[Federal Register Volume 87, Number 180 (Monday, September 19, 2022)]
[Notices]
[Pages 57238-57244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20144]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95754; File No. SR-MEMX-2022-25]


Self-Regulatory Organizations; MEMX LLC; Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend MEMX Rule 
11.15, Clearly Erroneous Executions

September 13, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on [insert date], MEMX LLC (``MEMX'' or the ``Exchange'') filed 
with the Securities and Exchange Commission (the ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange filed the proposal as 
a ``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Commission a proposed rule change 
to extend the current pilot program related to amend MEMX Rule 11.15, 
Clearly Erroneous Executions. The text of the proposed rule change is 
provided in Exhibit 5.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend MEMX Rule 
11.15, Clearly Erroneous Executions. On September 1, 2022, the 
Commission approved the proposal of Cboe BZX Exchange, Inc. (``BZX''), 
to adopt on a permanent basis the pilot program for Clearly Erroneous 
Executions in BZX Rule 11.17.\5\ Based on the BZX Approval, the 
Exchange proposes: (1) make the current clearly erroneous pilot program 
permanent; and (2) limit the circumstances where clearly erroneous 
review would continue to be available during Regular Trading Hours,\6\ 
when the LULD Plan to Address Extraordinary Market Volatility (the 
``LULD Plan'') \7\ already provides similar protections for trades 
occurring at prices that may be deemed erroneous. The Exchange believes 
that these changes are appropriate as the LULD Plan has been approved 
by the Commission on a permanent basis,\8\ and in light of amendments 
to the LULD Plan, including changes to the applicable Price Bands \9\ 
around the open and close of trading. Further, the proposed rule change 
is based on and substantively identical to BZX Rule 11.17. The only 
differences between proposed MEMX Rule 11.15 and BZX Rule 11.17 relate 
to different terms to define trading sessions (i.e., the Exchange uses 
the terms Pre-Market Session and Post-Market Session whereas BZX uses 
the terms Early Trading Session, Pre-Opening Session and After Hours 
Trading Session), minor language differences for clarity, and the 
omission of language related to halt auctions for securities listed on 
the Exchange, as the Exchange does not list any securities or conduct 
halt auctions while BZX does.
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    \5\ See Securities Exchange Act Release No. 95658 (September 1, 
2022) (SR-CboeBZX-2022-037) (``BZX Approval'').
    \6\ The term ``Regular Trading Hours'' means the time between 
9:30 a.m. and 4 p.m. eastern time. See MEMX Rule 1.5(bb).
    \7\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \8\ See Securities Exchange Act Release No. 84843 (December 18, 
2018), 83 FR 66464 (December 26, 2018) (``Notice''); 85623 (April 
11, 2019), 84 FR 16086 (April 17, 2019) (File No. 4-631) 
(``Amendment Eighteen'').
    \9\ ``Price Bands'' refers to the term provided in Section V of 
the LULD Plan.
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Proposal To Make the Clearly Erroneous Pilot Permanent
    On May 4, 2020, the Commission approved MEMX's Form 1 Application 
to register as a national securities exchange with rules including, on 
a pilot basis, MEMX Rule 11.15.\10\ Rule 11.15, among other things (i) 
provides for uniform treatment of clearly erroneous execution reviews 
in multi-stock events involving twenty or more securities; and (ii) 
reduces the ability of the Exchange to deviate from objective standards 
set forth in the rule. The rule further provides that: (i) a series of 
transactions in a particular security on one or more trading days may 
be viewed as one event if all such transactions were effected based on 
the same fundamentally incorrect or grossly misinterpreted issuance 
information resulting in a severe valuation error for all such 
transactions; and (ii) in the event of any disruption or malfunction in 
the operation of the electronic communications and trading facilities 
of the Exchange, another SRO, or responsible single plan processor in 
connection with the transmittal or receipt of a trading halt, an 
Officer of the Exchange or senior level employee designee, acting on 
his or her own motion, shall nullify any transaction that occurs after 
a trading halt has been declared by the primary listing market for a 
security, and before such a trading halt has officially ended according 
to the primary listing market.\11\
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    \10\ See Securities Exchange Release No. 88806 (May 4, 2020), 85 
FR 27451 (May 8, 2020).
    \11\ See MEMX Rule 11.15.
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    When it originally approved the clearly erroneous pilot, the 
Commission explained that the changes were ``being

[[Page 57239]]

implemented on a pilot basis so that the Commission and the Exchanges 
can monitor the effects of the pilot on the markets and investors, and 
consider appropriate adjustments, as necessary.'' \12\ In the 12 years 
since that time, national securities exchanges have gained considerable 
experience in the operation of the rule, as amended on a pilot basis. 
Based on that experience, the Exchange believes that the program should 
be allowed to continue on a permanent basis so that equities market 
participants and investors can benefit from the increased certainty 
provided by the amended rule.
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    \12\ See e.g., Securities Exchange Act Release No. 62886 
(September 10, 2010), 75 FR 56613 (September 16, 2010) (SR-BATS-
2010-016).
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    The clearly erroneous pilot was implemented following a severe 
disruption in the U.S. equities markets on May 6, 2010 (``Flash 
Crash'') to ``provide greater transparency and certainty to the process 
of breaking trades.'' \13\ Largely, the pilot reduced the discretion of 
the Exchange, other national securities exchanges, and Financial 
Industry Regulatory Authority (``FINRA'') to deviate from the objective 
standards in their respective rules when dealing with potentially 
erroneous transactions. The pilot has thus helped afford greater 
certainty to Members and investors about when trades will be deemed 
erroneous pursuant to self-regulatory organization (``SRO'') rules and 
has provided a more transparent process for conducting such reviews. 
The Exchange proposes to make the current pilot permanent so that 
market participants can continue to benefit from the increased 
certainty afforded by the current rule.
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    \13\ Id.
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Amendments to the Clearly Erroneous Rules
    When the Participants to the LULD Plan filed to introduce the Limit 
Up-Limit Down (``LULD'') mechanism, itself a response to the Flash 
Crash, a handful of commenters noted the potential discordance between 
the clearly erroneous rules and the Price Bands used to limit the price 
at which trades would be permitted to be executed pursuant to the LULD 
Plan. For example, two commenters requested that the clearly erroneous 
rules be amended so the presumption would be that trades executed 
within the Price Bands would not be not subject to review.\14\ While 
the Participants acknowledged that the potential to prevent clearly 
erroneous executions would be a ``key benefit'' of the LULD Plan, the 
Participants decided not to amend the clearly erroneous rules at that 
time.\15\ In the years since, industry feedback has continued to 
reflect a desire to eliminate the discordance between the LULD 
mechanism and the clearly erroneous rules so that market participants 
would have more certainty that trades executed with the Price Bands 
would stand. For example, the Equity Market Structure Advisory 
Committee (``EMSAC'') Market Quality Subcommittee included in its April 
19, 2016, status report a preliminary recommendation that clearly 
erroneous rules be amended to conform to the Price Bands--i.e., ``any 
trade that takes place within the band would stand and not be broken 
and trades outside the LU/LD bands would be eligible for the 
consideration of the Clearly Erroneous rules.'' \16\
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    \14\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (n. 33505).
    \15\ Id.
    \16\ See EMSAC Market Quality Subcommittee, Recommendations for 
Rulemaking on Issues of Market Quality (November 29, 2016), 
available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rulemaking-market-quality.pdf.
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    The Exchange believes that it is important for there to be some 
mechanism to ensure that investors' orders are either not executed at 
clearly erroneous prices or are subsequently busted as needed to 
maintain a fair and orderly market. At the same time, the Exchange 
believes that the LULD Plan, as amended, would provide sufficient 
protection for trades executed during Regular Trading Hours. Indeed, 
the LULD mechanism could be considered to offer superior protection as 
it prevents potentially erroneous trades from being executed in the 
first instance. After gaining experience with the LULD Plan, the 
Exchange now believes that it is appropriate to largely eliminate 
clearly erroneous review during Regular Trading Hours when Price Bands 
are in effect. Thus, as proposed, trades executed within the Price 
Bands would stand, barring one of a handful of identified scenarios 
where such review may still be necessary for the protection of 
investors. The Exchange believes that this change would be beneficial 
for the U.S. equities markets as it would ensure that trades executed 
within the Price Bands are subject to clearly erroneous review in only 
rare circumstances, resulting in greater certainty for Members and 
investors.
    The current LULD mechanism for addressing extraordinary market 
volatility is available solely during Regular Trading Hours. Thus, 
trades during the Exchange's Pre-Market Session \17\ or Post-Market 
Session \18\ would not benefit from this protection and could 
ultimately be executed at prices that may be considered erroneous. For 
this reason, the Exchange proposes that transactions executed during 
the Pre-Market Session or Post-Market Session would continue to be 
reviewable as clearly erroneous. Continued availability of the clearly 
erroneous rule during pre- and post-market trading sessions would 
therefore ensure that investors have appropriate recourse when 
erroneous trades are executed outside of the hours where similar 
protection can be provided by the LULD Plan. Further, the proposal is 
designed to eliminate the potential discordance between clearly 
erroneous review and LULD Price Bands, which does not exist outside of 
Regular Trading Hours because the LULD Plan is not in effect. Thus, the 
Exchange believes that it is appropriate to continue to allow 
transactions to be eligible for clearly erroneous review if executed 
outside of Regular Trading Hours.
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    \17\ The term ``Pre-Market Session'' means the time between 7 
a.m. and 9:30 a.m. eastern time. See MEMX Rule 1.5(x).
    \18\ The term ``Post-Market Session'' means the time between 4 
p.m. and 5 p.m. eastern time. See MEMX Rule 1.5(w).
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    On the other hand, there would be much more limited potential to 
request that a transaction be reviewed as potentially erroneous during 
Regular Trading Hours. With the introduction of the LULD mechanism in 
2013, clearly erroneous trades are largely prevented by the requirement 
that trades be executed within the Price Bands. In addition, in 2019, 
Amendment Eighteen to the LULD Plan eliminated double-wide Price Bands: 
(1) at the Open, and (2) at the Close for Tier 2 NMS Stocks 2 with a 
Reference Price above $3.00.\19\ Due to these changes, the Exchange 
believes that the Price Bands would provide sufficient protection to 
investor orders such that clearly erroneous review would no longer be 
necessary during Regular Trading Hours. As the Participants to the LULD 
Plan explained in Amendment Eighteen: ``Broadly, the Limit Up-Limit 
Down mechanism prevents trades from happening at prices where one party 
to the trade would be considered `aggrieved,' and thus could be viewed 
as an appropriate mechanism to supplant clearly erroneous rules.'' 
While the Participants also expressed concern that the Price Bands 
might be too wide to afford meaningful protection around the open and 
close of trading, amendments to the LULD Plan adopted in Amendment

[[Page 57240]]

Eighteen narrowed Price Bands at these times in a manner that the 
Exchange believes is sufficient to ensure that investors' orders would 
be appropriately protected in the absence of clearly erroneous review. 
The Exchange therefore believes that it is appropriate to rely on the 
LULD mechanism as the primary means of preventing clearly erroneous 
trades during Regular Trading Hours.
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    \19\ See Amendment Eighteen, supra note 8.
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    At the same time, the Exchange is cognizant that there may be 
limited circumstances where clearly erroneous review may continue to be 
appropriate, even during Regular Trading Hours. Thus, the Exchange 
proposes to amend its clearly erroneous rules to enumerate the specific 
circumstances where such review would remain available during the 
course of Regular Trading Hours, as follows. All transactions that fall 
outside of these specific enumerated exceptions would be ineligible for 
clearly erroneous review.
    First, pursuant to proposed paragraph (c)(1)(A), a transaction 
executed during Regular Trading Hours would continue to be eligible for 
clearly erroneous review if the transaction is not subject to the LULD 
Plan. In such case, the Numerical Guidelines set forth in paragraph 
(c)(2) of Rule 11.15 will be applicable to such NMS Stock. While the 
majority of securities traded on the Exchange would be subject to the 
LULD Plan, certain equity securities, such as rights and warrants, are 
explicitly excluded from the provisions of the LULD Plan and would 
therefore be eligible for clearly erroneous review instead.\20\ 
Similarly, there are instances, such as the opening auction on the 
primary listing market,\21\ where transactions are not ordinarily 
subject to the LULD Plan, or circumstances where a transaction that 
ordinarily would have been subject to the LULD Plan is not--due, for 
example, to some issue with processing the Price Bands. These 
transactions would continue to be eligible for clearly erroneous 
review, effectively ensuring that such review remains available as a 
backstop when the LULD Plan would not prevent executions from occurring 
at erroneous prices in the first instance.
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    \20\ See Appendix A of the LULD Plan.
    \21\ The initial Reference Price used to calculate Price Bands 
is typically set by the Opening Price on the primary listing market. 
See Section V(B) of the LULD Plan.
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    Second, investors would also continue to be able to request review 
of transactions that resulted from certain systems issues pursuant to 
proposed paragraph (c)(1)(B). This limited exception would help to 
ensure that trades that should not have been executed would continue to 
be subject to clearly erroneous review. Specifically, as proposed, 
transactions executed during Regular Trading Hours would be eligible 
for clearly erroneous review pursuant to proposed paragraph (c)(1)(B) 
if the transaction is the result of an Exchange technology or systems 
issue that results in the transaction occurring outside of the 
applicable LULD Price Bands pursuant to Rule 11.15(g). A transaction 
subject to review pursuant to this paragraph shall be found to be 
clearly erroneous if the price of the transaction to buy (sell) that is 
the subject of the complaint is greater than (less than) the Reference 
Price, described in paragraph (d) of this Rule, by an amount that 
equals or exceeds the applicable Percentage Parameter defined in 
Appendix A to the LULD Plan (``Percentage Parameters'').
    Third, the Exchange proposes to narrowly allow for the review of 
transactions during Regular Trading Hours when the Reference Price, 
described in proposed paragraph (d), is determined to be erroneous by 
an Officer of the Exchange. Specifically, a transaction executed during 
Regular Trading Hours would be eligible for clearly erroneous review 
pursuant to proposed paragraph (c)(1)(C) if the transaction involved, 
in the case of (1) a corporate action or new issue or (2) a security 
that enters a Trading Pause pursuant to the LULD Plan and resumes 
trading without an auction,\22\ a Reference Price that is determined to 
be erroneous by an Officer of the Exchange because it clearly deviated 
from the theoretical value of the security. In such circumstances, the 
Exchange may use a different Reference Price pursuant to proposed 
paragraph (d)(2) of this Rule. A transaction subject to review pursuant 
to this paragraph shall be found to be clearly erroneous if the price 
of the transaction to buy (sell) that is the subject of the complaint 
is greater than (less than) the new Reference Price, described in 
paragraph (d)(2) below, by an amount that equals or exceeds the 
applicable Numerical Guidelines or Percentage Parameters, as applicable 
depending on whether the security is subject to the LULD Plan. 
Specifically, the Percentage Parameters would apply to all transactions 
except those in an NMS Stock that is not subject to the LULD Plan, as 
described in paragraph (c)(1)(A).
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    \22\ The Exchange notes that the ``resumption of trading without 
an auction'' provision of the proposed rule text applies only to 
securities that enter a Trading Pause pursuant to LULD and does not 
apply to a corporate action or new issue.
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    In the context of a corporate action or a new issue, there may be 
instances where the security's Reference Price is later determined by 
the Exchange to be erroneous (e.g., because of a bad first trade for a 
new issue), and subsequent LULD Price Bands are calculated from that 
incorrect Reference Price. In determining whether the Reference Price 
is erroneous in such instances, the Exchange would generally look to 
see if such Reference Price clearly deviated from the theoretical value 
of the security. In such cases, the Exchange would consider a number of 
factors to determine a new Reference Price that is based on the 
theoretical value of the security, including but not limited to, the 
offering price of the new issue, the ratio of the stock split applied 
to the prior day's closing price, the theoretical price derived from 
the numerical terms of the corporate action transaction such as the 
exchange ratio and spin-off terms, and the prior day's closing price on 
the OTC market for an OTC up-listing.\23\ In the foregoing instances, 
the theoretical value of the security would be used as the new 
Reference Price when applying the Percentage Parameters under the LULD 
Plan (or Numerical Guidelines if the transaction is in an NMS Stock 
that is not subject to the LULD Plan) to determine whether executions 
would be cancelled as clearly erroneous.
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    \23\ Using transaction data reported to the FINRA OTC Reporting 
Facility, FINRA disseminates via the Trade Data Dissemination 
Service a final closing report for OTC equity securities for each 
business day that includes, among other things, each security's 
closing last sale price.
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    The following illustrate the proposed application of the rule in 
the context of a corporate action or new issue:
Example 1
    1. ABCD is subject to a corporate action, 1 for 10 reverse split, 
and the previous day close was $5, but the new theoretical price based 
on the terms of the corporate action is $50.
    2. The security opens at $5, with LULD bands at $4.50 x $5.50.
    3. The bands will be calculated correctly but the security is 
trading at an erroneous price based on the valuation of the remaining 
outstanding shares.
    4. The theoretical price of $50 would be used as the new Reference 
Price when applying LULD bands to determine if executions would be 
cancelled as clearly erroneous.
Example 2
    1. ABCD is subject to a corporate action, the company is doing a 
spin off where a new issue will be listed, BCDE. ABCD trades at $50, 
and the spinoff company is worth \1/5\ of ABCD.

[[Page 57241]]

    2. BCDE opens at $50 in the belief it is the same company as ABCD.
    3. The theoretical values of the two companies are ABCD $40 and 
BCDE $10.
    4. BCDE would be deemed to have had an incorrect Reference Price 
and the theoretical value of $10 would be used as the new Reference 
Price when applying the LULD Bands to determine if executions would be 
cancelled as clearly erroneous.
Example 3
    1. ABCD is an uplift from the OTC market, the prior days close on 
the OTC market was $20.
    2. ABCD opens trading on the new listing exchange at $0.20 due to 
an erroneous order entry.
    3. The new Reference Price to determine clearly erroneous 
executions would be $20, the theoretical value of the stock from where 
it was last traded.
    In the context of the rare situation in which a security that 
enters a LULD Trading Pause and resumes trading without an auction 
(i.e., reopens with quotations), the LULD Plan requires that the new 
Reference Price in this instance be established by using the mid-point 
of the best bid and offer (``BBO'') on the primary listing exchange at 
the reopening time.\24\ This can result in a Reference Price and 
subsequent LULD Price Band calculation that is significantly away from 
the security's last traded or more relevant price, especially in less 
liquid names. In such rare instances, the Exchange is proposing to use 
a different Reference Price that is based on the prior LULD Band that 
triggered the Trading Pause, rather than the midpoint of the BBO.
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    \24\ See LULD Plan, Section I(U) and V(C)(1).
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    The following example illustrates the proposed application of the 
rule in the context of a security that reopens without an auction:
Example 4:
    1. ABCD stock is trading at $20, with LULD Bands at $18 x $22.
    2. An incoming buy order causes the stock to enter a Limit State 
Trading Pause and then a Trading Pause at $22.
    3. During the Trading Pause, the buy order causing the Trading 
Pause is cancelled.
    4. At the end of the 5-minute halt, there is no crossed interest 
for an auction to occur, thus trading would resume on a quote.
    5. Upon resumption, a quote that was available prior to the Trading 
Pause (e.g., a quote was resting on the book prior to the Trading 
Pause), is widely set at $10 x $90.
    6. The Reference Price upon resumption is $50 (mid-point of BBO).
    7. The SIP will use this Reference Price and publish LULD Bands of 
$45 x $55 (i.e., far away from BBO prior to the halt).
    8. The bands will be calculated correctly, but the $50 Reference 
Price is subsequently determined to be incorrect as the price clearly 
deviated from where it previously traded prior to the Trading Pause.
    9. The new Reference Price would be $22 (i.e., the last effective 
Price Band that was in a limit state before the Trading Pause), and the 
LULD Bands would be applied to determine if the executions should be 
cancelled as clearly erroneous.
    In all of the foregoing situations, investors would be left with no 
remedy to request clearly erroneous review without the proposed 
carveouts in paragraph (c)(1)(C) because the trades occurred within the 
LULD Price Bands (albeit LULD Price Bands that were calculated from an 
erroneous Reference Price). The Exchange believes that removing the 
current ability for the Exchange to review in these narrow 
circumstances would lessen investor protections.
Numerical Guidelines
    Today, paragraph (c)(1) defines the Numerical Guidelines that are 
used to determine if a transaction is deemed clearly erroneous during 
Regular Trading Hours, or during the Pre-Market Session and Post-Market 
Session. With respect to Regular Trading Hours, trades are generally 
deemed clearly erroneous if the execution price differs from the 
Reference Price (i.e., last sale) by 10% if the Reference Price is 
greater than $0.00 up to and including $25.00; 5% if the Reference 
Price is greater than $25.00 up to and including $50.00; and 3% if the 
Reference Price is greater than $50.00. Wider parameters are also used 
for reviews for Multi-Stock Events, as described in paragraph (c)(2). 
With respect to transactions in Leveraged ETF/ETN securities executed 
during Regular Trading Hours, Pre-Market Session and Post-Market 
Session, trades are deemed clearly erroneous if the execution price 
exceeds the Regular Trading Hours Numerical Guidelines multiplied by 
the leverage multiplier.
    Given the changes described in this proposed rule change, the 
Exchange proposes to amend the way that the Numerical Guidelines are 
calculated during Regular Trading Hours in the handful of instances 
where clearly erroneous review would continue to be available. 
Specifically, the Exchange would base these Numerical Guidelines, as 
applied to the circumstances described in paragraph (c)(1)(A), on the 
Percentage Parameters used to calculate Price Bands, as set forth in 
Appendix A to the LULD Plan. Without this change, a transaction that 
would otherwise stand if Price Bands were properly applied to the 
transaction may end up being subject to review and deemed clearly 
erroneous solely due to the fact that the Price Bands were not 
available due to a systems or other issue. The Exchange believes that 
it makes more sense to instead base the Price Bands on the same 
parameters as would otherwise determine whether the trade would have 
been allowed to execute within the Price Bands. The Exchange also 
proposes to modify the Numerical Guidelines applicable to leveraged 
ETF/ETN securities during Regular Trading Hours. As noted above, the 
Numerical Guidelines will only be applicable to transactions eligible 
for review pursuant paragraph (c)(1)(A) (i.e., to NMS Stocks that are 
not subject to the LULD Plan). As leveraged ETF/ETN securities are 
subject to LULD and thus the Percentage Parameters will be applicable 
during Regular Trading Hours, the Exchange proposes to eliminate the 
Numerical Guidelines for leveraged ETF/ETN securities traded during 
Regular Trading Hours. However, as no Price Bands are available outside 
of Regular Trading Hours, the Exchange proposes to keep the existing 
Numerical Guidelines in place for transactions in leveraged ETF/ETN 
securities that occur during the Pre-Market Session and Post-Market 
Session.
    The Exchange also proposes to move existing paragraphs (c)(2), 
(c)(3), and (d) to proposed paragraph (c)(2)(B), (c)(2)(C), and 
(C)(2)(D), respectively, as Multi-Stock Events, Additional Factors, and 
Outlier Transactions will only be subject to review if those NMS Stocks 
are not subject to the LULD Plan or occur during the Pre-Market Session 
and Post-Market Session. Proposed paragraph (c)(2)(B) is substantially 
similar to existing paragraph (c)(2) except for a change in rule 
reference to paragraph (c)(1) has been updated to paragraph (c)(1)(A). 
Further, given the proposal to move existing paragraph (c)(2) to 
paragraph (c)(2)(B), the Exchange also proposes to amend applicable 
rule references throughout paragraph (c)(2)(A). Finally, the Exchange 
proposes to update applicable rule references in paragraph (c)(2)(D) 
based on the above-described structural changes to the Rule.
Reference Price
    As proposed, the Reference Price used would continue to be based on 
last sale

[[Page 57242]]

and would be memorialized in proposed paragraph (d). Continuing to use 
the last sale as the Reference Price is necessary for operational 
efficiency as it may not be possible to perform a timely clearly 
erroneous review if doing so required computing the arithmetic mean 
price of eligible reported transactions over the past five minutes, as 
contemplated by the LULD Plan. While this means that there would still 
be some differences between the Price Bands and the clearly erroneous 
parameters, the Exchange believes that this difference is reasonable in 
light of the need to ensure timely review if clearly erroneous rules 
are invoked. The Exchange also proposes to allow for an alternate 
Reference Price to be used as prescribed in proposed paragraphs (d)(1), 
(2), and (3). Specifically, the Reference Price may be a value other 
than the consolidated last sale immediately prior to the execution(s) 
under review (1) in the case of Multi-Stock Events involving twenty or 
more securities, as described in paragraph (c)(2)(B) above, (2) in the 
case of an erroneous Reference Price, as described in paragraph 
(c)(1)(C) above,\25\ or (3) in other circumstances, such as, for 
example, relevant news impacting a security or securities, periods of 
extreme market volatility, sustained illiquidity, or widespread system 
issues, where use of a different Reference Price is necessary for the 
maintenance of a fair and orderly market and the protection of 
investors and the public interest, provided that such circumstances 
occurred during Pre-Market Session or Post-Market Session or the 
execution(s) are eligible for review pursuant to paragraph (c)(1)(A).
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    \25\ As discussed above, in the case of (c)(1)(C)(1), the 
Exchange would consider a number of factors to determine a new 
Reference Price that is based on the theoretical value of the 
security, including but not limited to, the offering price of the 
new issue, the ratio of the stock split applied to the prior day's 
closing price, the theoretical price derived from the numerical 
terms of the corporate action transaction such as the exchange ratio 
and spin-off terms, and the prior day's closing price on the OTC 
market for an OTC up-listing. In the case of (c)(1)(C)(2), the 
Reference Price will be the last effective Price Band that was in a 
limit state before the Trading Pause.
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Appeals
    As described more fully below, the Exchange proposes to eliminate 
paragraph (f), System Disruption or Malfunction. Accordingly, the 
Exchange proposes to remove from paragraph (e)(2), Appeals, each 
reference to paragraph (f), and include language referencing proposed 
paragraph (g), Transactions Occurring Outside of the LULD Bands.
System Disruption or Malfunction
    To conform with the structural changes described above, the 
Exchange now proposes to remove paragraph 11.15(f), System Disruption 
or Malfunction, and proposes new paragraph (c)(1)(B). Specifically, as 
described in paragraph (c)(1)(B), transactions occurring during Regular 
Trading Hours that are executed outside of the LULD Price Bands due to 
an Exchange technology or system issue, may be subject to clearly 
erroneous review pursuant to proposed paragraph 11.15(g). Proposed 
paragraph 11.15(c)(1)(B) further provides that a transaction subject to 
review pursuant to this paragraph shall be found to be clearly 
erroneous if the price of the transaction to buy (sell) that is the 
subject of the complaint is greater than (less than) the Reference 
Price, described in paragraph (d), by an amount that equals or exceeds 
the applicable Percentage Parameter defined in Appendix A to the LULD 
Plan.
Trade Nullification for UTP Securities That Are the Subject of Initial 
Public Offerings
    Current paragraph (h) of Rule 11.15 provides different procedures 
for conducting clearly erroneous review in initial public offering 
(``IPO'') securities that are traded pursuant to unlisted trading 
privileges (``UTP'') after the initial opening of such IPO securities 
on the listing market. Specifically, this paragraph provides that a 
clearly erroneous error may be deemed to have occurred in the opening 
transaction of the subject security if the execution price of the 
opening transaction on the Exchange is the lesser of $1.00 or 10% away 
from the opening price on the listing exchange or association. The 
Exchange no longer believes that this provision is necessary as opening 
transactions on the Exchange following an IPO are subject to Price 
Bands pursuant to the LULD Plan. The Exchange therefore proposes to 
eliminate this provision in connection with the broader changes to 
clearly erroneous review during Regular Trading Hours.
Securities Subject To Limit Up-Limit Down Plan
    The Exchange proposes to renumber paragraph (i) to paragraph (h) 
based on the proposal to eliminate existing paragraph (h), and to 
rename the paragraph to provide for transactions occurring outside of 
LULD Price Bands. Given that proposed paragraph (c)(1) defines the LULD 
Plan, the Exchange also proposes to eliminate redundant language from 
proposed paragraph (h). Finally, the Exchange also proposes to update 
references to the LULD Plan and Price Bands so that they are uniform 
throughout the Rule and to update rule references throughout the 
paragraph to conform to the structural changes to the Rule described 
above.
Multi-Day Event and Trading Halts
    The Exchange proposes to renumber paragraphs (j) and (k) to 
paragraphs (h) and (i), respectively, based on the proposal to 
eliminate existing paragraph (h). Additionally, the Exchange proposes 
to modify the text of both paragraphs to reference the Percentage 
Parameters as well as the Numerical Guidelines. Specifically, the 
existing text of proposed paragraphs (h) and (i) provides that any 
action taken in connection with this paragraph will be taken without 
regard to the Numerical Guidelines set forth in this Rule. The Exchange 
proposes to amend the rule text to provide that any action taken in 
connection with this paragraph will be taken without regard to the 
Percentage Parameters or Numerical Guidelines set forth in this Rule, 
with the Percentage Parameters being applicable to an NMS Stock subject 
to the LULD Plan and the Numerical Guidelines being applicable to an 
NMS Stock not subject to the LULD Plan.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\26\ in general, and 
Section 6(b)(5) of the Act,\27\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
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    As explained in the purpose section of this proposed rule change, 
the current pilot was implemented following the Flash Crash to bring 
greater transparency to the process for conducting clearly erroneous 
reviews, and to help assure that the review process is based on clear, 
objective, and consistent rules across the U.S. equities markets. The 
Exchange believes that the amended clearly erroneous rules have been 
successful in that regard and have thus furthered fair and orderly 
markets. Specifically, the Exchange believes that the pilot has 
successfully ensured that

[[Page 57243]]

such reviews are conducted based on objective and consistent standards 
across SROs and has therefore afforded greater certainty to Members and 
investors. The Exchange therefore believes that making the current 
pilot a permanent program is appropriate so that equities market 
participants can continue to reap the benefits of a clear, objective, 
and transparent process for conducting clearly erroneous reviews. In 
addition, the Exchange understands that the other U.S. equities 
exchanges and FINRA will also file largely identical proposals to make 
their respective clearly erroneous pilots permanent. The Exchange 
therefore believes that the proposed rule change would promote 
transparency and uniformity across markets concerning review of 
transactions as clearly erroneous and would also help assure consistent 
results in handling erroneous trades across the U.S. equities markets, 
thus furthering fair and orderly markets, the protection of investors, 
and the public interest.
    Similarly, the Exchange believes that it is consistent with just 
and equitable principles of trade to limit the availability of clearly 
erroneous review during Regular Trading Hours. The Plan was approved by 
the Commission to operate on a permanent rather than pilot basis. As a 
number of market participants have noted, the LULD Plan provides 
protections that ensure that investors' orders are not executed at 
prices that may be considered clearly erroneous. Further, amendments to 
the LULD Plan approved in Amendment Eighteen serve to ensure that the 
Price Bands established by the LULD Plan are ``appropriately tailored 
to prevent trades that are so far from current market prices that they 
would be viewed as having been executed in error.'' \28\ Thus, the 
Exchange believes that clearly erroneous review should only be 
necessary in very limited circumstances during Regular Trading Hours. 
Specifically, such review would only be necessary in instances where a 
transaction was not subject to the LULD Plan, or was the result of some 
form of systems issue, as detailed in the purpose section of this 
proposed rule change. Additionally, in narrow circumstances where the 
transaction was subject to the LULD Plan, a clearly erroneous review 
would be available in the case of (1) a corporate action or new issue 
or (2) a security that enters a Trading Pause pursuant to LULD and 
resumes trading without an auction, where the Reference Price is 
determined to be erroneous by an Officer of the Exchange because it 
clearly deviated from the theoretical value of the security. Thus, 
eliminating clearly erroneous review in all other instances will serve 
to increase certainty for Members and investors that trades executed 
during Regular Trading Hours would typically stand and would not be 
subject to review.
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    \28\ See Amendment Eighteen, supra note 8.
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    Given the fact that clearly erroneous review would largely be 
limited to transactions that were not subject to the LULD Plan, the 
Exchange also believes that it is necessary to change the parameters 
used to determine whether a trade is clearly erroneous. Specifically, 
due to the different parameters currently used for clearly erroneous 
review and for determining Price Bands, it is possible that a trade 
that would have been permitted to execute within the Price Bands would 
later be deemed clearly erroneous, if, for example, a systems issue 
prevented the dissemination of the Price Bands. The Exchange believes 
that this result is contrary to the principle that trades within the 
Price Bands should stand and has the potential to cause investor 
confusion if trades that are properly executed within the applicable 
parameters described in the LULD Plan are later deemed erroneous. By 
using consistent parameters for clearly erroneous reviews conducted 
during Regular Trading Hours and the calculation of the Price Bands, 
the Exchange believes that this change would also serve to promote 
greater certainty with regards to when trades may be deemed erroneous.
    The Exchange believes that it is consistent with the protection of 
investors and the public interest to remove the current provision of 
the clearly erroneous rule dealing with UTP securities that are the 
subject of IPOs. This provision applies specifically to opening 
transactions on a non-listing market following an IPO on the listing 
market. As such, review under this paragraph is limited to trades 
conducted during Regular Trading Hours. As previously addressed, trades 
executed during Regular Trading Hours would generally not be subject to 
clearly erroneous review but would instead be protected by the Price 
Bands. The Exchange therefore no longer believes that this paragraph is 
necessary, as all trades subject to this provision today would either 
be subject to the LULD Plan, or, in the event of some systems or other 
issue, would be subject to the provisions that apply to transactions 
that are not adequately protected by the LULD Plan.
    Finally, the proposed rule changes make organizational updates to 
the Exchange's Clearly Erroneous Execution Rule as well as minor 
updates and corrections to the Rule to improve readability and clarity.

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

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposal would ensure 
the continued, uninterrupted operation of harmonized clearly erroneous 
execution rules across the U.S. equities markets while also amending 
those rules to provide greater certainty to Members and investors that 
trades will stand if executed during Regular Trading Hours where the 
LULD Plan provides adequate protection against trading at erroneous 
prices. The Exchange understands that the other national securities 
exchanges and FINRA will also file similar proposals, the substance of 
which are identical to this proposal. Thus, the proposed rule change 
will help to ensure consistency across SROs without implicating any 
competitive issues.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \29\ and Rule 19b-
4(f)(6) \30\ thereunder.
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    \29\ 15 U.S.C. 78s(b)(3)(A).
    \30\ 17 CFR 240.19b-4.
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    A proposed rule change filed under Rule 19b-4(f)(6) \31\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \32\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become operative on

[[Page 57244]]

October 1, 2022. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest, as it will allow the Exchange to coordinate its 
implementation of the revised clearly erroneous execution rules with 
the other national securities exchanges and FINRA, and will help ensure 
consistency across the SROs.\33\ For this reason, the Commission hereby 
waives the 30-day operative delay and designates the proposed rule 
change as operative upon filing.\34\
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    \31\ 17 CFR 240.19b-4(f)(6).
    \32\ 17 CFR 240.19b-4(f)(6)(iii).
    \33\ See SR-CboeBZX-2022-37 (July 8, 2022).
    \34\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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 SR-MEMX-2022-25 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-MEMX-2022-25. 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 a.m. and 3 
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-MEMX-2022-25 
and should be submitted on or before October 11, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20144 Filed 9-16-22; 8:45 am]
BILLING CODE 8011-01-P