[Federal Register Volume 83, Number 149 (Thursday, August 2, 2018)]
[Notices]
[Pages 37867-37870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16530]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83731; File No. SR-GEMX-2018-26]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Codify the 
Protocol Definitions That Members Use To Enter Quotes and Orders

July 27, 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 July 16, 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.
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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 codify the definitions of the protocols 
that Members can use to enter quotes and orders on the Exchange.
    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 purpose of the proposed rule change is to codify the 
definitions of the protocols that Members use to enter quotes and 
orders on the Exchange, specifically, the Specialized Quote Feed 
(``SQF''), Ouch to Trade Options (``OTTO''), Financial Information 
eXchange (``FIX''), and Nasdaq Precise (``Precise''). On April 27, 
2017, the Exchange filed a proposed rule change that established the 
ports that Members use to connect to the Exchange, including ports used 
for quote and order entry--i.e., SQF, OTTO and FIX.\3\ The Exchange has 
also filed proposed rule changes that briefly describe the availability 
of Precise, which is the Exchange's proprietary front-end interface 
used by Electronic Access Members (``EAMs'') and their Sponsored 
Customers \4\ to send orders to the

[[Page 37868]]

Exchange and perform other related functions.\5\ The protocols used by 
Members to submit quotes and orders play an important role in the 
operation of the trading system as critical Exchange functionality used 
by Members to transact in options is offered through these protocols. 
The Exchange therefore believes that codifying definitions of these 
protocols in its rules will increase transparency around its 
operations.
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    \3\ See Securities Exchange Act Release No. 80649 (May 10, 
2017), 82 FR 22595 (May 16, 2017) (SR-GEMX-2017-07).
    \4\ A ``Sponsored Customer'' is a non-member of the Exchange 
that trades under a sponsoring member's execution and clearing 
identity pursuant to a sponsorship arrangement between such non-
member and sponsoring member, as set forth in Supplementary Material 
to Rule 706. Market makers must connect to the Exchange via SQF, 
which is the Exchange's quoting protocol, and are therefore not 
eligible to use Precise.
    \5\ See Securities Exchange Act Release No. 81109 (July 10, 
2017), 82 FR 32594 (July 14, 2017) (SR-GEMX-2017-28) (proposed rule 
change regarding how Immediate-or-Cancel Orders will be handled); 
and Securities Exchange Act Release No. 81970 (October 27, 2017), 82 
FR 50910 (November 2, 2017) (SR-GEMX-2017-50) (proposed rule change 
related to the Kill Switch risk protection).
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    As it relates to FIX, OTTO, and SQF, the proposed language is 
substantially similar to the language included in SR-GEMX-2017-07 with 
changes to more clearly and accurately reflect the certain information 
included on each protocol, such as by separating out different 
categories of messages (e.g., auction orders, auction notifications, 
and auction responses). Furthermore, the proposed definitions will be 
harmonized where appropriate with definitions to be included in the 
rules of the Exchange's affiliated options markets, including by using 
consistent terms to define the buckets of information transmitted, or 
the features available, on each protocol.\6\ Although the Exchange is 
changing how it categorizes various features included on FIX, OTTO, and 
SQF as part of its harmonization effort, the list of features included 
in the proposed definitions are intended to be exhaustive with respect 
to the buckets of information provided on each protocol. The Exchange 
also seeks to memorialize Precise to reflect the specific categories of 
features that are available on the Precise front-end today (e.g., order 
and execution management, market data, and risk management). Overall, 
the Exchange believes that the proposed changes will allow Members to 
more easily understand what information is available on which protocol.
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    \6\ The Exchange's affiliates--i.e., Nasdaq ISE, LLC (``ISE''), 
Nasdaq MRX, LLC (``MRX''), Nasdaq PHLX LLC (``Phlx''), Nasdaq 
Options Market (``NOM''), and Nasdaq BX, LLC (``BX'')--intend to 
file similar rule changes as part of this exercise.
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    As proposed, Supplementary Material .03 to Rule 715 (i.e., Types of 
Orders) will provide that the Exchange offers Members the following 
protocols for entering orders and quotes respectively:

A. Financial Information eXchange Ports

    When the Exchange initially filed to adopt order and quote entry 
protocols, it described the FIX protocol as follows: ``FIX is an 
interface that allows market participants to connect and send orders 
and auction orders into the Exchange. Data includes the following: (1) 
Options Symbol Directory Messages; (2) System Event Messages (e.g., 
start of messages, start of system hours, start of quoting, start of 
opening); (3) Option Trading Action Messages (e.g., halts, resumes); 
(4) Execution Messages; (5) Order Messages (order messages, risk 
protection triggers or purge notifications).''
    The Exchange now proposes to codify the following definition of FIX 
in its rulebook: ``Financial Information eXchange'' or ``FIX'' is an 
interface that allows Members and their Sponsored Customers to connect, 
send, and receive messages related to orders and auction orders to the 
Exchange. Features include the following: (1) Execution messages; (2) 
order messages; (3) risk protection triggers and cancel notifications; 
and (4) post trade allocation messages.

B. Ouch To Trade Options Ports

    When the Exchange initially filed to adopt order and quote entry 
protocols, it described the OTTO protocol as follows: ``OTTO is an 
interface that allows market participants to connect and send orders, 
auction orders and auction responses into the Exchange. Data includes 
the following: (1) Options Auction Notifications (e.g., Flash, PIM, 
Solicitation and Facilitation or other information); (2) Options Symbol 
Directory Messages; (3) System Event Messages (e.g., start of messages, 
start of system hours, start of quoting, start of opening); (5) Option 
Trading Action Messages (e.g., halts, resumes); (6) Execution Messages; 
(7) Order Messages (order messages, risk protection triggers or purge 
notifications).''
    The Exchange now proposes to codify the following definition of 
OTTO in its rulebook: ``Ouch to Trade Options'' or ``OTTO'' is an 
interface that allows Members and their Sponsored Customers to connect, 
send, and receive messages related to orders, auction orders, and 
auction responses to the Exchange. Features include the following: (1) 
Options symbol directory messages (e.g., underlying instruments); (2) 
system event messages (e.g., start of trading hours messages and start 
of opening); (3) trading action messages (e.g., halts and resumes); (4) 
execution messages; (5) order messages; (6) risk protection triggers 
and cancel notifications; (7) auction notifications; (8) auction 
responses; and (9) post trade allocation messages.

C. Specialized Quote Feed Ports

    When the Exchange initially filed to adopt order and quote entry 
protocols, it described the SQF protocol as follows: ``SQF is an 
interface that allows market makers to connect and send quotes, sweeps 
and auction responses into the Exchange. Data includes the following: 
(1) Options Auction Notifications (e.g., opening imbalance, Flash, PIM, 
Solicitation and Facilitation or other information); (2) Options Symbol 
Directory Messages; (3) System Event Messages (e.g., start of messages, 
start of system hours, start of quoting, start of opening); (4) Option 
Trading Action Messages (e.g., halts, resumes); (5) Execution Messages; 
(6) Quote Messages (quote/sweep messages, risk protection triggers or 
purge notifications).''
    The Exchange now proposes to codify the following definition of SQF 
in its rulebook: ``Specialized Quote Feed'' or ``SQF'' is an interface 
that allows market makers to connect, send, and receive messages 
related to quotes, Immediate-or-Cancel Orders, and auction responses to 
the Exchange. Features include the following: (1) Options symbol 
directory messages (e.g., underlying instruments); (2) system event 
messages (e.g., start of trading hours messages and start of opening); 
(3) trading action messages (e.g., halts and resumes); (4) execution 
messages; (5) quote messages; (6) Immediate-or-Cancel Order messages; 
(7) risk protection triggers and purge notifications; (8) opening 
imbalance messages; (9) auction notifications; and (10) auction 
responses. The SQF Purge Interface only receives and notifies of purge 
requests from the market maker.\7\
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    \7\ All of the notification messages available on SQF ports as 
described above (i.e., options symbol directory messages, system 
event messages, trading action messages, etc.) are configurable in 
that market makers can select the specific types of notifications 
they wish to receive on their SQF ports. As such, SQF Purge 
Interface ports are a subpart of SQF ports that have been configured 
to only receive and notify of purge requests.
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D. Nasdaq Precise

    ``Nasdaq Precise'' or ``Precise'' is a front-end interface that 
allows Electronic Access Members and their Sponsored Customers to send 
orders to the Exchange and perform other related functions. Features 
include the following: (1) Order and execution management: Enter, 
modify, and cancel orders on the Exchange, and manage executions (e.g., 
parent/child orders, inactive orders, and post-trade allocations); (2) 
market data: Access to real-time market data (e.g., NBBO and

[[Page 37869]]

Exchange BBO); (3) risk management: set customizable risk parameters 
(e.g., kill switch); and (4) book keeping and reporting: comprehensive 
audit trail of orders and trades (e.g., order history and done away 
trade reports).
    Precise is a software application that is offered by the Exchange 
to EAMs and their Sponsored Customers. Use of Precise is completely 
voluntary. The Exchange makes Precise available to EAMs and their 
Sponsored Customers as a convenience for entering and managing orders, 
but the protocol is not an exclusive means for any user to send orders 
to GEMX. Precise is merely a front-end interface to the Exchange's 
existing trading system, and is designed as an alternative to the 
Exchange's other protocols (i.e., FIX, OTTO, and SQF) for the sending 
of orders to GEMX. Precise is also an alternative to similar front-end 
order and execution management systems currently offered by other 
technology providers as well as other exchanges.\8\
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    \8\ For example, Cboe Exchange, Inc. currently offers a similar 
front-end order and execution management system called PULSe\SM\ 
that allows users to send orders to Cboe Options Exchange, C2 
Options, Cboe Futures Exchange, and other U.S. options and stock 
exchanges. See https://www.cboe.org/hybrid/pulsesalessheet.pdf.
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    Precise provides users with access to GEMX's regular order book. 
The protocol offers order and execution features that allow users to 
send, modify, and cancel their orders, and manage executions. For 
example, the protocol offers users the capability to stage larger 
orders and divide them into smaller orders for execution (i.e., parent/
child orders), or stage multiple orders to send for execution at a 
later time (i.e., inactive orders). Precise also offers post trade 
allocation, including the capability for users to directly adjust 
clearing information on the front-end protocol. Precise users can also 
access and display real-time market data such as the National Best Bid 
and Offer (``NBBO'') and the Exchange Best Bid and Offer (``Exchange 
BBO'').
    Precise also provides risk management capabilities that allow users 
to set customizable risk parameters.\9\ For example, Precise supports 
the kill switch risk protection feature, which is an optional tool that 
enables members to initiate a message(s) to the Exchange's trading 
system to promptly cancel orders and restrict entry of new orders until 
re-entry has been enabled.\10\ Lastly, Precise provides a comprehensive 
audit trail of orders and trades through its book keeping and reporting 
features, including order history reports and done away trade 
reports.\11\
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    \9\ The Exchange is characterizing the risk protections on 
Precise under a broader category of risk management compared to the 
risk protection categories on the other protocols because Precise 
also supports administrator capability for accessing and setting 
risk parameters for multiple users within a member firm.
    \10\ See Rule 711(d). Precise is able to send a message to the 
Exchange to initiate the kill switch through Precise.
    \11\ Done away trade reports allow Precise users to record 
orders and executions, including executions on a different venue 
than the Exchange.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the 
``Act''),\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism for a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is consistent 
with the protection of investors and the public interest as it codifies 
the protocols used to connect to the Exchange's trading system. As 
discussed above, the Exchange previously filed to establish FIX, OTTO, 
and SQF in SR-GEMX-2017-07. These protocols will now be codified in the 
Exchange's rulebook. In addition, the Exchange has briefly described 
Precise in various proposed rule changes filed with the Commission. In 
the interest of transparency, the Exchange has included a more fulsome 
description of the functionalities offered via Precise in this proposed 
rule change, and is codifying language in its rules that would describe 
this protocol.
    While no functional changes to the protocols are proposed in this 
filing, the Exchange believes that including a description of the 
protocols in its rulebook will benefit Members by increasing 
transparency around the operation of the Exchange. Furthermore, the 
proposed definitions being included in the rulebook will more clearly 
and accurately reflect the information included on the protocols, and 
will be harmonized with language to be included in the rules of its 
affiliated exchanges to the extent that the protocols operate in the 
same manner. The protocols described in this filing provide a range of 
important features to Members, including the ability to submit quotes 
and orders, and perform other functions necessary to manage trading on 
the Exchange. The Exchange believes codifying the quote and order entry 
protocols will increase transparency to the Members that use these 
protocols to connect to the Exchange.

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

    In accordance with Section 6(b)(8) of the Act,\14\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As explained 
above, the Exchange is codifying the quote and order entry protocols 
that Members use to connect to the Exchange's trading system. The 
Exchange does not believe that codifying these protocols in the 
rulebook will have any competitive impact. FIX, OTTO, and SQF were 
established in SR-GEMX-2017-07, and are already available to Members, 
who use these protocols to connect and manage their trading activity on 
the Exchange. Adding rule language that describes these Exchange 
offerings will increase transparency around the operation of the 
Exchange without having any impact on intermarket or intramarket 
competition. Furthermore, Precise is a voluntary piece of functionality 
that EAMs and their Sponsored Customers may use as a convenience for 
entering and managing orders and executions, as an alternative to the 
Exchange's other protocols (i.e., FIX, OTTO, and SQF). Precise is also 
an alternative to similar front-end order and execution management 
systems currently offered by other technology providers as well as 
other exchanges (e.g., PULSe). If market participants believe that 
other products available in the marketplace are more beneficial than 
Precise, they will simply use those products instead. For the foregoing 
reasons, the Exchange does not believe that its proposal to codify 
Precise will impose any burden on intermarket or intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \14\ 15 U.S.C. 78f(b)(8).
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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.

[[Page 37870]]

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \15\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
In this case, the Commission waives the five-day pre-filing 
requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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-2018-26 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-2018-26. 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 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-2018-26 and should be submitted on 
or before August 23, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16530 Filed 8-1-18; 8:45 am]
 BILLING CODE 8011-01-P