[Federal Register Volume 84, Number 213 (Monday, November 4, 2019)]
[Notices]
[Pages 59432-59435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23976]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87414; File No. SR-MRX-2019-22]
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 3,
Section 17, the Exchange's Kill Switch Risk Protection
October 29, 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 October 15, 2019, 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.
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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 Options 3, Section 17, which sets
forth the Exchange's optional Kill Switch risk protection.
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 expand the optional Kill Switch risk
protection the Exchange offers to Members today to allow cancellation
and restriction of quotes, orders, or both. This new functionality will
be offered alongside the existing port Kill Switch (as defined below),
which currently allows Members to cancel and restrict only their
orders. The Exchange also proposes to amend its rules to add more
detail on how the port Kill Switch operates today. As discussed further
below, no functional changes to the existing port Kill Switch
functionality are being contemplated by this rule change; rather, the
Exchange is providing more detailed information on the port Kill Switch
so that the rule is more aligned with the current operation of existing
functionality.
Port Kill Switch
Today, Kill Switch provides Members with a risk management tool for
immediate control of their order activity. Specifically as set forth in
Options 3, Section 17(a), Kill Switch enables Members to initiate a
message \3\ to the System \4\ to promptly cancel orders and restrict
entry of new orders
[[Page 59433]]
until re-entry has been enabled. Members may submit a request to the
System to cancel orders for that Member. The System will send an
automated message to the Member when a Kill Switch request has been
processed by the Exchange's System.
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\3\ Today, Members are able to send a message to the Exchange to
initiate the Kill Switch. A Kill Switch message may be sent through
the Exchange order entry ports FIX or OTTO (hereinafter, referred to
as ``port Kill Switch'').
\4\ The term ``System'' means the electronic system operated by
the Exchange that receives and disseminates quotes, executes orders
and reports transactions. See Options 1, Section 1(a)(48).
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If orders are cancelled by the Member utilizing the Kill Switch, it
will result in the removal of all orders for the Member.\5\ The Member
is unable to enter additional orders until the Member has made a verbal
request to the Exchange and Exchange staff has set a re-entry indicator
to enable re-entry.\6\ Once enabled for re-entry, the System will send
a Re-entry Notification Message to the Member. The applicable Clearing
Member for that Member will also be notified of the re-entry into the
System after orders are cancelled as a result of the Kill Switch,
provided the Clearing Member has requested to receive such
notification.
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\5\ Members may not cancel orders by symbol. Of note, Opening
Sweeps are also cancelled. An Opening Sweep is a Market Maker order
submitted for execution against eligible interest in the system
during the Opening Process pursuant to Options 3, Section 8(b)(1).
See Options 3, Section 7(u). Consistent with current auction
functionality, PIM auction orders and responses are not cancelled.
PIM is the Exchange's price improvement mechanism. See Options 3,
Section 13. Other auctions orders and responses are cancelled.
\6\ The Member must directly and verbally contact the Exchange
to request the re-set.
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The Exchange now proposes to provide additional detail regarding
the port Kill Switch described above to better align the Rule with
existing system functionality. The Exchange proposes to clarify that
Members may submit a Kill Switch request to the System through FIX or
OTTO for the Member's requested identifier (i.e., badge \7\ or mnemonic
\8\) (``Identifier'') on a user level (i.e., by individual badge or
mnemonic).\9\ As such, Members using the port Kill Switch today may
elect to cancel all existing orders and restrict entry of additional
orders by individual badge/mnemonic (i.e., Identifier).\10\
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\7\ A ``badge'' shall mean an account number, which may contain
letters and/or numbers, assigned to Market Makers. A Market Maker
account may be associated with multiple badges. See Options 1,
Section 1(a)(4).
\8\ A ``mnemonic'' shall mean an acronym comprised of letters
and/or numbers assigned to Electronic Access Members. An Electronic
Access Member account may be associated with multiple mnemonics. See
Options 1, Section 1(a)(22).
\9\ Using the port Kill Switch, Members are only able to cancel
and restrict their order activity at the user level (i.e., by
individual Identifier). As discussed below, the new Kill Switch
enhancement will offer Members the additional option of submitting
requests at the user level or group level--in other words, by
individual Identifier or for a group of Identifiers. See, e.g.,
Nasdaq Options Market (``NOM'') Chapter VI, Sec. 6(d), which sets
forth NOM's Kill Switch rule, for similar terminology related to
Identifier.
\10\ Thus, for example, an Electronic Access Member that is
configured to trade on the Exchange in mnemonics ABCD1, ABCD2, and
ABCD3 would submit a separate request for each mnemonic using the
port Kill Switch, which would result in the cancellation of all
existing orders and the restriction of additional orders associated
with mnemonics ABCD1, ABCD2, and ABCD3 on the Exchange.
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While the current rule text does not specifically provide for the
ability to cancel and restrict orders by individual Identifier(s), the
existing port Kill Switch functionality operates in this manner today.
Accordingly, the Exchange proposes to replace the existing language in
section (a)(1) with the following to make clear how the System operates
today: ``A Member may submit a request to the System through FIX or
OTTO to cancel all existing orders and restrict entry of additional
orders for the requested Identifier(s) on a user level on the
Exchange.''
As noted above, the Exchange is not proposing any functional
modifications to the existing port Kill Switch; rather, all of the
changes proposed above are to provide additional specificity as to how
the port Kill Switch operates today for greater consistency between the
rule text and the operation of the System. Lastly, the Exchange
proposes to delete the last sentence of (a)(1), which is redundant with
the re-entry provisions already set forth in the Rule.\11\
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\11\ See Options 3, Section 17(a)(2). As discussed below, this
section will be renumbered as section (a)(3) under this proposal.
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GUI Kill Switch
The Exchange also proposes to add new functionality that would
enhance the current Kill Switch risk protection for orders to apply to
both orders and quotes.\12\ The Exchange will provide this enhancement
through a separate graphical user interface (hereinafter, ``GUI Kill
Switch'') as an alternative way for Members to manage their trading
activity.\13\ As discussed below, the new GUI Kill Switch will be
functionally similar to the existing port Kill Switch, with the most
notable difference being the added ability to cancel all existing
quotes and block the entry of additional quotes. For instance, similar
to the port Kill Switch today, Members will be able to use the GUI Kill
Switch for requested Identifier(s) on the Exchange. Accordingly,
Options 3, Section 17 will be amended to reflect that the Exchange will
offer the proposed GUI Kill Switch alongside the existing port Kill
Switch. In particular, paragraph (a) will provide that Kill Switch
would enable Members to initiate a message to the System to promptly
cancel and restrict their quote and order activity on the Exchange, as
further described in the Rule. The Exchange also proposes to specify
that Members may submit a Kill Switch request to the System for certain
Identifier(s) on either a user or group level. Permissible groups must
reside within a single Member firm.\14\
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\12\ As discussed more fully later in the filing, the proposed
Kill Switch enhancement will also have additional features to allow
Members to kill quotes and/or orders for requested Identifier(s) on
either a user or group level.
\13\ The GUI Kill Switch will be available to all Members
through a web-based interface.
\14\ For example, a permissible group could include all badges
associated with a Market Maker. Member would be able to set up these
groups beforehand to include all or some of the Identifiers
associated with the Member firm so that a GUI Kill Switch request
could apply to this pre-defined group.
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As discussed above, while the proposed language in section (a) on
applying Kill Switch for requested Identifier(s) on the Exchange is
new, these features exist today with respect to the port Kill Switch.
Accordingly, the proposed changes in (a) with respect to order
cancellation and restriction clarify the current manner in which the
port Kill Switch operates today, and also extends the rule to encompass
the proposed GUI Kill Switch.
The Exchange further proposes to describe the new GUI Kill Switch
functionality in new section (a)(2).\15\ Specifically, the Exchange
proposes to add the following: ``Alternatively, a Member may submit a
request to the System through a graphical user interface to cancel all
existing, and restrict entry of additional, quotes and/or orders for
the requested Identifier(s) on either a user or group level on the
Exchange.'' \16\
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\15\ In light of adopting this new section, current (a)(2) will
be renumbered as (a)(3).
\16\ Members may not cancel orders and quotes by symbol using
the GUI Kill Switch, similar to how orders may not be cancelled by
symbol through the port Kill Switch today. Also similar to the port
Kill Switch, Opening Sweeps will be cancelled upon initiating the
GUI Kill Switch. Lastly, all auction orders and responses other than
PIM orders/responses will similarly be cancelled. See supra note 5.
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The Exchange believes that the proposed enhancement to the Kill
Switch will offer Members an alternative means to control their
exposure, through a separate interface which is not dependent on the
integrity of the member's own systems, should the member experience a
failure. Because the proposed enhancement will be provided through a
separate user interface instead of one of the Exchange's order entry
ports, the Exchange believes it would promote transparency in its Rules
to separately define these alternative methods in (a)(1) and (a)(2). As
noted above, the
[[Page 59434]]
proposed enhancement is similar to the existing port Kill Switch that
allows Members to control their order activity but has additional
optionality, most significantly the ability to cancel and restrict
quotes, orders, or both. Furthermore, Members can set up the GUI Kill
Switch so they are able to control their quote and/or order activity
for an individual Identifier or a group of Identifiers,\17\ as compared
to the port Kill Switch which is limited to individual Identifiers
only.\18\
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\17\ As noted above, NOM Chapter VI, Sec. 6(d) has similar
terminology in its Kill Switch rule. See supra note 9. Furthermore,
the proposed GUI Kill Switch is functionally similar to NOM's Kill
Switch in that both are offered through a separate graphical user
interface and have similar features, including the ability for
members to apply Kill Switch for certain identifiers on a user or
group level.
\18\ As an example of the GUI Kill Switch, assume a Market Maker
is configured to trade on the Exchange in badges 123A, 123B, and
123C, with pre-defined settings that include all three badges as one
group to which the GUI Kill Switch will apply. The Market Maker
could then submit a GUI Kill Switch request to restrict their quote
activity for the pre-defined group, resulting in the cancellation of
all existing quotes and restriction of additional quotes associated
with badges 123A, 123B, and 123C on the Exchange. The same Market
Maker could instead opt to submit a GUI Kill Switch request for only
badge 123A to cancel all existing quotes and restrict entry of
additional quotes for that individual badge. The proposed
functionality therefore allows the Member to have more optionality
as compared to the existing mechanism.
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The re-entry provisions in section (a)(3) will also be amended
throughout to reflect that the re-entry process after initiating the
GUI Kill Switch will be identical to the current process for the port
Kill Switch. Specifically, once a Member initiates either the port or
GUI Kill Switch, the Member will be unable to enter additional orders,
and/or quotes if pursuant to the GUI Kill Switch, for the affected
Identifier(s) until the Member has made a verbal request to the
Exchange and Exchange staff has set a re-entry indicator to enable re-
entry.\19\ Lastly, the Exchange proposes to make a related change in
the last sentence of section (a)(3) to delete the reference to order
cancellation, and also provide that the ``applicable Clearing Member
will be notified of such re-entry . . .'' for better readability.
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\19\ Identical to re-entry for the port Kill Switch, Members
must directly and verbally contact the Exchange to request the re-
set if they initiate the GUI Kill Switch. See supra note 6 with
accompanying text.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \20\ in general, and furthers the objectives of Section
6(b)(5) of the Act \21\ 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 enhancing the risk protections available to Members. The
proposal promotes policy goals of the Commission which has highlighted
the need for execution venues, exchange and non-exchange alike, to
enhance risk protection tools and other mechanisms to decrease risk and
increase stability.\22\
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ See, e.g., Securities Exchange Act Release Nos. 69077
(March 8, 2013), 78 FR 18083 (March 25, 2013) (Proposing Release) at
18090-91; and 73639 (November 19, 2014), 79 FR 72251 (December 5,
2014) (Adopting Release) at 72253 (highlighting that quality
standards, testing and improved error response mechanisms are among
the issues needing very thoughtful and focused attention in today's
securities markets).
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The proposed GUI Kill Switch, similar to the existing port Kill
Switch, is designed to protect Members in the event the Member
encounters a situation, like a systems issue, for which they would need
to withdraw temporarily from the market. The individual Member firm
benefits of enhanced risk protections, including Kill Switch
mechanisms, flow downstream to counter-parties both at the Exchange and
at other options exchanges, thereby increasing systemic protections as
well. Additionally, because the Exchange will continue offer this
optional risk tool to all Members, the Exchange believes that it will
encourage liquidity generally and remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
protect investors and the public interest. To the extent the Exchange's
proposal provides Members with greater control over their quotes and
orders, and allows them to remove quotes and cancel orders in an
appropriate manner, then the proposal may encourage Members to provide
liquidity on MRX and thus contribute to fair and orderly markets in a
manner that protects the public interest and protects investors.
As noted above, this optional risk tool will continue to be offered
to all Members. The Exchange further represents that its proposal will
continue to operate consistently with the firm quote obligations of a
broker-dealer pursuant to Rule 602 of Regulation NMS and that the
functionality is not mandatory. Specifically, any interest that is
executable against a Member's orders or quotes that are received \23\
by the Exchange, prior to the time the Kill Switch is processed by the
System, will automatically execute at the price up to the Member's
size. The Kill Switch message will be accepted by the System in the
order of receipt in the queue and will be processed in that order so
that interest that is already accepted into the System will be
processed prior to the Kill Switch message. Messages sent to the System
by the Kill Switch are processed in the order they are received by the
matching engine, through the same queuing mechanism that a quote or
order message is processed. The Exchange also notes that the latency
profile of the GUI Kill Switch is comparable to the latency profile of
killing interest through a message based Kill Switch from a Member's
order entry port.
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\23\ The time of receipt for an order or quote is the time such
message is processed by the Exchange's order book.
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A Market Maker's obligation to provide two-sided quotes on a daily
basis is not diminished by the removal of such quotes and/or orders by
utilizing the Kill Switch. Market Makers that utilize Kill Switch will
not be relieved of the obligation to provide intra-day quotes pursuant
to Options 2, Section 5(e), nor will it prohibit the Exchange from
taking disciplinary action against a Market Maker for failing to meet
its quoting obligations each trading day.
The proposed changes will also permit Clearing Members that clear
transactions on a Member's behalf pursuant to a Letter of Guarantee
\24\ to receive information regarding the Member's re-entry into the
System after the Member initiates the GUI Kill Switch, and makes the
verbal request to the Exchange for re-entry pursuant to Options 3,
Section 17(a). As is the case today with the port Kill Switch, because
such Clearing Members guarantee all transactions on behalf of that
Member and therefore bear the risk associated with those transactions,
the Exchange believes that it is appropriate for the Clearing Member to
receive information regarding re-entry into the System after quotes
and/or orders are cancelled as a result of the GUI Kill Switch, should
the Clearing Member request such notification. This information may
help provide Clearing Members with greater control and flexibility in
managing the risk associated with the Member's activity.
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\24\ A Letter of Guarantee obligates the issuing Clearing Member
to accept financial responsibilities for all Exchange transactions
made by the guaranteed Member. See Options 6, Section 4(a) and (b).
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Lastly, the Exchange believes that the proposed changes to add
greater specificity with respect to how the port Kill Switch currently
operates (i.e., that a Kill Switch request sent through FIX or OTTO
will result in the cancellation
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of all existing orders, and restrict entry of additional orders for the
requested Identifier(s) on a user level on the Exchange) will promote
greater transparency around the existing Kill Switch, and will serve to
better align the Exchange's rules with current System functionality, to
the benefit of 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 proposal does not impose an
undue burden on intramarket competition because all Members may avail
themselves of the Kill Switch. The Kill Switch risk protection is
optional. The proposed rule change to expand this risk protection to
encompass quote cancellation and restriction will further protect
Members in the event the Member is suffering from a systems issue or
from the occurrence of unusual or unexpected market activity that would
require them to withdraw from the market in order to protect investors.
The Exchange notes other exchanges, including the Exchange's affiliated
options markets, similarly offer Kill Switch protections for both
quotes and orders.\25\
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\25\ The proposed GUI Kill Switch protections are similar to
those available on its affiliated options markets Nasdaq BX
(``BX''), NOM, and Nasdaq Phlx (``Phlx''). See BX Chapter VI,
Section 6(d); NOM Chapter VI, Section 6(d); and Phlx Rule 1019(b).
See also CBOE Exchange Rule 5.34(c)(7) and BOX Options Exchange Rule
7280(b) for other options exchanges that offer Kill Switch
protections for quotes and orders.
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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 \26\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\27\
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\26\ 15 U.S.C. 78s(b)(3)(A)(iii).
\27\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and 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.
The Exchange has requested that the Commission waive the pre-filing
requirement. The Commission hereby waives that requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \28\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\29\ the Commission
may 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.
According to the Exchange, waiver of the operative delay is consistent
with the protection of investors and the public interest because it
would provide Members with greater control over their quotes and
orders, which may reduce disruptive trading events to the benefit of
all investors and the public interest. The Exchange notes that similar
kill switch protections are available on other options exchanges,\30\
and as such, the proposed rule change does not raise any new, unique or
substantive issues. The Commission believes that waiving the 30-day
operative delay is consistent with the protection of investors and the
public interest. Accordingly, the Commission waives the 30-day
operative delay and designates the proposed rule change operative upon
filing.\31\
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\28\ 17 CFR 240.19b-4(f)(6).
\29\ 17 CFR 240.19b-4(f)(6)(iii).
\30\ See supra notes 25.
\31\ 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 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-2019-22 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-2019-22. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-MRX-2019-22 and should be submitted on
or before November 25, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23976 Filed 11-1-19; 8:45 am]
BILLING CODE 8011-01-P