[Federal Register Volume 83, Number 247 (Thursday, December 27, 2018)]
[Notices]
[Pages 66800-66803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28000]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84862; File No. SR-MRX-2018-39]
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Relating to Market
Makers Trading in Non-Appointed Options Classes
December 19, 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 December 12, 2018, 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.
---------------------------------------------------------------------------
\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 amend Rule 805(b) relating to Market
Makers \3\ trading in non-appointed options classes.
---------------------------------------------------------------------------
\3\ ``Market Makers'' refers to ``Competitive Market Makers''
and ``Primary Market Makers'' collectively. See Rule 100(a)(34).
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqmrx.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 this rule change is to amend Rule 805(b) relating to
Market Makers trading in non-appointed options classes.
Rule 805(b) presently governs the submission of orders by Market
Makers in non-appointed options classes. Subparagraphs (b)(2) and
(b)(3) place limitations on the overall percentage of executions that
can occur in the non-appointed options classes. Specifically,
subparagraph (b)(2) limits a Competitive Market Maker's (``CMM'') total
number of contracts executed in non-appointed options classes to 25% of
the CMM's total number of contracts executed in its appointed options
classes and with respect to which it was quoting pursuant to Rule
804(e)(1), and subparagraph (b)(3) limits a Primary Market Maker's
(``PMM'') total number of contracts executed in non-appointed options
classes to 10% of the PMM's total number of contracts executed in its
appointed classes.
The Exchange now proposes in subparagraph (b)(3) to increase the
overall percentage of executions that
[[Page 66801]]
can occur in a PMM's non-appointed options classes from 10% to 25% to
align with the CMM allowance as well as other options exchanges,
including its affiliated options market, BX Options.\4\ The Exchange
adopted the 10% volume limitation for PMMs as part of its application
to be registered as a national securities exchange, and initially
restricted PMMs in this manner because as a nascent exchange, it sought
to promote PMM activity in their appointed options classes in order to
encourage liquidity on the Exchange. Since then, there has been a
proliferation of options classes added to the Exchange for trading, and
the Exchange therefore believes that the 10% limitation is restrictive
in light of the current environment. The Exchange does not believe that
its proposal will adversely impact the quality of the Exchange's market
or lead to a material decrease in liquidity. As noted above, other
options exchanges are operating today with similar or more generous
allowances for its market makers without sacrificing market quality,
and the Exchange believes that its proposed increase will likewise not
result in a decrease of market quality.\5\ Furthermore, Market Makers
and in particular, PMMs, will continue to be subject to the highest
standard applicable on the Exchange to provide liquidity. For instance
as set forth in Rule 804(e)(2), PMMs are held to the highest quoting
standards on the Exchange. Specifically, PMMs are required to provide
two-sided quotations in 90% of the cumulative number of seconds for
which that PMM's appointed options class is open for trading.\6\
Furthermore, PMMs are required to quote in certain options series of
their appointed classes that are excluded from the quoting requirements
of CMMs (i.e., Quarterly Options Series, Adjusted Options Series, and
long-term options). In addition, the Exchange can announce a higher
percentage than the current 90% quoting requirement if doing so would
be in the interest of a fair and orderly market.\7\ PMMs are also
required to enter quotes in their appointed options classes and
participate in the Opening Process.\8\ Accordingly, the Exchange
believes that the foregoing obligations will continue to ensure that
PMMs will provide liquidity in their appointed options classes
notwithstanding the proposed increase in the trading allowance in non-
appointed classes.
---------------------------------------------------------------------------
\4\ BX Options Market Makers (including Lead Market Makers) can
execute no more than 25% of their total volume outside of their
registered options classes. See BX Options Rules, Chapter VII,
Section 6(e). In addition, CBOE Rule 8.7, Interpretations and
Policies .03 provides that 75% of a Market-Maker's total contract
volume must be in classes to which the Market-Maker is appointed.
Accordingly, only 25% of a CBOE Market-Maker's contract volume can
be in non-appointed classes. CBOE Rule 8.7 applies equally to Lead
Market-Makers and Designated Primary Market-Makers in the same
manner as Market-Makers. The Exchange also notes that NYSE Arca
Options does not impose a strict percentage limitation on its market
makers for transacting in non-appointed classes. See NYSE Arca
Options Rules 6.37-O(d) and 6.37B-O.
\5\ Id.
\6\ See Rule 804(e)(2).
\7\ See Rule 804(e)(2). See also Securities Exchange Act Release
No. 84582 (November 14, 2018), 83 FR 58665 (November 20, 2018) (SR-
MRX-2018-34).
\8\ See Rule 701(c)(3).
---------------------------------------------------------------------------
In addition, the Exchange believes that the proposed increase in
the overall percentage from 10% to 25% will bring MRX in line with
other options exchanges, and permit its Market Makers to effectively
compete with market makers on other options exchanges. Moreover,
applying requirements that are substantially similar to other options
exchanges will remove a significant compliance burden on market makers
who provide liquidity across multiple options exchanges.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\10\ 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. In particular, the Exchange believes that the proposed rule
change promotes just and equitable principles of trade because it
reduces an outdated restriction on PMMs, and simplifies the application
of the rule by imposing the same 25% volume limitation on all Market
Makers. The purpose of limiting the number of contracts executed in
non-appointed classes to a small percentage of contracts executed in
appointed classes was to encourage Market Makers to provide liquidity
in their appointed classes. As discussed above, the Exchange initially
adopted the 10% volume limitation for PMMs because as a nascent
exchange, it sought to promote PMM activity in their appointed options
classes in order to encourage liquidity on the Exchange. Since then,
there has been a proliferation of options classes added to the Exchange
for trading, and the Exchange therefore believes that the 10%
limitation is restrictive in light of the current environment. Other
options exchanges are operating today with similar or more generous
allowances for its market makers without sacrificing market quality,
and the Exchange therefore believes that the proposed increase will not
result in a decrease of quality on its own market.\11\ In addition, the
Exchange believes that the heightened obligations for PMMs to
participate in the Opening Process and provide intra-day quotes will
continue to ensure that PMMs provide liquidity in their appointed
options classes notwithstanding the proposed increase in the trading
allowance in non-appointed classes.\12\ As discussed above, the
proposed rule change will also conform MRX's Market Maker obligations
to the requirements of other options markets, which will promote the
application of consistent compliance standards for market makers who
provide liquidity across multiple options exchanges.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
\11\ See note 4 above.
\12\ See notes 6-8 above, with accompanying text.
---------------------------------------------------------------------------
Furthermore, such volume limitations were traditionally put in
place and especially important at ``floor-based'' exchanges, since
market makers were limited in the number of classes in which they could
physically make markets, and it was in the floor-based exchange's
interest that market makers focus their market making abilities on
their appointed classes.\13\ Although limitations on trading in non-
appointed classes may be less important on a fully electronic exchange
since electronic quoting and trading systems allow market makers to
make markets and provide liquidity in many more options classes than on
a floor-based exchange, MRX still believes focusing its Market Makers
on trading in their appointed classes is important for providing
liquidity in those classes. In this respect, the Exchange believes that
its proposal would continue to meet that objective because the proposed
limitation for PMMs would still require that a substantial percentage
(i.e., 75%) of a PMM's transactions be effected in their appointed
classes.
---------------------------------------------------------------------------
\13\ See e.g., Securities Exchange Act Release No. 35786 (May
31, 1995), 60 FR 30122 (June 7, 1995) (SR-Amex-94-51) (order
approving proposal by American Stock Exchange, Inc. relating to the
in person trading volume requirement for registered options
traders).
---------------------------------------------------------------------------
Finally, in determining to revise requirements for its Market
Makers, the Exchange is mindful of the balance between the obligations
and benefits provided to Market Makers. While the proposal will change
obligations currently in place for Market Makers, the Exchange does not
believe that these
[[Page 66802]]
changes reduce the overall obligations applicable to Market Makers. In
this respect, the Exchange still imposes many obligations on Market
Makers to maintain a fair and orderly market in their appointed
classes, which the Exchange believes eliminates the risk of a material
decrease in liquidity.\14\ In addition, Market Makers are required to
abide by quoting requirements in their appointed options classes in
order to maintain the status of a Market Maker, and PMMs in particular
are held to the highest quoting standards on the Exchange.\15\ As
further discussed above, PMMs are also required to enter quotes and
participate during the Opening Process, pursuant to Rule 701. Lastly,
the Exchange also notes that for non-appointed options classes of
Market Makers, Rule 803(d) would continue to prohibit a Market Maker
from engaging in transactions for an account in which it has an
interest that are disproportionate in relation to, or in derogation of,
the performance of its obligations as specified in Rule 803(b) with
respect to its appointed options classes. In particular, Market Makers
would be prohibited from (1) individually or as a group, intentionally
or unintentionally, dominating the market in options contracts of a
particular class and (2) effecting purchases or sales on the Exchange
except in a reasonable and orderly manner.\16\ Accordingly, the
proposal supports the quality of the Exchange's markets by helping to
ensure that Market Makers and in particular, PMMs, will continue to be
obligated to and have incentives to provide liquidity in their
appointed classes. Ultimately, the benefit that the proposed rule
change confers upon PMMs by increasing the percentage of contracts
executed in the PMM's non-appointed classes from 10% to 25% is offset
by the PMM's continued responsibilities to provide significant
liquidity to the market to the benefit of market participants.
---------------------------------------------------------------------------
\14\ See Rule 803(b)(1)-(4).
\15\ See notes 6 and 7 above, with accompanying text.
\16\ See Rule 803(d)(1) and (2).
---------------------------------------------------------------------------
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 Exchange does not believe
that its proposal will impose an undue burden on intra-market
competition because it will align the percentage limitations for both
PMMs and CMMs to 25% of their non-appointed classes, and will treat all
Market Makers uniformly in this respect. In terms of inter-market
competition, the Exchange operates in a highly competitive market in
which market participants can send order flow to competing exchanges if
they deem trading practices at a particular exchange to be onerous or
cumbersome. The proposal to increase the limitation on the percentage
of contracts executed in a PMM's non-appointed classes from 10% to 25%
will serve to better align the Exchange's requirements with those in
place at other options exchanges, which enhances the ability of its
Market Makers to effectively compete with market makers on other
options exchanges.\17\
---------------------------------------------------------------------------
\17\ See note 4 above.
---------------------------------------------------------------------------
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)(iii) of the Act \18\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78s(b)(3)(A)(iii).
\19\ 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.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \20\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \21\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. MRX has
requested that the Commission waive the 30-day operative delay
contained in Rule 19b-4(f)(6)(iii). The Commission believes that waiver
of the 30-day operative delay is consistent with the protection of
investors and the public interest. The proposal raises no novel issues.
As the Exchange notes, other options markets require their market
makers to a 25% restriction for trading in non-appointed classes.
Further, pursuant to the proposal, PMMs' obligation to their appointed
classes would remain unchanged. Accordingly, the Commission waives the
operative delay and designates the proposed rule change operative upon
filing.\22\
---------------------------------------------------------------------------
\20\ 17 CFR 240.19b-4(f)(6).
\21\ 17 CFR 240.19b-4(f)(6)(iii).
\22\ 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).
---------------------------------------------------------------------------
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 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-MRX-2018-39 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-2018-39. 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
[[Page 66803]]
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-MRX-2018-39 and
should be submitted on or before January 17, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Brent J. Fields,
Secretary.
[FR Doc. 2018-28000 Filed 12-26-18; 8:45 am]
BILLING CODE 8011-01-P