Notice2025-19353
Self-Regulatory Organizations; MX2 LLC; Order Granting Approval to a Proposed Rule Change To Adopt Rules To Govern the Trading of Options on the Exchange for a New Facility Called MX2 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
October 2, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 189 (Thursday, October 2, 2025)</title>
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[Federal Register Volume 90, Number 189 (Thursday, October 2, 2025)]
[Notices]
[Pages 47867-47880]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-19353]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104152; File No. SR-MX2-2025-01]
Self-Regulatory Organizations; MX2 LLC; Order Granting Approval
to a Proposed Rule Change To Adopt Rules To Govern the Trading of
Options on the Exchange for a New Facility Called MX2 Options
DATES: September 30, 2025.
I. Introduction
On June 18, 2025, MX2 LLC (``MX2'' 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
governing the trading of options on the Exchange for a new facility
called MX2 Options. The proposed rule change was published for comment
in the Federal Register on July 7, 2025.\3\ On August 20, 2025,
pursuant to Section 19(b)(2) of the Act,\4\ 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.\5\ The
Commission received no comments on the proposed
[[Page 47868]]
rule change. This order approves the proposed rule change.
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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. 103363 (July 1,
2025), 90 FR 29898 (July 7, 2025) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 103750 (Aug. 20,
2025), 90 FR 41448 (Aug. 25, 2025).
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II. Description of the Proposal
`The Exchange is proposing to adopt a series of rules in connection
with MX2 Options, a new facility of the Exchange that will operate an
electronic trading system to trade options (the ``System''). Much of
the proposed functionality for MX2 Options is substantially similar to
MEMX Options, and the Exchange proposes to adopt rules applicable to
MX2 Options that are substantively identical or substantially similar
to the approved rules of MEMX applicable to MEMX Options, with certain
differences described below.
MX2 Options Members
Pursuant to the proposed rules in Chapter 17 (Participation on MX2
Options), the Exchange will authorize any Exchange Member who meets
certain enumerated qualification requirements (any such Member, an
``Options Member'') and any Options Member's Sponsored Participants to
obtain access to, and transact business on, MX2 Options.
There will be two types of Options Members--Options Order Entry
Firms (``OEFs'') and Options Market Makers. OEFs will be those Options
Members representing orders as agent on MX2 Options or trading as
principal on MX2 Options. Options Market Makers will be eligible to
participate as Preferred Market Makers, Lead Market Makers, or Market
Makers.
To become an Options Market Maker, an Options Member is required to
register by filing a written application with the Exchange, and then
may select class appointments to make markets in those classes.
Pursuant to proposed Rule 22.2, the Exchange may appoint one Lead
Market Maker (or ``LMM'') per option class. Market Makers may select
from among any option issues traded on the Exchange to request
appointment as an LMM, subject to the approval of the Exchange. In
considering the approval of the appointment of an LMM in each security,
the Exchange will consider: the Market Maker's preference; the
financial resources available to the Market Maker; the Market Maker's
experience, expertise and past performance in making markets, including
the Market Maker's performance in other securities; the Market Maker's
operational capability; and the maintenance and enhancement of
competition among Market Makers in each security in which they are
registered, including pursuant to the performance standards set forth
in proposed Rule 22.2(i).
Pursuant to proposed Rule 22.2(c), an unlimited number of Market
Makers may be registered in each class unless the number of Market
Makers registered to make a market in a particular option class should
be limited whenever, in the Exchange's judgment, quotation system
capacity in an option class or classes is not sufficient to support
additional Market Makers in such class or classes. The Exchange will
not restrict access in any particular option class until such time as
the Exchange has submitted objective standards for restricting access
to the Commission for its review and approval.
Options Market Makers will be required to electronically engage in
a course of dealing reasonably calculated to contribute to the
maintenance of fair and orderly markets. Among other things, an Options
Market Maker would generally have to satisfy the following
responsibilities and duties during trading: (1) maintain a continuous
two-sided market in each of its appointed classes; (2) engage, to a
reasonable degree under the existing circumstances, in dealings for its
own accounts when there exists, or it is reasonably anticipated that
there will exist, a lack of price continuity, a temporary disparity
between the supply of (or demand for) a particular option contract, or
a temporary distortion of the price relationships between option
contracts of the same class; (3) compete with other Market Makers in
its appointed classes; (4) enter a size of at least one contract for
its best bid and its best offer; and (5) maintain minimum net capital
in accordance with Commission and Exchange rules. The Exchange proposes
to specify numerically the meaning of ``continuous'' with respect to
maintaining continuous, two-sided quotes. For purposes of Rule 22.6,
the Exchange will consider the continuous quoting requirement fulfilled
if a Market Maker enters continuous bids and offers in 60% of the
cumulative number of seconds, or such higher percentage as the Exchange
may announce in advance, for which that Options Market Maker's
appointed classes are open for trading, excluding any adjusted series,
any intraday add-on series on the day during which such series are
added for trading, any Quarterly Option Series, and any series with an
expiration of greater than 270 days.\6\ Pursuant to proposed Rule
22.5(c), substantial or continued failure by an Options Market Maker to
meet any of its obligations and duties will subject the Options Market
Maker to disciplinary action, suspension, or revocation of the Options
Market Maker's registration as such or its appointment in one or more
of its appointed options classes.
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\6\ The Exchange also proposes to adopt provisions that exclude
from the calculation of continuous quoting those times that an
Options Market Maker is experiencing a technical failure or
limitation, during a trading halt, suspension or pause in the
underlying security, or when the underlying security is in a limit
up-limit down state. See, e.g., proposed Rule 22.6(d)(2)-(3).
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Options Market Makers receive certain benefits for carrying out
their duties. For example, a Market Maker may be designated by the
Exchange as a Lead Market Maker or may have orders directed to it in
its capacity as a Preferred Market Maker, in each case receiving a
priority advantage over other non-Customer orders to the extent
applicable priority overlays have been implemented, as described below.
Thus, an Options Market Maker has a corresponding obligation to hold
itself out as willing to buy and sell options for its own account on a
regular or continuous basis to justify this favorable treatment. The
proposed continuous quoting requirement under proposed Rule 22.6(d) is
substantially identical to that of MEMX Options as well as other
options exchanges, including Cboe EDGX Options (``EDGX Options''),
Nasdaq PHLX LLC (``Phlx''), and Nasdaq ISE, LLC (``ISE'').\7\
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\7\ See MEMX Rule 22.6(d); EDGX Options Rule 22.6(d); Phlx Rule
1081(c) and ISE Rule 804(e).
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OEFs that transact business with Public Customers must be members
of FINRA. Pursuant to proposed Rule 17.2(g), (Requirements for Options
Participation, Options Principal), every Options Member will be
required to have at least one registered Options Principal who
satisfies the criteria of that rule, including the satisfaction of a
proper qualification examination. An OEF may only transact business
with Public Customers if such Options Member also is an Options Member
of another registered national securities exchange or association with
which the Exchange has entered into an agreement under Rule 17d-2 under
the Act \8\ pursuant to which such other exchange or association will
be the designated options examining authority for the OEF. The proposed
rules relating to qualification and participation on MX2 Options as an
Options Member (including as an OEF and an Options Market Maker) are
substantively identical to the relevant rules of MEMX Options.
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\8\ 17 CFR 240.17d-2 .
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As provided in proposed Rule 16.2, existing Exchange Rules
applicable to the MX2 equities market contained in
[[Page 47869]]
Chapters 1 through 15 of the Exchange Rules will apply to Options
Members unless a specific Exchange Rule applicable to the MX2 Options
market (proposed Chapters 16 through 29 of the Exchange Rules) governs
or unless the context otherwise requires. Options Members can therefore
provide sponsored access to the MX2 Options Exchange to a non-Member
(i.e., a Sponsored Participant) pursuant to Rule 11.3 of the Exchange
Rules.
Definitions
The Exchange proposes to define a series of terms under proposed
Rule 16.1 (Definitions), which are to be used in proposed Chapters 16
to 29 relating to the trading of options contracts on the Exchange.
Each of the terms defined in proposed Rule 16.1 is identical to
definitions included in MEMX Rule 16.1.\9\
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\9\ See Notice, supra note 3, at 29900-02.
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Execution System
MX2 Options will closely resemble the Exchange's affiliate, MEMX
Options, but will differ in that MX2 Options will maintain a pro rata
allocation model with execution priority dependent on the capacity of
an order (e.g., Customer or non-Customer) as well as status as a Lead
Market Maker or Preferred Market Maker, as applicable.\10\
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\10\ The proposed market structure for MX2 Options is similar to
other options exchanges such as EDGX Options, NYSE American Options
(``NYSE American'') and the MIAX Options Exchange (``MIAX'').
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All trading interest entered into the System will be automatically
executable. Orders entered into the System will be displayed on an
anonymous basis. However, options trades will not be anonymous through
settlement. Accordingly, as set forth in proposed Rule 21.10,
aggregated and individual transaction reports produced by the System
will indicate the details of a User's transactions, including the
contra party's executing firm ID (``EFID''), capacity, and clearing
firm account number.\11\ The Exchange will become an exchange member of
the Options Clearing Corporation (``OCC''). The System will be linked
to OCC for the Exchange to transmit locked-in trades for clearance and
settlement.
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\11\ The Exchange will reveal a User's identity: when a
registered clearing agency ceases to act for a participant, or the
User's clearing firm, and the registered clearing agency determines
not to guarantee the settlement of the User's trades; and for
regulatory purposes or to comply with an order of an arbitrator or
court. See proposed Rule 21.10. The Exchange notes that proposed
Rule 21.10 is identical to MEMX Rule 21.10.
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Hours of Operation. Proposed Rule 21.2 states that MX2 Options
System will begin accepting orders after 9:30 a.m. Eastern Time
pursuant to the market opening procedures described in proposed Rule
21.7.\12\ The System will be open until 4:00 p.m. Eastern Time except
that option contracts on Fund Shares, as defined in proposed Rule
19.3(i), option contracts on exchange-traded notes including Index-
Linked Securities, as defined in proposed Rule 19.3(l), and option
contracts on broad-based indexes, as defined in proposed Rule 29.1(j),
will close as of 4:15 p.m. Eastern Time. The proposed hours of
operation on MX2 Options are the same as on MEMX Options.
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\12\ Specifically, proposed Rule 21.7(a) states that the System
will open options, other than index options, for trading after the
System's observation after 9:30 a.m. Eastern Time of both: the first
transaction on the primary listing market in the security underlying
the option, and the Limit Up-Limit Down price bands applicable to
the security underlying the option as disseminated by the applicable
Securities Information Processor (``SIP''). With respect to index
options, the System will open for trading after a time period (which
the Exchange determines for all classes) following the System's
observation after 9:30 a.m. Eastern Time of the first disseminated
index value for the index underlying an index option.
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Units of Trading. As stated in proposed Rule 21.3, the unit of
trading in each series of options traded on MX2 Options will be the
unit of trading established for that series by the OCC pursuant to the
rules of the OCC and the agreements of the Exchange with the OCC. The
proposed determination of the unit of trading for a series of options
traded on MX2 Options is the same as on MEMX Options pursuant to MEMX
Rule 21.3.
Minimum Quotation and Trading Increments. As stated in proposed
Rule 21.5(a), the Exchange is proposing to apply the following
quotation increments: (1) if the options series is trading at less than
$3.00, five (5) cents; (2) if the options series is trading at $3.00 or
higher, ten (10) cents; and (3) if the options series is trading
pursuant to the Penny Interval Program one (1) cent if the options
series is trading at less than $3.00, five (5) cents if the options
series is trading at $3.00 or higher, unless for QQQ, SPY, or IWM where
the minimum quoting increment will be one (1) cent for all series. In
addition, as stated in proposed Rule 21.5(b), the Exchange is proposing
that the minimum trading increment for options contracts traded on MX2
Options will be one (1) cent for all series \13\ Such proposed minimum
quotation and trading increments are the same as on MEMX Options
pursuant to MEMX Rules 21.5(a), (b) and (c).
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\13\ The Exchange also proposes to offer trading of Mini
Options, and that the minimum trading increment for Mini Options
will be the same as the minimum trading increment permitted for
standard options on the same underlying security. See proposed Rule
21.5(c).
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Penny Interval Program. As set forth in proposed Rule 21.5(d), the
Exchange is proposing to adopt a Penny Interval Program that is
substantially similar to the penny programs of other exchanges,
including MEMX Options, which includes minimum quoting requirements for
option classes listed under the Penny Interval Program. However,
eligibility for inclusion in the Penny Interval Program will be limited
to those classes already operating under penny programs of other
options exchanges at the time MX2 Options is launched. The list of
option classes included in the Penny Interval Program will be announced
by the Exchange via circular distributed to Options Members and
published by the Exchange on its website.
Order Types and Handling Instructions. The System will make
available to Users two Order Types (as defined in proposed Rule
21.1(d))--Limit Orders and Market Orders--as well as various other
instructions and modifiers that can be appended to such orders. The
characteristics and functionality of each Order Type is substantially
similar to what is currently approved for use on MEMX Equities, MEMX
Options, and on other options exchanges, including EDGX Options, except
where described in the Notice. The Exchange notes that each of the
proposed rules regarding the order types and order type instructions
and modifiers is substantively identical to the applicable rule for a
corresponding order type or order type instruction or modifier offered
by MEMX Options with the exception of the proposed addition of Reserve
Orders, which are not currently offered on MEMX Options.
Reserve orders are limit orders that have both a portion of the
quantity displayed (``Display Quantity'') and a reserve portion of the
quantity (``Reserve Quantity'') not displayed. Both the Display
Quantity and Reserve Quantity of the Reserve Order are available for
potential execution against incoming orders. If the Display Quantity of
a Reserve Order is fully executed, the System will, in accordance with
the User's instruction, replenish the Display Quantity from the Reserve
Quantity using either Random Replenishment or Fixed Replenishment, as
directed by the User. Under either instruction, any order with a
Reserve Quantity will be handled as a new order by the System and a new
order identification number will be created each time a displayed
quantity is replenished. The Exchange will obfuscate the unique order
identification number on its data feeds
[[Page 47870]]
for replenishment of an order with Reserve Quantity. If the remainder
of an order is less than the replenishment amount, the Exchange will
display the entire remainder of the order. A User must instruct the
Exchange as to the quantity of the order to be initially displayed by
the System (``Max Floor'') when entering an order with a Reserve
Quantity, which is also used to determine the replenishment amount, as
set forth below. Users may not designate bulk messages as Reserve
Orders.
With respect to the replenishment instructions, if a User
designates Random Replenishment, the replenishment quantities for the
order are randomly determined by the System within a replenishment
range established by the user, (i.e. the range will be between the Max
floor minus the replenishment value selected by the User and the Max
Floor plus the replenishment value established by the User. Further, a
User must select whether the Random Replenishment be immediate or to
have the time interval of such replenishment randomly set by the
Exchange. If the User selects a random time interval, the System will
randomly replenish the User's displayed replenishment quantity at
different time intervals ranging up to one (1) millisecond following
each execution that triggers replenishment. The nondisplayed portion of
an order subject to Random Replenishment will remain fully executable
prior to the replenishment of a User's displayed quantity.
If the User selects Fixed Replenishment, the System will replenish
the Display Quantity of the order to the Max Floor designated by the
User. As noted above, the Exchange does not currently offer Reserve
Orders on MEMX Options, however, the definition and functionality of
Reserve Orders as proposed in MX2 Rule 21.1(e)(4) are substantively
identical to that in MX2 Rule 11.6(k), as well as MEMX Rule 11.6(k), as
Reserve Orders are provided on MEMX Equities. According to the
Exchange, although Reserve Orders are not currently available on MEMX
Options, they are available on multiple competing options
exchanges,\14\ and Reserve orders operate in the same manner on those
exchanges, the only difference being that the Exchange offers the
random time interval functionality as an option if Random Replenishment
is selected.\15\
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\14\ See, e.g., EDGX Options Rule 21.1(d)(1) and Nasdaq GEMX
Options 3, Section 7(g).
\15\ The random time interval functionality is currently offered
on MEMX under Rule 11.6(k) and MX2 under Rule 11.6(k).
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Time-in-Force Designations. Users may designate their orders to
remain in force and available for display and/or potential execution
for varying periods of time. Unless cancelled earlier, once these time
periods expire, the order (or the unexecuted portion thereof) is
returned to the entering party. A Time-in-Force applied to a bulk
message applies to each bid and offer within that bulk message. Unless
otherwise specified in the Exchange Rules or the context indicates
otherwise, the Exchange determines which of the following Times-in-
Force are available on a class or system basis. The Time-in-Force
designations available on MX2 Options are described in proposed Rule
21.1(g) and include Immediate or Cancel (``IOC'') or Day. Each of the
proposed Time-in-Force designations available on MX2 Options is
identical to the same Time-in-Force designation available on MEMX
Options.
Member Match Trade Prevention Modifiers. As with MEMX Options, the
Exchange will allow Users to use certain Match Trade Prevention
(``MTP'') modifiers, which are described in proposed Rule 21.1(h). Any
incoming order designated with an MTP modifier will be prevented from
executing against a resting opposite side order also designated with an
MTP modifier and originating from the same EFID, Exchange Member
identifier, trading group identifier, or Exchange Sponsored Participant
identifier. The Exchange will offer the following MTP modifiers: MTP
Cancel Newest, described in proposed Rule 21.1(h)(1); MTP Cancel
Oldest, described in proposed Rule 21.1(h)(2); and MTP Cancel Both,
described in proposed Rule 21.1(h)(3).
Re-Pricing Mechanism. The Exchange, like MEMX Options, proposes to
offer a re-pricing mechanism to Users to comply with the order
protection and trade through restrictions of the Options Order
Protection and Locked/Crossed Market Plan. This re-pricing mechanism,
described in proposed Rule 21.1(i), is referred to by the Exchange as
Price Adjust and is identical to the Price Adjust mechanism offered by
MEMX Options pursuant to MEMX Rule 21.1(i).
EFIDs. As proposed in Rule 21.1(j), the term ``EFIDs'' means
Executing Firm IDs and refers to what the System uses to identify the
User and the clearing number for the execution of orders and quotes
submitted to the System with that EFID. A User may obtain one or more
EFIDs from the Exchange (in a form and manner determined by the
Exchange). The Exchange assigns an EFID to its Users. Each EFID
corresponds to a single User and a single clearing number of a Clearing
Member with the Clearing Corporation. A User may obtain multiple EFIDs,
which may be for the same or different clearing numbers. A User is able
(in a form and manner determined by the Exchange) to designate which of
its EFIDs may be used for each of its ports. If a User submits an order
or quote through a port with an EFID not enabled for that port, the
System cancels or rejects the order or quote. The Exchange notes that
its proposed Rule 21.1(j) is identical to MEMX Rule 21.1(j).
Ports and Bulk Messages. Proposed Rule 21.1(k) defines two types of
ports: (1) a ``physical port,'' which provides a physical connection to
the System and may provide access to multiple logical ports; and (2) a
``logical port'' or ``application session,'' which provides Users with
the ability within the System to accomplish a specific function through
a connection, such as order entry, data receipt, or access to
information. The Exchange notes that each of the proposed types of
ports available on MX2 Options is identical to the same types of ports
on MEMX Options. The Exchange also proposes to offer bulk message
functionality through the same logical ports as Users submit other
messages to the Exchange, as MEMX Options does. Finally, the Exchange
proposes to adopt the same bulk message functionality as is offered by
MEMX Options. The term ``bulk message'' is proposed to mean a bid or
offer included in a single electronic message a User submits with a
Market Maker Capacity to the Exchange in which the User may enter,
modify, or cancel up to an Exchange-specified number of bids and offers
(which number the Exchange will announce via Exchange notice or
publicly available technical specifications). The System handles a bulk
message in the same manner as it handles an order or quote, unless the
Exchange Rules specify otherwise. Users may submit bulk messages
through a logical port, subject to the following: bulk messages must
contain a Time-in-Force of Day or IOC; a Market Maker with an
appointment in a class must designate a bulk message for that class as
Post Only or Book Only, and a non-appointed Market Maker must designate
a bulk message for that class as Post Only; the System cancels or
rejects a Post Only bulk message bid (offer) with a price that locks or
crosses the Exchange best offer (bid) or ABO (ABB); the System executes
a Book Only bulk message bid (offer) that locks or crosses the ABO
(ABB) against offers (bids) resting in the Book at prices the same as
or better than the ABO (ABB)
[[Page 47871]]
and then cancels the unexecuted portion of that bid (offer).
Cancel Back. Users can use a ``Cancel Back'' instruction on an
order (including bulk messages) to make the order not subject to the
Price Adjust process pursuant to proposed Rule 21.1(i). The System
cancels or rejects an order with a Cancel Back instruction (immediately
at the time the System receives the order or upon return to the System
after being routed away) if displaying the order on the Book would
create a violation of proposed Rule 27.3, or if the order cannot
otherwise be executed or displayed in the Book at its limit price. The
System executes a Book Only--Cancel Back order against resting orders.
The proposed definition of Cancel Back in proposed Rule 21.1(m) is
identical to a Cancel Back Order defined in MEMX Rule 21.1(m).
Market Opening Procedures. As stated in proposed Rule 21.7, the
System will open options, other than index options, for trading after
the System's observation after 9:30 a.m. Eastern Time of both: (1) the
first transaction on the primary listing market in the security
underlying the option, and (2) the Limit Up-Limit Down price bands
applicable to the security underlying the option as disseminated by the
applicable Securities Information Processor (``SIP''). With respect to
index options, the System will open for trading after a time period
(which the Exchange determines for all classes) following the System's
observation after 9:30 a.m. Eastern Time of the first disseminated
index value for the index underlying an index option. Because the
Exchange does not propose to adopt an opening cross or similar opening
process, the opening trade that occurs on the Exchange will be a trade
in the ordinary course of dealings on the Exchange. Accordingly, the
System will ensure that the opening trade in an options series will not
trade through a Protected Quotation at another options exchange,
consistent with the general standard regarding trade throughs
articulated in proposed Rule 21.6(e). The proposed market opening
procedures are substantively identical to the market opening procedures
for MEMX Options. Additionally, the Exchange proposes under Rule
21.7(c) that it may delay the commencement of trading in any class of
options in the interests of a fair and orderly market. As stated in
proposed Rule 21.6(c), orders received prior to the opening of the
System will be cancelled.
Routing. Pursuant to proposed Rule 21.9, the MX2 Options Exchange
will support orders that are designated to be routed to the National
Best Bid and Offer (``NBBO'') as well as orders that will execute only
within MX2 Options. Orders that are designated to execute at the NBBO
will be routed to other options markets to be executed when the
Exchange is not at the NBBO consistent with the Options Order
Protection and Locked/Crossed Market Plan. Subject to the exceptions
contained in proposed Rule 27.2(b), (Order Protection, Exceptions to
Trade-Through Liability), the System will ensure that an order will not
be executed at a price that trades through another options exchange. An
order that is designated by an Options Member as routable will be
routed in compliance with applicable trade-through restrictions. Any
order entered with a price that would lock or cross a Protected
Quotation that is not eligible for either routing or the price adjust
process as defined in proposed Rule 21.1(i) will be cancelled. Bulk
messages are not eligible for routing. These rules related to routing
are substantively identical to those of MEMX Options.
Pursuant to proposed Rule 21.9(d), MX2 Options can route orders in
options via MEMX Execution Services LLC (``MEMX Execution Services''),
which serves as the Outbound Router of the Exchange, as defined in Rule
2.11. The function of the Outbound Router will be to route orders in
options listed and open for trading on MX2 Options to other options
exchanges pursuant to the proposed rules of MX2 Options solely on
behalf of MX2 Options. 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. Use of MEMX Execution
Services or Routing Services (as defined below) to route orders to
other market centers is optional. In the event the Exchange is not able
to provide order routing services through its affiliated broker-dealer,
the Exchange will route orders to other options exchanges in
conjunction with one or more routing brokers that are not affiliated
with the Exchange (``Routing Services'').\16\ Parties that do not
desire to use MX2 Execution Services or other Routing Services provided
by the Exchange must designate orders as not available for routing.\17\
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\16\ See proposed Rule 21.9(e).
\17\ See proposed Rule 21.9(d).
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In connection with the proposed rules regarding routing to away
options exchanges, proposed Rule 21.9(f) provides that MEMX Execution
Services has, pursuant to Rule 15c3-5 under the Act,\18\ implemented
certain tests designed to mitigate the financial and regulatory risks
associated with providing the Exchange's Users with access to such away
options exchanges. Pursuant to the policies and procedures developed by
MEMX Execution 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), MEMX Execution Services will
reject such orders prior to routing and/or seek to cancel any orders
that have been routed. This is consistent with the routing
implementation of other options exchanges, and the Exchange notes that
proposed Rule 21.9(f) is substantively identical to MEMX Rule 21.9(f).
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\18\ 17 CFR 240.15c3-5.
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Order Priority. Upon opening, trades on the Exchange will occur
when a buy order and a sell order match on the Exchange's order book.
The system will execute trading interest within the System in price
priority, meaning it will execute all trading interest at the best
price level within the System before executing trading interest at the
next best price. Pursuant to proposed Rule 21.8(c), after considering
price priority, all orders are matched according to pro-rata priority
according to size. In addition, Customer, Lead Market Maker, and
Preferred Market Maker priority overlays are available at the
Exchange's discretion on a class-by-class basis pursuant to proposed
Rule 21.8(d). The Exchange will issue a notice specifying which classes
of options are initially subject to these additional priority overlays
and will provide such Options Members with reasonable advance notice of
any changes to the application of such overlays.
Specifically, (i) the Customer Overlay provides Customers with
priority over all non-Customer interest at the same price, and if there
are two or more Customer orders for the same options series at the same
price, priority is afforded to the Customer orders in the sequence in
which they were received by the System; \19\ (ii) the Preferred Market
Maker overlay (which may only be in effect if the Customer Overlay is
also in effect and will only apply to any remaining balance after
Priority Customer Orders have been satisfied provides the Preferred
Market Maker with priority over other Market Makers for a certain
percentage of contracts allocated at the same price (60% or 40%
depending upon the number of other
[[Page 47872]]
Market Makers at the NBBO); \20\ and (iii) the Lead Market Maker
overlay (which may only be in effect if the Customer Overlay is also in
effect and will only apply to any remaining balance after Priority
Customer Orders have been satisfied) provides Lead Market Makers with
priority over other Market Makers for a certain percentage of contracts
allocated at the same price (60% or 40% depending upon the number of
other Market Makers at the NBBO) \21\ and for small size orders.\22\
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\19\ See proposed Rule 21.8(d)(1).
\20\ See proposed Rule 21.8(f)(1), which states: For each
incoming order, if the PMM has a priority quote at the NBBO, its
participation entitlement is equal to the greater of the proportion
of the total size at the best price represented by the size of its
quote, or sixty percent (60%) of the contracts to be allocated if
there is only one other Market Maker quotation or non-Customer order
at the NBBO and forty percent (40%) if there are two or more other
Market Maker quotes and/or non-Customer orders at the NBBO.
\21\ See proposed Rule 21.8(g)(1), which states: For each
incoming order, if the LMM has a priority quote at the NBBO, its
participation entitlement is equal to the greater of the proportion
of the total size at the best price represented by the size of its
quote, or sixty percent (60%) of the contracts to be allocated if
there is only one other Market Maker quotation or non-Customer order
at the NBBO and forty percent (40%) if there are two or more other
Market Maker quotes and/or non-Customer orders at the NBBO.
\22\ See proposed Rule 21.8(g)(2), which states: Small size
orders will be allocated in full to the LMM if the LMM has a
priority quote at the NBBO. The Exchange will review this provision
quarterly and will maintain the small order size at a level that
will not allow small size orders executed by LMMs to account for
more than 40% of the volume executed on the Exchange. Small size
orders are defined as incoming orders of five or fewer contracts.
---------------------------------------------------------------------------
After executions resulting from the Priority Overlays described
above, Orders and Quotes within the System for the accounts of non-
Customers, including Professional Customers, have next priority. If
there is more than one highest bid or more than one lowest offer in the
Consolidated Book for the account of a non-Customer, then such bids or
offers will be afforded priority on a ``size pro rata'' basis.\23\
---------------------------------------------------------------------------
\23\ See proposed Rule 21.8(e).
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In allocating the participation entitlements set forth in proposed
Rule 21.8(h) to the Preferred Market Maker and the Lead Market Maker,
the following will apply.\24\ In a class of options where both the Lead
Market Maker and the Preferred Market Maker participation entitlements
are in effect and an Options Member has directed an order to a
Preferred Market Maker: (A) if the Preferred Market Maker's priority
quote is at the NBBO, the Preferred Market Maker's participation
entitlement will supersede the Lead Market Maker's participation
entitlements for an order directed to such Preferred Market Maker; (B)
if the Preferred Market Maker's priority quote is not at the NBBO, the
Lead Market Maker's participation entitlement will apply to that order,
provided the Lead Market Maker's priority quote is at the NBBO; (C) if
an order is preferred to the Lead Market Maker (i.e. the Lead Market
Maker is also the Preferred Market Maker), the Lead Market Maker
receives the participation and/or small order entitlement, as
applicable, provided the Lead Market Maker/Preferred Market Maker's
priority quote is at the NBBO; and (D) neither the Preferred Market
Maker's nor the Lead Market Maker's priority quote is at the NBBO then
executed contracts will be allocated in accordance with the pro-rata
allocation methodology as described in paragraphs 21.8(c) and 21.8(e)
without regard to any participation entitlement. If an incoming order
has not been preferred to a Preferred Market Maker by an Options
Member, however, then the Lead Market Maker's participation entitlement
will apply to that order, provided the Primary Market Maker's priority
quote is at the NBBO.\25\
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\24\ See proposed Rule 21.8(h)(1).
\25\ See proposed Rule 21.8(h)(2).
---------------------------------------------------------------------------
As proposed and as noted above, the participation entitlements of
proposed Rule 21.8 will not be in effect unless the Customer Overlay is
also in effect and the participation entitlements will only apply to
any remaining balance after Customer orders have been satisfied.\26\
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\26\ See proposed Rule 21.8(h)(3).
---------------------------------------------------------------------------
Pursuant to proposed Rule 21.8(h)(4), neither the Lead Market Maker
nor the Preferred Market Maker may be allocated a total quantity
greater than the quantity they are quoting at the execution price. If
the Lead Market Maker's or the Preferred Market Maker's allocation of
an order pursuant to its participation entitlement is greater than its
pro-rata share of priority quotes at the best price at the time that
the participation entitlement is granted, neither the Lead Market Maker
nor the Preferred Market Maker will receive any further allocation of
that order.
In establishing the counterparties to a particular trade, the
participation entitlements will first be counted against the Lead
Market Maker's highest priority bids and offers or the Preferred Market
Maker's highest priority bids or offers.\27\
---------------------------------------------------------------------------
\27\ See proposed Rule 21.8(h)(5).
---------------------------------------------------------------------------
The proposed participation entitlements only apply to the
allocation of executions among competing Market Maker priority quotes
existing on the MX2 Options Book at the time the order is received by
the Exchange. No market participant is allocated any portion of an
execution unless it has an existing interest at the execution price.
Moreover, no market participant can execute a greater number of
contracts than is associated with its interest at a given price.
Accordingly, the Lead Market Maker and the Preferred Market Maker
participation entitlements contained in the proposed Rule are not
guarantees.\28\
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\28\ See proposed Rule 21.8(h)(6).
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The Exchange believes that proposed Rule 21.8 governing priority on
the Exchange is consistent with other options exchanges that have
similar market models, including EDGX Options and NYSE American.\29\
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\29\ See, e.g., EDGX Options Rule 21.8; NYSE American Rule
964NY.
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Data Feeds. The System will offer proprietary data feeds including
a depth of book quotation and execution feed, a top of book quotation
and executions information feed, a DROP feed that offers information
regarding the options trading activity of a specific User, and a
historical options data feed.\30\
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\30\ See proposed Rule 21.15(b)(1)-(4).
---------------------------------------------------------------------------
Risk Controls. The Exchange proposes to offer Users the ability to
establish certain risk control parameters and limits that are intended
to assist Users in managing their market risk. The proposed risk
controls are set forth in proposed Rules 21.16 and 21.17 and are
identical to those offered by MEMX Options pursuant to MEMX Rules 21.16
and 21.17.\31\ The proposed risk controls are designed to offer Users
protection from entering orders outside of certain size and price
parameters, as well as certain standard or Exchange-established
parameters based on order type and market conditions.
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\31\ See Securities Exchange Act Release No. 98730 (Oct. 12,
2023) 88 FR 71898 (Oct. 18, 2023) (SR-MEMX-2023-28) and Securities
Exchange Act Release No. 99700 (Mar. 8, 2024) 89 FR 18689 (Mar. 14,
2024) (SR-MEMX-2024-09) (together, ``MEMX Risk Control Filings'')
for details regarding the risk controls.
---------------------------------------------------------------------------
Under the proposed Risk Monitor Mechanism, Users may configure risk
limits for various parameters, including number of contracts executed
(``volume''), notional value of executions (``notional''), number of
executions (``count''), number of contracts executed as a percentage of
number of contracts outstanding within an Exchange-designated time
period or during the trading day (``percentage''), and the number of
times the limits on any of the foregoing parameters are reached (``risk
trips''). The System will track each of the parameters within an
underlying for an EFID (``underlying limit''), across all underlyings
for an EFID (``EFID limit''), across all
[[Page 47873]]
underlyings for a group of EFIDs (``EFID Group'') (``EFID Group
limit''), and/or across a customized group of orders designated by the
User (``Custom Group Limit''), over a User-established time period
(``interval'') and on an absolute basis for a trading day (``absolute
limits'').
When the System determines that a specified parameter has reached
the User-defined risk limit, depending on the User's instructions and
the applicable limit that has been reached, the Risk Monitor Mechanism
either: (1) cancels or rejects such User's orders or quotes in all
series of the applicable underlying(s) and cancels or rejects any
additional orders or quotes from the User in the applicable
underlying(s) until the counting program resets; or (2) suspends all of
a User's resting orders or quotes in all series of the applicable
underlying(s) and cancels or rejects any additional orders or quotes
from the User in the applicable underlying(s) until the Exchange is
instructed to reinstate such bids and offers. A User may also engage
the Risk Monitor Mechanism to cancel resting bids and offers, as well
as subsequent orders as set forth in proposed Rule 22.10 (``mass
cancellation'') or to suspend all resting bids and offers until the
Exchange is instructed to reinstate such bids and offers (``mass
suspension'').
In addition to the Risk Monitor Mechanism functionality described
above, the Exchange also proposes to offer additional price protection
mechanisms and risk controls that relate to certain standard or
Exchange-established parameters based on order type and market
conditions, which are described in proposed Rule 21.17, as well as
additional controls applicable to options activity, described in Rule
21.17, Interpretations and Policies .01. These controls include a
Market Order NBBO Width Protection, Limit Order Fat Finger Check, Buy
Order Put Check, Drill-Through Price Protection, Market Orders in No-
Bid (Offer) Series control, Bulk Message Fat Finger Check, and
Rejection of Bulk Message Updates, controls related to the maximum
dollar amount for a single order and maximum number of contracts for a
single order, controls related to the order types or modifiers that can
be utilized as well as orders when the market is crossed, controls to
restrict the options classes for which a User may enter orders to test
symbols only, controls prohibiting the entry of duplicative orders,
controls restricting the overall rate of order entry, and credit
controls measuring both gross and net exposure that warn when
approached and, when breached, prevent submission of either all new
orders or Market Orders only.\32\
---------------------------------------------------------------------------
\32\ See MEMX Risk Control Filings, supra note 31.
---------------------------------------------------------------------------
Proposed Rule 21.17, Interpretation and Policy .02 indicates that
the Exchange will offer risk functionality that permits a user to: to
(i) cancel all unexecuted orders and quotes in the MX2 Options Book, or
(ii) block the entry of any new orders and quotes, or (iii) both cancel
all unexecuted orders and quotes in the MX2 Options Book and block the
entry of any new orders and quotes. In addition to (i), (ii), and
(iii), the Exchange also offers (iv) risk functionality that
automatically cancels a User's open orders and quotes to the extent the
User loses its connection to the Exchange. Further, MX2 Options offers
batch cancel functionality that permits a User to cancel any orders or
quotes in any series of options by requesting the Exchange to affect
such cancellation. A User initiating such a request may also request
that the Exchange block new inbound orders in any series of options.
The block will remain in effect until the User requests the Exchange
remove the block. Finally, proposed Rule 21.17, Interpretation and
Policy .03 indicates that the risk controls provided are meant to
supplement, and not replace, the Member's or User's own internal
systems, monitoring, and procedures related to risk management and are
not designed for compliance with Rule 15c3-5 under the Act.
Responsibility for compliance with all Exchange and SEC rules remains
with the Member or User.\33\
---------------------------------------------------------------------------
\33\ See id.
---------------------------------------------------------------------------
One-Second Exposure Period. Proposed Rule 22.11 will prohibit
Options Members from executing as principal on MX2 Options orders they
represent as agent unless (i) agency orders are first exposed on MX2
Options for at least one (1) second or (ii) the Options Member has been
bidding or offering on MX2 Options for at least one (1) second prior to
receiving an agency order that is executable against such bid or offer.
During this one-second exposure period, other Options Members will be
able to enter orders to trade against the exposed order. The one-second
order exposure period requirement is consistent with the rules of other
options exchanges, including MEMX Options.
Options Order Protection and Locked/Crossed Market Plan Rules
The Exchange will participate in the Options Order Protection and
Locked/Crossed Market Plan (the ``Plan'') and therefore will be
required to comply with the obligations of the Plan. Similar to
Regulation NMS, the Plan requires exchanges to adopt rules ``reasonably
designed to prevent Trade-Throughs,'' while specifying certain
exemptions from that prohibition, including for ISOs. The proposed
rules in Chapter 27 (Options Order Protection and Locked and Crossed
Markets Rules) are identical to the rules of MEMX Options, and as such,
the Exchange is proposing to incorporate Chapter 27 of MEMX's rulebook
by reference into Chapter 27 of the MX2 Rulebook.\34\
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\34\ Specifically, the Exchange denotes: ``The rules contained
in MEMX Chapter 27, as such rules may be in effect from time to
time, are hereby incorporated by reference into this Chapter.
Members must comply with MEMX Chapter 27 as if such rules were part
of the Rules. Unless the context dictates otherwise, the following
terms, or any variations of these terms, from MEMX Chapter 27 have
the following meaning for purposes of this Chapter: ``Exchange''
means ``MX2''; and ``Member'' (i.e., MEMX Member) means ``Member
(i.e., MX2 Member).'' The Exchange will copy this language into the
additional MEMX chapters it is proposing to incorporate by reference
into MX2's rulebook, each as further described below.
---------------------------------------------------------------------------
Securities Traded on MX2 Options
General Listing Standards. The Exchange proposes to adopt listing
standards for options traded on MX2 Options as described in Chapter 19
(Securities Traded on MX2 Options), as well as for index options as
described in Chapter 29 (Index Rules), which are identical to the
approved rules of MEMX Options.\35\ The Exchange will join the Options
Listings Procedures Plan and will list and trade options already listed
on other options exchanges. The Exchange will gradually phase-in its
trading of options, beginning with a selection of actively traded
options. The Exchange is proposing to incorporate by reference the
rules of MEMX's Chapters 19 and 29 into Chapters 19 and 29 of MX2's
rulebook.
---------------------------------------------------------------------------
\35\ See MEMX Rules, Chapters 19 and 29.
---------------------------------------------------------------------------
Conduct and Operational Rules for Options Members
The Exchange proposes to adopt rules for MX2 Options that are
substantively identical to the rules of MEMX Options regarding
exercises and deliveries as described in Chapter 18 (Business Conduct);
Chapter 23 (Exercises and Deliveries); records, reports and audits as
described in Chapter 24 (Records, Reports and Audits); doing business
with the public as described in Chapter 26 (Doing Business With the
Public); and margin as described in Chapter 28 (Margin Requirements).
The Exchange proposes to incorporate each of those MEMX chapters by
reference into
[[Page 47874]]
Chapters 18, 23, 24, 26 and 28 of MX2's rulebook.\36\
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\36\ See MEMX Rules, Chapters 18, 23, 24, 26, and 28.
---------------------------------------------------------------------------
National Market System
Before it begins operations, MX2 Options will become a member of
the Options Price Reporting Authority (``OPRA''), the Options Linkage
Authority (``OLA''), the Options Regulatory Surveillance Authority
(``ORSA''), and the Options Listing Procedures Plan (``OLPP'').
Regulation
The Exchange will join the existing options industry agreements
pursuant to Section 17(d) of the Act \37\ prior to commencing
operations, as it did for equities. The Exchange will amend its
Regulatory Services Agreement (``RSA'') with FINRA prior to commencing
operations to govern many aspects of the regulation and discipline of
Members that participate in options trading, just as it does for
equities regulation. Further, the Exchange itself will perform options
listing regulation, as well as authorize Options Members to trade on
MX2 Options, and conduct surveillance of options trading as it does
today for equities.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78q(d).
---------------------------------------------------------------------------
Section 17(d) of the Act and the rules thereunder permit self-
regulatory organizations (``SROs'') to allocate certain regulatory
responsibilities to avoid duplicative oversight and regulation. Rule
17d-2 \38\ permits SROs to file with the Commission plans under which
the SROs allocate among themselves the responsibility to receive
regulatory reports from, and examine and enforce compliance with,
specified provisions of the Act and rules thereunder and SRO rules by
firms that are members of more than one SRO (``common members''). If
such a plan is declared effective by the Commission, an SRO that is a
party to the plan is relieved of regulatory responsibility as to any
common member for whom responsibility is allocated under the plan to
another SRO.
---------------------------------------------------------------------------
\38\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------
All of the options exchanges, FINRA, and NYSE have entered into the
Options Sales Practices Agreement and the Exchange will join this
agreement prior to the commencement of operations for MX2 Options.
Under this Agreement, the examining SROs will examine firms that are
common members of the Exchange and the particular examining SRO for
compliance with specified provisions of the Act, specified rules and
regulations adopted thereunder, specified examining SRO rules, and
specified MX2 Options rules. The Exchange also intends to enter into
and seek Commission approval of a bilateral Rule 17d-2 agreement with
FINRA prior to commencing of operations for MX2 Options. Additionally,
all options exchanges and FINRA have entered into the Options-Related
Market Surveillance Agreement and the Exchange intends to join this
agreement prior to the commencement of operations for MX2 Options.
For those regulatory responsibilities that fall outside the scope
of any Rule 17d-2 agreements, the Exchange will retain full regulatory
responsibility under the Act. However, the Exchange has entered into a
Regulatory Services Agreement with FINRA, pursuant to which FINRA
personnel operate as agents for the Exchange in performing certain of
these functions. The Exchange and FINRA will continue to operate under
the Regulatory Services Agreement that is currently in place but with
modifications as necessary to accommodate the expanded scope for MX2
Options. Those modifications will be implemented prior to the
commencement of operations of MX2 Options. The Exchange will supervise
FINRA's performance of regulatory services and will continue to bear
ultimate regulatory responsibility for the MX2 Options.
Consistent with the Exchange's existing regulatory structure, the
Exchange's Chief Regulatory Officer will have general supervision of
the regulatory operations of MX2 Options, including responsibility for
overseeing the surveillance, examination, and enforcement functions and
for administering all regulatory services agreements applicable to MX2
Options. Similarly, the Exchange's existing Regulatory Oversight
Committee will be responsible for overseeing the adequacy and
effectiveness of Exchange's regulatory and self-regulatory organization
responsibilities, including those applicable to MX2 Options.
Finally, the Exchange will perform automated surveillance of
trading on MX2 Options for the purpose of maintaining a fair and
orderly market at all times. The Exchange will monitor MX2 Options to
identify unusual trading patterns and determine whether particular
trading activity requires further regulatory investigation.
In addition, the Exchange will oversee the process for determining
and implementing trade halts, identifying and responding to unusual
market conditions, and administering the Exchange's process for
identifying and remediating ``obvious errors'' by and among its Options
Members. The proposed rules in Chapter 20 (Regulation of Trading on MX2
Options) regarding halts, unusual market conditions, extraordinary
market volatility, obvious errors, audit trail, transfers of positions,
and off-exchange RWA transfers are substantively identical to the
approved rules of MEMX Options.
Minor Rule Violation Plan
The Exchange's disciplinary rules, including Exchange Rules
applicable to ``minor rule violations,'' are set forth in Chapter 8 of
the Exchange's current Rules. Such disciplinary rules will apply to
Options Members and their associated persons.
The Exchange's Minor Rule Violation Plan (``MRVP'') specifies those
uncontested minor rule violations with sanctions not exceeding $2,500
that would not be subject to the provisions of Rule 19d-1(c)(1) under
the Act \39\ requiring that an SRO promptly file notice with the
Commission of any final disciplinary action taken with respect to any
person or organization.\40\ The Exchange's MRVP includes the policies
and procedures included in Exchange Rule 8.15 (Imposition of Fines for
Minor Violation(s) of Rules) and in Exchange Rule 8.15, Interpretations
and Policy .01.
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\39\ 17 CFR 240.19d-1(c)(1).
\40\ The Commission adopted amendments to paragraph (c) of Rule
19d-1 to allow SROs to submit for Commission approval plans for the
abbreviated reporting of minor disciplinary infractions. See Release
No. 34-21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any
disciplinary action taken by an SRO against any person for violation
of a rule of the SRO which has been designated as a minor rule
violation pursuant to such a plan filed with and declared effective
by the Commission will not be considered ``final'' for purposes of
Section 19(d)(1) of the Act if the sanction imposed consists of a
fine not exceeding $2,500 and the sanctioned person has not sought
an adjudication, including a hearing, or otherwise exhausted his
administrative remedies.
---------------------------------------------------------------------------
The Exchange proposes to amend its MRVP and Exchange Rule 8.15,
Interpretation and Policy .01 to include proposed Rule 25.3 (Penalty
for Minor Rule Violations). The rules included in proposed Rule 25.3 as
appropriate for disposition under the Exchange's MRVP are: (a) position
limit and exercise limit violations; (b) violations regarding the
failure to accurately report position and account information; (c)
Market Maker quoting obligations; (d) violations regarding expiring
exercise declarations; (e) violations relating to the failure to
respond to the Exchange's requests for the submission of trade data;
and (f) violations relating to noncompliance with the Consolidated
Audit Trail Compliance Rule requirements. The
[[Page 47875]]
rules included in proposed Rule 25.3 are the same as the rules included
in the MRVPs of MEMX Options and other options exchanges.\41\
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\41\ See MEMX Rule 25.3. See also EDGX Options Rule 25.3 and
Cboe BZX Options (``BZX Options'') Rule 25.3.
---------------------------------------------------------------------------
The Exchange will include the enumerated options trading rule
violations in the Exchange's standard quarterly report of actions taken
on minor rule violations under the MRVP. The quarterly report includes:
the Exchange's internal file number for the case, the name of the
individual and/or organization, the nature of the violation, the
specific rule provision violated, the fine imposed, the number of times
the rule violation has occurred, and the date of disposition. In
addition, because amended Rule 8.15 will offer procedural rights to a
person sanctioned for a violation listed in proposed Rule 25.3, the
Exchange will provide a fair procedure for the disciplining of members
and associated persons, consistent with Section 6(b)(7) of the Act.\42\
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\42\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------
The Exchange will continue to conduct surveillance with due
diligence and make a determination based on its findings, on a case-by-
case basis, whether a fine of more or less than the recommended amount
is appropriate for a violation under the MRVP or whether a violation
requires a formal disciplinary action.
Section 36 Exemption Request
The Exchange proposes to incorporate by reference as MX2 Options
rules certain rules of the Cboe Exchange, Inc. (``Cboe''), the New York
Stock Exchange (``NYSE''), FINRA, and as described above, its
affiliated exchange, MEMX. Specifically, MX2 Options proposes to
incorporate by reference the applicable rules of MEMX with respect to
Chapter 18 (Business Conduct), Chapter 19 (Securities Traded on MX2
Options), Chapter 23 (Exercises and Deliveries), Chapter 24 (Records,
Reports and Audits), Chapter 26 (Doing Business with the Public),
Chapter 27 (Options Order Protection and Locked and Crossed Markets
Rules), Chapter 28 (Margin Requirements) and Chapter 29 (Index
Rules).\43\ In addition, MX2 Options Rule 26.16 proposes to incorporate
by reference the applicable rules of FINRA with respect to
Communications with Public Customers; MX2 Options Rule 28.3 proposes to
incorporate by reference initial and maintenance margin requirements of
either Cboe or NYSE; MX2 Options Rule 29.5 proposes to incorporate by
reference the applicable rules of Cboe with respect to position limits
for broad based index options; and MX2 Options Rule 29.7 proposes to
incorporate by reference the applicable rules of Cboe with respect to
position limits for Narrow-Based and Micro-Narrow Based Index Options
traded on MX2 Options and also on Cboe. Thus, for certain MX2 Options
rules, Exchange members will comply with a MX2 Options rule by
complying with the MEMX, Cboe, NYSE, or FINRA rule referenced.
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\43\ Each MEMX Chapter incorporated by reference into MX2's
rules will have the same chapter numbers in MX2's rulebook.
---------------------------------------------------------------------------
The Exchange has requested, pursuant to Rule 240.0-12 under the
Act,\44\ an exemption under Section 36 of the Act from the rule filing
requirements of Section 19(b) of the Act for changes to those MX2
Options rules that are effected solely by virtue of a change to a
cross-referenced MEMX, Cboe, NYSE, or FINRA rule. The Exchange proposes
to incorporate by reference categories of rules (rather than individual
rules within a category) that are not trading rules. The Exchange also
agrees to provide written notice to Options Members prior to the launch
of MX2 Options of the specific MEMX, Cboe, NYSE, and FINRA rules that
it will incorporate by reference. In addition, the Exchange will notify
Options Members whenever MEMX, Cboe, NYSE, or FINRA proposes a change
to a cross-referenced MEMX, Cboe, NYSE, or FINRA rule.\45\
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\44\ 17 CFR 240.0-12.
\45\ The Exchange will provide such notice through a posting on
the same website location where the Exchange will post its own rule
filings pursuant to Rule 19b-4(l) under Act, within the time frame
required by that rule. The website posting will include a link to
the location on the MEMX, Cboe, NYSE, or FINRA website where the
proposed rule change is posted.
---------------------------------------------------------------------------
Amendments to Existing Exchange Rules
In addition to the rules of MX2 Options proposed above, the
Exchange proposes to amend certain existing Exchange Rules that
currently apply to the Exchange's equities market in order to reflect
the Exchange's proposed operation of MX2 Options.
First, the Exchange proposes to amend paragraph (d) of
Interpretations and Policies .01 to Rule 2.5 (Restrictions), which
generally requires each Member to register at least two Principals with
the Exchange subject to certain exceptions described therein, to
provide that such paragraph (d) will not apply to a Member that solely
conducts business on the Exchange as an Options Member, however,
Options Members must comply with the registration requirements set
forth in proposed Rule 17.2(g). The Exchange notes that proposed Rule
17.2(g), which provides that every Options Member must have at least
one Options Principal and sets forth the Exchange's Options Principal
registration requirements, is identical to MEMX Rule 17.2(g). In
connection with this proposed change, the Exchange also proposes to
amend paragraph (i) of Interpretations and Policies .01 to Rule 2.5 to
include Options Principal as a registration category and to set forth
the Exchange's qualification requirements for an Options Principal,
which are the same as those for an Options Principal on MEMX Options.
The Exchange also proposes to modify Rule 2.11(a)(6), which states
that MEMX Execution Services will maintain an error account for the
purpose of addressing positions that are the result of an execution or
executions that are not clearly erroneous under Rule 11.15 and result
from a technical or systems issue at MEMX Execution Services, the
Exchange, a routing destination, or a non-affiliate third-party routing
broker that affects one or more orders (``Error Positions''). The
proposed change to Rule 2.11(a)(6) would add a reference to the
comparable provision to that which governs review and resolution of
clearly erroneous transactions (e.g., for equities, Rule 11.15) but for
options transactions, namely Rule 20.6, which governs review and
resolution of options transactions that may qualify as obvious errors.
Lastly, the Exchange proposes to amend Interpretations and Policies
.01 Rule 8.15 (Imposition of Fines for Minor Violation(s) of Rules),
which contains the list of Exchange Rule violations and recommended
fine schedule pursuant to Rule 8.15, to include a new paragraph (i)
referencing proposed Rule 25.3 for the recommended fines for minor rule
violations of the Exchange Rules appliable to MX2 Options, which the
Exchange notes are the same as those of MEMX Options.
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal is consistent with the requirements of the Act and the rules
and regulations thereunder applicable to a national securities
exchange.\46\ In particular, the Commission finds that the proposed
rule change is consistent with, among
[[Page 47876]]
others, Sections 6(b)(1),\47\ 6(b)(5),\48\ and 6(b)(8) \49\ 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 designated, among other things, to promote just and
equit6able 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.
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\46\ 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).
\47\ 15 U.S.C. 78f(b)(1).
\48\ 15 U.S.C. 78f(b)(5).
\49\ 15 U.S.C. 78f(b)(8).
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As detailed above, MX2's proposed rules are substantially similar
to those of other exchanges, including its affiliated options exchange,
MEMX Options, except primarily with respect to the Exchange's priority
model and the availability of Reserve orders, which differ from MEMX
Options.
Exchange Members
For the same reasons provided by the Commission in its order
approving MEMX Options,\50\ the proposed qualification, registration,
member operations, and use of MX2 Options requirements provide the
Exchange with the capacity to carry out the purposes of the Act 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, provide that registered
broker-dealers can become members and have access to MX2 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.\51\
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\50\ 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'').
\51\ See 15 U.S.C. 78f(b)(1), (b)(2) and (b)(6).
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Additionally, for the same reasons provided by the Commission in
its order approving MEMX Options, the proposed Options Market Maker
registration and qualification requirements provide an objective
process by which an Options Member could become a Market Maker 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. As discussed above, the proposed rules
relating to Market Makers are substantively identical to the rules of
MEMX Options.
The proposed Options Market Maker participation requirements
provide that Market Makers receive certain benefits for carrying out
their responsibilities. At the same time, the proposed Options Market
Maker participation requirements impose affirmative obligations on
Market Makers that balance the benefits afforded to such participants.
For the same reasons provided by the Commission in its order approving
MEMX Options, the quoting obligations for Market Makers are designed to
contribute to the maintenance of a fair and orderly market. MX2
Options' Market Maker participation requirements are substantially
similar to the participation requirements of MEMX Options.
MX2 Options Market Structure and Trading Rules
The functionalities and features of MX2 Options market structure
and trading system are based on functionalities and features currently
used and previously approved for other options exchanges and do not
raise novel issues. Among other things, the rules are reasonably
designed to provide for a simple, orderly opening process for an
exchange that only trade multiply listed options and an orderly re-
opening process following the conclusion of a trading halt. The
proposed rules provide for the electronic display and execution of
orders in a pro rata allocation model with execution priority dependent
on the capacity of an order (e.g., Customer or non-Customer) as well as
status as a Lead Market Maker or Preferred Market Maker, as applicable.
The proposed priority model is similar to that in place on other
options exchanges that have been previously approved by the
Commission.\52\
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\52\ See, e.g., EDGX Options Rule 21.8(c), NYSE American Options
Rule 964NYP(h), MIAX Emerald Options Rule 514(c)(2), and MIAX
Options Rule 514(c)(2).
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MX2 Options will only utilize the two industry standard order types
(limit orders and market orders) and will offer order handling
instructions that are substantially similar to the rules of other
options exchanges. The Exchange's proposed reserve order functionality
is similar to that available on other options exchanges.\53\ The
Commission finds that the priority system and order types are
consistent with Section 6(b)(5) of the Act and are designed to promote
just and equitable principles of trade and are not designed to permit
unfair discrimination between customers, issuers, brokers, and dealers.
---------------------------------------------------------------------------
\53\ See, e.g., EDGX Options Rule 21.1(d)(1) and NYSE Arca
Options Rule 6.62P-OE(d)(1).
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MX2 Options will require a one-second exposure period in order to
execute a principal order represented as an agent, similar to MEMX
Options and the requirements of other exchanges. This exposure
requirement should facilitate the prompt execution of orders while
continuing to provide members with an opportunity to compete for
exposed bids and offers.
MX2 Options listing standards are identical to MEMX Options listing
standards. MX2 Options will join the OLPP and will list and trade
options already listed on other options exchanges. The Commission finds
that the proposed listing standards are consistent with the Section
6(b)(5) of the Act and are designed to protect investors and the public
interest and promote just and equitable principles of trade.
MX2 Options proposes operational rules that are substantially
identical to MEMX Options, including rules applicable to exercise and
deliveries. 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.\54\
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\54\ See MEMX Options Order, supra note 50.
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The Commission finds that the proposed functionalities and features
of MX2 Options' overall structure and trading operations are consistent
with
[[Page 47877]]
Section 6(b)(5) of the Act, which requires an exchange's rules to,
among other things, be designed to promote just and equit6able
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, and dealers.
Options Order Protection, Locked/Crossed Market Plan, and Outbound
Routing
MX2 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, MX2
Options will be required under Rule 608(c) of Regulation NMS \55\ 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 MX2 Options 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 proposed
Rule 21.1(i) will be cancelled. Additionally, as discussed above, MX2
Options will route orders in options listed and open for trading on MX2
Options via MEMX Execution Services, the Outbound Router of the
Exchange, to other options exchanges.\56\ Furthermore, MEMX Execution
Services has, pursuant to Rule 15c3-5 under the Act,\57\ implemented
certain tests designed to mitigate the financial and regulatory risks
associated with providing the Exchange's Users with access to such away
options exchanges. Pursuant to the policies and procedures developed by
MEMX Execution 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), MEMX Execution 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.\58\ For the same reasons the
Commission provided in its order approving rules governing MEMX
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.\59\
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\55\ See 17 CFR 242.608(c).
\56\ 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.
\57\ 17 CFR 240.15c3-5.
\58\ Proposed Rule 21.9(f) is substantively identical to MEMX
Rule 21.9(f).
\59\ See MEMX Options Order, supra note 50.
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Before commencing operations, MX2 Options will join the Options
Order Protection and Locked/Crossed Market Plan. To meet their
regulatory responsibilities under that plan, including the requirement
to avoid trading through better-priced protected quotations available
on other markets, other options exchanges that are participants must
have sufficient notice of new protected quotations, as well as all
necessary information such as final technical specifications.
Therefore, it would be a reasonable policy and procedure under the
Options Order Protection and Locked/Crossed Market Plan for industry
participants to begin treating MX2 Options' best bid and best offer as
a protected quotation no later than 60 days after the date of this
order or such later date as MX2 Options begins operation.
Risk Monitoring and Protection
MX2 Options will offer several optional types of risk controls that
are designed to offer protection from entering orders outside of
certain size and price parameters, as well as certain standard or
Exchange-established parameters based on order type and market
conditions. These include pre-trade risk controls, activity-based risk
controls, and global risk controls. The proposed risk controls are
identical to those offered by MEMX Options.\60\
---------------------------------------------------------------------------
\60\ See MEMX Rules 21.16 and 21.17.
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MX2 Options also will offer additional price protection mechanism
and risk controls. These controls are substantially similar to those
offered on MEMX Options. The proposed risk protections are reasonably
designed to provide liquidity providers with protections to help them
manage risk and efficiently use capital when trading options. These
protections are in addition to, and do not take the place of, members'
required market access controls, vigilant oversight of trading and
algorithms, and overall risk management. For example, these mechanisms
are intended to provide Market Makers with optional supplemental tools
as an additional layer of protection to assist them in managing risk
and utilize available capital in leveraged options securities. To the
extent they achieve that intended objective, liquidity providers would
be incentivized to quote more contracts at potentially better prices,
thus benefitting investors through the availability of that liquidity.
Accordingly, the proposed risk protections for MX2 Options are designed
to, among other things, promote just and equitable principles of trade
and protect investors and the public interest.
Participation in Multiparty Options-Related Plans
The Exchange will become a participant in the various applicable
multiparty plans for options trading. Specifically, the Exchange
represents that MX2 Options will become a member of OPRA, the Options
Order Protection and Locked/Crossed Market Plan, the ORSA, and the OLPP
prior to commencing operations. Joining these plans will integrate MX2
Options into the national market system for standardized listed
options.
Regulation
The Exchange's proposed approach to self-regulation of its members
and facilities is discussed in detail above, and involves joining the
existing options industry multiparty agreements, utilizing an RSA with
FINRA, and perform options listing and marketplace surveillance. Also,
as explained above, consistent with the Exchange's existing regulatory
structure, the Exchange's Chief Regulatory Officer will have general
supervision of the regulatory operations of MX2 Options, including
responsibility for overseeing the surveillance, examination, and
enforcement functions and for administering all regulatory services
agreements applicable to MX2 Options. Similarly, 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 MX2 Options.
The Exchange's proposed rules and regulatory structure with respect
to MX2 Options are consistent with the requirements of Section 6(b)(1)
of the
[[Page 47878]]
Act, which requires an exchange to be so organized and have the
capacity to be able to carry out the purposes of the Act and to comply,
and to enforce compliance, by its members and persons associated with
its members, with the Act and the rules and regulations thereunder and
the rules of the Exchange, and with Section 6(b)(6) and (7) of the Act,
which require an Exchange to provide fair procedures for the
disciplining of members and persons associated with members. Further,
it is consistent with the Act to allow the Exchange to contract with
FINRA to perform functions relating to the regulation and discipline of
members and the regulation of MX2 Options.\61\ These functions are
fundamental elements to a regulatory program and constitute core self-
regulatory functions. FINRA has the expertise and experience to perform
these functions on behalf of the Exchange.\62\
---------------------------------------------------------------------------
\61\ See, e.g., Regulation of Exchanges and Alternative Trading
Systems, Securities Exchange Act Release No. 40760 (Dec. 8, 1998),
63 FR 70844 (Dec. 22, 1998). See also Securities Exchange Act
Release No. 50122 (July 29, 2004), 69 FR 47962 (Aug. 6, 2004) (SR-
Amex-2004-32) (Order approving proposed rule that allowed Amex to
contract with another SRO for regulatory services).
\62\ The RSA is not before the Commission, and therefore, the
Commission is not acting on it.
---------------------------------------------------------------------------
The amended MRVP will provide the Exchange with the capacity to
enforce compliance with, and provide appropriate discipline for,
violations of the rules of the Exchange and the federal securities
laws. As existing Exchange Rule 8.15 will continue to offer procedural
rights to a person sanctioned for a violation listed in proposed MX2
Options Rule 25.3, the Exchange's rules provide a fair procedure for
the disciplining of members and associated persons, consistent with the
requirements of Section 6(b)(7) of the Act.\63\ For the same reasons
provided by the Commission in its order approving MEMX Options, the
MRVP changes should strengthen the Exchange's ability to carry out its
oversight and enforcement responsibilities as an SRO in cases where
full disciplinary proceedings are unsuitable in view of the minor
nature of the particular violation.\64\
---------------------------------------------------------------------------
\63\ 15 U.S.C. 78f(b)(7).
\64\ 17 CFR 240.19b-1(c)(2). See also MEMX Options Order, supra
note 50.
---------------------------------------------------------------------------
In approving the proposed changes to the Exchange's MRVP, the
Commission in no way minimizes the importance of compliance with the
Exchange's rules and all other rules subject to the imposition of fines
under the Exchange's MRVP. The violation of any SRO rules, as well as
the federal securities laws, is a serious matter. However, the
Exchange's MRVP provides a reasonable means of addressing rule
violations that do not rise to the level of requiring formal
disciplinary proceedings, while providing flexibility in handling
certain violations. The Exchange represents that it will continue to
conduct surveillance with due diligence and make a determination based
on its findings, on a case-by-case basis, whether a fine of more or
less than the recommended amount is appropriate for a violation under
the Exchange's MRVP or whether a violation requires a formal
disciplinary action.\65\
---------------------------------------------------------------------------
\65\ See Notice, supra note 3, at 29909.
---------------------------------------------------------------------------
Section 11(a) of the Act
Section 11(a)(1) of the Act \66\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion
(collectively, ``covered accounts''), unless an exception applies. Rule
11a2-2(T) under the Act,\67\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\68\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member or an associated
person has investment discretion, neither the member nor its associated
person may retain any compensation in connection with effecting the
transaction except as provided in the Rule.
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\66\ 15 U.S.C. 78k(a)(1).
\67\ 17 CFR 240.11a2-2(T).
\68\ This prohibition also applies to associated persons. The
member may, however, participate in clearing and settling the
transaction.
---------------------------------------------------------------------------
In a letter to the Commission, the Exchange requests that the
Commission concur with the Exchange's conclusion that Options Members
that enter orders into the proposed System satisfy the requirements of
Rule 11a2-2(T).\69\ For the reasons set forth below, orders entered
into the System could satisfy the requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------
\69\ See Letter from Anders Franzon, General Counsel, Exchange,
to Vanessa Countryman, Secretary, dated Sept. 24, 2025 (``MX2
Options 11(a) Letter'').
---------------------------------------------------------------------------
The Rule's first requirement is that orders for covered accounts be
transmitted from off the exchange floor. In the context of automated
trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\70\ The Exchange has represented that MX2 Options
does not have a physical trading floor, and the System will receive
orders from Options Members electronically through remote terminals or
computer-to-computer interfaces.\71\ The System satisfies this off-
floor transmission requirement.
---------------------------------------------------------------------------
\70\ See, e.g., MEMX Options Order, supra note 50, and
Securities Exchange Act Release Nos. 85828 (May 10, 2019), 84 FR
21841 (May 15, 2019) (registration of Long-Term Stock Exchange);
75760 (Aug. 7, 2015), 80 FR 48600 (Aug. 13, 2015) (SR-EDGX-2015-18);
61419 (Jan. 26, 2010), 75 FR 5157 (Feb. 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (Dec. 23, 2008), 73 FR 80468
(Dec. 31, 2008) (SR-BSE-2008-48) (approving equity securities
listing and trading on BSE); 57478 (Mar. 12, 2008), 73 FR 14521
(Mar. 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080)
(approving NOM options trading); 53128 (Jan. 13, 2006), 71 FR 3550,
3553 (Jan. 23, 2006) (File No. 10-131) (granting the exchange
registration of Nasdaq Stock Market, Inc.); 44983 (Oct. 25, 2001),
66 FR 55225 (Nov. 1, 2001) (SR-PCX-00-25) (approving Archipelago
Exchange); 29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR-
NYSE-90-52 and SR-NYSE-90-53) (approving NYSE's Off-Hours Trading
Facility); and 15533 (Jan. 29, 1979), 44 FR 6084 (Jan. 31, 1979)
(``1979 Release'').
\71\ See MX2 Options 11(a) Letter, supra note 69, at 5.
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Second, the Rule requires that the member and any associated person
not participate in the execution of its order after the order has been
transmitted. MX2 represented that at no time following the submission
of an order is an Options Member or an associated person of the Options
Member allowed to acquire control or influence over the result or
timing of the order's execution.\72\ According to the Exchange,
[[Page 47879]]
the execution of an Options Member's order is determined solely by what
quotes and orders are present in the System at the time the Options
Member submits the order, and the order priority based on MX2
rules.\73\ Accordingly, an Options Member and its associated persons do
not participate in the execution of an order submitted to the
System.\74\
---------------------------------------------------------------------------
\72\ See id. at 6. MX2 notes that Rule 11a2-2(T) does not
preclude members from canceling or modifying orders, or from
modifying instructions for executing orders, after they have been
transmitted, provided that such cancellations or modifications are
transmitted from off an exchange floor. See id. The Commission has
stated that the non-participation requirement is satisfied under
such circumstances so long as such modifications or cancellations
are also transmitted from off the floor. See Securities Exchange Act
Release No. 14563 (Mar. 14, 1978), 43 FR 11542 (Mar. 17, 1978)
(``1978 Release'') (stating that the ``non-participation requirement
does not prevent initiating members from canceling or modifying
orders (or the instructions pursuant to which the initiating member
wishes orders to be executed) after the orders have been transmitted
to the executing member, provided that any such instructions are
also transmitted from off the floor'').
\73\ See MX2 Options 11(a) Letter, supra note 69, at 2. MX2
proposes rules for the registration, obligations, and operation of
market makers on MX2 Options. MX2 has represented that market makers
will submit quotes in classes of options contracts to which they are
appointed. See id.
\74\ See, e.g., Securities Exchange Act Release Nos. 58375 (Aug.
18, 2008), 73 FR 49498, 49505 (Aug. 21, 2008) (File No. 10-182)
(order granting the registration of BATS Exchange, Inc.) (``Bats
Order'') and 61698 (Mar. 12, 2010), 75 FR 13151, 13164 (Mar. 18,
2010) (File Nos. 10-194 and 10-196) (order approving DirectEdge
exchanges) (``DirectEdge Order'').
---------------------------------------------------------------------------
Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities, such as the System, are used as
long as the design of these systems ensures that members do not possess
any special or unique trading advantages in handling their orders after
transmitting them to the exchange.\75\ The Exchange has represented
that the design of the System ensures that no Options Member has any
special or unique trading advantages in the handling of its orders
after transmitting its orders to the Exchange.\76\ Based on the
Exchange's representation, the System satisfies this condition.
---------------------------------------------------------------------------
\75\ See, e.g., Bats Order and DirectEdge Order, supra note 74.
In considering the operation of automated execution systems operated
by an exchange, the Commission stated that, while there is not an
independent executing exchange member, the execution of an order is
automatic once it has been transmitted into the system. Because the
design of these systems ensures that members do not possess any
special or unique trading advantages in handling their orders after
transmitting them to the exchange, the Commission has stated that
executions obtained through these systems satisfy the independent
execution requirement of Rule 11a2-2(T). See 1979 Release, supra
note 70.
\76\ See MX2 Options 11(a) Letter, supra note 69.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\77\ Options Members trading for covered accounts over
which they exercise investment discretion must comply with this
condition in order to rely on the rule's exemption.\78\
---------------------------------------------------------------------------
\77\ See Bats Order and DirectEdge Order, supra note 74. In
addition, Rule 11a2-2(T)(d) requires a member or associated person
authorized by written contract to retain compensation, in connection
with effecting transactions for covered accounts over which such
member or associated persons thereof exercises investment
discretion, to furnish at least annually to the person authorized to
transact business for the account a statement setting forth the
total amount of compensation retained by the member or any
associated person thereof in connection with effecting transactions
for the account during the period covered by the statement. See 17
CFR 240.11a2-2(T)(d). See also 1978 Release, supra note 72 (stating
``[t]he contractual and disclosure requirements are designed to
assure that accounts electing to permit transaction-related
compensation do so only after deciding that such arrangements are
suitable to their interests'').
\78\ See MX2 Options 11(a) Letter, supra note 69. The Exchange
represented that it will advise its membership through the issuance
of a Regulatory Circular that those Options Members trading for
covered accounts over which they exercise investment discretion must
comply with this condition in order to rely on the rule's exemption.
See id. at 3.
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IV. Exemption From Section 19(b) of the Act With Regard to Certain
Rules of Cboe, NYSE, FINRA, and MEMX Incorporated by Reference
The Exchange proposes to incorporate by reference as MX2 Options
Rules certain rules of Cboe, NYSE, FINRA, and MEMX.\79\ Thus, for
certain MX2 Options rules, the Exchange members will comply with a MX2
Options rule by complying with the rule referenced. In connection with
its proposal to incorporate these rules by reference, the Exchange
requested, pursuant to Rule 240.0-12 under the Act,\80\ an exemption
under Section 36 of the Act \81\ from the rule filing requirements of
Section 19(b) of the Act for changes to those MX2 Options rules that
are effected solely by virtue of a change to a cross-referenced Cboe,
NYSE, FINRA, or MEMX rule. The Exchange proposes to incorporate by
reference categories of rules (rather than individual rules within a
category) that are not trading rules. The Exchange agrees to provide
written notice to Options Member prior to the launch of MX2 Options of
the specific Cboe, NYSE, FINRA, and MEMX rules that it will incorporate
by reference. In addition, the Exchange will notify Options Members
whenever Cboe, NYSE, FINRA, or MEMX proposes a change to a cross-
referenced Cboe, NYSE, FINRA, or MEMX rule.\82\
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\79\ Specifically, MX2 Options proposes to incorporate by
reference the applicable rules of MEMX with respect to Chapter 18
(Business Conduct), Chapter 19 (Securities Traded on MX2 Options),
Chapter 23 (Exercises and Deliveries), Chapter 24 (Records, Reports
and Audits), Chapter 26 (Doing Business with the Public), Chapter 27
(Options Order Protection and Locked and Crossed Markets Rules),
Chapter 28 (Margin Requirements) and Chapter 29 (Index Rules); MX2
Options Rule 26.16 proposes to incorporate by reference the
applicable rules of FINRA with respect to Communications with Public
Customers; MX2 Options Rule 28.3 proposes to incorporate by
reference initial and maintenance margin requirements of either Cboe
or NYSE; MX2 Options Rule 29.5 proposes to incorporate by reference
the applicable rules of Cboe with respect to position limits for
broad based index options; and MX2 Options Rule 29.7 proposes to
incorporate by reference the applicable rules of Cboe with respect
to position limits for Narrow-Based and Micro-Narrow Based Index
Options traded on MX2 Options and also on Cboe.
\80\ 17 CFR 240.0-12.
\81\ 15 U.S.C. 78mm.
\82\ The Exchange represents that it will provide such notice
through a posting on the same website location where the Exchange
will post its own rule filings pursuant to Rule 19b-4(l) under Act,
within the time frame required by that rule. The website posting
will include a link to the location on the MEMX, Cboe, NYSE, or
FINRA website where the proposed rule change is posted.
---------------------------------------------------------------------------
Using its authority under Section 36 of the Act, the Commission
previously exempted certain SROs from the requirement to file proposed
rule changes under Section 19(b) of the Act.\83\ Each such exempt SRO
agreed to be governed by the incorporated rules, as amended from time
to time, but has not been required to file a separate proposed rule
change with the Commission each time the SRO whose rules are
incorporated by reference seeks to modify its rules. Each exempt SRO
had procedures in place to provide written notice to its members each
time a change is proposed to the incorporated rules of another SRO in
order to provide its members with notice of a proposed rule change that
affects their interests, so that they would have an opportunity to
comment on it.
---------------------------------------------------------------------------
\83\ See Securities Exchange Act Release No. 49260 (Feb. 17,
2004), 69 FR 8500 (Feb. 24, 2004) (granting application for
exemptions pursuant to Section 36(a) under the Act by the American
Stock Exchange LLC, the International Securities Exchange, Inc., the
Municipal Securities Rulemaking Board, the Pacific Exchange, Inc.,
the Philadelphia Stock Exchange, Inc., and the Boston Stock
Exchange, Inc.). See also, e.g., MEMX Options Order, supra note 50,
and Securities Exchange Act Release Nos. 75760 (Aug. 7, 2015) 80 FR
48600 (Aug. 13, 2015) (SR-EDGX-2015-18) (approving the operations of
EDGX Options Exchange, which included exemptive relief pursuant to
Section 36(a) under the Act) and 57478 (Mar. 12, 2008), 73 FR 14521
(Mar. 18, 2008) (order approving SR-NASDAQ-2007-004 and SR-NASDAQ-
2007-080, which included exemptive relief pursuant to Section 36(a)
under the Act).
---------------------------------------------------------------------------
The Commission is granting the Exchange's request for exemption,
pursuant to Section 36 of the Act, from the rule filing requirements of
Section
[[Page 47880]]
19(b) of the Act with respect to the rules that the Exchange proposes
to incorporate by reference into the rules of MX2 Options. This
exemption is appropriate in the public interest and consistent with the
protection of investors because it will promote more efficient use of
Commission and SRO resources by avoiding duplicative rule filings based
on simultaneous changes to identical rule text sought by more than one
SRO. Consequently, the Commission grants the Exchange's exemption
request for MX2 Options. This exemption is conditioned upon the
Exchange providing written notice to Options Members whenever Cboe,
NYSE, FINRA, or MEMX proposes to change a rule that MX2 Options has
incorporated by reference.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposal
is consistent with the Act and the rules and regulations thereunder
applicable to a national securities exchange.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-MX2-2025-01) be, and it hereby is,
approved.
It is further ordered, pursuant to Section 36 of the Act,\84\ that
MX2 shall be exempted from the rule filing requirements of Section
19(b) of the Act \85\ with respect to the Cboe, FINRA, NYSE, and MEMX
rules that MX2 proposes to incorporate by reference in MX2 rules,
subject to the conditions specified in this order.
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\84\ 15 U.S.C. 78mm.
\85\ 15 U.S.C. 78s(b).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\86\
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\86\ 17 CFR 200.30-3(a)(12) and (76).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-19353 Filed 10-1-25; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on October 2, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.