[Federal Register Volume 82, Number 106 (Monday, June 5, 2017)]
[Notices]
[Pages 25827-25837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11509]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80815; File No. SR-MRX-2017-02]


Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing 
of Proposed Rule Change in Connection With a System Migration to Nasdaq 
INET Technology

May 30, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 17, 2017, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend various rules in connection with a 
system migration to Nasdaq INET technology.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule change is to amend certain rules to 
reflect the MRX technology migration to a Nasdaq, Inc. (``Nasdaq'') 
supported architecture. INET is the proprietary core technology 
utilized across Nasdaq's global markets and utilized on The NASDAQ 
Options Market LLC (``NOM''), NASDAQ PHLX LLC (``Phlx'') and NASDAQ BX, 
Inc. (``BX'') (collectively, ``Nasdaq Exchanges''). The migration of 
MRX to the Nasdaq INET architecture would result in higher performance, 
scalability, and more robust architecture. With this system migration, 
the Exchange intends to adopt certain trading functionality currently 
utilized at Nasdaq Exchanges. The functionality being adopted is 
described in this filing.
    The Exchange is also separately filing \3\ a rule change to amend 
the Exchange's Opening Process. MRX will replace its current opening 
process at Rule 701 with Phlx's Opening Process.\4\
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    \3\ See SR-MRX-2017-01 (not yet published).
    \4\ See Phlx Rule 1017. See also Securities Exchange Act Release 
No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR-
Phlx-2017-79) (notice of Filing of Partial Amendment No. 2 and Order 
Granting Approval of a Proposed Rule Change, as Modified by Partial 
Amendment No. 2, to Amend PHLX Rule 1017, Openings in Options).
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    The Exchange intends to begin implementation of the proposed rule 
changes in Q3 2017. The migration will be on a symbol by symbol basis, 
and the Exchange will issue an alert to members in the form of an 
Options Trader Alert to provide notification of the symbols that will 
migrate and the relevant dates.
Generally
    With the re-platform, the Exchange will now be built on the Nasdaq 
INET architecture, which allows certain trading system functionality to 
be performed in parallel. The Exchange believes that this architecture 
change will improve the member experience by reducing overall latency 
compared to the current MRX system because of the manner in which the 
system is segregated into component parts to handle processing.
Trading Halts
Cancellation of Quotes
    The Exchange proposes to amend MRX Rule 702 entitled ``Trading 
Halts.'' Specifically, the Exchange proposes to amend Rule 702(a)(2) to 
note that during a halt, the Exchange will maintain existing orders on 
the book, but not existing quotes prior to the halt, accept orders and 
quotes, and process cancels and modifications for quotes and orders, 
except that existing quotes are cancelled. Today, MRX maintains 
existing orders and quotes during a trading halt. With respect to 
cancels and modifications, this behavior will not change. MRX does not 
have a quote

[[Page 25828]]

purge today, so this functionality will be changed with the adoption of 
this trading rule. The Exchange believes that purging quotes upon a 
halt will remove uncertainty for market participants.
    The Exchange proposes to conform the treatment of quotes and orders 
on MRX to Phlx Rule 1047(f) in conjunction with the replatform of MRX. 
The Exchange desires to handle halts in a similar manner as Phlx.
Limit Up-Limit Down
    The Exchange also proposes to add new MRX Rule 702(d) to replace 
rule text currently contained in MRX Rule 703A entitled ``Trading 
During Limit Up-Limit Down States in Underlying Securities.'' Proposed 
MRX Rule 702(d) is similar to language currently in Phlx Rule 1047(d), 
which provides for Exchange handling due to extraordinary market 
volatility. Currently MRX Rule 703A(a) and (b) provides modified order 
handling procedures when a security underlying an options class traded 
on the Exchange enters a Limit State or Straddle State under the Plan 
to Address Extraordinary Market Volatility (the ``Plan'').\5\ 
Specifically, during a Limit State or Straddle State: (1) Incoming 
Market Orders are automatically rejected, and all unexecuted Market 
Orders pending in the system are cancelled, and (2) incoming Stop 
Orders (which become Market Orders if elected) are automatically 
rejected, and unexecuted Stop Orders pending in the system cannot be 
elected and will be held until the end of the Limit State or Straddle 
State. In addition, MRX Rule 703A(c) provides that when the security 
underlying an option class is in a Limit State or Straddle State, the 
maximum quotation spread requirements for market maker quotes contained 
in MRX Rule 803(b)(4) and the continuous quotation requirements 
contained in MRX Rule 804(e) shall be suspended.\6\
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    \5\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan. As set forth 
in more detail in the Plan, Price Bands consisting of a Lower Price 
Band and an Upper Price Band for each NMS Stock are calculated by 
the Processors (Section V(A) of the Plan). When the National Best 
Bid (Offer) is below (above) the Lower (Upper) Price Band, the 
Processors shall disseminate such National Best Bid (Offer) with an 
appropriate flag identifying it as unexecutable. When the National 
Best Bid (Offer) is equal to the Upper (Lower) Price Band, the 
Processors shall distribute such National Best Bid (Offer) with an 
appropriate flag identifying it as a Limit State Quotation (Section 
VI(A) of the Plan). All trading centers in NMS stocks must maintain 
written policies and procedures that are reasonably designed to 
prevent the display of offers below the Lower Price Band and bids 
above the Upper Price Band for NMS stocks. Notwithstanding this 
requirement, the Processor shall display an offer below the Lower 
Price Band or a bid above the Upper Price Band, but with a flag that 
it is non-executable. Such bids or offers shall not be included in 
the National Best Bid or National Best Offer calculations (Section 
VI(A)(3) of the Plan). Trading in an NMS stock immediately enters a 
Limit State if the National Best Offer (Bid) equals but does not 
cross the Lower (Upper) Price Band (Section VI(B)(1) of the Plan. 
Trading for an NMS stock exits a Limit State if, within 15 seconds 
of entering the Limit State, all Limit State Quotations were 
executed or canceled in their entirety. If the market does not exit 
a Limit State within 15 seconds, then the Primary Listing Exchange 
would declare a five-minute trading pause pursuant to Section VII of 
the Plan, which would be applicable to all markets trading the 
security. The primary listing market would declare a Trading Pause 
in an NMS stock; upon notification by the primary listing market, 
the Processor would disseminate this information to the public. No 
trades in that NMS stock could occur during the trading pause, but 
all bids and offers may be displayed (Section VII(A) of the Plan). 
In addition, the Plan defines a Straddle State as when the National 
Best Bid (Offer) is below (above) the Lower (Upper) Price Band and 
the NMS stock is not in a Limit State. For example, assume the Lower 
Price Band for an NMS Stock is $ 9.50 and the Upper Price Band is $ 
10.50, such NMS stock would be in a Straddle State if the National 
Best Bid were below $ 9.50, and therefore unexecutable, and the 
National Best Offer were above $ 9.50 (including a National Best 
Offer that could be above $ 10.50). If an NMS stock is in a Straddle 
State and trading in that stock deviates from normal trading 
characteristics, the Primary Listing Exchange may declare a trading 
pause for that NMS stock if such Trading Pause would support the 
Plan's goal to address extraordinary market volatility.
    \6\ The time periods associated with Limit States and Straddle 
States are not considered by the Exchange when evaluating whether a 
market maker complied with the continuous quotation requirements 
contained in Rule 804(e).
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    With the re-platform, the Exchange will adopt opening limitation, 
Market Order and Stop Order handling consistent with handling today on 
Phlx.\7\ Specifically, proposed MRX Rule 702(d) will provide that 
during a Limit State and Straddle State in the Underlying NMS stock: 
(i) The Exchange will not open an affected option, (ii) provided the 
Exchange has opened an affected option for trading, the Exchange shall 
reject Market Orders, as defined in MRX Rule 715(a), and shall notify 
Members of the reason for such rejection, and (iii) provided the 
Exchange has opened an affected option for trading, the Exchange will 
elect Stop Orders if the condition is met, and, because they become 
Market Orders, shall cancel them back and notify Members of the reason 
for such rejection. The language in proposed MRX Rule 703(d)(iv) [sic] 
concerning the maximum quotation spread requirements for market maker 
quotes and the continuous quotation requirements suspensions are the 
same language currently contained in MRX Rule 703A(c).
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    \7\ See proposed MRX Rule 702(d)(ii) and (iii).
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    These amendments differ in certain respects from the manner in 
which MRX operates today during a Limit State or Straddle State. The 
current MRX rule does not address the opening. The Exchange proposes to 
adopt rule text to provide for how the Exchange shall treat the Opening 
Process.\8\ The opening in an option will not commence in the event 
that the underlying NMS stock is open, but has entered into a Limit 
State or Straddle State. If this occurs, the opening will only commence 
and complete if the underlying NMS stock stays out of a Limit or 
Straddle State. Accordingly, proposed MRX Rule 702(d)(i) [sic] will 
provide that the Exchange will not open an affected option. As a 
result, if an opening process is occurring, it will cease and then 
start the opening process from the beginning once the Limit State or 
Straddle State is no longer occurring.
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    \8\ See note 3 above.
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    In addition, MRX currently cancels Market Orders pending in the 
system upon initiation of a Limit or Straddle State. Under the proposal 
to adopt the Phlx rule and implementation of the Limit Up-Limit Down 
procedures, Market Orders pending in the system will continue to be 
processed regardless of the Limit or Straddle State. The Exchange 
believes this is a reasonable handling of Market Orders in the system 
since these orders are only pending in the system if they are exposed 
at the NBBO pursuant to Supplementary Material .02 to Rule 1901. If at 
the end of the exposure period the affected underlying is in a Limit or 
Straddle State, the Market Order will be cancelled with no execution 
occurring. If at the end of the exposure period the underlying is no 
longer in a Limit or Straddle State, the Market Order will be handled 
under the normal operation of the rules.
    Lastly, MRX does not currently elect Stop Orders that are pending 
in the system during a Limit or Straddle State. Under the proposal, and 
in-line with the Phlx implementation, Stop Orders that are pending in 
the system during a Limit or Straddle State will be elected, if 
conditions for such election are met, however because they become 
Market Orders will be cancelled back to the Member with a reason for 
such rejection.
    While the implementation of Market and Stop Order handling varies 
from MRX today, both the current and proposed Rule provide for 
protections from erroneous executions in a highly volatile period.\9\ 
The Exchange believes consistency across the six options

[[Page 25829]]

markets operated by Nasdaq, Inc. provides clarity for Members as to how 
their orders, as well as the opening process, will be handled in a 
Limit or Straddle State.
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    \9\ The Exchange is introducing a Phlx protection, Acceptable 
Trade Range, into MRX Rules as discussed within this rule change.
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Auction Handling During a Trading Halt
    The Exchange proposes to amend various rules to add detail to MRX 
rules to account for the impact of a trading halt on the Exchange's 
auction mechanisms. The Exchange proposes to memorialize within MRX 
Rule 723, entitled ``Price Improvement Mechanism for Crossing 
Transactions'' the manner in which a trading halt will impact an order 
entered into PIM once it is migrated to the INET architecture.
    Today, if a trading halt is initiated after an order is entered 
into the Price Improvement Mechanism (``PIM'') on MRX, such auction is 
terminated and eligible interest is executed. The Exchange proposes to 
amend today's current behavior and instead terminate the auction and 
not execute eligible interest when a trading halt occurs. In the event 
of a trading halt, terminating the auction and not executing eligible 
interest will provide certainty to participants in regard to how their 
interest will be handled. Memorializing the manner in which the system 
will handle orders entered into PIM during a trading halt will provide 
transparency for the benefit of members and investors.
    The Exchange proposes an amendment to MRX Rule 716, entitled 
``Block Trades'' to memorialize that if a trading halt is initiated 
after an order is entered into the Block Order Mechanism, Facilitation 
Mechanism, or Solicited Order Mechanism, such auction will also be 
automatically terminated without execution. This is the current 
behavior today on MRX and will not be changing.
    As discussed above, Phlx Rule 1047(c) provides that in the event 
the Exchange halts trading, all trading in the affected option shall be 
halted. This is interpreted to restrict executions after a halt unless 
there is a specific rule specifying that such trades should take place. 
The Exchange is proposing to add more specificity into the relevant 
rules. With respect to Block Order Mechanism, Facilitation Mechanism, 
or Solicited Order Mechanism, the Exchange notes that the current 
behavior is consistent with Phlx Rule 1047(c) generally, where all 
trading in the affected option shall be halted.\10\ In the event of a 
trading halt, terminating these auction mechanisms and not executing 
eligible interest will provide certainty to participants in regard to 
how their interest will be handled. Memorializing the manner in which 
the system will handle orders during a trading halt will provide 
transparency for the benefit of members and investors.
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    \10\ See Phlx Rule 1047(c).
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Market Order Spread Protection
    The Exchange proposes to amend MRX Rule 711, entitled ``Acceptance 
of Quotes and Orders'' to adopt a new mandatory risk protection 
entitled Market Order Spread Protection. MRX does not have a similar 
feature today. This mandatory feature is currently offered on NOM to 
protect Market Orders from being executed in very wide markets.\11\
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    \11\ See NOM Rules at Chapter VI, Section 6(c). NOM's current 
rule states, ``System Orders that are Market Orders will be rejected 
if the best of the NBBO and the internal market BBO (the ``Reference 
BBO'') is wider than a preset threshold at the time the order is 
received by the System.'' NOM has two order types, Price-Improving 
and Post-Only Orders, which result in non-displayed pricing that may 
cause the internal market BBO to be better than the NBBO. MRX does 
not have similar non-displayed order types and therefore the 
reference to the internal market BBO is not necessary.
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    Pursuant to proposed MRX Rule 711(c), if the NBBO is wider than a 
preset threshold at the time a Market Order is received, the order will 
be rejected. For example, if the Market Order Spread Protection is set 
to $20.00, and a Market Order to buy is received while the NBBO is 
$1.00-$50.00, such Market Order will be rejected. The proposed feature 
would assist with the maintenance of fair and orderly markets by 
mitigating the risks associated with errors resulting in executions at 
prices that are away from the Best Bid or Offer and potentially 
erroneous. Further the proposal protects investors from potentially 
receiving executions away from the prevailing prices at any given time. 
The Exchange proposes this feature to avoid a series of improperly 
priced aggressive orders transacting in the Order Book.
    Today, the NOM threshold is set at $5. MRX will initially set the 
threshold to $5. Similar to NOM, the Exchange will notify Members of 
the threshold with a notice, and, thereafter, Members will be notified 
of any subsequent changes to the threshold. NOM set the differential at 
$5 to match the bid/ask differential permitted for quotes on the 
Exchange.\12\ MRX has a similar $5 differential.\13\ Thus, the presence 
of a quote on the Exchange will ensure the NBBO is at least $5 wide. 
The Exchange believes the presence of a quote on the Exchange, or a 
bid/ask differential of the NBBO, which is no more than $5 wide affords 
Market Orders proper protection against erroneous execution and in the 
event a bid/ask differential is more than $5, then a Market Order is 
rejected. The threshold is appropriate because it seeks to capture 
improperly priced Market Orders and reject them to reduce the risk of, 
and to potentially prevent, the automatic execution of Market Orders at 
prices that may be considered erroneous. The Exchange's proposed 
threshold is a reasonable measure to ensure prices remain within the 
reasonable limits. This protection will bolster the normal resilience 
and market behavior that persistently produces robust reference prices. 
This feature should create a level of protection that prevents Market 
Orders from entering the Order Book outside of an acceptable range for 
the Market Order to execute.
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    \12\ See Chapter VII, Section 6(d)(ii) of NOM Rules which 
describes the bid/ask differentials. Options on equities (including 
Exchange-Traded Fund Shares), and on index options must be quoted 
with a difference not to exceed $5 between the bid and offer 
regardless of the price of the bid, including before and during the 
opening. However, respecting in-the-money series where the market 
for the underlying security is wider than $5, the bid/ask 
differential may be as wide as the quotation for the underlying 
security on the primary market. The Exchange may establish 
differences other than the above for one or more series or classes 
of options.
    \13\ See MRX Rule 803(b)(4).
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    Finally, the Market Order Spread Protection will be the same for 
all options traded on the Exchange, and is applicable to all Members 
that submit Market Orders.
Acceptable Trade Range
    The Exchange proposes to amend Rule 714, entitled ``Automatic 
Execution of Orders,'' at MRX Rule 714(b)(1) to remove the current 
Price Level Protection rule and adopt Phlx's Acceptable Trade 
Range.\14\ The Exchange is proposing to adopt similar functionality 
which is currently utilized on Phlx in connection with the replatform 
of MRX. Today, MRX places a limit on the number of price levels at 
which an incoming order or quote to sell (buy) will be executed 
automatically when there are no bids (offers) from other exchanges at 
any price for the options series. Orders and quotes are executed at 
each successive price level until the maximum number of price levels is 
reached, and any balance is either handled by the Primary Market Maker 
pursuant to Rule 803(c)(1) (in the case of Priority Customer Orders) or 
canceled (in the case of Professional Orders). The number of price 
levels, may be between one (1) and ten (10). The Exchange determines 
the number of price levels from time-to-time on a class-by-class basis.
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    \14\ See Phlx Rule 1080(p).

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[[Page 25830]]

    MRX proposes to replace the current Price Level Protection with 
Phlx's Acceptable Trade Range.\15\ The proposed Acceptable Trade Range 
is a mechanism to prevent the system from experiencing dramatic price 
swings by creating a level of protection that prevents the market from 
moving beyond set thresholds. The thresholds consist of a reference 
price plus (minus) set dollar amounts based on the nature of the option 
and the premium of the option.
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    \15\ The Exchange notes that the version of Acceptable Trade 
Range to be implemented on MRX will not include the posting period 
functionality available today on Phlx. The proposed rules reflect 
this change.
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    The system will calculate an Acceptable Trade Range to limit the 
range of prices at which an order or quote will be allowed to execute. 
To bolster the normal resilience and market behavior that persistently 
produces robust reference prices, MRX is proposing to create a level of 
protection that prevents the market from moving beyond set thresholds. 
The Acceptable Trade Range is calculated (upon receipt of a new order 
or quote) by taking the reference price, plus or minus a value to be 
determined by the Exchange (i.e., the reference price - (x) for sell 
orders/quotes and the reference price + (x) for buy orders).\16\ Upon 
receipt of a new order, the reference price is the National Best Bid 
(``NBB'') for sell orders/quotes and the National Best Offer (``NBO'') 
for buy orders/quotes. If an order or quote reaches the outer limit of 
the Acceptable Trade Range without being fully executed, then any 
unexecuted balance will be cancelled. The proposed Acceptable Trade 
Range would work as follows: Prior to executing orders received by MRX, 
an Acceptable Trade Range is calculated to determine the range of 
prices at which orders/quotes may be executed.\17\ When an order is 
initially received, the threshold is calculated by adding (for buy 
orders/quotes) or subtracting (for sell orders/quotes) a value,\18\ as 
discussed below, to the National Best Offer for buy orders/quotes or 
the National Best Bid for sell orders/quotes to determine the range of 
prices that are valid for execution. A buy (sell) order or quote will 
be allowed to execute up (down) to and including the maximum (minimum) 
price within the Acceptable Trade Range.
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    \16\ The Acceptable Trade Range settings are tied to the option 
premium.
    \17\ The Acceptable Trade Range will not be available for All-
Or-None orders. Today, MRX's Price Level Protection rule is not 
available for All-Or-None orders. The Exchange has determined that 
it would be difficult, from a technical standpoint, to apply this 
feature to those orders because their particular contingency makes 
it difficult to automate their handling.
    \18\ The value that is to be added to/subtracted from the 
reference price will be set by MRX and posted on its Web site.
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    For example, in a thinly traded option:

                                              Away Exchange Quotes
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                    Exchange                         Bid size        Bid price      Offer price     Offer size
----------------------------------------------------------------------------------------------------------------
NOM.............................................              10           $1.00           $1.05              10
NYSE Arca.......................................              10            1.00            1.05              10
NYSE MKT........................................              10            1.00            1.10              10
BOX.............................................              10            1.00            1.15              10
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                                                MRX Price Levels
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                    Exchange                         Bid size        Bid price      Offer price     Offer size
----------------------------------------------------------------------------------------------------------------
MRX orders......................................              10           $1.00           $1.05              10
MRX orders......................................  ..............  ..............            1.10              10
MRX orders......................................  ..............  ..............            1.40              10
MRX orders......................................  ..............  ..............            5.00              10
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    If MRX receives a routable market order to buy 80 contracts, the 
system will respond as described below:

--10 contracts will be executed at $1.05 against MRX
--10 contracts will be executed at $1.05 against NOM
--10 contracts will be executed at $1.05 against NYSE Arca.
--10 contracts will be executed at $1.10 against MRX
--10 contracts will be executed at $1.10 against NYSE MKT
--10 contracts will be executed at $1.15 against BOX

    After these executions, there are no other known valid away 
exchange quotes. The National Best Bid/Offer (``NBBO'') is therefore 
comprised of the remaining interest on the MRX book, specifically 10 
contracts at $1.40 and 10 contracts at $5.00. In the absence of an 
Acceptable Trade Range mechanism, the order would execute against the 
remaining interest at $1.40 and $5.00, resulting in potential harm to 
investors.
    MRX will set the parameters of the mechanism at levels that will 
ensure that it is triggered quite infrequently. Importantly, the 
Acceptable Trade Range is neutral with respect to away markets, an 
order may route to other destinations to access liquidity priced within 
the Acceptable Trade Range provided the order is designated as 
routable.
    The options premium will be the dominant factor in determining the 
Acceptable Trade Range. Generally, options with lower premiums tend to 
be more liquid and have tighter bid/ask spreads; options with higher 
premiums have wider spreads and less liquidity. Accordingly, a table 
consisting of several steps based on the premium of the option will be 
used to determine how far the market for a given option will be allowed 
to move. This table or tables would be listed on the Exchange Web site 
and any periodic updates to the table would be announced via an Options 
Trader Alert.
    For example, looking at some SPY May 2013 Call options on May 1st 
of 2013:

Bid/Offer of SPY May 160 Call (at or near-the-money): $1.23 x $1.24 
(several hundred contracts on bid and offer)
Bid/Offer of SPY May 105 Call (deep in-the-money): $54.10 x $54.26 (11 
contracts on each side)

    The deep in-the-money calls (May 105 calls) have a wider spread 
($54.10 - $54.26 = $0.16) compared to a spread of $0.01 for the at-the-
money calls (May

[[Page 25831]]

160 calls). Therefore, it is appropriate to have different thresholds 
for the two options. For instance, it may make sense to have a $0.05 
threshold for the at-the-money strikes (Premium < $2) and a $0.50 
threshold for the deep in-the-money strikes (Premium > $10).
    To consider another example, the May 2013 ORCL put options on May 
1st of 2013:

Bid/Offer of ORCL 33 May Put (at or near-the-money): $0.33 x $0.34 (100 
x 500)
Bid/Offer of ORCL 44 May Put (deep in-the-money): $10.40 x $10.55 (50 x 
200)

    Even though ORCL has a much lower share price than SPY, and is a 
different type of security (it is a common stock of a technology 
company whereas SPY is an ETF based on the S&P 500 Index), the pattern 
is the same. The option with the lower premium has a very narrow spread 
of $0.01 with significant size displayed whereas the higher premium 
option has a wide spread ($0.15) and less size displayed.
    The Acceptable Trade Range settings will be tied to the option 
premium. However, other factors will be considered when determining the 
exact settings. For example, acceptable ranges may change if market-
wide volatility is as high as it was during the financial crisis in 
2008 and 2009, or if overall liquidity is low based on historical 
trends. These different market conditions may present the need to 
adjust the threshold amounts from time to time to ensure a well-
functioning market. Without adjustments, the market may become too 
constrained or conversely, prone to wide price swings. As stated above, 
the Exchange would publish the Acceptable Trade Range table or tables 
on the Exchange Web site. The Exchange does not foresee updating the 
table(s) often or intraday, although the exchange may determine to do 
so in extreme circumstances. The Exchange will provide sufficient 
advanced notice of changes to the Acceptable Trade Range table, 
generally the prior day, to its membership via an Exchange alert.
    The Acceptable Trade Range settings would generally be the same 
across all options traded on MRX, although MRX proposes to maintain 
flexibility to set them separately based on characteristics of the 
underlying security. For instance, Google is a stock with a high share 
price ($824.57 closing price on April 30, 2013). Google options 
therefore may require special settings due to the risk involved in 
actively quoting options on such a high-priced stock. Option spreads on 
Google are wider and the size available at the best bid and offer is 
smaller. Google could potentially need a wider threshold setting 
compared to other lower-priced stocks. There are other options that fit 
into this category (e.g. AAPL) which makes it necessary to have 
threshold settings that have flexibility based on the underlying 
security. Additionally, it is generally observed that options subject 
to the Penny Pilot program quote with tighter spreads than options not 
subject to the Penny Pilot. MRX will set Acceptable Trade Ranges for 
three categories of options: (1) Penny Pilot Options trading in one 
cent increments for options trading at less than $3.00 and increments 
of five cents for options trading at $3.00 or more, (2) Penny Pilot 
Options trading in one-cent increments for all prices, and (3) Non-
Penny Pilot Options.
    The Phlx rule contains language that references a posting 
period.\19\ Specifically, the Phlx Rule provides if an order/quote 
reaches the outer limit of the Acceptable Trade Range (the ``Threshold 
Price'') without being fully executed, it will be posted at the 
Threshold Price for a brief period, not to exceed one second (``Posting 
Period''), to allow more liquidity to be collected, unless a Quote 
Exhaust has occurred, in which case the Quote Exhaust process in Phlx 
Rule 1082(a)(ii)(B)(3) will ensue, triggering a new Reference 
Price.\20\ The Exchange will not post interest that exceeds the outer 
limit of the Acceptable Trade Range, rather the interest will be 
cancelled. Only if the order limit does not exceed the Acceptable Trade 
Range will it post on the Exchange, if not otherwise executed. Further, 
the Phlx rule provides for the re-pricing of that order or quote and 
calculation of a new Acceptable Trade Range. Consistent with the 
current treatment of orders and quotes under MRX rules, the Exchange is 
not adopting the posting period. Unlike Phlx, MRX does not offer a 
general continuous re-pricing mechanism, and does not consider 
iterations in its current functionality.\21\ MRX would cancel rather 
than reprice orders which exceed the outer limit of the Acceptable 
Trade Range. Orders which do not exceed the outer limit of the 
Acceptable Trade Range will post to the order book and will reside on 
the order book at such price until they are either executed in full or 
cancelled by the Member. Additionally, resting orders do not re-price 
on the order book as they do today on Phlx. For these reasons, the 
unexecuted balance which exceeds the outer limit of the Acceptable 
Trade Range will be cancelled, rather than posted to the order book.
---------------------------------------------------------------------------

    \19\ See Phlx Rule 1080(p)(1)(B).
    \20\ The Quote Exhaust process occurs when Phlx's disseminated 
market at a particular price level includes a quote, and such market 
is exhausted by an inbound contra-side quote or order, and following 
such exhaustion, contracts remain to be executed from such quote or 
order through the initial execution price.
    \21\ With respect to trade-throughs and locked and crossed 
markets, a Phlx order will not be executed at a price that trades 
through another market or is displayed at a price that would lock or 
cross another market. If, at the time of entry, an order that the 
entering party has elected not to make eligible for routing would 
cause a locked or crossed market violation or would cause a trade-
through violation, it will be re-priced to the current national best 
offer (for bids) or the current national best bid (for offers) and 
displayed at one minimum price variance above (for offers) or below 
(for bids) the national best price. See Phlx Rule 1080(m)(iv)(A). In 
the instance that the system automatically reprices an order or 
quote, the system would assign the orders or quote a new timestamp 
and the order or quote will be reprioritized within the Order Book 
in accordance with the priority rules in Phlx Rule 1014(g).
---------------------------------------------------------------------------

PMM Order Handling and Opening Obligations
    Today, PMMs are responsible for handling Priority Customer orders 
that are not automatically executed pursuant to MRX Rule 714(b)(1), 
i.e., the Price Level Protection, and to initiate the opening rotation 
in each series pursuant to MRX Rule 701. This responsibility is 
described in each of those rules, as well as in MRX Rule 803(c), which 
provides that:

    In addition to the obligations contained in this Rule for market 
makers generally, for options classes to which a market maker is the 
appointed Primary Market Maker, it shall have the responsibility to: 
(1) As soon as practical, address Priority Customer Orders that are 
not automatically executed pursuant to Rule 714(b)(1) in a manner 
consistent with its obligations under paragraph (b) of this Rule by 
either (i) executing all or a portion of the order at a price that 
at least matches the NBBO and that improves upon the Exchange's best 
bid (in the case of a sell order) or the Exchange's best offer (in 
the case of a buy order); or (ii) releasing all or a portion of the 
order for execution against bids and offers on the Exchange. (2) 
Initiate trading in each series pursuant to Rule 701.

    As described in more detail in the sections above, with the re-
platform to Nasdaq technology, the Exchange is adopting Acceptable 
Trade Range and opening rotation functionality currently offered on NOM 
and Phlx, which do not contain similar requirements for the PMM. The 
Exchange therefore proposes to eliminate the PMM order handling and 
opening obligations in Rule 803(c).
    The Exchange believes that the elimination of the PMM obligation to 
initiate the opening rotation in this rule is appropriate because the 
proposed

[[Page 25832]]

opening process \22\ is initiated by the receipt of an appropriate 
number of valid width Primary Market Maker or Competitive Market Maker 
quotes as outlined in proposed MRX Rule 701(c)(i) [sic]. Similarly, the 
Acceptable Trade Range functionality will continue to provide an 
important protection to members without imposing any Primary Market 
Maker obligations. Today, Phlx does not have similar roles for a 
Specialist on its market. In connection with the replatform, the 
Exchange will conform its rules with those of Phlx with respect to the 
manner in which it operates the Opening Process.
---------------------------------------------------------------------------

    \22\ See note 3 above.
---------------------------------------------------------------------------

Back-Up PMM
    The Exchange also proposes to amend MRX Supplementary Material .03 
to Rule 803 to eliminate its Back-Up Primary Market Maker program. 
Today, any MRX Member that is approved to act in the capacity of a 
Primary Market Maker may voluntarily act as a ``Back-Up Primary Market 
Maker'' in options series in which it is quoting as a Competitive 
Market Maker. A Back-Up Primary Market Maker assumes all of the 
responsibilities and privileges of a Primary Market Maker under the 
Exchange's rules with respect to any series in which the appointed 
Primary Market Maker fails to have a quote in the system except that a 
Back-Up Primary Market Maker's quoting obligations are the same as the 
quoting obligations for Competitive Market Makers as described in MRX 
Rule 804(e)(2)(iii) and .02 of Supplementary Material to Rule 804.\23\ 
If more than one Competitive Market Maker that has volunteered to be a 
Back-Up Primary Market Maker is quoting in an options series at the 
time that a Primary Market Maker ceases quoting, the Competitive Market 
Maker with the largest offer at the lowest price in the series at that 
time will be chosen to be the Back-Up Primary Market Maker. In the 
event of a tie based on price and size, the Competitive Market Maker 
with time priority will be automatically chosen. The Back-Up Primary 
Market Maker is automatically restored to Competitive Market Maker 
status when the appointed Primary Market Maker initiates quoting in the 
series. The obligations of a Primary Market Maker include the 
initiation of a trading rotation pursuant to MRX Rule 701, quoting and 
other obligations pursuant to MRX Rules 803 and 804, and financial 
requirements pursuant to MRX Rule 809. The Exchange is proposing to 
amend the obligations of a PMM only with regard to the initiation of a 
trading rotation pursuant to MRX Rule 701. The quoting and financial 
requirements rules shall remain the same.
---------------------------------------------------------------------------

    \23\ The Exchange notes that the current rule text for Back-up 
Primary Market Maker on MRX does not indicate that quoting 
obligations for Back-up Primary Market Makers are the same as for 
Competitive Market Makers. This, however, has been the Exchanges 
practice, and the practice of its affiliated exchanges, including, 
the Nasdaq ISE, LLC. See Securities Exchange Act Release No. 76936 
(January 20, 2016), 81 FR 4347 (January 26, 2016) (SR-ISE-2016-02).
---------------------------------------------------------------------------

    With the re-platform, a Back-Up Primary Market Maker is no longer 
necessary since the order handling obligations present on MRX today are 
not going to be present in the new system. Furthermore, the proposed 
Opening Process,\24\ obviates the importance of such a role. The 
Opening Process describes the entry of quotes by both a Primary Market 
Maker and a Competitive Market Maker, provided they are Valid Width 
Quotes.\25\ The Opening Process further describes alternative methods 
to open the market if such quotes are not entered at the opening by 
either of these market makers.\26\ The reliance on a market maker to 
initiate the opening process is no longer present within the proposed 
rule.\27\
---------------------------------------------------------------------------

    \24\ See note 3 above.
    \25\ A Valid Width Quote is a two-sided electronic quotation 
submitted by a Market Maker that consists of a bid/ask differential 
that is compliant with MRX proposed Rule 803(b)(4). See note 3 
above.
    \26\ See note 3 above.
    \27\ Id.
---------------------------------------------------------------------------

Market Maker Speed Bump
    The Exchange proposes to amend MRX Rule 804, entitled ``Market 
Maker Quotations'' to establish default parameters for certain risk 
functionality. The Exchange offers a risk protection mechanism for 
market maker quotes that removes a member's quotes in an options class 
if a specified number of curtailment events occur during a set time 
period (``Market Maker Speed Bump''). In addition, the Exchange offers 
a market-wide risk protection that removes a market maker's quotes 
across all classes if a number of curtailment events occur (``Market-
Wide Speed Bump''). MRX Rule 804(g) currently requires that market 
makers set curtailment parameters for both the Market Maker Speed Bump 
and the Market-Wide Speed Bump. Today, if a market maker does not set 
these parameters their quotes are rejected by the trading system for 
each of the speed bumps mentioned herein.
    With the re-platform, the Exchange has determined to provide 
default curtailment parameters to assist market makers when they do not 
enter their own parameters into the system. The default parameters will 
be determined by the Exchange and announced to members. Rather than 
rejecting quotes, the default parameters would be instituted. The 
default parameters are important because market makers at MRX have 
quoting obligations as specified in MRX Rule 804. When a market maker's 
quotes are removed from the system, the time does not count toward the 
continuous quoting obligations. The Exchange believes that allowing for 
default settings would cause quotes not to be rejected and would assist 
market makers in meeting their quoting obligations because they would 
not have their quotes removed from the market. Today, Phlx indicates 
default parameters for its detection of loss of communication 
settings.\28\
---------------------------------------------------------------------------

    \28\ Phlx Rule 1019(c).
---------------------------------------------------------------------------

Anti-Internalization
    The Exchange proposes to amend the MRX Supplementary Material at 
.03 to Rule 804, entitled ``Market Maker Quotations'' to adopt an Anti-
Internalization rule. Today, MRX's functionality prevents Immediate-or-
Cancel (``IOC'') \29\ orders entered by a market maker from trading 
with the market maker's own quote.\30\ As implemented, if an IOC order 
entered by a market maker would trade with a quote entered by the same 
market maker, that order will instead be allocated to other interest at 
the same price, and the balance cancelled. The Exchange proposes to 
replace this self-trade protection functionality with Anti-
Internalization functionality currently offered on Phlx.\31\
---------------------------------------------------------------------------

    \29\ An IOC order is a limit order that is to be executed in 
whole or in part upon receipt. Any portion not so executed is to be 
treated as cancelled. See Rule 715(b)(3).
    \30\ This functionality is not memorialized in MRX's rules.
    \31\ Phlx Rule 1080(p)(2).
---------------------------------------------------------------------------

    Today, Phlx provides anti-internalization (``AIQ'') functionality 
to Specialists and Registered Options Traders (``collectively market 
makers''). Quotes and orders entered by Phlx market makers using the 
same badge \32\ are not executed against quotes and orders entered on 
the opposite side of the market using the same badge. This 
automatically prevents these quotes and orders from interacting with 
each other in the system. On Phlx, the system cancels the resting quote 
or order back to the entering party prior to execution. This 
functionality does not apply in any

[[Page 25833]]

auction or with respect to complex transactions.
---------------------------------------------------------------------------

    \32\ A badge is the same as a market participant identifier 
(``MPID'').
---------------------------------------------------------------------------

    The Exchange proposes to adopt a similar rule that provides that 
quotes and orders entered by Market Makers using the same member 
identifier will not be executed against quotes and orders entered on 
the opposite side of the market by the same market maker using the same 
member identifier. In such a case, the system will cancel the resting 
quote or order back to the entering party prior to execution. This 
functionality shall not apply in any auction. AIQ is difficult to apply 
during auctions, and there is limited benefit in doing so. There is 
limited benefit because, generally speaking, auctions do not raise the 
same policy concerns for wash sales and ERISA \33\ due to the semi-
random manner in which trades are matched.
---------------------------------------------------------------------------

    \33\ AIQ also is designed to assist market participants in 
complying with certain rules and regulations of the Employee 
Retirement Income Security Act (``ERISA'') that preclude and/or 
limit managing broker-dealers of such accounts from trading as 
principal with orders generated for those accounts. It can also 
assist Market Makers in reducing trading costs from unwanted 
executions potentially resulting from the interaction of executable 
buy and sell trading interest from the same firm when performing the 
same market making function.
---------------------------------------------------------------------------

    This functionality does not relieve or otherwise modify the duty of 
best execution owed to orders received from public customers. Market 
Makers generally do not display public customer orders in market making 
quotations, opting instead to enter public customer orders using 
separate identifiers. In the event that a Market Maker opts to include 
a public customer order within a market making quotation, the Market 
Maker must take appropriate steps to ensure that public customer orders 
that do not execute due to anti-internalization functionality 
ultimately receive the same execution price (or better) they would have 
originally obtained if execution of the order was not inhibited by the 
functionality.
    This Anti-Internalization functionality can assist Market Makers in 
reducing trading costs from unwanted executions potentially resulting 
from the interaction of executable buy and sell trading interest from 
the same firm when performing the same market making function.
Minimum Execution Quantity Orders
    The Exchange proposes to amend MRX Rule 715, entitled ``Types of 
Orders'' at 715(q) to remove minimum quantity orders. Today, the 
Exchange allows members to enter minimum quantity orders, which is an 
order type that is available for partial execution, but each partial 
execution must be for a specified number of contracts or greater. If 
the balance of the order after one or more partial executions is less 
than the minimum, such balance is treated as All-Or-None. Like All-Or-
None orders, minimum quantity orders are contingency orders that are 
not displayed in the Exchange's best bid or offer. However, the 
Exchange disseminates to market participants an indication that a 
minimum quantity order has been entered. The Exchange has found that 
its members have not adopted this feature and therefore proposes to 
remove this functionality.\34\ Furthermore, the Exchange proposes to 
remove two references to minimum quantity orders in other rules. 
Specifically, the Exchange proposes to remove references to minimum 
quantity orders in MRX Supplementary Material .02 to Rule 713, which 
notes that minimum quantity orders are contingency orders that have no 
priority on the book, and in MRX Supplementary Material .04 to Rule 
717, which explains that non-marketable minimum quantity orders are 
deemed ``exposed'' one second following a broadcast notifying the 
market that such an order to buy or sell a specified number of 
contracts at a specified with a specified minimum quantity has been 
received in the options series.
---------------------------------------------------------------------------

    \34\ This functionality is not currently being utilized by any 
member on MRX.
---------------------------------------------------------------------------

Cancel and Replace Orders
    The Exchange is proposing to amend Supplementary Material .02 to 
MRX Rule 715 to memorialize the manner in which the system will handle 
cancel and replace orders in connection with the Exchange's technology 
migration to INET.
    By way of background with respect to cancel and replace orders, a 
Member has the option of either sending in a cancel order and then 
separately sending in a new order which serves as a replacement of the 
original order (two separate messages) or sending a single cancel and 
replace order in one message (``Cancel and Replace Order''). Sending in 
a cancel order and then separately sending in a new order will not 
retain the priority of the original order on the current MRX system and 
on the INET system.
    Today, MRX does not treat all Cancel and Replace Orders as new 
orders. For example, a Cancel and Replace Order which reduced the size 
of the original order from 600 to 300 contracts would not be treated as 
a new order. A new order would be subject to price or other 
reasonability checks,\35\ which this order today on MRX would not be 
subject to as a result of decreasing the size of the order. This order 
would continue to retain its time priority in the system. If a Cancel 
and Replace Order does not pass a price or other reasonability check, 
the order will cancel, but it will not be replaced with a new order.
---------------------------------------------------------------------------

    \35\ Price or other reasonability checks consider the current 
market at the time of the Cancel and Replace Order.
---------------------------------------------------------------------------

    The Exchange proposes to define a Cancel and Replace Order as a 
single message for the immediate cancellation of a previously received 
order and the replacement of that order with a new order. If the 
previously placed order is already partially filled or in its 
entirety,\36\ the replacement order is automatically canceled or 
reduced by the number of contracts that were executed. Additionally, 
the replacement order will retain the priority of the cancelled order, 
if the order posts to the Order Book,\37\ provided the price is not 
amended, size is not increased,\38\ or in the case of Reserve Orders, 
size is not changed.\39\ However, if the replacement portion of a 
Cancel and Replace Order does not satisfy the system's price or other 
reasonability checks the existing order will be cancelled and not 
replaced.\40\
---------------------------------------------------------------------------

    \36\ For example, in both the current MRX system and INET, the 
original order is automatically canceled or reduced by the number of 
contracts that were executed depending on the volume of the original 
order that was filled.
    \37\ During an exposure period a Cancel and Replace Order will 
retain priority if the order posts to the Order Book, provided price 
is not changed, size is not increased or, for a Reserve Order, size 
is not changed.
    \38\ Decrementing the volume will not result in a change in 
priority, as is the case today with MRX.
    \39\ A Reserve Order is a limit order that contains both a 
displayed portion and a non-displayed portion. See MRX Rule 715(g).
    \40\ The Exchange notes that if the replacement portion of a 
Cancel and Replace order does not satisfy the system's price or 
other reasonability checks, the existing order shall be cancelled 
and not replaced. The price reasonability checks include: (i) MRX 
Rule 710; (ii) MRX Rule 711(c); and (iii) MRX Rule 714(b)(2). The 
Exchange notes that other than these price reasonability checks, the 
Exchange may cancel an order because it does not satisfy a format or 
other requirement specified in the Exchange's s rules and 
specifications.
---------------------------------------------------------------------------

    The Exchange represents that conducting price or other 
reasonability checks for all Cancel and Replace Orders will validate 
orders against current market conditions prior to proceeding with the 
request to modify the order. The Exchange further believes that 
memorializing Cancel and Replace Order handling will add transparency 
to the Exchange's rules and reduce the potential for investor 
confusion. Other exchanges with a similar order type permit an order to 
retain priority if only

[[Page 25834]]

the size of the order is decremented.\41\ Accordingly, the Commission 
believes it is appropriate for the Exchange to define Cancel and 
Replace Order in the manner proposed.
---------------------------------------------------------------------------

    \41\ See Phlx Rule 1080(b)(i)(A).
---------------------------------------------------------------------------

All-Or-None Orders
    The Exchange proposes to amend Rule 715(c) to provide that an All-
Or-None Order may only be entered into the system with a time-in-force 
designation of Immediate-Or-Cancel order in connection with the 
Exchange's technology migration to INET.
    An All-Or-None Order is a limit or market order that is to be 
executed in its entirety or not at all. Today, an All-Or-None Order may 
be designated as a market or limit order with any time-in-force 
designation. The Exchange proposes to limit All-Or-None Orders to only 
be accepted with a time-in-force designation of Immediate-Or-Cancel. An 
Immediate-Or-Cancel Order is a limit order that is to be executed in 
whole or in part upon receipt. Any portion not so executed is to be 
treated as cancelled.
    The Exchange also proposes to amend Supplementary Material .02 to 
Rule 713 to make clear that All-Or-None Orders will only be accepted 
with a time-in-force designation of Immediate-Or-Cancel and, therefore, 
would not persist in the Order Book. The Exchange also proposes to 
amend Supplementary Material .04 to Rule 717 to reserve this section as 
All-Or-None Orders \42\ would not be subject to exposure because they 
would be cancelled if not executed in their entirety.\43\
---------------------------------------------------------------------------

    \42\ This section is also being reserved because the Exchange is 
eliminating Minimum Quantity Orders.
    \43\ The Exchange notes that Rule 716(e), Solicited Order 
Mechanism, is not being amended. The proposed rule change does not 
impact the manner in which the Solicited Order Mechanism operates.
---------------------------------------------------------------------------

Delay of Implementation
    The Exchange proposes to delay the implementation of Directed Order 
\44\ functionality on MRX. The Exchange proposes to continue to offer 
this functionality on the current platform. The Exchange however would 
propose not to launch the Directed Order functionality on MRX at the 
same time as proposed herein for the proposals to amend other trading 
functions. The Exchange would instead issue an alert which specifies a 
different date for this functionality to commence on MRX. This 
functionality will remain the same on the new platform.
---------------------------------------------------------------------------

    \44\ MRX currently operates a Directed Order system in which 
Electronic Access Members (``EAMs'') can send an order to a DMM for 
possible price improvement. If a DMM accepts Directed Orders 
generally, that DMM must accept all Directed Orders from all EAMs. 
Once such a DMM receives a Directed Order, it either (i) must enter 
the order into the Exchange's PIM auction and guarantee its 
execution at a price better than the MRX best bid or offer (``MRX 
BBO'') by at least a penny and equal to or better than the NBBO or 
(ii) must release the order into the Exchange's limit order book, in 
which case there are certain restrictions on the DMM interacting 
with the order. See MRX Rule 811.
---------------------------------------------------------------------------

    The Exchange proposes to amend the rule text in Rule 811 (Directed 
Orders) to note that this functionality will not be available as of a 
certain date in the third quarter of 2017 to be announced in a notice. 
The Exchange will recommence this functionality on MRX within one year 
from the date of filing of this rule change to be announced in a 
separate notice.
    The Exchange intends to begin implementation of the functionality 
for Directed Orders after Q3 2017. The migration will also be on a 
symbol by symbol basis, and the Exchange will issue an alert to members 
in the form of an Options Trader Alert to provide notification of the 
symbols that will migrate and the relevant dates. The Exchange will 
introduce Directed Orders on MRX within one year from the date of this 
filing, otherwise the Exchange will file a rule proposal with the 
Commission to remove these rules.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\45\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\46\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest for the reasons stated below.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78f(b).
    \46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Trading Halts
    The Exchange's proposal to amend MRX Rule 702 concerning Trading 
Halts to specifically note that during a halt the Exchange will 
maintain existing orders on the book but not existing quotes is 
consistent with the Act because it provides market participants with 
clarity as to the manner in which interest will be handled by the 
system. During a trading halt, the market may move and create risk to 
market participants with respect to resting interest. The Exchange 
believes that cancelling existing quotes protects investors and the 
public interest by removing potentially stale quotes during the halt 
process.
    The Exchange's proposal to amend its rules on order handling during 
Limit up-Limit Down states and trading halts is consistent with the Act 
because it will harmonize the way the Exchange treats orders during a 
Limit State or Straddle State in the equity market, or a trading halt 
in the option, with how those orders are handled on other Nasdaq 
Exchanges. The proposed rule text should provide certainty about how 
options orders and trades will be handled during periods of 
extraordinary volatility in the underlying security. Specifically, 
under the proposal, market participants will be able to continue to 
trade options overlying securities that are in a Limit State or 
Straddle State, while addressing specific order types that are subject 
to added risks during such periods. The Exchange believes that the 
rejection of options Market Orders (including elected Stop Orders) 
should help to prevent executions that might occur at prices that have 
not been reliably formed, which should, in turn, protect, in 
particular, retail investors from executions of un-priced orders during 
times of significant volatility. The Exchange believes that harmonizing 
these rules will provide a better experience to members that trade on 
multiple markets operated by Nasdaq, Inc.
Cancellation of Quotes
    The Exchange's proposal to amend MRX Rule 702 concerning Trading 
Halts to specifically note that during a halt the Exchange will 
maintain existing orders on the book but not existing quotes is 
consistent with the Act because it provides market participants with 
clarity as to the manner in which interest will be handled by the 
system. During a trading halt, the market may move and create risk to 
market participants with respect to resting interest. The Exchange 
believes that cancelling existing quotes protects investors and the 
public interest by removing potentially stale quotes during the halt 
process.
Limit Up-Limit Down
    The Exchange's proposal to add new MRX Rule 702(d) to replace rule 
text currently contained in MRX Rule 703A entitled ``Trading During 
Limit Up-Limit Down States in Underlying Securities'' is consistent 
with the Act because the proposed rules provide for protections from 
erroneous executions in a highly volatile period. The proposed rule 
text in MRX Rule 702(d) is similar to language currently in Phlx Rule 
1047(d), which provides for Exchange handling due to extraordinary 
market volatility. As noted within this proposal, the Exchange will 
adopt opening limitation, Market Order and

[[Page 25835]]

Stop Order handling consistent with handling today on Phlx. The 
Exchange proposes to adopt rule text to provide for how the Exchange 
shall treat the opening rotation.\47\ If an opening process is 
occurring, it will cease and then start the opening process from the 
beginning once the Limit State or Straddle State is no longer 
occurring. The Exchange believes that this treatment at the opening 
will protect investors and the public interest by halting trading to 
prevent unintended executions. Also, with this proposal, Market Orders 
pending in the system will continue to be processed regardless of the 
Limit or Straddle State. The Exchange believes that this treatment of 
Market Orders is consistent with the Act because these Market Orders 
are only pending in the system if they are exposed at the NBBO pursuant 
to Supplementary Material .02 to Rule 1901. If at the end of the 
exposure period the affected underlying is in a Limit or Straddle 
State, the Market Order will be cancelled with no trade occurring. If 
at the end of the exposure period, the affected underlying is no longer 
in a Limit or Straddle State, the Market Order will be handled pursuant 
to the normal operation of the rules.
---------------------------------------------------------------------------

    \47\ See note 3 above.
---------------------------------------------------------------------------

    Lastly, MRX does not currently elect Stop Orders that are pending 
in the system during a Limit or Straddle State. Under the proposal, and 
in-line with the Phlx implementation, Stop Orders that are pending in 
the system during a Limit or Straddle State will be elected, if 
conditions for such election are met, and, because they become Market 
Orders, will be cancelled back to the Member with a reason for such 
rejection. The Exchange believes that this is consistent with the Act 
because it affords the appropriate protections to an elected Stop Order 
once it becomes a Market Order after election. The Exchange believes 
that this approach provides the market participant with the intended 
result.
Auction Handling During a Trading Halt
    The Exchange's proposal to amend various rules to add detail to MRX 
rules to account for the impact of a trading halt on the Exchange's 
auction mechanisms is consistent with the Act for the reasons which 
follow. The Exchange's proposal to amend today's current behavior and 
instead terminate the PIM auction and not execute eligible interest 
when a trading halt occurs is consistent with the Act because during a 
trading halt, the market may move and create risk to market 
participants with respect to resting interest. The Exchange believes 
that terminating the PIM auction protects investors and the public 
interest by providing certainty to participants in regard to how their 
interest will be handled. Memorializing the manner in which the system 
will handle orders entered into PIM during a trading halt will provide 
transparency for the benefit of members and investors.
    The Exchange's proposal to amend MRX Rule 716, entitled ``Block 
Trades'' to memorialize that if a trading halt is initiated after an 
order is entered into the Block Order Mechanism, Facilitation 
Mechanism, or Solicited Order Mechanism, such auction will also be 
automatically terminated without execution is consistent with the Act 
because in the event of a trading halt, terminating these auction 
mechanisms and not executing eligible interest will provide certainty 
to participants in regard to how their interest will be handled. 
Memorializing the manner in which the system will handle orders during 
a trading halt will provide transparency for the benefit of members and 
investors.
Market Order Spread Protection
    The Exchange's proposal to amend MRX Rule 711 to adopt a mandatory 
risk protection entitled Market Order Spread Protection is consistent 
with the Act because it provides a protection for Market Orders that 
may encourage price continuity, which should, in turn, protect 
investors and the public interest by reducing executions occurring at 
dislocated prices. Further, the Exchange believes that this rule 
proposal will mitigate risks to market participants.
Acceptable Trade Range
    The Exchange's proposal to amend MRX Rule 714 to remove the current 
Price Level Protection rule and adopt Phlx's Acceptable Trade Range is 
consistent with the Act and will remove impediments to and perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest by making the 
Exchange's market more efficient, to the benefit of the investing 
public. Further, it should prevent the system from experiencing 
dramatic price swings by creating a level of protection that prevents 
the market from moving beyond set thresholds. The proposed rule change 
will reduce the negative impacts of sudden, unanticipated volatility in 
individual options, and serve to preserve an orderly market in a 
transparent and uniform manner, enhance the price-discovery process, 
increase overall market confidence, and promote fair and orderly 
markets and the protection of investors. Specifically, the Exchange 
believes that the NBBO is a fair representation of then-available 
prices and accordingly the proposal helps to avoid executions at prices 
that are significantly worse than the NBBO.
    With respect to the posting information, which is described in the 
Phlx rule, but not contained in the proposed MRX rule, the Exchange 
believes that it is consistent with the Act to cancel unexecuted 
interest which is priced through an Acceptable Trade Range. Today, the 
Exchange does not have an iterative process wherein the Exchange will 
attempt to execute unexecuted balances for a period of time while that 
interest is automatically re-priced on the order book. Phlx has this 
type of functionality for Acceptable Trade Range, while the Exchange 
does not re-price interest on the order book. The Exchange 
transparently describes the cancellation of the interest within its 
rules.
PMM Order Handling and Opening Obligations
    The Exchange's proposal to eliminate the PMMs order handling and 
opening obligations is consistent with the Act because PMMs will no 
longer have these obligations due to the introduction of Acceptable 
Trade Range and opening rotation functionality that is offered today on 
NOM and Phlx. Because the PMM will no longer have these obligations, 
the Exchange believes that it is appropriate to remove these rules.
Back-Up PMM
    The Exchange's proposal to remove certain responsibilities of 
Primary Market Makers with respect to Back-Up Primary Market Maker 
assignments is consistent with the Act because the Exchange believes 
this function is not necessary. Today, in addition to market making 
obligations, the Primary Market Maker has certain order handling and 
other obligations as prescribed by Exchange Rules. Specifically, the 
obligations of a Primary Market Maker include the initiation of a 
trading rotation pursuant to MRX Rule 701, quoting and other 
obligations pursuant to MRX Rules 803 and 804, and financial 
requirements pursuant to MRX Rule 809. The Exchange is proposing to 
amend the obligations of a PMM only with regard to the initiation of a 
trading rotation pursuant to MRX Rule 701. The quoting and financial 
requirements rules shall remain the same. With the re-platform, a Back-
Up Primary Market Maker is no longer necessary since the order handling 
obligations present on MRX today are not going to be present

[[Page 25836]]

in the new system. Furthermore, the proposed Opening Process,\48\ 
obviates the importance of such a role. The Opening Process further 
describes alternative methods to open the market if such quotes are not 
entered at the opening by either of these market makers.\49\ The 
reliance on a market maker to initiate the opening process is no longer 
present within the proposed rule.\50\
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    \48\ See note 3 above.
    \49\ Id.
    \50\ Id.
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    In addition, the Exchange does not believe there is an interest 
among market participants for the back-up assignment.
Default Settings for Market Maker Risk Protections
    The Exchange's proposal to amend MRX Rule 804(g) to introduce 
default curtailment settings for the Market Maker Speed Bump and 
Market-Wide Speed Bump is consistent with the Act as it will allow 
market makers to use Exchange set default values for these risk 
protections. Today, these market makers would have their quotes 
rejected if they fail to enter the required curtailment parameters. The 
default settings provide an alternative for market makers that have not 
entered their curtailment settings. Default settings will be announced 
to members who will have the opportunity to avoid the defaults by 
entering their own curtailment settings as required under the rule.
Anti-Internalization
    The Exchange's proposal to amend the MRX Supplementary Material at 
.03 to Rule 804 to add Anti-Internalization is consistent with the Act 
because it is designed to assist market makers in reducing trading 
costs from unwanted executions potentially resulting from the 
interaction of executable buy and sell trading interest from the same 
firm when performing the same market making function.
    Further, it is consistent with the Act to not apply this 
functionality in any auction because AIQ is difficult to apply during 
auctions, and there is limited benefit in doing so. There is limited 
benefit because, generally speaking, auctions do not raise the same 
policy concerns for wash sales and ERISA \51\ due to the semi-random 
manner in which trades are matched.
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    \51\ See note 34 above.
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Minimum Quantity Orders
    The Exchange believes that removing minimum quantity orders would 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system by simplifying functionality 
available on the Exchange and reducing complexity of its order types.
Delay of Implementation
    The Exchange believes that delaying the implementation of the 
Directed Order functionality on MRX is consistent with the Act because 
the Exchange desires to rollout this functionality at a later date to 
allow additional time to rebuild this technology on the new platform. 
The Exchange is staging the replatform to provide maximum benefit to 
its Members while also ensuring a successful rollout. This delay will 
provide the Exchange additional time to implement this functionality, 
which is not being amended. Members have been given adequate notice of 
the implementation dates. The Exchange will continue to provide 
notifications to Members to ensure clarity about the delay of 
implementation of this functionality. The Exchange will note the 
applicable dates within the rule text.
Cancel and Replace Orders
    With respect to Cancel and Replace Orders, the Exchange believes 
that it is consistent with the Act to treat such orders as new orders 
which will be subject to price or other reasonability checks. The 
Exchange believes that conducting price or other reasonability checks 
for all Cancel and Replace Orders will protect investors and the public 
interest by validating the order against the current market conditions 
prior to proceeding with the request to modify the order. The manner in 
which MRX treats priority with respect to Cancel and Replace Orders is 
not changing. The MRX system currently assigns a new priority to the 
order when the price is changed, size is increased or the size of a 
reserve order is changed. Hence, the priority of the original order 
would continue to not be retained in the same manner with respect to 
the original order. The Exchange believes that allowing Cancel and 
Replace Orders, where the size is reduced, to retain the priority of 
the original order is consistent with the manner in which the Exchange 
treats partially executed orders, which similarly apply the priority of 
the executed portion of the order to the remaining portion of the 
order. Other exchanges today permit an order to retain priority if only 
the size was decremented.\52\ The Exchange believes that permitting 
size to decrement and allowing the order to retain priority is 
consistent with the Act because the reduced change in size does not 
impact the terms of the order materially. The reduced size of the order 
would have priority on the Order Book with the original order.
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    \52\ See NASDAQ PHLX, LLC Rule 1080(b)(i)(A).
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    The Exchange believes that it is consistent with the Act to treat 
Reserve Orders differently than other order types by giving these 
orders a new priority if size is amended in any way, including a 
decrement in size, with a Cancel and Replace Order because unlike other 
order types, Reserve Orders have both a displayed an [sic] non-
displayed portion. The Exchange believes that any change to the 
original order of a Reserve Order should be treated as a new order 
because the size of a Reserve Order is specifically defined as part of 
that order type. A Member must specify the displayed and total volume, 
a portion of which is non-displayed, when a Reserve Order is entered 
into the system. Treating this order type as a new order if size is 
amended is consistent with the Act because the terms of the original 
order of a Reserve Order would modify the total size of the order, 
including potentially displayed and non-displayed portions which the 
Exchange believes should result in a new order as it changes a material 
portion of the order.
    The Exchange believes that memorializing the Cancel and Replace 
Order handling will add transparency and specificity to the Rules 
thereby protecting investors and the public interest by reducing the 
potential for investor confusion.
All-Or-None Orders
    The Exchange believes that the proposal with respect to All-Or-None 
Orders is appropriate and reasonable, because the time-in-force 
designation of Immediate-Or-Cancel will offer Members certainty with 
respect to their order handling. With this proposal, an All-Or-None 
Order will either execute immediately or be cancelled back to the 
Member. All-Or-None Orders are contingency orders that have no priority 
on the Order Book. These orders would receive an execution after all 
other trading interest at the same price has been exhausted. This 
proposal would remove uncertainty with respect to the manner in which 
these orders would be handled in the Order Book by cancelling back an 
All-Or-None Order if it cannot be immediately executed in its entirety. 
Today, the NASDAQ Options Market, LLC (``NOM'') only permits All-Or-
None Orders to be submitted with a time-in-

[[Page 25837]]

force designation of Immediate-Or-Cancel.\53\
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    \53\ See NOM Rules, Chapter VI, Section 1(g)(2).
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    The Exchange notes that Members are aware of the Exchange's efforts 
to replatform to the INET technology. Members have been involved in 
testing the system and providing feedback to the Exchange throughout 
this migration process. Members were provided notice of this proposed 
change to the system. The Exchange intends to make clear the 
implementation of this functionality within its Rulebook.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. As explained above, the 
Exchange is re-platforming it's trading system onto the Nasdaq INET 
architecture, and is making certain other changes to its trading 
functionality in connection with this migration. A majority of the 
functionality that is being added with the proposed rule change already 
exists on one or more Nasdaq Exchanges. As a result, the Exchange does 
not believe that the proposed rule change will impact the intense 
competition that exists in the options market. In fact, the Exchange 
believes that adopting this functionality on MRX will allow the 
Exchange to more effectively compete for order flow with other options 
markets.
    The Exchange does not believe conducting price or other 
reasonability checks for all Cancel and Replace Orders imposes an undue 
burden on competition because all Cancel and Replace Orders will 
uniformly be subject to this additional protection based on the current 
market conditions. Permitting all market participants to reduce their 
exposure without penalty does not impose an undue burden [sic] 
competition, rather it promotes competition by allowing participants 
the ability to change their orders in a changing market, provided the 
order was not already filled. The Exchange believes that not permitting 
Reserve Orders to retain priority if size is amended does not create an 
undue burden on competition because all Members will be treated in a 
uniform manner with respect to Cancel and Replace Order handling.
    The Exchange does not believe that the proposed rule change to All-
or-None Orders will impact the intense competition that exists in the 
options market because the All-Or-None Order type, as proposed, will 
continue to offer Members a competitive alternative on MRX for 
submitting orders for execution.
    Delaying the implementation of the Directed Order functionality 
will allow additional time to rebuild this technology on the new 
platform and provide maximum benefit to Members for a successful 
rollout. No Member will be able to utilize the Directed Order 
functionality with the delay. Members have been given adequate notice 
of the implementation dates.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MRX-2017-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-MRX-2017-02. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MRX-2017-02 and should be 
submitted on or before June 26, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11509 Filed 6-2-17; 8:45 am]
 BILLING CODE 8011-01-P