[Federal Register Volume 83, Number 50 (Wednesday, March 14, 2018)]
[Notices]
[Pages 11259-11261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05164]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82847; File No. SR-GEMX-2018-09]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
of Proposed Rule Change To Introduce the ATR Protection for Orders That 
Are Routed to Away Markets

March 9, 2018.
    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 February 26, 2018, Nasdaq GEMX, LLC (``GEMX'' 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to introduce its Acceptable Trade Range 
protection for orders that are routed to away markets pursuant to the 
Options Order Protection and Locked/Crossed Markets Plan.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqgemx.cchwallstreet.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 Exchange offers an Acceptable Trade Range (``ATR'') protection 
that prevents the execution of quotes and orders on the regular order 
book outside of set thresholds. The purpose of the proposed rule change 
is to enhance this ATR protection for orders that are routed to away 
markets pursuant to the Options Order Protection and Locked/Crossed 
Markets Plan (``Linkage Plan'') instead of being executed immediately 
on the Exchange or resting on the regular order book.
    As codified in Rule 714(b)(1), the Exchange's trading system 
calculates an Acceptable Trade Range to limit the range of prices at 
which an order or quote will be allowed to execute.\3\ The Acceptable 
Trade Range is calculated 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 or 
quotes).\4\ Upon receipt of a new order or quote, 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.
---------------------------------------------------------------------------

    \3\ The ATR protection is not available for All-or-None orders.
    \4\ There are three categories of options for ATR: (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.
---------------------------------------------------------------------------

    Currently, the trading system calculates an appropriate reference 
price for an incoming order or quote when that order or quote rests or 
trades on the regular order book but not when orders are routed to an 
away market pursuant to the Linkage Plan without first trading on the 
Exchange. The Exchange now proposes to enhance its ATR protection by 
applying it to orders that are routed to away markets without first 
trading on the Exchange. As proposed, Rule 714(a)(1) will continue to 
provide that the reference price for the ATR protection is the NBB for 
sell orders/quotes and the NBO for buy orders/quotes. For clarity, 
however, the Exchange proposes to move this language to a separate 
bullet under proposed Rule 714(a)(1)(ii). In addition, proposed Rule 
714(a)(1)(ii) will indicate that the reference price is calculated upon 
receipt of a new order or quote, provided that if the applicable NBB or 
NBO price is improved at the time an order is routed to an away market, 
a new reference price is calculated based on the NBB or NBO at that 
time.
    Although the Exchange will continue to use the NBB or NBO as the 
reference price for the ATR protection, the Exchange believes that it 
is appropriate to update the reference price if the applicable NBB or 
NBO price is improved at the time an order is routed to an away market. 
Orders that are routed to away markets are eligible for the ``Flash'' 
auction process described in Supplementary Material .02 to Rule 1901. 
When a Flash auction is initiated, members are given an opportunity to 
enter responses to trade with the order for a time period established 
by the Exchange not to exceed one (1) second.\5\ Because the applicable 
NBB or NBO price may change during the Flash auction, the Exchange 
believes that it is appropriate to consider the updated NBB or NBO 
price at the time the order is actually routed to an away market, if 
doing so would provide additional protection to the order--i.e., if the 
NBB or NBO price used as the reference price is improved at that time. 
If the NBB or NBO price is not improved, the ATR protection will 
continue to use the NBB or NBO price on entry as the reference price, 
thereby providing the maximum protection to the order. The following 
examples illustrate how the ATR protection will be applied to orders 
routed to away markets:
---------------------------------------------------------------------------

    \5\ Currently, the exposure period for the Flash auction is set 
to 150 milliseconds.
---------------------------------------------------------------------------

    Example 1 
1. ATR threshold set to $0.15 for non-penny symbols
2. NBBO is $0.90 (35) x $1.00 (25):
    a. BATS: $0.90 (10) x $1.00 (25)
    b. CBOE: $0.90 (25) x $1.05 (25)
    c. MIAX: $0.85 (25) x $1.15 (25)
    d. GEMX: $0.85 (50) x $1.20 (50)
3. Member enters a Limit Order to buy 200 contracts at $1.20
4. Flash auction initiated at a price of $1.00
5. CBOE quote improved establishing a new NBBO of $0.90 (35) x $0.95 
(25):
    a. BATS: $0.90 (10) x $1.00 (25)
    b. CBOE: $0.90 (25) x $0.95 (25)
    c. MIAX: $0.85 (25) x $1.15 (25)
    d. GEMX: $0.85 (50) x $1.20 (50)
6. No responses entered and Flash auction terminates and routes:
    a. 25 contracts to buy to CBOE at $0.95
    b. 25 contracts to buy to BATS at $1.00
7. Because the NBO is improved at time of routing, the reference 
price is set to the improved NBO price of $0.95,

[[Page 11260]]

establishing an Acceptable Trade Range of $1.10
8. The remaining balance of 150 contracts that cannot be executed 
within the Acceptable Trade Range is cancelled
    Example 2 
1. ATR threshold set to $0.15 for non-penny symbols
2. NBBO is $0.90 (35) x $1.00 (25):
    a. BATS: $0.90 (10) x $1.00 (25)
    b. CBOE: $0.90 (25) x $1.05 (25)
    c. MIAX: $0.85 (25) x $1.15 (25)
    d. GEMX: $0.85 (50) x $1.20 (50)
3. Member enters a Limit Order to buy 200 contracts at $1.20
4. Flash auction initiated at a price of $1.00
5. BATS quote worsened establishing a new NBBO of $0.90 (35) x $1.05 
(50):
    a. BATS: $0.90 (10) x $1.05 (25)
    b. CBOE: $0.90 (25) x $1.05 (25)
    c. MIAX: $0.85 (25) x $1.15 (25)
    d. GEMX: $0.85 (50) x $1.20 (50)
6. No responses entered and Flash auction terminates and routes:
    a. 25 contracts to buy to BATS at $1.05
    b. 25 contracts to buy to CBOE at $1.05
    c. 25 contracts to buy to MIAX at $1.15
7. Because the NBO is worsened at time of routing, the reference 
price is set to the initial NBO price of $1.00, establishing an 
Acceptable Trade Range of $1.15
8. The remaining balance of 125 contracts that cannot be executed 
within the Acceptable Trade Range is cancelled
Implementation
    The Exchange proposes to launch the ATR functionality described in 
this proposed rule change no later than October 31, 2018. The Exchange 
will announce the implementation date of this functionality in an 
Options Trader Alert issued to members prior to the launch date.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\6\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\7\ 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.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Exchange believes that the proposed rule change 
would remove impediments to and perfect the mechanism of a free and 
open market by enhancing the Exchange's ATR protection. The ATR 
functionality is designed to ensure that orders and quotes entered on 
the Exchange are executed at reasonable prices based on the applicable 
NBBO price on receipt. Currently, the Exchange's ATR protection 
calculates a reference price at the time an order or quote rests or 
trades locally but not when an order is routed to an away market 
pursuant to the Linkage Plan without first trading on the Exchange. To 
further protect orders that are subject to routing that have not traded 
on the Exchange, the Exchange is proposing to implement the ATR 
protection for those orders. The Exchange will continue to use the NBBO 
as the reference price for the ATR protection but now that the Exchange 
is protecting orders that are routed away pursuant to the Linkage Plan 
without trading on the Exchange, the Exchange proposes to use the NBBO 
price on routing instead of the NBBO on receipt only in those 
circumstances where the NBBO is improved at the time of routing. As 
described earlier in this proposed rule change, the Exchange operates a 
Flash auction that provides an opportunity for Members to match or 
improve the NBBO price prior to routing eligible orders to away 
markets. Since the NBBO price may change during the Flash auction's 
exposure period, the Exchange believes that the ATR protection should 
take improved NBBO prices into account when determining whether a 
particular price is a reasonable execution price. The Exchange 
believes, however, that a worsened NBBO price should not be considered 
as this would decrease rather than increase the protection provided to 
such an order. In sum, the proposed changes to the ATR protection will 
protect investors and the public interest by providing additional 
protections designed to ensure that quotes and orders entered on the 
Exchange are executed at reasonable prices, and thereby perfect the 
mechanism of a free and open market and a national market system.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
designed to enhance the Exchange's ATR protection by extending that 
protection to orders that are routed to away markets that did not first 
trade on the Exchange. The proposed protection will apply equally to 
all orders that are routed to away markets pursuant to the Linkage 
Plan. The Exchange believes that this change is the result of a 
competitive market where exchanges must continually improve the 
functionality offered to market participants in order to remain 
competitive.

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-GEMX-2018-09 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-GEMX-2018-09. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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

[[Page 11261]]

available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10:00 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. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
GEMX-2018-09 and should be submitted on or before April 4, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05164 Filed 3-13-18; 8:45 am]
 BILLING CODE 8011-01-P