8.
\297\ Id. at 5-6.
---------------------------------------------------------------------------
Another commenter stated that it ``observe[s] similar delays and
quote inaccessibility resulting from the current market structure.''
\298\ The commenter provided an example of a quote from an exchange
located in Carteret disseminating through OPRA with ``a total latency
of about 525 microseconds (albeit this is often exceeded significantly
in practice).'' \299\
[[Page 45880]]
The commenter further stated that its ``observations suggest retail
brokers take well beyond 100 times more time than the speedbump to
process and route a retail order instruction.'' \300\ Another commenter
stated that ``[r]etail investors simply do not trade within the
microsecond timeframes during which IEX's protections operate.'' \301\
One commenter stated that ``[t]his 0.000350 second window is big enough
to prevent predatory latency arbitrage, and yet small enough to
minimise the chance that a real end user's order arrives at the
exchange within the same window'' \302\ and that ``[t]he latency
overhead of an end user without direct market access sending their
order via a broker's systems is usually measured in milliseconds, a few
orders of magnitude larger than the 350 microsecond de minimis delay .
. . the extra de minimis delay should have no impact on any real end
user's order, but it will have a big impact on the market-maker's
ability to provide liquidity.'' \303\
---------------------------------------------------------------------------
\298\ HAP Trading Letter at 1.
\299\ Id. at 1. The commenter stated that ``[f]aster paths such
as microwaves and lasers are generally not used to transmit option
data by order handlers such as wholesalers due to their expense and
the vast bandwidth required for options data relative to equities or
futures data.'' Id.
\300\ Id. at 3.
\301\ Verret Letter at 3.
\302\ Maven Letter at 3.
\303\ Id.
---------------------------------------------------------------------------
Responding to the comment about the length of the access delay, IEX
stated that ``[c]ertain tools--microwave technology, for example--in
combination with the fastest proprietary data, can reduce transmission
and reaction time, but they can't overcome the laws of physics,'' and
that such ``tools have long been available to some but are not
available to many participants.'' \304\ Further, IEX stated that
participants have no trouble accounting for the same speed bump in
IEX's equities market, so they should not have any problems accounting
for it when routing to IEX Options, ``especially so because options
participants are already accustomed to the potential for mass
cancelation of market maker quotes in circumstances that are not
related to observable differences in equities prices.'' \305\ IEX
stated that the length of the delay 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.'' \306\ IEX also stated that the latency between and among
the data centers located in New Jersey is similar.\307\
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\304\ IEX Response I at 16.
\305\ Id.
\306\ See Amendment No. 3, supra note 8, at 26885 (internal
cites omitted). While the Commission's interpretation of ``automated
quotations'' does not concern options because that concept applies
only to equities, it nevertheless is instructive that the Commission
found a de minimis delay to not impair fair and efficient access to
an exchange's protected quotation. See Securities Exchange Act
Release No. 78102 (June 17, 2016), 81 FR 40785 (June 23, 2016) (File
No. S7-03-16).
\307\ IEX states that ``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.'' See Amendment No. 3, supra note 8, at 26886. See
also, e.g., Securities Exchange Act Release No. 78101 (June 17,
2016), 81 FR 41142 (June 23, 2016) (File No. 10-222), at n.270
(comparing the distance between NYSE's data center and Nasdaq's data
center). When it approved IEX's initial exchange registration, the
Commission stated that the latency to and from IEX would be
comparable to, or even less than, delays attributable to other
markets included in the NBBO, and cited a statement from IEX
referring to the geographic distance that an order had to travel
between one exchange's trading systems located in Chicago and its
data center in New Jersey. See id.
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The Commission has considered the comments stating that a 350-
microsecond access delay is unsuitable in the current trading
environment,\308\ as well as those comments that consider it to still
be de minimis.\309\ The commenters that supported the length of the
delay stated that it was within or shorter than delays currently
experienced by market participants as a result of exchange matching
engine ``noise'' and OPRA aggregation, calculation, and dissemination
latencies,\310\ as well as vastly shorter than the time it takes retail
brokers, retail investors, and market participants without direct
market access to transmit an order.\311\ The commenter that objected to
the length of the access delay stated that the delay ``is not within
geographic and technological latencies experienced today for options''
and stated that it has observed a ``50% improvement in end to end quote
message roundtrip time between 2016 and 2024 within its system'' and
linked to its study on transmission times between exchanges.\312\ The
Commission examined data showing OPRA's metrics from June 2025 which
stated that its average message latency was 36.9 microseconds, its 10th
percentile latency was 14 microseconds and its 99th percentile latency
was 479 microseconds.\313\ These latencies do not include the time to
transmit a quote from an exchange to OPRA for consolidation and back,
which, according to available public data, would take between
approximately 185 microseconds and 341 microseconds in one direction,
based on travel times between data centers used by exchanges and the
Mahwah data center used by OPRA: between Secaucus and Mahwah and
between Carteret and Mahwah, respectively.\314\ Using OPRA processing
times as a reference, which will be in addition to the time it takes
market participants to receive that OPRA market data, process it, make
a trading decision, and then route an order to an exchange, the
proposed 350-microsecond access delay appears to be within or less than
geographic and technological latencies that options market participants
experience today, consistent with the Commission's approval of the IEX
exchange in 2016 in which the Commission explained that IEX's speed
bump is ``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.'' \315\ Though the commenter observed a 50% improvement in
roundtrip message time within its system, additional latencies also
exist and need to be accounted for when trading, including the time
associated with the aggregation and dissemination of market data and
order processing times. Because of the vastly larger number of classes
and series for options compared to equities, faster communication
infrastructure may be impractical and prohibitively expensive
[[Page 45881]]
for wider use. Accordingly, the latencies experienced as a result of
the geographic distance between data centers, between brokers and
customers, and within consolidated options market data processing and
the technology that handles voluminous amounts of options market data
still exceed for the average market participant the proposed 350
microsecond delay such that IEX's proposed options delay will be de
minimis and will not impair fair and efficient access to options quotes
on IEX.
---------------------------------------------------------------------------
\308\ See Nasdaq Letter at 7.
\309\ See, e.g., HAP Trading Letter at 1; CTC Letter at 9; Maven
Letter at 3. See also IEX Response I at 16.
\310\ See CTC Letter at 8, 9; HAP Trading Letter at 1.
\311\ See HAP Trading Letter at 3; Verret Letter at 3; Maven
Letter at 3.
\312\ See Nasdaq Letter at 7. The commenter cited to its study
that looked at fiber optic cables versus radio wave communications
and the time for messages to travel between exchanges (e.g.,
advertised 320 microseconds between Nasdaq and NYSE and 150
microseconds between Nasdaq and IEX). That study stated ``[i]n the
real world, it also takes time to process and retransmit data--so
actual times are likely a little slower.'' See Nasdaq, How Trades
Speed Between Venues, available at: <a href="https://www.nasdaq.com/articles/how-trades-speed-between-venues">https://www.nasdaq.com/articles/how-trades-speed-between-venues</a>.
\313\ See Key Operating Metrics of U.S. Options Securities
Information Processor (OPRA SIP), available at <a href="https://cdn.opraplan.com/documents/OPRA_SIP_Metrics.pdf">https://cdn.opraplan.com/documents/OPRA_SIP_Metrics.pdf</a> (last accessed Aug.
19, 2025).
\314\ See ICE Global Network Factsheet, available at <a href="https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf">https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf</a> (last
accessed Aug. 19, 2025), at 2. A separate site provided similar
transmission latencies using fiber optic cable. See Nasdaq, How
Trades Speed Between Venues, available at: <a href="https://www.nasdaq.com/articles/how-trades-speed-between-venues">https://www.nasdaq.com/articles/how-trades-speed-between-venues</a> (last accessed Aug. 19,
2025). One commenter stated that options order handlers tend to not
use wireless (microwave or laser) connectivity to transmit option
data due to the expense and the required bandwidth for options data.
See supra note 299.
\315\ See Securities Exchange Act Release No. 78101 (June 17,
2016), 81 FR 41142, 41161 (June 23, 2016).
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Further, one commenter stated that ``[i]t is not only the length of
the intentional delay that matters, but also what is permitted to
happen during the delay (i.e., IEX uses the latest market data to
determine, on behalf of its market makers, whether to remain firm or
cancel a displayed quote--in essence a `last look' mechanism).'' \316\
This is not a novel regulatory issue because the access delay proposed
for IEX Options is identical to the access delay currently in place for
IEX's equities marketplace, where IEX uses the delay to take in current
market data to inform whether to reprice or cancel D-Limit orders and
manage other types of midpoint orders.\317\ The access delay allows IEX
to give effect to the protections it offers against latency arbitrage
without which those protections might be ineffective because IEX would
not have sufficient time to take in data, perform the necessary
calculations, and take the actions required by its rules before high-
speed traders are able to remove that liquidity.
---------------------------------------------------------------------------
\316\ Citadel Letter II at 3.
\317\ See, e.g., D-Limit Approval Order, supra note 127.
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h. Rule Change Required
Two commenters expressed concern that the proposal would allow IEX
the discretion to set and modify parameters in the ORP calculation
without the need to file proposed rule changes under Section 19 of the
Act.\318\ One commenter, noting that ``several key parameters used in
the ORP calculation are not provided in the filing,'' questioned
whether IEX knows how ORP will operate in practice given those missing
values and criticized how those parameters would be communicated in a
Trading Alert and not be subject to Commission review when
changed.\319\ Another commenter cautioned that the proposal would give
IEX control over ``parameters that could vastly amend the operation of
the ORP'' without requiring a proposed rule change filing.\320\
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\318\ See MEMX Letter at 5-6; Nasdaq Letter at 6.
\319\ See MEMX Letter at 5-6. See also id. at 6 (explaining that
``[t]his is akin to advertising tailored shirts with a disclaimer
that actual sizes will vary within a range between XS and XXL at the
discretion of the tailor'').
\320\ Nasdaq Letter at 6.
---------------------------------------------------------------------------
Responding to the comments about the need for proposed rule change
filings to amend the rule, IEX amended its proposal in Amendment No. 3
to require it to submit a proposed rule change filing whenever it
proposes to change the Delta Bound Band, the Quote Instability
Threshold, and the frequency of the calculation of implied volatility
in the ORP formula. Accordingly, IEX has fully addressed the
commenters' concern by ensuring full and complete transparency in the
rules of IEX concerning those material terms of the ORP formula and
committing to follow the proposed rule change filing process under
Section 19 of the Act.\321\
---------------------------------------------------------------------------
\321\ 15 U.S.C. 78s.
---------------------------------------------------------------------------
i. Lack of Data
Several commenters criticized IEX for not providing sufficient data
in its initial filing to support its proposal.\322\ One commenter
stated that IEX should provide more data to show how often the ORP
would be expected to cancel or change quotes \323\ such as the ``volume
and depth'' of Market Maker quotes cancelled or repriced and the
``impact on fill rates as a result of those cancellations or
repricings.'' \324\ Another commenter stated that ``IEX does not
provide data demonstrating that the delay will not cause market
participants to miss favorable pricing opportunities'' or otherwise
assess the impact on market participants and questioned whether IEX
``has the ability to incorporate real-time, intra-day events and news
that drive the theoretical implied volatility surfaces of all
optionable underlying instruments.'' \325\ One commenter stated that
``IEX's filing would introduce a novel exchange with no data whatsoever
that would allow the Commission to evaluate whether its purportedly
firm quotations would in fact be firm.'' \326\
---------------------------------------------------------------------------
\322\ See, e.g., SIFMA Letter at 2; NYSE American and NYSE Arca
Letter at 1; MEMX Letter at 2; IMC Schwab Citadel Letter I at 3.
\323\ SIFMA Letter at 2-3.
\324\ Id. at 3.
\325\ NYSE American and NYSE Arca Letter at 1, 3.
\326\ MEMX Letter at 2.
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In Amendment No. 3, IEX provided ``data analysis estimating that
the ORP would only have a de minimis impact on market maker quotes on
IEX thus evidencing that its benefit is designed to be narrowly
tailored to protect against latency arbitrage strategies.'' \327\
Specifically, ``IEX conducted data analysis on the expected frequency
with which it estimates that the ORP would impact a quote on IEX''
using OPRA data ``for all series of over a thousand options classes of
varying levels of volume and activity for various dates in February
2025.'' \328\ In selecting dates for its analysis, IEX chose: ``the day
with the highest volume, the day with the lowest volume, the day with
the highest CBOE Volatility Index (`VIX') level, the two days with the
largest interday change in VIX, and Fridays with monthly and non-
monthly settlements.'' \329\ Significantly, IEX set the ORP parameters
\330\ for its analysis at their most aggressive to assume facts that
would trigger the ORP as often as possible, which resulted in the
Exchange estimating the maximum possible impact of the ORP, and which,
in a real world live environment, would have less of an effect because
the parameters would not be as extreme.\331\
---------------------------------------------------------------------------
\327\ Amendment No. 3, supra note 8, at 26866.
\328\ Id. at 26889.
\329\ Id.
\330\ See supra notes 102-107 and accompanying text for a
discussion of the Quote Instability Threshold and the Delta Bound
Band.
\331\ See Amendment No. 3, supra note 8, at 26889. Specifically,
IEX ``set the Quote Instability Threshold to 0, the Delta Bound Band
to its full range of 0-1, and assumed ORP was enabled across all
options classes.'' Id. In addition, ``the analysis assumed that: (1)
IEX's displayed quote in the options classes assessed was at the
NBBO 100% of the time, (2) IEX's displayed quote in such options
classes was composed exclusively of Market Maker quotes, and (3) all
of those Market Maker quotes were enabled to be subject to ORP.''
Id.
---------------------------------------------------------------------------
Based on this analysis, IEX ``estimates that the ORP would impact
IEX Market Maker quotes on average per series significantly less than
0.001% of the trading day during regular trading hours.'' \332\ For
Penny Interval Program classes (that quote in pennies instead of larger
increments) IEX estimated an impact of ``on average less than 0.01%''
and for classes not in the Penny Interval Program the estimate was
0.0005%.\333\ For ``the most active options class, the SPDR S&P 500 ETF
Trust (``SPY''), the ORP would impact an IEX Market Maker's quote for
less than 0.2% of the trading day.'' \334\ In light of these results,
IEX concluded that the ORP ``is designed to be nearly imperceptible to
all market participants who are not specifically seeking to engage in
latency arbitrage to execute against a market maker's quote at a stale
price, based on its speed-based advantage that enables the most
technologically low-latency view of market prices.'' \335\ In a
response to comments, IEX stated that ``[t]o further validate [its]
analysis,'' it
[[Page 45882]]
repeated that analysis for ``the last full week of July 2025 (July 21
through July 25), using the same parameters and assumptions used in the
earlier evaluation,'' which analysis ``confirmed the Exchange's
evaluation from February, as the July results were within all of the
previously stated values for each category outlined in the February
analysis.'' \336\
---------------------------------------------------------------------------
\332\ Id.
\333\ Id.
\334\ Id.
\335\ Id.
\336\ See IEX Response II at 10. IEX stated that ``no data of
any type has ever been required to justify the use of existing risk
controls.'' Id. The Exchange also stated that ``[i]n considering the
claim that retail or other investor orders will fail to trade with a
quote solely because the ORP has triggered, the relevant data and
analysis is the data and analysis we have provided. And it is the
same type of data and analysis the Commission and court used to
conclude that D-Limit quotes would be accessible by investors.'' Id.
---------------------------------------------------------------------------
Responding to comments about its ability to perform the ORP
calculations, IEX stated that ``IEX is not proposing to take over the
market maker's role or to take account of all the factors a market
maker may consider in performing it'' but rather has the limited
purpose to ``(i) use the specific elements specified in the ORP formula
to judge when option quote and underlying prices are fundamentally
misaligned; and (ii) when they are, to take specific actions specified
by the market maker.'' \337\
---------------------------------------------------------------------------
\337\ IEX Response I at 22.
---------------------------------------------------------------------------
The data contained in Amendment No. 3 is relevant and persuasive.
Time-based data is most relevant to analyze the ORP because it shows
the impact on investors of the ORP, which is a tool designed to target
latency arbitrage conditions that are infrequent. Volume of incoming
orders affected, fill rates, and the number of market maker quotes
repriced or cancelled would be misleading to evaluate the impact of a
risk protection mechanism that targets latency arbitrage because higher
impacted volume and lower fill rates would be evidence that a tool
designed to protect liquidity providers against latency arbitrage is
working exactly as intended. It would not provide evidence that firms
not engaged in latency arbitrage are impacted and unable to access
quotes on IEX during regular trading hours. The tool is reasonably
designed to target firms engaged in latency arbitrage. IEX's analysis
clearly shows that the ORP will not be overbroad in its application
and, as explained above, generally should not affect market
participants not engaged in latency arbitrage or adversely affect the
functioning of the options market but rather will 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.
C. Other Rules
IEX will list and trade options already listed on other options
exchanges.\338\ The Exchange has represented that it will join the OLPP
\339\ and will become an exchange member of OCC.\340\ IEX's listing
standards for options trading on IEX Options are substantively similar
to those utilized by other exchanges including MEMX Options.\341\ For
the same reasons the Commission provided in its order approving rules
governing MEMX Options, the Exchange's proposed listing standards are
designed to protect investors and the public interest and promote just
and equitable principles of trade.\342\
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\338\ See Amendment No. 3, supra note 8, at 26881.
\339\ See id.
\340\ See id. at 26872.
\341\ See id. at 26881.
\342\ See MEMX Options Order, supra note 133.
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Further, IEX proposes operational rules that are substantively
identical to the rules of other options exchanges, such as MEMX
Options, including rules applicable to exercise and deliveries.\343\
Those rules adopt the common set of options exchange requirements
applicable to exercise notices and applicable cut-off times for
submission of exercise-related notices, the assignment of exercise
notices, and delivery and payment requirements. For the same reasons
the Commission provided in its order approving MEMX Options, these
rules are 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 are not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.\344\
---------------------------------------------------------------------------
\343\ See proposed Chapter 24 (Exercises and Deliveries).
\344\ See MEMX Options Order, supra note 133.
---------------------------------------------------------------------------
Based on the foregoing, the proposed functionalities and features
of IEX Options' overall structure and trading operations are designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest, and are not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
D. Options Order Protection, Locked/Crossed Market Plan, and Outbound
Routing Risk Monitoring and Protection
The IEX Options rules are designed to comply with applicable
federal securities laws and regulations and the obligations of the
Options Order Protection and Locked/Crossed Market Plan. Specifically,
the rules are designed to ensure that an order is not executed at a
price that would trade through another options exchange. In this
regard, IEX Options will be required under Rule 608(c) of Regulation
NMS \345\ to comply with and enforce compliance by its Options Members
with the Options Order Protection and Locked/Crossed Market Plan once
it joins that plan, including the requirement to avoid trading through
better prices available on other markets. Any order designated by an
Options Member as routable will be routed by IEX in compliance with
applicable trade-through restrictions, and 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 in Rule
22.100(i) will be cancelled. Additionally, as discussed above, IEX
Options will route orders in options via IEX Services, the Outbound
Router of the Exchange, to routing brokers that are not affiliated with
the Exchange to other options exchanges.\346\ Furthermore, IEX Services
has, pursuant to Rule 15c3-5 under the Act,\347\ 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.\348\ 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.\349\ For the same reasons the Commission provided in
its order approving rules governing MEMX
[[Page 45883]]
Options, the Exchange's proposed order protection rules and outbound
routing rules are designed to promote just and equitable principles of
trade, to remove impediments to and perfect the mechanism of a free and
open market and a national market system, and, in general, protect
investors and the public interest.\350\
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\345\ See 17 CFR 242.608(c).
\346\ 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 Act. 15 U.S.C. 78s.
\347\ 17 CFR 240.15c3-5.
\348\ See proposed Rule 22.180(e).
\349\ IEX states that proposed Rule 22.180(e) is substantively
identical to MEMX Rule 21.9(f).
\350\ See MEMX Options Order, supra note 133.
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Before commencing operations, IEX represents that it will join the
Options Order Protection and Locked/Crossed Market Plan. To meet their
regulatory responsibilities under the Options Order Protection and
Locked/Crossed Market Plan, including the requirement to avoid trading
through better-priced
[…truncated; see source link]Indexed from Federal Register on September 23, 2025.
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