[Federal Register Volume 83, Number 187 (Wednesday, September 26, 2018)]
[Notices]
[Pages 48678-48681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20886]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84238; File No. SR-GEMX-2018-32]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to Risk 
Protections

September 20, 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 September 11, 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 amend GEMX Rules 100(a)(5) which contains 
definitions, Rule 711, ``Acceptance of Quotes and Orders'' and Rule 
714, ``Automatic Execution of Orders.''
    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
    GEMX proposes to amend Rule 714, Automatic Execution of Orders, by 
placing all risk protections within this rule and further creating 
sections to distinguish order protections, order and quote protections 
and quote protections. The Exchange believes that providing Members 
with a single rule with all risk protections will provide an easy 
reference to the mandatory single leg risk protections on GEMX.
    The Exchange is amending Rule 714(b) to rename the caption from 
``Other Order Protections'' to ``Other Risk Protections.'' The Exchange 
is amending references to ``order protections'' to ``risk protections'' 
within that rule to more broadly describe the type of protections 
offered on GEMX. Finally, the Exchange is relocating rule text from 
Rule 714(c) to the end of proposed Rule 714(b), which states, ``In the 
event of unusual market conditions and in the interest of a fair and 
orderly market, the Exchange may temporarily establish the levels at 
which the order protections contained in this paragraph are triggered 
as necessary and appropriate.'' These non-substantive rule changes are 
intended to bring greater clarity to the rule.
    The Exchange proposes to add the following to proposed Rule 
714(b)(1), ``The following are order risk protections on GEMX:'' The 
Exchange proposes to list all order protections within Rule 714(b)(1). 
The Exchange proposes to relocate Limit Order Price Protection from 
Rule 714(b)(2) to proposed Rule 714(b)(1)(A). The Exchange also 
proposes to add a new sentence to the end of proposed Rule 714(b)(1)(A) 
which provides, ``Limit Order Price Protection shall not apply to the 
Opening Process or during a trading halt.'' The Exchange is adding this 
sentence, which was not contained in the initial rule change, to make 
clear the limitations as to when this protection is available on GEMX. 
The Exchange notes the Limit Order Price Protection rejects orders to 
buy (sell) as the greater of the Exchange's best offer (bid) plus 
(minus) either an absolute dollar or a percentage. The Exchange notes 
that the bid or offer is not established until after an option series 
options for trading. Applying this protection during the Opening 
Process is not necessary as the quote width allowance is tighter during 
the Opening Process.\3\ With respect to trading halts, Opening Process 
procedures will be used to reopen an option series after a trading 
halt, therefore, the same protections noted for the Opening Process 
will apply for a trading halt and the same restrictive boundaries would 
apply.\4\ This sentence memorializes the Exchange's current practice. 
The Exchange believes that this rule text will bring greater clarity to 
the Limit Order Price Protection functionality.
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    \3\ With respect to the Opening Process, a Quality Opening 
Market is required. A Quality Opening Market a bid/ask differential 
applicable to the best bid and offer from all Valid Width Quotes 
defined in a table to be determined by the Exchange and published on 
the Exchange's website. See GEMX Rule 701(a)(7).
    \4\ See GEMX Rule 701(d).
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    The Exchange proposes to relocate and re-number Market Order Spread 
Protection from Rule 711(c) to proposed Rule 714(b)(1)(B). The Exchange 
also proposes to add a sentence which provides, ``Market Order Spread 
Protection shall not apply to the Opening Process or during a trading 
halt.'' The Exchange believes that the Market Order Spread Protection 
is unnecessary during the Opening Process and during a trading halt 
because protections are in place during the Opening Process to ensure 
that the best bid and offer displayed on the Exchange are within a 
reasonable range.\5\ The

[[Page 48679]]

Opening Process has more restrictive boundaries than those proposed for 
the Market Order Spread Protection. With respect to the Opening 
Process, a Quality Opening Market is required. A Quality Opening Market 
requires a bid/ask differential applicable to the best bid and offer 
from all Valid Width Quotes defined in a table \6\ to be determined by 
the Exchange.\7\ The Exchange's requirements during the Opening Process 
are more restrictive than the proposed initial setting for the Market 
Order Spread Protection, which is proposed at $5. As provided in Rule 
701(d), trading halts are subject to the reopening process as provided 
for in Rule 701(e). The same protections noted for the Opening Process 
above will apply for trading halts. The Exchange believes that the 
Market Order Spread Protection is unnecessary during the Opening 
Process and during a trading halt because other protections are in 
place to ensure that the best bid and offer displayed on the Exchange 
are within a reasonable range. The Exchange is adding this sentence to 
make clear the limitations as to when this protection is available on 
GEMX. The Exchange believes that this rule text will bring greater 
clarity to the Market Order Spread Protection functionality.
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    \5\ See note 3 above. With respect to trading halts, Opening 
Process procedures will be used to reopen an option series after a 
trading halt, therefore, the same protections noted for the Opening 
Process will apply for a trading halt and the same restrictive 
boundaries would apply. See GEMX Rule 701(d).
    \6\ The table is located at: https://business.nasdaq.com/media/GEMXSystemSetting_tcm5044-41351.pdf.
    \7\ The calculation of Quality Opening Market is based on the 
best bid and offer of Valid Width Quotes. The differential between 
the best bid and offer are compared to reach this determination. The 
allowable differential, as determined by the Exchange, takes into 
account the type of security (for example, Standard Penny Issues, 
Non-Penny Issues and Special Penny Issues), volatility, option 
premium, and liquidity. The Quality Opening Market differential is 
intended to ensure the price at which the Exchange opens reflects 
current market conditions. See GEMX Rule 701(a)(7).
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    The Exchange is also memorializing a sentence which was contained 
in the filing which adopted Market Order Spread Protection. The 
Exchange noted in the adopting filing that the Exchange may establish 
differences other than the referenced threshold for one or more series 
or classes of options.\8\ At this time, the Exchange proposes to 
memorialize this capability within Rule 714(b)(1)(B) by stating, ``The 
Exchange may establish different thresholds for one or more series or 
classes of options.'' The Exchange believes that adding this provision 
to the rule will add transparency to the Exchange's capability to 
establish different thresholds per options series or class.
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    \8\ Securities Exchange Act Release No. 79677 (December 22, 
2016), 81 FR 96114 (December 29, 2016) (SR-ISEGemini-2016-17).
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    The Exchange proposes to relocate Size Limitation from Rule 
714(b)(3) to proposed Rule 714(b)(1)(C) without any amendments. The 
Exchange proposes to add the following to proposed Rule 714(b)(2), 
``The following are order and quote risk protections on GEMX:'' The 
Exchange proposes to list all order and quote protections within Rule 
714(b)(2). The Exchange proposes to re-letter Acceptable Trade Range 
from Rule 714(b)(1) to proposed Rule 714(b)(2)(A).
    The Exchange proposes to relocate Market Wide Risk Protection from 
Rule 714(d) to proposed Rule 714(b)(1)(D). The Exchange is only 
amending cross references within this rule to reflect the new location 
of this text.
    The Exchange proposes new rule text at Rule 714(b)(3) which 
provides, ``The following are Market Maker risk protections on GEMX:'' 
The Exchange proposes to list all Market Maker protections within Rule 
714(b)(3). The Exchange proposes to relocate Anti-Internalization from 
Supplementary Material .03 to Rule 804 to proposed Rule 714(b)(3)(A). 
The Exchange proposes to replace the words ``market participant 
identifier'' with ``Market Maker identifiers.'' The Exchange also 
proposes to replace the words ``Exchange account identifier'' with 
``account number.'' \9\ The Exchange believes these modifications will 
bring more clarity to the functionality. The Exchange is removing the 
words ``Notwithstanding Rule 804(d)(1) above'' which refer to the firm 
quote.\10\ The Exchange notes that the submission of bids and offers 
must be firm notwithstanding any protection offered by the Exchange, 
not just Anti-Internalization. The Exchange does not believe it is 
necessary to specifically cite this caveat for this order protections. 
The Exchange also proposes to capitalize the defined term Market Maker 
in this sentence.
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    \9\ An ``account number'' shall mean a number assigned to a 
Member. Members may have more than one account number. See Rule 
100(a)(1).
    \10\ GEMX Rule 804(d)(1) provides that Market Maker bids and 
offers are firm for orders and Exchange Market Maker quotations both 
under this Rule and Rule 602 of Regulation NMS under the Exchange 
Act (``Rule 602 of Reg NMS'') for the number of contracts specified 
according to the requirements of paragraph 804(b).
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    The Exchange proposes to relocate Automated Quotation Adjustments 
from Rule 804(g) to proposed Rule 714(b)(3)(B). Rule 804(g) will be 
reserved. The Exchange is amending references in the rule to reflect 
the new placement within Rule 714 and replacing the words ``Exchange's 
system (``System'')'' with the defined term System.\11\ Finally, the 
term ``member'' was capitalized because it is a defined term. The 
Exchange is also making clear within Rule 715(b)(3)(B)(vi) that Market 
Makers must request the Exchange enable re-entry by contacting the 
Exchange's Operations Department.
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    \11\ The term ``System'' means the electronic system operated by 
the Exchange that receives and disseminates quotes, executes orders 
and reports transactions. See Rule 100(a)(64).
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    Finally, the Exchange proposes to amend the definition of badge 
within Rule 100(a)(5) to state that a badge is an account number, which 
may contain letters and/or numbers, assigned to Market Makers. The 
Exchange may from time to time modify the manner in which a badge is 
expressed systemically. This proposed language allows for latitude in 
establishing badges within the System.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of 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 of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by grouping the various risk protections into a single rule 
for ease of reference and adding headers to the rule to make clear 
whether the risk protection is an order protection, order or quote 
protection or a protection applicable to Market Makers. The Exchange 
believes the reorganization of the existing rule and relocation of 
various rules into Rule 714 is a non-substantive rule change. The 
Exchange believes that this rule change is consistent with the 
protection of investors and the public interest because it will bring 
greater transparency to the protections offered on GEMX.
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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's proposal to not apply the Limit Order Price 
Protection during the Opening Process is consistent with the Act 
because the Exchange rejects orders to buy (sell) as the greater of the 
Exchange's best offer (bid) plus (minus) either an absolute dollar or a 
percentage. The Exchange notes that the bid or offer is not established 
until after an option series options for trading. Applying this 
protection during the Opening Process is not necessary as the quote 
width allowance is tighter during the Opening

[[Page 48680]]

Process.\14\ With respect to trading halts, Opening Process procedures 
will be used to reopen an option series after a trading halt, 
therefore, the same protections noted for the Opening Process will 
apply for a trading halt and the same restrictive boundaries would 
apply.\15\
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    \14\ With respect to the Opening Process, a Quality Opening 
Market is required. A Quality Opening Market a bid/ask differential 
applicable to the best bid and offer from all Valid Width Quotes 
defined in a table to be determined by the Exchange and published on 
the Exchange's website. See GEMX Rule 701(a)(7).
    \15\ See GEMX Rule 701(d).
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    The Exchange's proposal to not apply the Market Order Spread 
Protection during the Opening Process is consistent with the Act 
because protections exist during the Opening Process to ensure that the 
best bid and offer displayed on the Exchange are within a reasonable 
range. The Exchange's Opening Process Rule 701 \16\ and the reopening 
process after a trading halt \17\ both contain more restrictive 
boundaries than those proposed or the Market Order Spread Protection. 
With respect to the Opening Process, a Quality Opening Market is 
required. A Quality Opening Market requires a bid/ask differential 
applicable to the best bid and offer from all Valid Width Quotes 
defined in a table to be determined by the Exchange.\18\ The Exchange's 
requirements during the Opening Process are more restrictive than the 
proposed initial setting for the Market Order Spread Protection, which 
is set at $5. The same protections noted for the Opening Process above 
will apply for trading halts. The Exchange believes that the Market 
Order Spread Protection is unnecessary during the Opening Process and 
during a trading halt because other protections are in place to ensure 
that the best bid and offer displayed on the Exchange are within a 
reasonable range.
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    \16\ See note 14 above.
    \17\ With respect to trading halts, Opening Process procedures 
will be used to reopen an option series after a trading halt, 
therefore, the same protections noted for the Opening Process will 
apply for a trading halt and the same restrictive boundaries would 
apply. See GEMX Rule 701(d).
    \18\ The table is located at: https://business.nasdaq.com/media/GEMXSystemSetting_tcm5044-41351.pdf.
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    Memorializing the ability of the Exchange to establish different 
Market Order Spread Protection thresholds per options series or class 
will also bring greater clarity to the rule. Today, the Exchange has 
this ability, it is simply adding that text to the rule. Utilizing 
defined terms within the Rulebook will also bring clarity to the rules. 
The Exchange also believes using more discrete language within the 
Anti-Internalization rule will clarity the functionality.
    Finally, the Exchange believes that expanding the definition of 
badge is consistent with the Act because it allows the Exchange the 
flexibility to administer the badges within its 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 not necessary or appropriate in 
furtherance of the purposes of the Act. The proposal does not impose an 
intra-market burden on competition with respect to the reorganization 
and relocation of the various rules into Rule 714 because the various 
risk protections are mandatory and will continue to apply uniformly to 
all market participants. The Exchange also believes that the addition 
of specific limitations to both the Limit Order Price Protection and 
Market Order Spread Protection rules will provide market participants 
with greater information as to when these protections will apply. These 
limitations apply uniformly to all market participants. The remainder 
of the rule changes are intended to bring greater transparency to the 
current operation Exchange's rules.

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

    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) of the Act \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of 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.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \21\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \22\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the proposed rule change may become operative upon filing. The 
Exchange argues that waiver of the operative delay would allow the 
Exchange to immediately incorporate all risk protections into Rule 714 
and bring greater transparency to the risk protections offered on the 
Exchange. The Commission believes that waiver of the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. Accordingly, the Commission hereby waives the operative delay 
and designates the proposed rule change operative upon filing.\23\
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    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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 change 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-2018-32 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-2018-32. This file 
number should be included on the

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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-2018-32, and should be submitted on or before October 17, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-20886 Filed 9-25-18; 8:45 am]
 BILLING CODE 8011-01-P