[Federal Register Volume 84, Number 181 (Wednesday, September 18, 2019)]
[Notices]
[Pages 49151-49158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20151]
[[Page 49151]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86949; File No. SR-MRX-2019-17]
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Priority of Quotes and Orders Rule
September 12, 2019.
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 August 28, 2019, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III, 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 MRX Options 2, Section 5 titled
``Market Maker Quotations,'' Options 3, Section 7, titled ``Types of
Orders,'' and Options 3, Section 10, titled ``Priority of Quotes and
Orders.''
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 Exchange proposes to amend Options 3, Section 10, titled
``Priority of Quotes and Orders'' to provide additional detail to the
rule and make other technical and organizational modifications. The
Exchange also proposes to amend cross-references within Options 2,
Section 5 titled ``Market Maker Quotations'' and Options 3, Section 7,
titled ``Types of Orders.'' Finally, the Exchange proposes to relocate
certain rule text as described herein. Each change is described below
in detail. This rule change is intended to further clarify the
Exchange's current allocation process. This rule change does not amend
the current System.
Options 3, Section 10
The Exchange proposes to retitle this rule, ``Allocation and
Priority of Quotes and Orders.''
Definitions
The Exchange proposes to capitalize the defined terms ``Market
Order'' \3\ and ``Limit Order'' \4\ within Options 3, Section 10.
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\3\ Market Order is defined within Options 3, Section 7(a).
\4\ Limit Order is defined within Options 3, Section 7(b).
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The Exchange proposes to amend Options 3, Section 10(a) to re-title
this section ``Definitions and Applicability'' instead of simply
``Definitions.'' The Exchange proposes to renumber the current rule
text as ``(i)'' and add the following to proposed new ``(ii)'':
Applicability. This rule does not apply to the Block Order
Mechanism described within Options 3, Section 11(a), the
Facilitation Mechanism described within Options 3, Section 11(b),
the Solicited Order Mechanism described within Options 3, Section
11(d), the Price Improvement Mechanism described within Options 3,
Section 13 or an exposure period as provided in Options 5, Section 2
at Supplementary Material .02, unless Options 3, Section 10 is
specifically referenced within MRX Rules applicable to the
aforementioned functionality.
The Exchange notes that today, Options 3, Section 10 is applicable
to interest on the Order Book. The Exchange has separate and distinct
rules for functionality related to the Block Order Mechanism, the
Facilitation Mechanism and the Solicited Order Mechanism within Options
3, Section 11, the Price Improvement Mechanism within Options 3,
Section 13, and an exposure period as provided in Options 5, Section 2
at Supplementary Material .02. The Exchange proposes to make clear that
Options 3, Section 10 shall not apply to the aforementioned
functionalities unless Options 3, Section 10 is specifically referred
to within MRX Rules applicable to the aforementioned functionality. The
Exchange notes that the current Options 3, Section 10 at Commentary
.01(c) only makes reference to the Facilitation Mechanism. The Exchange
notes that it is amending the rule to reflect all the mechanisms which
have their own allocation methodologies. Proposed Options 3, Section
10(a)(ii) reflects the current System. This is not a change to the
current System. The Exchange believes that adding the proposed
applicability section will better explain the interaction as between
Options 3, Section 10 and other trading functionality.
Zero-Bid
The Exchange proposes to create a new proposed Options 3, Section
10(b)(1) and title that rule ``Zero-Bid Option Series.'' The Exchange
proposes to capitalize the defined terms ``Market Order'' \5\ and
``Limit Order'' within this rule. The Exchange proposes to amend the
first sentence to add the phrase ``accepted by the System'' to provide
more context to the rule. This rule does not apply to a Market Order
that is not accepted because it was rejected upon entry.\6\ The
Exchange also proposes to add greater detail to the zero bid rule by
providing, ``With respect to Market Orders to sell which are submitted
prior to the Opening Process and persist after the Opening Process,
those orders are posted at a price equal to the minimum trading
increment as defined in Options 3, Section 3.'' This detail represents
the Exchange's current practice. The Exchange believes this rule text
will add greater detail to the MRX rule which operates in a similar
manner to the Nasdaq Phlx, LLC (``Phlx'').\7\
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\5\ Market Order is defined within Options 3, Section 7(a).
\6\ For example, a Market Order that it rejected due to Limit-Up
Limit-Down would not be treated as a Limit Order because it was not
accepted by the System.
\7\ See Phlx 1035, which contains a similar sentence as proposed
herein.
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Priority
The Exchange proposes to amend Options 3, Section 10 because the
proposed description of priority adds greater detail to each allocation
tier. The general allocation and priority provisions are contained
within the Supplementary Material to Options 3, Section 10. The rule
therefore needs to
[[Page 49152]]
be read by referring to the Supplementary Material while reading the
main rule. The Exchange proposes to amend the current priority rule
within Options 3, Section 10 to explain the allocation of interest and
the priority of such allocation in a timeline format to avoid confusion
and ease the reading of the rule. Further, the Exchange proposes to add
greater detail to the current rule.
The Exchange proposes to rename current Options 3, Section 10(c)
titled, ``Priority,'' as ``Execution Priority and Processing in the
System.'' The Exchange proposes to provide greater detail to this rule.
The Exchange proposes to state that it will apply a Size Pro-Rata
execution algorithm to orders, unless otherwise specified. The Exchange
proposes to detail the manner in which it applies Size Pro-Rata
execution today by stating, ``The System shall execute trading interest
within the System in price priority, meaning it will execute all
trading interest at the best price level within the System before
executing trading interest at the next best price. Size Pro-Rata
Priority shall mean that if there are two or more resting orders or
quotes at the same price, the System allocates contracts from an
incoming order or quote to resting orders and quotes beginning with the
resting order or quote displaying the largest size proportionally
according to displayed size, based on the total number of contracts
displayed at that price. If the result is not a whole number, it will
be rounded up to the nearest whole number. If there are still contracts
to be allocated after the displayed size of all orders at that price
has been executed, the remaining size from the incoming order will be
allocated proportionally against non-displayed interest according to
remaining total size of each resting order at such price, beginning
with the order which has the largest total size remaining.'' The
Exchange notes that this proposed rule text represents the Exchange's
current practice. The Exchange is not amending the manner in which it
applies the Size Pro-Rata allocation. This practice is explained in
Supplementary Material .01(a) to Options 3, Section 10 wherein it
states, ``Professional Orders and market maker quotes at the best price
receive allocations based upon the percentage of the total number of
contracts available at the best price that is represented by the size
of the Professional Order or quote.'' The Exchange believes that this
rule text will provide Members with transparency as to the allocation
methodology applied within the System.
The Exchange proposes to add a new Options 3, Section 10(c)(1)
which provides, ``Priority Overlays Applicable to Size Pro-Rata
Execution Algorithm: the Exchange will apply the following designated
Member priority overlays. No Member shall be entitled to receive a
number of contracts that is greater than the size that is associated
with their quotation or order.'' This language represents current
practice within Supplementary Material .01(c) to Options 3, Section 10.
The Exchange is proposing to introduce each priority category in the
order that they are allocated, as is currently expressed in the rule
today, and note specifically that no Member may receive an allocation
greater than their size which is the case today. Current rule text
within Supplementary Material .01(c) to Options 3, Section 10 provides,
``No market participant is allocated any portion of an execution unless
it has an existing interest at the execution price. Moreover, no market
participant can execute a greater number of contracts than is
associated with the price of its existing interest.''
The below priority overlays described herein will be applied by the
Exchange as explained within the proposed rule for all options series.
Priority Customer
Proposed Options 3, Section 10(c)(1)(A) describes Priority Customer
\8\ allocation. As is the case today, Priority Customers on the
Exchange have priority over other market participants at the same price
and in the same option series as specified in current Options 3,
Section 10(c). The Exchange proposes to replace Options 3, Section
10(c) and (d) with the following rule text which represents the current
System:
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\8\ The term ``Priority Customer'' means a person or entity that
(i) is not a broker or dealer in securities, and (ii) does not place
more than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). See Options 1,
Section 1 (a)(35).
(A) Priority Customer: the highest bid and lowest offer shall
have priority except that Priority Customer orders shall have
priority over non-Priority Customer interest at the same price in
the same options series. If there are two or more Priority Customer
orders for the same options series at the same price, priority shall
be afforded to such Priority Customer orders in the sequence in
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which they are received by the System.
The Exchange proposes to initially note the priority that is
afforded to Priority Customers and make clear that time priority
continues to apply. Specifically, the Exchange proposes to make clear
in the introductory paragraph of proposed Options 3, Section 10(c) that
non-displayed Priority Customer interest will not trade ahead of other
displayed interest at the same price regardless of the displayed
interest's capacity, as is the case today within Options 3, Section
10(1)(c) and (d). The Exchange believes that the proposed rule text
provides clarity to the current allocation methodology.
Primary Market Maker
The Exchange proposes new rule text at Options 3, Section
10(c)(1)(B) to describe the current manner in which the System handles
Enhanced Primary Market Maker \9\ Priority:
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\9\ The term ``Primary Market Maker'' means a Member that is
approved to exercise trading privileges associated with PMM Rights.
See Options 1, Section 1(a)(34).
Enhanced Primary Market Maker Priority: A Primary Market Maker
may be assigned by the Exchange in each option class in accordance
with Options 2, Section 3(b). After all Priority Customer orders
have been fully executed, provided the Primary Market Maker's quote
is at the NBBO, the Primary Market Maker shall be entitled to
receive the allocation described in Options 3, Section
10(c)(1)(B)(i), unless the incoming order to be allocated is a
Preferenced Order and the Primary Market Maker is not the Preferred
Market Maker, in which case allocation would be pursuant to
(c)(1)(C). If the order is a Preferenced Order and the Primary
Market Maker is also the Preferred Market Maker (``Preferred Market
Maker Priority'') then the Preferred Market Maker Participation
Entitlement in (c)(1)(C) or (c)(1)(E) applies. The Primary Market
Maker shall not be entitled to receive a number of contracts that is
greater than the size associated with such Primary Market Maker's
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quote.
The Exchange proposes to note that a Primary Market Maker may be
assigned by the Exchange in each option class in accordance with
Options 2, Section 3(b). Reiterating the priority afforded to Priority
Customer orders, the Exchange notes that Priority Customers must be
first fully executed and then Primary Market Maker allocation would be
accounted for in that order.
The Exchange proposes to state that provided the Primary Market
Maker's quote is at the NBBO the Primary Market Maker shall be entitled
to receive the allocation described in Options 3, Section
10(c)(1)(B)(i), unless the incoming order to be allocated is a
Preferenced Order and the Primary Market Maker is not the Preferred
Market Maker.
Current Options 3, Section 10(e) provides,
Precedence of Professional Orders and Market Maker Quotes.
Except as provided
[[Page 49153]]
under Options 3, Section 10(g), if there are two (2) or more
Professional Orders or market maker quotes at the Exchange's best
bid or offer, after all Priority Customer Orders (if any) at that
price have been filled, executions at that price will be allocated
between the Professional Orders and market maker quotes pursuant to
an allocation procedure to be determined by the Exchange from time
to time; provided, however, that if the Primary Market Maker is
quoting at the Exchange's best bid or offer, it shall have
precedence over Professional Orders and Competitive Market Maker
quotes for execution of orders that are for a specified number of
contracts or fewer, which number shall be determined by the Exchange
from time to time.
Current Supplementary Material .01 to Options 3, Section 10(a) and
(b) provide,
(a) Subject to the two limitations in subparagraphs (b) and (c)
below and subject to paragraph .03 (Preferenced Orders),
Professional Orders and market maker quotes at the best price
receive allocations based upon the percentage of the total number of
contracts available at the best price that is represented by the
size of the Professional Order or quote;
(b) If the Primary Market Maker is quoting at the best price, it
has participation rights equal to the greater of (i) the proportion
of the total size at the best price represented by the size of its
quote, or (ii) sixty percent (60%) of the contracts to be allocated
if there is only one (1) other Professional Order or market maker
quotation at the best price, forty percent (40%) if there are two
(2) other Professional Orders and/or market maker quotes at the best
price, and thirty percent (30%) if there are more than two (2) other
Professional Orders and/or market maker quotes at the best price . .
.
The current rule text describes the precedence of orders for
Professional Orders \10\ and market maker \11\ quotes together. The
Exchange notes that Primary Market Makers may receive certain
allocations that other market participants do not receive and therefore
the Exchange is proposing to provide for Primary Market Maker
allocations separately and then account for allocations of all other
market participant allocations. As is the case today, after Priority
Customers are allocated, Primary Market Makers would be allocated
before any other market participant. The Exchange notes that pursuant
to the current rule, a Primary Market Maker quoting at the Exchange's
best bid or offer shall have precedence over Professional Orders and
Competitive Market Maker quotes for execution of orders that are for a
specified number of contracts or fewer.
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\10\ The term ``Professional Order'' means an order that is for
the account of a person or entity that is not a Priority Customer.
See Options 1, Section 1(a)(37).
\11\ The term ``Market Makers'' refers to ``Competitive Market
Makers'' and ``Primary Market Makers'' collectively. See Options 1,
Section 1(a)(20). The term ``Competitive Market Maker'' means a
Member that is approved to exercise trading privileges associated
with CMM Rights. See Options 1, Section 1(a)(11).
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First, the Exchange proposes to replace the term ``best price''
with ``NBBO.'' \12\ The best price in this case is the NBBO. The
amendment to this term does not reflect a substantive change to the
current System. With respect to a Primary Market Maker's quote, the
quote will not be executed at a price that trades through another
market or displayed at a price that would lock or cross another market.
The ``NBBO'' is the best Protected Bid and Protected Offer as defined
in the Options Order Protection and Locked/Crossed Markets Plan;
Protected Bids and Protected Offers that are displayed at a price but
available on the Exchange at a better non-displayed price shall be
included in the NBBO at their better non-displayed price for purposes
of this rule.\13\
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\12\ A Primary Market Maker's quote may be executed at the BBO
provided the BBO is not inferior to the NBBO. The Primary or
Preferenced Market Maker may receive either the Enhanced Primary
Market Maker Allocation or the Preferenced Market Maker Allocation
if they are quoting at the BBO, which would be equivalent to the
NBBO, if an ISO Order is received because the ISO Order would have
been routed simultaneously with other orders to any better priced
interest at away markets in accordance with MRX Options 5, Section
1(h). Other options markets have a rule equivalent to Options 5,
Section 1(h). See also Options 3, Section 7(b)(4) which provides,
``An Intermarket Sweep Order (ISO) is a limit order that meets the
requirements of Options 5, Section 1(h).''
\13\ See 17 CFR 242.600(b)(43). National best bid and national
best offer means, with respect to quotations for an NMS security,
the best bid and best offer for such security that are calculated
and disseminated on a current and continuing basis by a plan
processor pursuant to an effective national market system plan;
provided, that in the event two or more market centers transmit to
the plan processor pursuant to such plan identical bids or offers
for an NMS security, the best bid or best offer (as the case may be)
shall be determined by ranking all such identical bids or offers (as
the case may be) first by size (giving the highest ranking to the
bid or offer associated with the largest size), and then by time
(giving the highest ranking to the bid or offer received first in
time).
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Second, the Exchange proposes to replace the words ``other
Professional Orders and market maker quotes'' with ``other non-Priority
Customer orders and Market Maker quotes.'' While the term
``Professional Orders'' is defined within Options 1, Section 1(a)(37)
to mean an order that is for the account of a person or entity that is
not a Priority Customer, the Exchange believes that simply stating
``non-Priority Customer'' is a less circular manner in which to
describe the type of market participant to which the allocation
applies. The Exchange believes that the term ``non-Priority Customer''
reduces any confusion regarding any reference to Professional Order or
Professional Customer. Orders and quotes are counted individually for
purposes of allocation even if they are from the same market
participant.\14\ The Exchange notes that if a Competitive Market Maker
had both a quote and order at the NBBO, the Competitive Market Maker's
quote and order would be considered separately for purposes of
allocation pursuant to proposed Options 3, Section 10(c)(1)(E) based on
Size Pro-Rata. Whichever quote or order is larger at the best price
level will be allocated first based on its individually represented
size. This amendment is not a change to current System operations.
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\14\ For example, if a Competitive Market Maker submits 2 orders
and one quote, this would equate to 3 non-Priority Customer interest
(orders and quotes) for purposes of determining the number of market
participants for the allocation percentage.
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Third, the Exchange proposes to reiterate the language in current
Supplementary Material .01(b) to Options 3, Section 10 by stating
within proposed Options 3, Section 10(c)(1)(B)(i),
(i) When the Primary Market Maker is at the same price as a non-
Priority Customer Order or Market Maker quote and the number of
contracts is greater than 5, the Primary Market Maker shall receive
the greater of:
a. 60% of remaining interest if there is one other non-Priority
Customer Order or Market Maker quote at that price; 40% of remaining
interest if there are two other non-Priority Customer Orders or
Market Maker quotes at that price; or 30% of remaining interest if
there are more than two other non-Priority Customer Orders and
Market Maker quotes at that price (the ``Primary Market Maker
Participation Entitlement''); or
b. the Primary Market Maker's Size Pro-Rata share under
subparagraph (a)(1)(E) (``All Other Remaining Interest'').
Fourth, the Exchange proposes to provide within Options 3, Section
10(a)(1)(B) the following new rule text, ``The Primary Market Maker
shall not be entitled to receive a number of contracts that is greater
than the size associated with such Primary Market Maker's quote.'' This
is also the case today.
The Exchange proposes to explain the allocation methodology based
on the size of the order within Options 3, Section 10(c)(1)(B)(i). When
the number of contracts is greater than 5 allocation would be pursuant
to Options 3, Section 10(c)(1)(B) and when the number of contracts is 5
or fewer, allocation would be pursuant to Options 3, Section
10(c)(1)(D). Further, the Exchange proposes within proposed Options 3,
Section 10(c)(1)(B) to distinguish when the Primary Market Maker and
the Preferred Market Maker Participation Entitlement apply. The
Exchange notes if the incoming order to be allocated is
[[Page 49154]]
a Preferenced Order and the Primary Market Maker is not the Preferred
Market Maker, allocation would be pursuant to (c)(1)(C) provided the
Preferred Market Maker's quote is at the NBBO. The Preferred Market
Maker allocation is provided for within proposed Options 3, Section
10(c)(1)(C). If the order is a Preferenced Order and the Primary Market
Maker is also the Preferred Market Maker (``Preferred Market Maker
Priority'') then the Preferred Market Maker Participation Entitlement
in (c)(1)(C) or (c)(1)(E) applies, depending on whether the Primary
Market Maker is quoting at the NBBO.
Preferred Market Maker
The Exchange proposes to provide for the allocation that a
Preferred Market Maker is entitled to within proposed Options 3,
Section 10(c)(1)(C). The Exchange notes within proposed Options 3,
Section 10(c)(1)(B) that if the incoming order to be allocated is a
Preferenced Order and the Primary Market Maker is not the Preferred
Market Maker, the Enhanced Primary Market Maker Priority shall not
apply. The Exchange rules currently provides within Supplementary
Material .03 to Options 3, Section 10 the following:
Preferenced Orders. An Electronic Access Member may designate a
``Preferred Market Maker'' on orders it enters into the System
(``Preferenced Orders'').
(a) A Preferred Market Maker may be the Primary Market Maker
appointed to the options class or any Competitive Market Maker
appointed to the options class.
(b) If the Preferred Market Maker is not quoting at a price
equal to the NBBO at the time the Preferenced Order is received, the
allocation procedure contained in paragraph .01 shall be applied to
the execution of the Preferenced Order.
(c) If the Preferred Market Maker is quoting at the NBBO at the
time the Preferenced Order is received, the allocation procedure
contained in paragraph .01 shall be applied to the execution of the
Preferenced Order except that the Primary Market Maker will not
receive the participation rights described in paragraphs .01(b) and
(c), and instead the Preferred Market Maker shall have participation
rights equal to the greater of:
(i) The proportion of the total size at the best price
represented by the size of its quote,
(ii) sixty percent (60%) of the contracts to be allocated if
there is only one (1) other Professional Order or market maker
quotation at the best price and forty percent (40%) if there are two
(2) or more other Professional Orders and/or market maker quotes at
the best price, or
(iii) the full size of a Preferenced Order for five (5)
contracts or fewer if the Primary Market Maker appointed to the
options class is designated as the Preferred Market Maker.
First, the Exchange proposes to amend cross-references within this
current rule text and relocate certain rule text into new proposed
Options 3, Section 10(c)(1)(C) which proposes to state,
(C) Preferred Market Maker Priority: After all Priority Customer
orders have been fully executed, upon receipt of a Preferenced Order
pursuant to Supplementary .01 to Options 3, Section 10, provided the
Preferred Market Maker's quote is at the NBBO, the Preferred Market
Maker will be afforded a participation entitlement. Preferred Market
Maker participation entitlements will apply only after the Opening
Process.
(i) When the Preferred Market Maker is at the same price as a
non-Priority Customer Order or Market Maker quote, pursuant to the
Preferred Market Maker participation entitlement, the Preferred
Market Maker shall receive, with respect to a Preferenced Order, the
greater of:
a. 60% of remaining interest if there is one other non-Priority
Customer Order or Market Maker quote at that price; or 40% of
remaining interest if there are two or more other non-Priority
Customer Orders or Market Maker quotes at that price; or
b. the Preferred Market Maker's Size Pro-Rata share under
subparagraph (c)(1)(E) (``All Other Remaining Interest''); or
c. the entitlement for Orders of 5 Contracts or Fewer under
subparagraph (c)(1)(D) if the Preferred Market Maker is also the
Primary Market Maker and the incoming Order is for 5 Contracts or
Fewer.
Second, the Exchange is proposing to reiterate that a Preferred
Market Maker shall be allocated after Priority Customer orders have
been fully executed. The Exchange notes that the Preferred Market
Maker's bid/offer must be at the NBBO for an entitlement to apply. The
Exchange notes that the Preferred Market Maker participation
entitlements will apply only after the Opening Process. This is the
case today, but is not currently noted within Options 3, Section 10.
The Exchange proposes to memorialize this limitation for clarity.
Third, the Exchange proposes to replace the words ``other
Professional Orders and market maker quotes'' with ``other non-Priority
Customer Orders and Market Maker quotes.'' The Exchange believes that
the term ``non-Priority Customer'' reduces any confusion regarding any
reference to Professional Order or Professional Customer. Orders and
quotes are counted individually for purposes of allocation even if they
are from the same market participant. This amendment is not a change to
current System operations.
The new proposed rule text seeks to capture allocation text
currently within Supplementary Material .03 to Options 3, Section 10
and add text to demonstrate the interaction between the Entitlement for
Orders of 5 Contracts or Fewer and the new proposed bucket of
allocation within proposed Options 3, Section 10(c)(1)(E) for all other
market participants. The Exchange believes that new rule text makes
clear the manner in which the various allocations interact with one
another and make clear that the Member is entitled to the greater of
all potential allocations.
Orders for 5 Contracts or Fewer
Current Supplementary .01(c) to Options 3, Section 10 provides,
Orders for five (5) contracts or fewer will be executed first by
the Primary Market Maker; provided however, that on a quarterly
basis the Exchange will evaluate what percentage of the volume
executed on the Exchange (excluding volume resulting from the
execution of orders in the Facilitation Mechanism (see Options 3,
Section 11(d))) is comprised of orders for five (5) contracts or
fewer executed by Primary Market Makers, and will reduce the size of
the orders included in this provision if such percentage is over
forty percent (40%).
The Exchange proposes new rule text within Options 3, Section
10(c)(1)(D) to specifically describe in greater detail the manner in
which Orders of 5 Contracts or Fewer are handled. The Exchange notes
that the Entitlement for Orders of 5 Contracts or Fewer shall only
apply after the Opening Process. The Exchange noted within proposed
Options 3, Section 10(a)(ii) that Options 3, Section 10 was not
applicable to the Block Order Mechanism, Facilitation Mechanism or the
Solicited Order Mechanism within Options 3, Sections 11, the Price
Improvement Mechanism within Options 3, Section 13 and an exposure
period as provided in Options 5, Section 2 at Supplementary Material
.02, unless Options 3, Section 10 is specifically referenced within MRX
Rules applicable to the aforementioned functionality. These limitations
apply today and the Exchange proposes to memorialize the limitations
within the rule for clarity. The Exchange proposes to amend and
relocate the language concerning the quarterly evaluation into this
proposed new rule text. Specifically, the Exchange proposes to delete
the rule text which excludes volume resulting from the execution of
orders in the Facilitation Mechanism as explained herein with the
proposed applicability rule text. The Exchange specifically describes
allocating orders on the Order Book within Options 3, Section 10. The
Exchange describes functionality and allocations for the Block Order
Mechanism, the Facilitation Mechanism, the Solicited Order Mechanism,
the Price Improvement Mechanism, orders described within Options 3,
Section 11
[[Page 49155]]
or an exposure period within other MRX Rules.\15\ The Entitlement for
Orders of 5 Contracts or Fewer is only allocated pursuant to proposed
Options 3, Section 10(c)(1)(D) and applies specifically to the Order
Book.
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\15\ See Options 5, Section 2 at Supplementary Material .02,
unless Options 3, Section 10.
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The Exchange proposes to make clear the manner in which Orders of 5
Contracts or Fewer may be allocated by providing that a Primary Market
Maker is entitled to priority with respect to Orders of 5 Contracts or
Fewer if the Primary Market Maker has a quote at the NBBO with no other
Priority Customer or Preferenced Market Maker interest present which
has a higher priority, including when the Primary Market Maker is also
the Preferred Market Maker. Further, the Exchange notes that if the
Primary Market Maker is quoting at the NBBO and the Primary Market
Maker is also the Preferred Market Maker or there is no Preferred
Market Maker quoting at the NBBO, and a Priority Customer has a higher
priority at the time of execution, the Priority Customer will be
allocated the Orders of 5 Contracts or Fewer up to their displayed size
\16\ pursuant to Options 3, Section 10(c)(1)(A) and if contracts
remain, the Primary Market Maker will be allocated the remainder
pursuant to Options 3, Section 10(c)(1)(D).\17\ Finally, if the Primary
Market Maker is quoting at the NBBO and no Priority Customer has a
higher priority at the time of execution and a Preferred Market Maker,
who is not the Primary Market Maker, is quoting at the NBBO then
allocation shall proceed according to Options 3, Section 10(c)(1)(C).
This rule text represents the current practice. The Exchange believes
that spelling out the potential scenarios and explaining the resulting
allocations will make the allocation of Orders of 5 Contracts or Fewer
more transparent.
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\16\ The Exchange notes that the inverse is also true. If the
Primary Market Maker is quoting at the NBBO and the Preferenced
Market Maker is not the Primary Market Maker and is quoting at the
NBBO then the Priority Customer would receive the allocation.
\17\ The Primary Market Maker may receive the remaining
contracts (i.e. if a Priority Customer has 1 contract order and the
Primary Market Maker and a Competitive Market Maker have 5 contracts
each, an incoming order of 5 contracts would be allocated such that
the Priority Customer receives 1 contract and the remaining 4
contracts would be allocated to the Primary Market Maker).
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The Exchange proposes a new category of allocation for all other
market participants. The Exchange proposes to note within proposed new
Options 3, Section 10(c)(1)(E), ``If there are contracts remaining
after all priorities in (A)-(D) have been fully executed,
notwithstanding Options 3, Section 7(g)(3) \18\ and (k)(2),\19\ such
contracts shall be executed based on the Size Pro-Rata execution
algorithm as described within Options 3, Section 10(c). Legging Orders
will be allocated after all other non-displayed interest, pursuant to
Options 3, Section 7(k)(2).'' \20\ The Exchange notes that the priority
of allocation for all other market participants' changes with respect
to the order in which displayed and non-displayed volume is allocated
for non-Priority Customer market participants. Displayed volume will be
allocated before non-displayed volume. Further Priority Customer non-
displayed Reserve Orders will be allocated before non-Priority Customer
non-displayed Reserve Orders. Further Legging Orders are capacity-less
and are executed after all non-displayed interest. Proposed Options 3,
Section 10(c) describes the manner in which Priority Customers are
allocated pursuant to Size Pro-Rata priority. The Exchange believes
that separating out all other market participants as a new category as
well as referring to the allocation methodology within each bucket of
allocation will make clear the manner in which the Exchange allocates.
This amendment does not change the operation of the current System.
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\18\ Options 3, Section 7(g) concerns Reserve Orders. A Reserve
Order is a limit order that contains both a displayed portion and a
non-displayed portion. Specifically, Options 3, Section 7(g)
provides, ``The displayed portion of a Reserve Order will trade in
accordance with Options 3, Section 10(c) and (d) for Priority
Customer Orders, and Options 3, Section 10(e) and Supplementary
Material .01, for Professional Orders.''
\19\ Options 3, Section 7(k) concerns Legging Orders. A legging
order is a limit order on the regular limit order book that
represents one side of a Complex Options Order that is to buy or
sell an equal quantity of two options series resting on the
Exchange's Complex Order Book. Specifically, Options 3, Section
7(k)(2) provides, ``(2) A legging order is executed only after all
other executable orders (including any non-displayed size) and
quotes at the same price are executed in full. When a legging order
is executed, the other portion of the Complex Options Order will be
automatically executed against the displayed best bid or offer on
the Exchange.''
\20\ MRX Options 3, Section 7(k)(2) provides, ``A legging order
is executed only after all other executable orders (including any
non-displayed size) and quotes at the same price are executed in
full. When a legging order is executed, the other portion of the
Complex Options Order will be automatically executed against the
displayed best bid or offer on the Exchange.''
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Finally, the Exchange proposes to state that, ``A Market Maker is
entitled only to an Enhanced Primary Market Maker Priority pursuant to
Options 3, Section 10(c)(1)(B) or the Entitlement for Orders of 5
Contracts or Fewer pursuant to Options 3, Section 10(c)(1)(D) on a
quote, or the Preferred Market Maker Priority pursuant to Options 3,
Section 10(c)(1)(C) on a quote.'' The Exchange believes that this text
makes clear that only a market maker quote may receive these enhanced
allocations. Only a Primary Market Maker quote entitles a Primary
Market Maker to the allocations within Options 3, Section 10(c)(1)(B)
or (D) while a quote or a Market Maker Order entitles a Preferred
Market Maker to the allocation within Options 3, Section 10(c)(1)(C).
This amendment does not change the operation of the current System.
Current Rule Text
The Exchange proposes to delete current Options 3, Section 10(c)-
(e) as this rule text is being replaced by proposed Options 3, Section
10(c)(1)(A), (B) and (E). The Exchange proposes to delete current
Supplementary Material .01 to Options 3, Section 10 which is being
replaced by proposed Options 3, Section 10(a)(1)(A), (B), (D) and (E).
The Exchange proposes to delete current Supplementary Material .02 to
Options 3, Section 10 which is reserved.
The Exchange proposes to relocate current Supplementary Material
.03 (a) and (b) and part of (c) to Options 2, Section 10, which is
currently reserved, and title that section ``Preferenced Orders''. The
Exchange is proposing to delete part of current Supplementary Material
.03(c) to Options 3, Section 10 which is being replaced by proposed
Options 3, Section 10(c)(1)(C). The Exchange believes that providing a
separate rule for Preferenced Orders will make it easier to locate.
MRX Options 3, Section 7(g) and Options 2, Section 4
The Exchange proposes to amend Options 3, Section 7 and Options 2,
Section 4 to update cross-references to Options 3, Section 10.
The Exchange also proposes, similar to the changes made within
Options 3, Section 10 to remove the term ``Professional'' and
substitute that term with a broader term. In this case, the Exchange
proposes to utilize the term ``non-Priority Customer'' in place of
Professional to indicate market participants who are not Priority
Customers.
Examples
1. Size-Pro Rate Description. This provides a description of size
pro-rata allocation.
Primary Market Maker quote [email protected] x [email protected]
Order1 Priority Customer Buy [email protected]
Order2 Priority Customer Reserve Buy [email protected]">2[email protected] (display qty = 5)
Order3 Firm Reserve Buy [email protected]">2[email protected] (display qty = 5)
Order4 Firm Buy [email protected]">2[email protected]
[[Page 49156]]
Order5 Firm Reserve Buy [email protected] (display qty = 5)
Sell 7[email protected]
First Allocation Tier--Priority Customer, Displayed, Price Time
Sell order trades with:
--Order1 [email protected]
--Order[email protected]">2[email protected] (displayed only)
Second Allocation Tier--Non-Priority Customer, Displayed, Pro-rata
Sell Order Trades with:
--Order4 [email protected]">2[email protected]
--Order3 [email protected]
--Order5 [email protected]
Order 4 has priority because it is the largest order. The
displayed size determines the priority of allocation. If there are
two or more resting orders or quotes at the same price, the System
allocates contracts beginning with the resting order or quote
displaying the largest size proportionally according to displayed
size, based on the total number of contracts displayed at that
price.
Third Allocation Tier--Priority Customer, Non-Displayed, Price Time
Sell Order Trades with:
--Order2 [email protected]
Fourth Allocation Tier--Non-Priority Customer, Non-Displayed, Pro-Rata
Sell Order trades with:
--Order3 [email protected]">1[email protected]
--Order5 [email protected]
The sell order had a size of 75 contracts. In this final
allocation, there were still contracts to be allocated after the
displayed size of all orders at that price has been executed. The
remaining size from the incoming order is allocated proportionally
according to remaining total size of each resting order at such
price, beginning with the order which has the largest total size
remaining.
2. Priority Customer With No Other Interest
Priority Customer Buy 1 @$12.00
Priority Customer Sell [email protected]
Sell order trades with resting buy order @8.00 pursuant to Section
10(c)(1)(A)
3. Priority Customer With Other Interest Present and Displayed v.
Non-Displayed
Primary Market Maker quote [email protected] x [email protected]
Order1 Priority Customer Buy [email protected]
Order2 Priority Customer Reserve Buy [email protected]">2[email protected] (display qty = 5)
Order3 Priority Customer Reserve Buy [email protected]">2[email protected] (display qty = 5)
Order4 Priority Customer Buy [email protected]">2[email protected]
Order5 Firm Reserve Buy [email protected] (display qty = 5)
Sell [email protected]
Sell Order Trades With: Priority Customer Displayed, Price-Time
--Order1 [email protected]
--Order[email protected]">2[email protected] (displayed only)
--Order3 [email protected] (displayed only)
--Order4 [email protected]">2[email protected]
Non-Priority Customer displayed, Size Pro-Rata
In this case the Primary Market Maker is allocated the full
quantity which is better than entitlement pursuant to Section
10(c)(1)(B)(i). The incoming sell order has only executed 36 of its
100 contracts; 64 remain. There are only 15 displayed contracts
remaining (10 PMM and 5 Firm), so each of those displayed quantities
are able to be completely filled.
--Primary Market Maker quote [email protected]
--Order5 [email protected] (displayed only)
Priority Customer Non-Displayed, Price-Time
--Order2 [email protected] (non-displayed)
--Order3 [email protected] (non-displayed)
Non-Priority Customer Non-Displayed, Pro-Rata
--Order5 [email protected]
Remaining Sell [email protected] rests on the order book
4. Primary Market Maker Allocation Where It Is 30% and With 5 Lot
Include Rounding
30% example below in #4
5 lot:
Primary Market Maker quote [email protected] x [email protected] (at NBBO)
Order1 Firm Sell [email protected]
Order2 Firm Sell [email protected]
Buy [email protected]
Buy order trades with Primary Market Maker quote [email protected] pursuant to
Section 10(c)(1)(B)(a)
5. Primary Market Maker's Size Pro-Rata Share Pursuant Section
10(c)(1)(E) (``All Other Remaining Interest'')
Primary Market Maker quote [email protected] x [email protected] (at NBBO)
Order1 Firm sell [email protected]
Order2 Firm sell [email protected]
MM quote [email protected] x [email protected]
Buy 1[email protected]
Buy order trades with: best price
--MM quote [email protected]
Final price, other interest Size Pro-Rata
Primary Market Maker is allocated the Size Pro-Rate quantity
pursuant to Section 10(c)(1)(B)(i)(b). This allocation quantity was
greater than 30% allocation pursuant to 10(c)(1)(B)(i)(a).
--Primary Market Maker quote [email protected]
--Order1 [email protected]
--Order2 [email protected]
6. Primary Market Maker Is Preferenced Market Maker and Gets
Preferenced Allocation
Primary Market Maker quote [email protected] x [email protected] (at NBBO)
Order1 Firm sell [email protected]
MM1 Quote [email protected] x [email protected]
MM2 Quote [email protected] x [email protected]
Buy order [email protected], preferenced to Primary Market Maker
Buy order trades with: Preferenced Market Maker 40% priority
share pursuant to Section 10(c)(1)(c)(i)(a).
--Primary Market Maker quote [email protected]
Pro-rata with other interest:
--Order1 [email protected]
--MM1 Quote [email protected]
--MM2 Quote [email protected]
7. Primary Market Maker and Preferenced Market Maker Are Not the
Same
Primary Market Maker quote [email protected] x [email protected] (at NBBO)
Order1 Firm sell [email protected]
MM1 Quote [email protected] x [email protected] (at NBBO)
MM2 Quote [email protected] x [email protected]
Buy order [email protected], preferenced to MM1
Buy order trades with: Preferenced Market Maker 40% priority
share pursuant to Section 10(c)(1)(c)(i)(a).
--MM1 Quote [email protected]
Pro-rata with other interest:
Primary Maker Maker quote [email protected]
Order1 [email protected]
MM2 Quote [email protected]
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\21\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\22\ 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. The Exchange's proposal to
reorganize Options 3, Section 10, add additional context and provide
for limitations in the Opening Process and the auctions is consistent
with the Act because the additional organization and detail will bring
greater transparency to the Exchange's rule. Proposed Options 3,
Section 10(a)(ii) reflects the current System. This rule change does
not amend the current System.
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\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
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Specifically, with respect to zero-bid options series, indicating
that Market Orders to sell which are submitted prior to the Opening
Process and persist after the Opening Process will be posted at a price
equal to the minimum trading increment as defined in Options 3, Section
3 will provide additional information to Members about the Exchange's
current practice. The Exchange believes that providing Members with the
anticipated outcome of submitting zero-bid Market Orders will remove
impediments to and perfect the mechanism of a free and open market.
The Exchange proposes to replace the words ``other Professional
Orders and market maker quotes'' with ``other non-Priority Customer
orders and Market Maker quotes.'' The Exchange believes that the term
``non-Priority Customer'' reduces any confusion regarding any reference
to Professional Order or Professional Customer. Orders and quotes are
counted individually for
[[Page 49157]]
purposes of allocation even if they are from the same market
participant. This amendment is not a change to current System
operations.
The Exchange's proposal to replace the term ``best price'' with
``NBBO'' is consistent with the Act because it will provide greater
transparency to the allocation process. The best price in this case is
the NBBO. The amendment to this term does not reflect a substantive
change to the current System. With respect to a Primary Market Maker's
quote, the quote will not be executed at a price that trades through
another market or displayed at a price that would lock or cross another
market. The ``NBBO'' is the best Protected Bid and Protected Offer as
defined in the Options Order Protection and Locked/Crossed Markets
Plan; Protected Bids and Protected Offers that are displayed at a price
but available on the Exchange at a better non-displayed price shall be
included in the NBBO at their better non-displayed price for purposes
of this rule.\23\
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\23\ See 17 CFR 242.600(b)(43).
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Providing a more detailed description of the manner in which the
System applied Size Pro-Rata allocation in the current rule text, which
is not currently contained in current Options 3, Section 10, is
consistent with the Act because expanding upon the Exchange's current
practice will further detail for Members the manner in which allocation
occurs in the System. The Exchange's proposal is not intended to change
the Exchange's allocation methodology, rather the Exchange is proposing
to make clear the manner in which allocation is structured within the
System. Further the Exchange's proposal to describe the manner in which
orders are allocated to various types of market participants by
category of participant and the possible outcomes if multiple
allocations apply is consistent with the Act because understanding the
potential outcomes protects investors and the public interest by
increasing transparency. The Exchange's proposal to relocate current
rule text into the current rule and provide additional detail including
limitations for Preferred Market Maker participation entitlements
during the Opening Process and limitations on allocations of Orders of
5 Contracts or Fewer during the Opening Process and auctions will
increase transparency for the protection of investors and the public
interest. These limitations exist today. Finally, the Exchange believes
that including all potential scenarios for allocation Orders of 5
Contracts or Fewer more clearly explains the Exchange's current
allocation process. The Exchange believes that providing more detail
benefits investors and the public interest.
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's proposal does
not amend the current manner in which the Exchange allocates interest
among market participants. The amendments to the rule reflect the
manner in which the current System operates. The Exchange notes that
Priority Customers will continue to be afforded certain allocation
rights which are not available to other market participants. This is
the case today. Primary Market Makers and Preferred Market Makers will
continue to be afforded certain entitlements because of the continuing
obligations they are bound to with respect to provide liquidity and
quoting on the Exchange.\24\ The Exchange notes that other market
participants will continue to be allocated in the same manner as they
are today on a Size Pro-Rata basis after other entitlements have been
allocated. The Exchange believes the proposed rule provides more detail
and offers more transparency into the allocation process.
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\24\ See MRX Rule Options 2, Section 3.
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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.
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 \25\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\26\
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\25\ 15 U.S.C. 78s(b)(3)(A)(iii).
\26\ 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.
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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 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-2019-17 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-2019-17. 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
that we do not redact or edit personal
[[Page 49158]]
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-2019-17 and should be
submitted on or before October 9, 2019.
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\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20151 Filed 9-17-19; 8:45 am]
BILLING CODE 8011-01-P