[Federal Register Volume 90, Number 119 (Tuesday, June 24, 2025)]
[Notices]
[Pages 26865-26891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-11525]
[[Page 26865]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103290; File No. SR-IEX-2025-02)]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing of Amendment No. 3 to a Proposed Rule Change To Adopt Rules To
Govern the Trading of Options on the Exchange for a New Facility Called
IEX Options
June 18, 2025.
On January 10, 2025, the Investors Exchange LLC (``IEX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt rules to govern the trading of options on
IEX Options LLC, a facility of the Exchange that will be established in
a separate rule filing. The proposed rule change was published for
comment in the Federal Register on January 21, 2025.\3\ On March 6,
2025, the Commission designated a longer period within which to take
action on the proposed rule change.\4\ On March 12, 2025, the Exchange
filed Amendment No. 1 to the proposed rule change,\5\ and Amendment No.
1 was published for comment in the Federal Register on March 19,
2025.\6\ On April 21, 2025, the Commission instituted proceedings to
determine whether to approve or disapprove the proposed rule change
(``OIP'').\7\ On June 13, 2025, the Exchange filed Amendment No. 2 to
the proposed rule change, which it withdrew to correct a nonsubstantive
pagination issue and refiled as Amendment No. 3 on June 17, 2025.\8\
The Commission has received comments on the proposed rule change.\9\
The Commission is publishing this notice to solicit comments on the
proposed rule change, as amended by Amendment No. 3, from interested
persons. Items I and II below have been prepared by the Exchange.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 102190 (Jan. 14,
2025), 90 FR 7205.
\4\ See Securities Exchange Act Release No. 102536, 90 FR 11866
(Mar. 12, 2025). The Commission designated April 21, 2025 as the
date by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change. See id.
\5\ Amendment No. 1 is publicly available on the Commission's
website at: https://www.sec.gov/comments/sr-iex-2025-02/sriex202502-580115-1667463.pdf.
\6\ See Securities Exchange Act Release No. 102663 (Mar. 13,
2025), 90 FR 12890.
\7\ See Securities Exchange Act Release No. 102895, 90 FR 17474
(April 25, 2025).
\8\ Amendment No. 3 is publicly available on the Commission's
website at https://www.sec.gov/comments/sr-iex-2025-02/sriex202502.htm. See infra notes 17-19 and accompanying text for a
further explanation of the proposed revisions to the proposed rule
change set forth in Amendment No. 3.
\9\ Comments on the proposed rule change are available at
https://www.sec.gov/comments/sr-iex-2025-02/sriex202502.htm.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
On January 10, 2025, IEX, pursuant to the provisions of Section
19(b)(1) under the Act \10\ and Rule 19b-4 thereunder,\11\ filed with
the Commission proposed rule change SR-IEX-2025-02 (the ``Initial
Proposal'').\12\ As described in the Initial Proposal, IEX is proposing
to adopt rules to govern the trading of options on IEX Options LLC, a
facility of the Exchange that will be established in a separate rule
filing (referred to herein as ``IEX Options''). On March 12, 2025, the
Exchange filed with the SEC Amendment No. 1, which replaced and
superseded the Initial Proposal in its entirety in order to provide
increased clarity and modify certain aspects of the Initial Proposal as
described therein (``Amendment No. 1 Proposal''). The Exchange is
filing this Amendment No. 3 to provide increased clarity and modify
certain aspects of the Amendment No. 1 Proposal as described herein.
Amendment No. 3 replaces and supersedes Amendment No. 1 in its
entirety. The Exchange previously filed Amendment No. 2 but withdrew it
to correct a nonsubstantive pagination issue.
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\10\ 15 U.S.C. 78s(b)(1).
\11\ 17 CFR 240.19b-4.
\12\ See Securities Exchange Act Release No. 102190 (January 14,
2025), 90 FR 7205 (January 21, 2025) (``Initial Filing''), available
at https://www.iexexchange.io/resources/regulation/rule-filings.
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As proposed, the Exchange will operate IEX Options as a fully
automated trading system built on the core functionality of the
Exchange's approved equities platform, and in a manner similar to that
of other options exchanges. In addition, IEX Options will utilize a de
minimis delay on incoming order and quote messages designed to enable
IEX to obtain the most accurate view of the market prior to processing
orders and quotes, and an optional Market Maker quote parameter
designed to protect IEX Market Makers from excessive risk due to
execution of quotes at stale prices (i.e., before the market maker can
update them in response to changed market data) that can be exploited
by latency arbitrage strategies (as described below), in addition to
other risk protections substantially similar to those offered by other
options exchanges.
The text of the proposed rule change is available at the Exchange's
website at https://www.iexexchange.io/resources/regulation/rule-filings
and at the principal office of the Exchange.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 self-regulatory organization
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
Overview
The Commission published the proposed rule change for comment in
the Federal Register on January 21, 2025,\13\ and on March 6, 2025,
extended the review period to April 21, 2025.\14\ The Commission
published Amendment No. 1 for comment in the Federal Register on March
19, 2025.\15\ On April 21, 2025 the Commission instituted proceedings
to determine whether to approve or disapprove the proposed rule change,
as modified by Amendment No. 1 (``OIP'').\16\
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\13\ Id.
\14\ See Securities Exchange Act Release No. 102536 (March 6,
2025), 90 FR 11866 (March 12, 2025).
\15\ See Securities Exchange Act Release No. 102663 (March 13,
2025), 90 FR 12890 (March 19, 2025).
\16\ See Securities Exchange Act Release No. 102895 (April 21,
2025); 90 FR 17474 (April 25, 2025).
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The Exchange is filing Amendment No. 3 to the Amendment No. 1
Proposal in order to provide increased clarity and modify certain
aspects of Amendment No. 1, including to address the issues raised by
the Commission in the OIP.
First, IEX proposes to revise the Options Risk Parameter (``ORP'')
Indicator \17\ formula specified in Supplementary Material .04 (Quote
instability calculation) and Supplementary Material .05 (Calculation of
implied volatility) to
[[Page 26866]]
proposed Rule 23.150 to more narrowly tailor the parameters of the
calculation and provide greater clarity with respect to the variable
values included therein. Specifically, IEX proposes to revise proposed
Supplementary Material .04(1)(q) and (2)(e), and Supplementary Material
.05 to codify the initial value for each of three variables used in the
application of the ORP: (1) Delta Bound Band; (2) Quote Instability
Threshold; and (3) the frequency of the calculation of implied
volatility, respectively, and provide that, if the Exchange determines
to change any of the codified values within the specified ranges or
values, as applicable, it will do so by submitting a rule filing
pursuant to Rule 19b-4(f)(1) under the Exchange Act or other
appropriate rule filing type.
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\17\ See proposed Rule 23.150(h)(1).
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Second, the Exchange provides data analysis estimating that the ORP
would only have a de minimis impact on market maker quotes on IEX thus
evidencing that its benefit is designed to be narrowly tailored to
protect against latency arbitrage strategies. As described herein, IEX
expects that for significantly more than 99% of the trading day the ORP
would not impact a quote on IEX.
Third, IEX provides clarifications and additional support for
certain aspects of its proposed rule change as described herein.
Fourth, IEX proposes to revise proposed Rule 19.160 concerning when
accounts should be aggregated when determining position limits,
substantially similar to provisions in CBOE's rules.\18\
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\18\ Specifically, IEX proposes to adopt language from CBOE Rule
8.30 Interpretation and Policy .03(c)(4) in new subsection (f)(2)(D)
to proposed Rule 19.160 and from CBOE Rule 8.30 Interpretation and
Policy .09 in new Supplementary Material .03 to proposed Rule
19.160.
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Finally, IEX makes several non-substantive terminology revisions to
enhance clarity.\19\
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\19\ Specifically, in this Amendment No. 3 references to Cboe
Exchange, Inc. are to CBOE rather than C1, and the Options trading
system is referred to as the ``System'' rather than the ``Trading
System.''
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The Exchange proposes to adopt a series of rules in connection with
IEX Options, which will be a facility of the Exchange.\20\ As proposed,
the Exchange will operate IEX Options as a fully automated trading
system built on the core functionality of the Exchange's approved
equities platform, and in a manner similar to that of other options
exchanges.\21\
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\20\ IEX will file a separate proposed rule change with the
Commission pursuant to Section 19 of the Act to provide that IEX
Options will be operated by IEX Options LLC, a Delaware limited
liability company wholly owned by the Exchange, as a facility of the
Exchange as that term is defined in Section 3(a)(2) of the Act.
\21\ The IEX Options proposed rules are largely based on the
rules of other options exchanges, as described herein. When a
particular proposed rule is described as ``substantively identical''
to a rule(s) of another exchanges that means that the substance of
the proposed IEX Options rule is identical to the referenced rule of
the other exchange, with differences only to reflect terminology and
numbering. When a particular proposed rule is described as
``substantially similar'' to a rule(s) of another exchange this rule
filing describes the relevant differences.
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As proposed, IEX Options will operate an electronic trading system
to list and trade options issued by the Options Clearing Corporation
(``Clearing Corporation'' or ``OCC''). Specifically, IEX proposes to
operate a fully automated, pro-rata priority options market in a manner
similar to that of other options exchanges. In addition, IEX Options
will utilize a de minimis delay on incoming order and quote messages
designed to enable IEX to obtain the most accurate view of the market
prior to processing orders and quotes, and an optional Market Maker
quote parameter designed to protect Market Makers from excessive risk
due to execution of quotes at stale prices, in addition to other risk
protections substantially similar to those offered by other options
exchanges.
The Exchange proposes to adopt rules applicable to IEX Options that
are substantially similar to the approved rules of the MEMX, CBOE,
MIAX, and NYSE Amex and Arca options exchanges, with the material
proposed differences described herein.\22\
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\22\ See rulebooks of MEMX LLC (``MEMX''), Cboe Exchange, Inc.
(``CBOE''), Miami International Securities Exchange, LLC (``MIAX''),
NYSE Arca, Inc. (``NYSE Arca Options''), and NYSE American LLC
(``NYSE Amex Options''). However, IEX is not proposing to trade
index options at this time and therefore is not proposing rules for
the listing and trading of index options.
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As provided in proposed Rule 17.110 (Applicability), existing
Exchange Rules \23\ applicable to the IEX equities market contained in
Chapters 1 through 16 of the Exchange Rules will apply to Options
Members unless a specific Exchange Rule applicable to the IEX Options
market (in proposed Chapters 17 through 29 of the Exchange Rules)
governs or unless the context otherwise requires.
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\23\ See IEX Rule 1.160(jj).
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The IEX Options System \24\ will provide for the electronic display
and execution of orders on a pro-rata basis. All Exchange Members will
be eligible to participate in IEX Options by qualifying as Options
Members \25\ and obtaining one or more trading permits for their
activity on IEX Options, in accordance with applicable IEX Options
rules. The IEX Options System will provide an optional routing service
for orders when trading interest is not present on IEX Options and will
comply with all applicable securities laws and regulations and the
obligations of the Options Order Protection and Locked/Crossed Market
Plan.
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\24\ See proposed Rule 22.100(a).
\25\ See proposed Rule 17.100.
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Background
IEX began operation as a national securities exchange in 2016,
introducing an innovative market design that includes a 350-microsecond
speed bump and an indicator.\26\ These features were designed to
protect resting liquidity generally, as well as to increase displayed
liquidity, which enhances price discovery and the quality of markets
overall. These innovations have been successful in counteracting the
ability of market participants to exploit speed-based advantages when
the market is in transition.
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\26\ See infra notes 206 and 208 and accompanying text.
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Latency arbitrage is a high-speed trading strategy that exploits
microsecond resolution differences in market data dissemination and
trade reaction times. In essence, it involves detecting price changes
(or inconsistencies) in one market and racing to trade on another
market before those prices fully update. Typical latency arbitrageurs
trade with their own capital and invest heavily in highly sophisticated
technology and connectivity to facilitate said strategies. They
leverage these technological and speed advantages to execute rapidly
against passive resting orders and quotes at outdated ``stale'' prices,
microseconds before a liquidity provider has had a fair opportunity to
modify or cancel (or is in the process of modifying or cancelling) its
orders to reflect updated market conditions. Given the exponential
growth in options tradeable instruments (over 1.5 million individual
series) and the quote-driven nature of options markets, market makers
are uniquely susceptible to such strategies. This essentially
represents a risk-free profit for the taker whose true cost flows to
all participants as market makers price such activity into their quoted
spreads. This results in artificially wide markets that reduce trading
opportunities to the detriment of all market participants.\27\
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\27\ As the Commission has explained, latency arbitrage occurs
in the securities markets ``[i]n those rare moments when market
prices are in transition, a race condition exists between liquidity
providers who want to reprice their on-exchange displayed liquidity
to reflect the changing market prices and the liquidity takers who
want to take before those updates can occur.'' See Securities
Exchange Act Release No. 89686 (August 26, 2020), 85 FR 54438, at
54442 (September 1, 2020) (SR-IEX-2019-15) (``2020 SEC Approval
Order''). Those liquidity providers who cannot react as fast to
changing market conditions are subject to adverse selection of
executions at stale prices. See id.; see also Citadel Securities LLC
v. Securities and Exchange Commission, 45 F.4th 27, 31 (D.C. Cir.
2022) (explaining that exchanges experience latency whereby certain
high-frequency traders can take securities at old-stale prices just
before updated prices reach the exchange).
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Since Commission approval as an exchange, and more recently of its
D-Limit order type, IEX has grown in quote presence and market share as
market participants increasingly choose to trade on its exchange, drawn
by its innovative technology designed to protect all participants,
including liquidity providers, from latency arbitrage. Comparing the
third quarter of 2020 to the second quarter of 2025, IEX has
experienced a dramatic increase in the time and size in which quotes
entered on IEX are displayed on both sides of the NBBO (time increased
from 1.1% to 27.9% while size increased from 0.6% to 11.6%), as well as
a significant increase in traded volume and market share. IEX believes
that these increases evidence that market participants value its
protective innovations. Further, markouts for resting D-Limit orders on
IEX, which measure the magnitude and direction of price moves after a
trade, are substantially better when compared to other exchanges with
at least 1% market share, evidencing D-Limit's narrowly tailored
protection from latency arbitrage ($0.0017 per share compared to -
$0.0030 per share).\28\ And fill rates for orders attempting to trade
with displayed orders on IEX have remained consistent.
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\28\ Markouts are measured by comparing the trade price to the
midpoint of the NBBO one second after the trade, expressed in mils/
share, excluding any fees/rebates. (Source: NYSE Trade and Quote
data and IEX market data.)
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In today's options marketplace, liquidity is primarily derived from
market maker quotes and there are vastly more securities listed and
traded than on equities exchanges; more than 1.5 million options series
compared to approximately 10,000 National Market System (``NMS'')
securities. Because of the large number of options series, there are
less likely to be investor limit orders resting displayed on an
exchange in any one series at any given time, so prices are commonly
set by registered market makers' quotes. Thus, the need for such
protections is paramount to maintaining and increasing liquidity
available in the marketplace. Options market makers, even more so than
equities market makers, are left highly vulnerable, particularly given
the number of securities they are quoting, to latency arbitrage which
has an impact on their quoting activity in each security.
IEX believes that implementing the proposed protective measures
would enhance the fairness and orderliness of the market, support the
integrity of the public price discovery process, and mitigate
competitive imbalances consistent with Exchange Act goals.\29\ The
measures are designed to improve the execution quality experience of
market participants that are affected by adverse selection and this
improved execution quality could encourage more displayed liquidity and
contribute to tighter spreads.\30\ IEX further believes that the
innovations, that have been proven to increase displayed liquidity in
the equity markets, would be equally, if not more beneficial to the
options market given the market structure described above.
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\29\ See infra note 163 discussing structural challenges facing
market makers.
\30\ See, e.g., Citadel Securities, Market Lens, July 2020
(``Market Lens'') (explaining that ``a wide array of market
participants seek to lower their risk of inopportune executions by
constantly updating their orders to reflect changing market
conditions'' and this can lead to higher quote cancellation rates
and frequent quote updates to reflect accurate prices), available at
https://www.citadel.com/securities/wp-content/uploads/sites/2/2020/07/Market-Lens-Order-Cancellation-White-Paper_FINAL.pdf).
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Various tools provided by all options exchanges are designed to
enable market makers to manage risks, including those presented by
latency arbitrage, and to enhance quote accuracy on their markets (as
described below). In IEX's continuing efforts to find innovative
solutions to assist liquidity providers in managing risk, IEX seeks to
extend its proven, innovative technology to further assist options
market makers in managing such risks and thereby promote fairer markets
and mitigate speed-based advantages on its platform. This business
choice in exchange offerings supports the fostering of technological
innovation and dynamic competition in the options markets, as
envisioned by the Exchange Act.
IEX Options Members
Pursuant to the proposed rules in Chapter 18 (Participation on IEX
Options), the Exchange will authorize any Exchange Member that meets
certain enumerated qualification requirements (any such Member, an
``Options Member'') and any Options Member's Sponsored Participants to
obtain access to, and transact business on, IEX Options.\31\
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\31\ See proposed Rules 18.100, 18.110, 18.120, and 18.130.
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There will be three types of Options Members--Options Order Entry
Firms (``OEFs''), Options Market Makers, and Options Clearing Members.
Options Members may act in one, two, or all such capacities. OEFs will
be those Options Members representing Customer Orders as agent on IEX
Options or trading as principal on IEX Options. Options Market Makers,
in turn, will be eligible to participate as Registered Market Makers or
Specialists, as set forth in Rule 23.100. Additionally, all Options
Market Makers may participate as Directed Marker Makers.\32\ Clearing
Members will be those Options Members that have been admitted to
membership in the Clearing Corporation pursuant to the provisions of
the Rules of the Clearing Corporation and are self-clearing or that
clear IEX Options Transactions for other Options Members.
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\32\ Directed Market Makers would be subject to enhanced quoting
obligations (as compared to Registered Market Markers) as set forth
in proposed Rule 23.150(e)(3), which is substantively identical to
NYSE Amex Options Rule 964.1NYP.
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IEX proposes to issue different types of Trading Permits to Options
Members that allow the Trading Permit Holders to: (i) trade one or more
products authorized for trading on the Exchange; (ii) act in one or
more trading functions authorized by the Rules of IEX Options; and/or
(iii) act as a Clearing Member.\33\ Trading Permits shall be for the
types and terms as shall be determined by the Exchange from time to
time, and subject to effectiveness of one or more rule filings pursuant
to Section 19(b) of the Act. The proposed rule governing IEX's Trading
Permits, Rule 18.140, is based on CBOE Rule 3.1.\34\
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\33\ See proposed Rule 18.140.
\34\ On CBOE, part of the process of applying to be a Trading
Permit Holder is for a broker-dealer to qualify as a participant or
member of the exchange. IEX's proposed rule therefore differs from
CBOE Rule 3.1 because it does not include the membership
qualification-related provisions that are addressed elsewhere in
IEX's proposed Chapter 18. In particular, IEX is not proposing to
incorporate CBOE Rule 3.1(a)(3)'s language regarding jurisdiction
over Trading Permit Holders because it is covered by Rule 2.120
(requiring all IEX Members to consent to the Exchange's
jurisdiction) and proposed Rule 18.140(e) (applying the Exchange's
jurisdictional authority to all Options Members). In addition,
CBOE's rule includes limitations on the number of trading permits
the exchange may issue. IEX is not proposing such limitations.
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The rules governing Registered Market Makers and Specialists are
substantially based on MIAX and CBOE rules.\35\ To become an Options
Market
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Maker, an Options Member will be required to register by filing a
written application and obtain any required trading permits.\36\ The
Exchange will not place any limit on the number of entities that may
become Options Market Makers, the number of appointments an Options
Market Maker may have, or the number of Options Market Makers that may
have appointments in a class unless the Exchange determines to impose
any such limit based on system constraints, capacity restrictions, or
other factors relevant to protecting the integrity of the System. The
Exchange will not impose any such limitations until it has submitted
objective standards for imposing the limits to the Commission for its
review and approval.\37\
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\35\ See MIAX Rules 600-609 (regarding market maker
qualifications and obligations) and MIAX Rules 514(d), (e), and (g)
(regarding market maker quoting and priority). The primary
differences between these MIAX rules and IEX's proposed Market Maker
rules are: (1) MIAX has three tiers of market makers, while IEX
proposes to have two tiers; (2) MIAX puts Market Makers at a
priority level above other non-Priority Customer interest, while IEX
will not (IEX's proposed rules are substantively identical to the
priority rules in CBOE Rule 5.32 as it pertains to CBOE's Preferred
Market Makers); (3) IEX proposes to allocate participation
entitlements for Specialists with a priority quote based on the
amount of non-Priority customer interest (which is how CBOE Rule
5.32(a)(2)(B) allocates priority overlays), while MIAX only looks at
the amount of other market marker interest; and (4) MIAX offers a
Market Turner priority overlay which IEX is not proposing to adopt.
\36\ See proposed Rules 23.100 and 18.140.
\37\ This provision is substantively identical to MEMX Rule
22.2(c) and MIAX Rule 600(d).
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As proposed, the Exchange shall appoint Registered Market Makers to
one or more classes of options contracts traded on the Exchange. In
making such appointments the Exchange shall consider the financial
resources available to the Registered Market Maker, the Registered
Market Maker's experience and expertise in market making or options
trading, the preferences of the Registered Market Maker to receive
appointments in specific options classes, and the maintenance and
enhancement of competition among Registered Market Makers in each class
of options contracts to which they are appointed.\38\
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\38\ See proposed Rule 23.120(a)(1).
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While there may be several Registered Market Makers appointed to a
particular class of options contracts, the Exchange may appoint only
one Specialist to each options class traded on the Exchange.\39\ To be
appointed as a Specialist, an Options Member must first satisfy the
criteria for appointment as a Registered Market Maker set forth in Rule
23.120(a)(1) and then must participate in the Specialist Qualification
Process conducted by the Exchange and detailed in proposed Rule
23.130(b).\40\ Factors to be considered for selection as a Specialist
include, but are not limited to, representations regarding capital
operations, personnel or technical resources.\41\ After designating
certain Market Makers as Specialists, the Exchange will conduct a
process to determine which options classes to allocate to which
Specialist, based upon which candidate appears best able to perform the
functions of a Specialist in the designated options classes. Factors to
be considered in the allocation of options classes to Specialists by
the Exchange include, but are not limited to the following: experience
with trading the options issue; adequacy of capital; willingness to
promote the Exchange as a marketplace; operational capacity; support
personnel; history of adherence to Exchange rules and securities laws;
and evaluations made pursuant to proposed Rule 23.130(f).\42\ The
Exchange will also consider the number and quality of issues that have
been allocated, reallocated or transferred to a Specialist and the
Specialist's willingness to promote the Exchange as a marketplace.\43\
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\39\ See proposed Rule 23.130(g)(1)(A), which is substantively
identical to NYSE Amex Options Rule 923NY(b). The language providing
that the Exchange ``may'' appoint only one Specialist to each
options class is based upon and substantively identical to NYSE Amex
Options Rule 923NY(b).
\40\ IEX based the proposed Specialist rule (23.130) on NYSE
Amex Options Rules 927NY, 927.1NY, and 927.2NY because these rules
provide clear instructions to prospective Specialist candidates
about the manner in which the Exchange selects and evaluates
Specialists, and detailed rules about Specialist rights and
obligations.
\41\ See proposed Rule 23.130(b)(1). This rule is substantively
identical to NYSE Amex Options Rule 927NY, with the exception that
IEX is not proposing to obligate Specialists to make FLEX quotes,
because those are not offered by the Exchange.
\42\ See proposed Rule 23.130(g). This rule is substantively
identical to NYSE Amex Options Rule 927.2NY.
\43\ Id.
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The Exchange will also evaluate the performance of Specialists, and
upon a finding that a Specialist failed to meet minimum performance
standards, may take adverse action against the Specialist; Specialists
shall have the right to appeal any adverse actions against them
pursuant to IEX Rule Series 9.500, which governs adverse actions.\44\
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\44\ See proposed Rule 23.130(b)(2), and (f). These rules are
substantively identical to NYSE Amex Options Rules 927NY(b)(2) and
927.1NY, respectively.
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Quotations may only be entered by a Market Maker and only in
classes of options contracts to which the Market Maker is
appointed.\45\ Market Makers may also submit orders in classes of
options contracts to which the Market Maker is appointed, which shall
constitute a quote, and thus would help to satisfy the Market Maker's
quoting obligation.\46\ In addition, an Options Market Maker with an
OEF trading permit may submit orders in classes of options in which the
Market Maker has no appointment, provided that the total number of such
orders executed by the Market Maker do not exceed 25% of all contracts
the Market Maker executes on the Exchange in any calendar quarter.\47\
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\45\ See proposed Rule 23.150(a).
\46\ See proposed Rule 17.100 (defining ``Quote'' to include
orders entered by a Market Maker in the option series to which such
Market Maker is registered).
\47\ See proposed Rule 23.150(g).
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Options Market Makers will be required to electronically engage in
a course of dealing reasonably calculated to contribute to the
maintenance of fair and orderly markets.\48\ IEX does not propose to
incorporate MIAX's requirement that Market Makers refrain from
purchasing an option at a price more than $0.25 below parity,\49\
because IEX does not believe the restriction is necessary to the
maintenance of fair and orderly markets requirement, and notes that
other exchanges do not include this restriction.\50\ Market Makers will
be required to maintain a two-sided market on a continuous basis \51\
in at least 60% of the non-adjusted options series to which they are
appointed as Registered Market Makers and at least 90% of the non-
adjusted options series to which they are appointed as Specialists,
provided the options classes have a time to expiration of less than
nine months.\52\ And, as noted above, Directed Market Makers are
subject to enhanced quoting obligations compared to Registered Market
Makers.\53\ Market Makers and Specialists may use quotes and orders to
meet the applicable quoting requirements. These obligations will not
apply to an intra-day add-on series on the day during which such series
was added for trading. Market Maker quotes must be firm quotes that
comply with enumerated price and size rules.\54\ These obligations also
will not apply when an Options series is halted because the underlying
security has entered a Limit or Straddle state.\55\
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Registered Market Makers and Specialists also must maintain minimum net
capital in accordance with Commission and Exchange rules.\56\
Substantial or continued failure by an Options Market Maker to meet any
of its obligations and duties will subject the Options Market Maker to
disciplinary action, suspension, or revocation of the Market Maker's
registration as such or its appointment in one or more of its appointed
options classes.\57\
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\48\ See proposed Rule 23.140(a).
\49\ See MIAX rule 603(a).
\50\ See, e.g., NYSE Arca Options Rule 6.37-O.
\51\ ``Continuous quoting'' is defined as 90% of the time. See
proposed Rule 23.150(e).
\52\ See proposed Rule 23.150(e)(2) and (e)(1). Proposed Rule
23.150(e)(1) is based upon and substantively identical to NYSE Amex
Options Rule 925.1NYP(b) and proposed Rule 23.150(e)(2) is based
upon and substantively identical to NYSE Amex Options Rule
925.1NYP(c).
\53\ See supra note 29.
\54\ See proposed Rule 23.150(b) and (d).
\55\ See Supplementary Material .01 to proposed Rule 23.150(h),
which is substantively identical to MIAX Rule 530(f)(1).
\56\ See proposed Rule 23.180 ($200,000 net capital requirement
for Registered Market Makers), which is substantively identical to
MEMX Rule 22.9 and proposed Rule 23.130(c)(1)(H) ($1,000,000 net
capital requirement for Specialists), which is substantively
identical to Amex Options Rule 927NY(c)(10).
\57\ See proposed Rule 23.120(f). NYSE Amex Options Rule
927.1NY(1)(B) specifies that NYSE Amex Options provides its
specialists information related to their market share in allocated
issues on a monthly basis as part of the evaluation process. IEX is
not proposing to include this provision because it understands that
Specialist firms are well-equipped to monitor their market share and
performance on IEX and other markets.
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As on other exchanges, Options Market Makers receive certain
benefits for carrying out their duties. For example, a lender may
extend credit to a broker-dealer without regard to the restrictions in
Regulation T of the Board of Governors of the Federal Reserve System if
the credit is to be used to finance the broker-dealer's activities as a
specialist or market maker on a national securities exchange. Thus, an
Options Market Maker has a corresponding obligation to hold itself out
as willing to buy and sell options for its own account on a regular or
continuous basis to justify this favorable treatment.
Every Options Member shall at all times maintain membership in
another registered options exchange that is not registered solely under
Section 6(g) of the Exchange Act or in the Financial Industry
Regulatory Association (``FINRA'').\58\ OEFs and other Options Members
that transact business with Public Customers must at all times be
members of FINRA. Pursuant to proposed Rule 18.110(h), every Options
Member will be required to have at least one registered Options
Principal who satisfies the criteria of that rule, including the
satisfaction of a proper qualification examination. An OEF may only
transact business with Public Customers if such Options Member also is
an Options Member of another registered national securities exchange or
association with which the Exchange has entered into an agreement under
Rule 17d-2 under the Exchange Act \59\ pursuant to which such other
exchange or association shall be the designated options examining
authority for the OEF.\60\
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\58\ See proposed Rule 18.110(g).
\59\ 17 CFR 240.17d-2.
\60\ See proposed Rule 27.100.
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The proposed rules relating to qualification and participation on
IEX Options as an Options Member (including as an OEF, Options Market
Maker, or Clearing Member) are substantively identical to the relevant
rules of MEMX Options.\61\
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\61\ See MEMX Rulebook Chapters 17 and 22.
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As provided in proposed Rule 17.110, existing Exchange Rules
applicable to the IEX equities market contained in Chapters 1 through
16 of the Exchange Rules will apply to Options Members unless a
specific Exchange Rule applicable to the IEX Options market (proposed
Chapters 17 through 29 of the Exchange Rules) governs or unless the
context otherwise requires. Options Members can therefore provide
sponsored access to the IEX Options Exchange to a non-Member (i.e., a
Sponsored Participant) pursuant to Rule 11.130 of the Exchange Rules.
Definitions
The Exchange proposes to define a series of terms under proposed
Rule 17.100 (Definitions), which are to be used in proposed Chapters 17
to 29 relating to the trading of options contracts on the Exchange.
Unless otherwise indicated, all of the terms defined in proposed Rule
17.100 are either identical or substantially similar to definitions
included in MEMX Rule 16.1. Any modifications to the MEMX definitions,
or definitions based upon the rules of other exchanges are specifically
indicated below.
The definitions under proposed Rule 17.100 are as follows:
ABBO. The term ``ABBO'' or ``Away Best Bid or Offer''
means the best bid(s) or offer(s) disseminated by other Eligible
Exchanges (as defined in Rule 28.100) and calculated by the Exchange
based on market information the Exchange receives from OPRA.\62\
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\62\ IEX notes that this definition differs from the MEMX
definition of ABBO by spelling out the phrase ``Away Best Bid or
Offer'' that ABBO refers to for added clarity.
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Aggregate Exercise Price. The term ``Aggregate Exercise
Price'' means the exercise price of an options contract multiplied by
the number of units of the underlying security covered by the options
contract.
American-Style Option. The term ``American-Style'' option
means an options contract that, subject to the provisions of Rule
24.100 (relating to the cutoff time for exercise instructions) and to
the Rules of the Clearing Corporation, may be exercised at any time
from its commencement time until its expiration.
Associated Person and Person Associated with an Options
Member. The terms ``associated person'' and ``person associated with an
Options Member'' mean any partner, officer, director, or branch manager
of an Options Member (or any person occupying a similar status or
performing similar functions), any person directly or indirectly
controlling, controlled by, or under common control with an Options
Member or any employee of an Options Member, except that any person
associated with an Options Member whose functions are solely clerical
or ministerial shall not be included in the meaning of such term for
purposes of these Rules.
Bid. The term ``bid'' means a Limit order to buy one or
more options contracts.
Board. The term ``Board'' means the Board of Directors of
Investors' Exchange LLC.
Call. The term ``call'' means an options contract under
which the holder of the option has the right, in accordance with the
terms of the option, to purchase from the Clearing Corporation the
number of shares of the underlying security covered by the options
contract.
Capacity. The term ``capacity'' means the capacity in
which a User submits an order, which the User specifies by applying the
corresponding code to the order. The capacity codes available on IEX
Options will be listed in publicly available specifications and
published in a Regulatory Circular.
Class of Options. The terms ``class'' or ``class of
options'' mean all options contracts with the same unit of trading
covering the same underlying security.
Clearing Corporation and OCC. The terms ``Clearing
Corporation'' and ``OCC'' mean The Options Clearing Corporation.
Clearing Member. The term ``Clearing Member'' means an
Options Member that is self-clearing or an Options Member that clears
IEX Options Transactions for other Options Members.
Closing Purchase Transaction. The term ``closing purchase
transaction'' means an IEX Options Transaction that reduces or
eliminates a short position in an options contract.
Closing Writing Transaction. The term ``closing writing
transaction'' means an IEX Options Transaction that reduces or
eliminates a long position in an options contract.
Control. The term ``control'' means the power to exercise
a controlling influence over the management or
[[Page 26870]]
policies of a person, unless such power is solely the result of an
official position with such person. Any person who owns beneficially,
directly or indirectly, more than 20% of the voting power in the
election of directors of a corporation, or more than 25% of the voting
power in the election of directors of any other corporation which
directly or through one or more affiliates owns beneficially more than
25% of the voting power in the election of directors of such
corporation, shall be presumed to control such corporation.\63\
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\63\ This definition is substantively identical to the
definition in CBOE Rule 1.1. IEX proposes to incorporate this
definition, because the term is not specifically defined in the MEMX
rulebook and IEX believes that term would provide helpful context to
Options Members with respect to other rules that use the term, e.g.,
proposed IEX Rule 19.200.
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Covered Short Position. The term ``covered short
position'' means (i) an options position where the obligation of the
writer of a call option is secured by a ``specific deposit'' or an
``escrow deposit'' meeting the conditions of Rules 610(f) or 610(g),
respectively, of the Rules of the Clearing Corporation, or the writer
holds in the same account as the short position, on a share-for-share
basis, a long position either in the underlying security or in an
options contract of the same class of options where the exercise price
of the options contract in such long position is equal to or less than
the exercise price of the options contract in such short position; and
(ii) an options position where the writer of a put option holds in the
same account as the short position, on a share-for-share basis, a long
position in an options contract of the same class of options where the
exercise price of the options contract in such long position is equal
to or greater than the exercise price of the options contract in such
short position.
Customer. The term ``Customer'' means a Public Customer or
a broker-dealer.
Customer Order. The term ``Customer order'' means an
agency order for the account of a Customer.
Directed Order. The term ``Directed Order'' is an order
entered into the System by an Options Member with a designation for a
Market Maker in that class (referred to as a ``Directed Market Maker''
or ``DMM''). To qualify as a Directed Order, an order must be entered
on behalf of a Priority Customer.\64\
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\64\ This definition is based upon the definition in MIAX
Options Exchange (``MIAX'') Rule 100, with the distinction that IEX
proposes to make any Market Maker eligible to receive a Directed
Order, while MIAX only allows their Lead Market Makers (akin to
IEX's proposed ``Specialists'') and Primary Lead Market Makers
eligible; this aspect of IEX's proposed rule change is based upon
and substantially similar to CBOE Rule 5.32. Additionally, IEX
proposes to include language in the last sentence of this definition
based on NYSE Amex Rule 900.3NYP(i)(4) to clarify that an order
submitted on behalf of a non-Priority Customer would be treated as a
non-Directed Order.
---------------------------------------------------------------------------
Discretion. The term ``discretion'' means the authority of
a broker or dealer to determine for a Customer the type of option, the
class or series of options, the number of contracts, or whether options
are to be bought or sold.
European-Style Option. The term ``European-style option''
means an options contract that, subject to the provisions of Rule
24.100 (relating to the cutoff time for exercise instructions) and to
the Rules of the Clearing Corporation, can be exercised only on its
expiration date.
Exchange Act. The term ``Exchange Act'' or ``Act'' means
the Securities Exchange Act of 1934, as amended, or Rules thereunder.
Exercise Price. The term ``exercise price'' means the
specified price per unit at which the underlying security may be
purchased or sold upon the exercise of an options contract.
He, Him, and His. The terms ``he,'' ``him'' and ``his''
are deemed to refer to persons of female as well as male gender, and to
include organizations, as well as individuals, when the context so
requires.
IEX Exchange and Exchange. The terms ``IEX Exchange'' and
``Exchange'' mean Investors' Exchange LLC, a registered national
securities exchange.
IEX Options. The term ``IEX Options'' means IEX Options
LLC, a Delaware limited liability company wholly owned by the Exchange,
which operates as an options trading facility of the Exchange under
Section 3(a)(2) of the Exchange Act.
IEX Options Book. The term ``IEX Options Book'' means the
electronic book of options orders maintained by the System.\65\
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\65\ This definition is substantively identical to the
equivalent definition in the MEMX rulebook, except that it refers to
IEX, not MEMX.
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IEX Options Transaction. The term ``IEX Options
Transaction'' means a transaction involving an options contract that is
effected on or through IEX Options or its facilities or systems.\66\
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\66\ This definition is substantively identical to the
equivalent definition in the MEMX rulebook, except that it refers to
IEX, not MEMX.
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Individual Equity Option. The term ``individual equity
option'' means an options contract which is an option on an equity
security.
Long Position. The term ``long position'' means a person's
interest as the holder of one or more options contracts.
Market Makers (and Options Market Makers). The terms
``Market Makers'' or ``Options Market Makers'' refer collectively to
Options Members registered, pursuant to Rule 23.100, as either a
``Registered Market Maker'' or a ``Specialist''.\67\
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\67\ This definition is substantively identical to the
definition in the MIAX rulebook, except that MIAX has three classes
of Market Makers (Registered Market Makers, Lead Market Makers, and
Primary Lead Market Makers) while IEX proposes to have two classes
of Market Makers: Registered Market Makers (equivalent to MIAX
Registered Market Maker) and Specialists (which is based on MIAX's
Lead Market Maker and Primary Lead Market Maker rules). IEX proposes
to incorporate this definition, because the Market Maker rules
proposed herein are substantially based upon the rules of MIAX.
---------------------------------------------------------------------------
MPID. The term ``MPID'' means unique market participant
identifier assigned to an Options Member.
NBB, NBO, and NBBO. The term ``NBB'' means the national
best bid, the term ``NBO'' means the national best offer, and the term
``NBBO'' means the national best bid or offer as calculated by IEX
Options based on market information received by IEX Options from OPRA.
Offer. The term ``offer'' means a Limit order to sell one
or more options contracts.
OPRA. The term ``OPRA'' means the Options Price Reporting
Authority.
Opening Purchase Transaction. The term ``opening purchase
transaction'' means a IEX Options Transaction that creates or increases
a long position in an options contract.
Opening Writing Transaction. The term ``opening writing
transaction'' means a IEX Options Transaction that creates or increases
a short position in an options contract.
Options Contracts. The term ``options contract'' means a
put or a call issued, or subject to issuance by the Clearing
Corporation pursuant to the Rules of the Clearing Corporation.
Options Market Close and Market Close. The terms ``options
market close'' and ``market close'' mean the time the Exchange
specifies for the end of a trading session on the Exchange on that
trading day.
Options Market Open and Market Open. The terms ``options
market open'' and ``market open'' mean the time the Exchange specifies
for the beginning of a trading session on the Exchange on that trading
day.
Options Member. The term ``Options Member'' means a firm,
or organization that is registered with the Exchange pursuant to
Chapter 18 of these Rules for purposes of participating in options
trading on IEX Options as an ``Options Order Entry Firm'', ``Options
Market Maker'', or ``Clearing Member.''
[[Page 26871]]
Options Member Agreement. The term ``Options Member
Agreement'' means the agreement to be executed by Options Members to
qualify to participate on IEX Options.
Options Order Entry Firm, Order Entry Firm, and OEF. The
terms ``Options Order Entry Firm'' and ``Order Entry Firm'' or ``OEF''
mean those Options Members representing as agent Customer Orders on IEX
Options and those non-Market Maker Members conducting proprietary
trading.
Options Principal. The term ``Options Principal'' means a
person engaged in the management and supervision of the Options
Member's business pertaining to options contracts that has
responsibility for the overall oversight of the Options Member's
options related activities on the Exchange.
Order. The term ``order'' means a firm commitment to buy
or sell options contracts as defined in Rule 22.100.
Outstanding. The term ``outstanding'' means an options
contract which has been issued by the Clearing Corporation and has
neither been the subject of a closing writing transaction nor has
reached its expiration date.
Primary Market. The term ``primary market'' means the
primary exchange on which an underlying security is listed.\68\
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\68\ This definition is based on the definition in CBOE Rule
1.1, because IEX believed the definition was more streamlined than
the equivalent definition in the MEMX rulebook.
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Priority Customer and Priority Customer Order. The term
``Priority Customer'' means any person or entity that is not: (A) a
broker or dealer in securities; or (B) a Professional. The term
``Priority Customer Order'' means an order for the account of a
Priority Customer.
Professional. The term ``Professional'' means any person
or entity that (A) is not a broker or dealer in securities; and (B)
places more than 390 orders in listed options per day on average during
a calendar month for its own beneficial account(s). All Professional
orders shall be appropriately marked by Options Members.\69\
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\69\ See Supplementary Material .01 to proposed Rule 17.100,
which sets forth the methodology for calculation of Professional
orders.
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Protected Quotation. The term ``Protected Quotation'' has
the meaning provided in Rule 28.100.
Public Customer and Public Customer Order. The term
``Public Customer'' means a person that is not a broker or dealer in
securities. The term ``Public Customer Order'' means an order for the
account of a Public Customer.
Put. The term ``put'' means an options contract under
which the holder of the option has the right, in accordance with the
terms and provisions of the option and the Rules of the OCC, to sell to
the Clearing Corporation the number of units of the underlying security
covered by the options contract, at a price per unit equal to the
exercise price, upon the timely exercise of such option.
Quarterly Options Series. The term ``Quarterly Options
Series'' means a series in an options class that is approved for
listing and trading on the Exchange in which the series is opened for
trading on any business day and expires at the close of business on the
last business day of a calendar quarter.
Quote or Quotation. The terms ``quote'' or ``quotation''
means a bid or offer entered by a Market Maker as a firm order that
updates the Market Maker's previous bid or offer, if any. When the term
order is used in these Rules and a bid or offer is entered by the
Market Maker in the options series to which such Market Maker is
registered, such order shall, as applicable, constitute a quote or
quotation for purposes of these Rules. A quote or quotation may be
canceled or repriced in accordance with Rules 22.250, 22.260, or
23.150, if so designated by the Market Maker to assist in its risk
management.
Registered Market Maker. The term ``Registered Market
Maker'' means an Options Member registered with the Exchange for the
purpose of making markets in securities traded on the Exchange, who is
vested with the rights and responsibilities specified in Chapter 23 of
these Rules with respect to Registered Market Makers.\70\
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\70\ This definition is substantively identical to the
definition in MIAX Rule 100. IEX proposes to incorporate this
definition, because the Market Maker rules proposed herein are
substantially based upon the rules of MIAX.
---------------------------------------------------------------------------
Responsible Person. The term ``Responsible Person'' means
a U.S.-based officer, director, or management-level employee of an
Options Member, who is registered with the Exchange as an Options
Principal, responsible for the direct supervision and control of
associated persons of that Options Member.
Rules of IEX Options. The term ``Rules of IEX Options''
mean the rules contained in Chapters 17 to 29 of the Investors Exchange
Rules governing the trading of options on the Exchange.
Rules of the Clearing Corporation and Rules of the OCC.
The terms ``Rules of the Clearing Corporation'' and ``Rules of the
OCC'' mean the Certificate of Incorporation, the By-Laws and the Rules
of the Clearing Corporation, and all written interpretations thereof,
as may be in effect from time to time.
SEC or Commission. The terms ``SEC'' or ``Commission''
mean the United States Securities and Exchange Commission.
Series of Options. The terms ``series'' or ``series of
options'' mean all options contracts of the same class that are the
same type of options and have the same exercise price and expiration
date.
Short Position. The term ``short position'' means a
person's interest as the writer of one or more options contracts.
Short Term Options Series. The term ``Short Term Options
Series'' means a series in an options class that is approved for
listing and trading on the Exchange in which the series is opened for
trading on any Monday, Tuesday, Wednesday, Thursday or Friday that is a
business day and that expires on the Monday, Tuesday, Wednesday,
Thursday or Friday of the next business week, or, in the case of a
series that is listed on a Friday and expires on a Monday, is listed
one business week and one business day prior to that expiration. If a
Tuesday, Wednesday, Thursday or Friday is not a business day, the
series may be opened (or shall expire) on the first business day
immediately prior to that Tuesday, Wednesday, Thursday or Friday,
respectively. For a series listed pursuant to this section for Monday
expiration, if a Monday is not a business day, the series shall expire
on the first business day immediately following that Monday.
Specialist. The term ``Specialist'' means a Market Maker
appointed by the Exchange to act as the primary lead Market Maker for
the purpose of making markets in securities traded on the Exchange. The
Specialist is vested with the rights and responsibilities specified in
Chapter 23 of these Rules with respect to Specialists.\71\
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\71\ This definition is substantively identical to the
definition of Lead Market Makers and Primary Lead Market Makers in
MIAX Rule 100. As discussed above, IEX proposes to incorporate the
MIAX definitions for both Lead Market Makers and Primary Lead Market
Makers into its definition for Specialists, because the Market Maker
rules proposed herein are substantially based upon the rules of
MIAX.
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SRO. The term ``SRO'' means a self-regulatory organization
as defined in Section 3(a)(26) of the Exchange Act.
System. The term ``System'' means the automated trading
system used by IEX Options for the trading of options contracts.
[[Page 26872]]
Timestamp. The term ``timestamp'' means the effective time
sequence assigned to an order for purposes of determining its priority
ranking.
Trading Permit. The term ``Trading Permit'' means a
license issued by the Exchange to an Options Member that grants the
Trading Permit Holder (``TPH'') the right to access one or more of the
facilities of the Exchange for the purpose of effecting transactions in
options traded on the Exchange without the services of another person
acting as broker, and otherwise to access the facilities of the
Exchange for purposes of trading or reporting transactions or
transmitting orders or quotations in options traded on the Exchange, or
to engage in other activities that, under the Rules of IEX Options, may
only be engaged in by the TPH that satisfies any applicable
qualification requirements to exercise those rights. A Trading Permit
conveys no ownership interest in the Exchange, is only available
through the Exchange, and is subject to the terms and conditions set
forth in Rule 18.140.\72\
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\72\ This definition is substantively identical to the
definition in CBOE Rule 1.1. IEX proposes to incorporate this
definition, because its proposed Trading Permit rule (Rule 18.140),
is substantively similar to the equivalent CBOE Rule (CBOE Rule
3.1).
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Trading Permit Holder. The term ``Trading Permit Holder''
or ``TPH'' means the holder of a Trading Permit, as described in IEX
Rule 18.140.\73\
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\73\ This definition is substantively identical to the
definition in CBOE Rule 1.1. IEX proposes to incorporate this
definition, because its proposed Trading Permit rule (Rule 18.140),
is substantively similar to the equivalent CBOE Rule (CBOE Rule
3.1).
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Type of Option. The term ``type of option'' means the
classification of an options contract as either a put or a call.
Uncovered. The term ``uncovered'' means a short position
in an options contract that is not covered.
Underlying Security. The term ``underlying security''
means the security that the Clearing Corporation shall be obligated to
sell (in the case of a call option) or purchase (in the case of a put
option) upon the valid exercise of an options contract.
User. The term ``User'' means any Options Member or
Sponsored Participant who is authorized to obtain access to the System
pursuant to Rule 11.130 (Access).
Execution System
IEX Options will utilize a pro-rata allocation model with execution
priority dependent on the size and capacity of an order; specifically,
Priority Customer or non-Priority Customer, as well as status as a
Registered Market Maker or Specialist, as applicable. The proposed pro-
rata allocation model is similar to the MIAX and NYSE Amex options
exchanges.\74\
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\74\ See infra note 96.
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The Exchange will become an exchange member of the OCC. The System
will be linked to OCC for the Exchange to transmit locked-in trades for
clearance and settlement.\75\
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\75\ Proposed Rule 22.220(a) notes that all Options transactions
shall be submitted for clearance to the Clearing Corporation, and
the Exchange shall assume no responsibility with respect to any
unmatched trade or for any delays or errors in the reporting to it
of trade information. This provision is based upon and substantively
identical to MIAX Rule 524.
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IEX Options will include a de minimis delay on incoming order and
quote messages designed to enable IEX to obtain the most accurate view
of the market prior to processing orders and quotes, and an optional
Market Maker quote parameter designed to protect Market Makers from
excessive risk due to execution of quotes at stale prices, in addition
to other risk protections substantially similar to those offered by
other options exchanges.
Anonymity. As set forth in proposed Rule 22.190, aggregated and
individual transaction reports produced by the System will indicate the
details of a User's transactions, including the contra party's unique
market participant identifier (``MPID''), capacity, and clearing firm
account number.\76\
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\76\ The Exchange shall also reveal a User's identity: (i) when
a registered clearing agency ceases to act for a participant, or the
User's clearing firm, and the registered clearing agency determines
not to guarantee the settlement of the User's trades; and (ii) for
regulatory purposes or to comply with an order of an arbitrator or
court. See proposed Rule 22.190. The Exchange notes that proposed
Rule 22.190 is identical to MEMX Rule 21.10.
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Latency Mechanism.77 IEX's proposal includes a de
minimis hardware based latency mechanism (or speedbump) of 350
microseconds added to each incoming order and quote message \78\
designed to enable IEX to obtain the most accurate view of the market
prior to processing orders and quotes as well as to perform the Options
Quote Indicator (``Indicator'') calculation, and effectuate any action,
with current market data.\79\ If the Exchange determines to change the
duration of the delay, it will do so only pursuant to an effective rule
filing submitted to the Commission pursuant to Section 19 of the
Exchange Act.\80\
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\77\ See proposed Rule 22.100(n).
\78\ As it does for equities trading (which also applies an
inbound latency of 350 microseconds), IEX will subject incoming
order and quote messages to a de minimis delay using coiled optical
fiber. See Rule 11.510(a). Due to force majeure events and acts of
third parties, the Exchange does not guarantee that the delay will
always be consistent. The Exchange will periodically monitor such
latency and will make adjustments to the latency as reasonably
necessary to achieve consistency with the latency targets as soon as
commercially practicable.
\79\ See infra for more information about the Indicator.
\80\ The latency mechanism will not apply to outbound
communications from the Exchange to a User, inbound and outbound
communications between the Exchange and an Away Market regarding a
routed order, inbound communications from data feeds, order
processing and order execution on the IEX Options Order Book,
outbound communications to the Exchange's proprietary data feeds or
OPRA.
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Hours of Operation. As provided in proposed Rule 22.110(a), the IEX
Options System will begin accepting orders and quotes beginning at 8:00
a.m.\81\ pursuant to the market opening procedures described in
proposed Rule 22.160. Orders and bids and offers shall be open and
available until 4:00 p.m. except for options contracts on Fund Shares,
as defined in proposed Rule 20.120(i), which may close as of 4:15 p.m.
The Proposed Hours of Operation rule is based on MEMX Rule 21.2, except
that MEMX does not allow for submission of quotes before the market
opens for trading; IEX notes that other exchanges begin accepting
orders and quotes before the market opens, for example CBOE begins
accepting quotes at 7:30 a.m.\82\ Except as set forth above, IEX
Options shall operate during the normal business days and hours set
forth in the rules of the primary market trading the securities
underlying options traded on IEX Options, absent unusual conditions as
may be determined by the Exchange.\83\ IEX Options will not be open for
business on any holiday observed by the Exchange.\84\
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\81\ All times in this filing refer to the Eastern time zone.
\82\ See CBOE Rule 5.7.
\83\ See proposed IEX Rule 22.110(b).
\84\ See proposed IEX Rule 22.110(c).
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Units of Trading. As stated in proposed Rule 22.120, the unit of
trading in each series of options traded on IEX Options will be the
unit of trading established for that series by the OCC pursuant to the
rules of the OCC and the agreements of the Exchange with the OCC. The
proposed determination of the unit of trading for a series of options
traded on IEX Options is the same as on MEMX Options pursuant to MEMX
Rule 21.3.
Minimum Quotation and Trading Increments. As stated in proposed
Rule 22.140(a), the Exchange is proposing to apply the following
quotation increments: (1) if the options series is trading at less than
$3.00, five (5) cents; (2) if the options series is trading at $3.00 or
higher, ten (10) cents; and (3) if the options series is trading
pursuant
[[Page 26873]]
to the Penny Interval Program one (1) cent if the options series is
trading at less than $3.00, five (5) cents if the options series is
trading at $3.00 or higher, except for QQQ, SPY, or IWM where the
minimum quoting increment will be one (1) cent for all series. In
addition, as stated in proposed Rule 22.140(b), the Exchange is
proposing that the minimum trading increment for options contracts
traded on IEX Options will be one (1) cent for all series. Such
proposed minimum quotation and trading increments are the same as on
MEMX Options pursuant to MEMX Rules 21.5(a) and (b).
Penny Interval Program. As set forth in proposed Rule 22.140(c),
the Exchange is proposing to adopt a Penny Interval Program that is
substantially similar to the penny programs of other exchanges,
including MEMX Options pursuant to MEMX Rule 21.5(d), which includes
minimum quoting requirements for options classes listed under the Penny
Interval Program. However, eligibility for inclusion in the Penny
Interval Program will be limited to those classes already operating
under penny programs of other options exchanges at the time IEX Options
is launched. The list of options classes included in the Penny Interval
Program will be announced by the Exchange via circular distributed to
Options Members and published by the Exchange on its website.
Order Types and Handling Instructions. The System will make
available to Users two Order Types (as defined in proposed Rule
22.100(d))--Limit orders and Market orders--as well as various order
instructions and modifiers that can be appended to such orders. The
characteristics and functionality of each Order Type is substantially
similar to what is currently approved for use in the Exchange's
equities trading facility or on other options exchanges, including MEMX
Options, except where described below.
IEX Options will support bulk messages for Options Market Makers as
specified in the description of each Order Type or other instruction.
Proposed Rule 22.100(d) includes the following details with respect to
Limit orders and Market orders:
Limit order. Limit orders are orders (including bulk
messages) to buy or sell an option at a specified price or better. A
Limit order is marketable when, for a Limit order to buy, at the time
it is entered into the System, the order is priced at the current
inside offer or higher, or for a Limit order to sell, at the time it is
entered into the System, the order is priced at the current inside bid
or lower.
Market order. Market orders are orders to buy or sell at
the best price available at the time of execution. Market orders to buy
or sell an option traded on IEX Options will be rejected if they are
received when the underlying security is subject to a ``Limit State''
or ``Straddle State'' as defined in the Plan to Address Extraordinary
Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act
(the ``Limit Up-Limit Down Plan''). Bulk messages may not be Market
orders.
Pursuant to Rule 22.100(d)(3), Users have the option to designate
an order as ``attributable'' to that User's MPID. Attributable orders
are Market or Limit orders which display the User's MPID for purposes
of trading on the Exchange. Use of attributable orders is voluntary.
Attributable orders may not be available for all Exchange processes.
The Exchange will distribute a circular to Options Members specifying
the processes for which the attributable order-type shall be
available.\85\
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\85\ The proposed definition is substantively identical to the
definition in MIAX Rule 516(e). IEX proposes to incorporate this
definition and functionality, because MEMX Options does not have
Attributable Orders.
---------------------------------------------------------------------------
The System will also make available to Users several additional
instructions that can be designated on an order (``Handling
Instructions''). A Handling Instruction applied to a bulk message
applies to each bid and offer within that bulk message. The Handling
Instructions available on IEX Options are described in proposed Rule
22.100(e) and will include the following:
Book Only. Book Only is an instruction that an order is to
be ranked and executed on the Exchange pursuant to proposed Rule 22.170
(Order Display and Book Processing) or to be repriced or cancelled, as
appropriate, without routing away to another options exchange.
Post Only. Post Only is an instruction that an order is to
be ranked and executed on the Exchange pursuant to proposed Rule 22.170
(Order Display and Book Processing) or cancelled, as appropriate,
without routing away to another options exchange except that the order
will not remove liquidity from the IEX Options Book. The System
reprices, cancels or rejects a bid (offer) designated as Post Only with
a price that locks or crosses the Exchange's best offer (bid). A Market
order cannot be designated as Post Only.
Intermarket Sweep Order (``ISO''). ISOs are orders that
shall have the meaning provided in proposed Rule 28.100, which relates
to intermarket trading. Such orders may be executed at one or multiple
price levels in the System without regard to Protected Quotations at
other options exchanges (i.e., may trade through such quotations). The
Exchange relies on the marking of an order as an ISO order when
handling such order, and thus, it is the entering Options Member's
responsibility, not the Exchange's responsibility, to comply with the
requirements relating to ISOs. ISOs are not eligible for routing
pursuant to proposed Rule 22.180. A Market order cannot be designated
as an Intermarket Sweep Order. Users may not designate bulk messages as
ISOs.
The Exchange notes that each of the proposed Order Types and
Handling Instructions available on IEX Options are based upon and
substantially similar to those of MEMX, with the exception of the
Attributable Orders not offered by MEMX.
Time-in-Force (``TIF'') Designations. Users entering orders into
the System may designate such orders to remain in force and available
for display and/or potential execution for varying periods of time.
Unless cancelled earlier, once these time periods expire, the order (or
the unexecuted portion thereof) is returned to the entering party. A
TIF applied to a bulk message applies to each bid and offer within that
bulk message. Unless otherwise specified in the Exchange Rules or the
context indicates otherwise, the Exchange determines which of the
following TIFs are available on a class or system basis. The TIF
designations available on IEX Options are described in proposed Rule
22.100(g) and will include the following:
Immediate Or Cancel (``IOC''). IOC means, for an order so
designated, an order that is to be executed in whole or in part as soon
as such order is received. The portion not so executed immediately on
the Exchange or another options exchange is cancelled and is not posted
to the IEX Options Book. IOC orders that are not designated as Book
Only and that cannot be executed in accordance with proposed Rule
22.170 on the System when reaching the Exchange will be eligible for
routing away pursuant to proposed Rule 22.180.
Day. Day means, for an order so designated, an order to
buy or sell which, if not executed expires at market close. Market
Makers may designate bulk messages as Day.
The Exchange notes that each of the proposed TIF designations
available on IEX Options is identical to the same TIF designations
available on MEMX Options, except that they are applied differently in
one respect. Specifically, MEMX Options allows bulk messages to
[[Page 26874]]
have a TIF of IOC. IEX is proposing to only allow bulk messages to have
a TIF of DAY so that Market Makers do not take liquidity with quotes
submitted via bulk messages, and which are meant for liquidity
provision by Market Makers, which by definition the Exchange believes
constitutes orders resting on the Order Book.
Anti-Internalization Qualifier (``AIQ'') Modifiers. As with its
equities market, the Exchange will allow Users to use certain AIQ
modifiers, which are described in proposed Rule 22.100(h). Any incoming
order designated with an AIQ modifier will be prevented from executing
against a resting opposite side order also designated with an AIQ
modifier and originating from the same MPID, Options Member identifier,
trading group identifier, or Sponsored Participant identifier. The
Exchange will offer the following AIQ modifiers: AIQ Cancel Newest,
described in proposed Rule 22.100(h)(1); AIQ Cancel Oldest, described
in proposed Rule 22.100(h)(2); AIQ Cancel Both, described in proposed
Rule 22.100(h)(3); and AIQ Cancel Smallest, described in proposed Rule
22.100(h)(4). The Exchange notes that each of the proposed AIQ
modifiers available on IEX Options is substantially similar to the same
modifiers available on MEMX Options,\86\ with the distinction that on
MEMX a market maker may include the AIQ modifier on bulk messages,
while IEX is proposing to not allow AIQ modifiers to be included on
bulk messages because it would be meaningless on IEX where bulk
messages will only be for liquidity adding quotes, and the AIQ modifier
that dictates the AIQ interaction is determined by the liquidity
removing order.\87\
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\86\ MEMX does not offer an AIQ Cancel Smallest modifier, but it
is offered by other exchanges such as CBOE. See CBOE Rule 5.6 (Match
Trade Prevention Modifier--MTP Cancel Smallest).
\87\ MEMX calls them ``Match Trade Prevention'' modifiers. See
MEMX Rule 21.1(h).
---------------------------------------------------------------------------
Re-Pricing Mechanism. Like other options exchanges, the Exchange
proposes to offer a re-pricing mechanism to Users to comply with the
order protection and trade through restrictions of the Options Order
Protection and Locked/Crossed Market Plan.\88\ This re-pricing
mechanism, described in proposed Rule 22.100(i), is referred to by the
Exchange as Price Adjust and is substantially similar to the Price
Adjust mechanism offered by MEMX Options pursuant to MEMX Rule 21.1(i),
with the exception that IEX will only allow the ranked price and
displayed price of an order that has been repriced to be adjusted to a
more aggressive price one additional time (unlike MEMX, which allows
multiple adjustments).\89\
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\88\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (Aug. 6, 2009) (File No. 4-546).
\89\ The Exchange notes that this behavior is substantially
similar to the ``single price adjust'' behavior in CBOE Rule
5.32(b)(2)(A).
---------------------------------------------------------------------------
MPIDs. As proposed in Rule 22.100(j), the term ``MPID'' means the
unique market participant identifier assigned to a User and shall refer
to what the System uses to identify the User and the clearing number
for the execution of orders and quotes submitted to the System with
that MPID. Each MPID corresponds to a single User and a single clearing
number of a Clearing Member with the Clearing Corporation. A User may
obtain multiple MPIDs, which may be for the same or different clearing
numbers. A User is able (in a form and manner determined by the
Exchange) to designate which of its MPIDs may be used for each of its
ports. If a User submits an order or quote through a port with an MPID
not enabled for that port, the System cancels or rejects the order or
quote. The Exchange notes that its proposed Rule 22.100(j) is identical
to MEMX Rule 21.1(j) except that MEMX uses the term EFID rather than
MPID.
Ports and Bulk Messages. Proposed Rule 22.100(k) defines two types
of ports: (1) a ``physical port,'' which provides a physical connection
to the System and may provide access to multiple logical ports; and (2)
a ``logical port'' or ``application session,'' which provides Users
with the ability within the System to accomplish a specific function
through a connection, such as order entry, data receipt, or access to
information. The Exchange notes that each of the proposed types of
ports available on IEX Options is identical to the same types of ports
on MEMX Options.
The term ``bulk message'' is proposed to mean a single electronic
message a User submits with a Market Maker Capacity to the Exchange in
which the User may enter, modify, or cancel up to an Exchange-specified
number of bids and offers (which number the Exchange will announce via
Exchange notice and publicly available technical specifications). The
System handles a bulk message in the same manner as it handles an order
or quote, unless the Exchange Rules specify otherwise.
Only Market Makers may submit bulk messages through a logical port
in a class in which the Market Maker has an appointment. In addition,
bulk messages have a default TIF of Day and a default designation of
Post Only. As proposed, the System will cancel, reject, or reprice a
Post Only bulk message bid (offer) with a price that locks or crosses
the Exchange best offer (bid) or ABO \90\ (ABB \91\).\92\ These
provisions are similar to the manner in which market maker bulk
messages are handled by MEMX, which allows bulk messages to also have a
TIF of IOC, a designation as book only, and post only bulk messages in
unassigned classes.\93\
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\90\ The term ``ABO'' means the best offer(s) disseminated by
other Eligible Exchanges (as defined in proposed Rule 28.100) and
calculated by the Exchange based on market information the Exchange
receives from OPRA.
\91\ The term ``ABB'' means the best bid(s) disseminated by
other Eligible Exchanges (as defined in proposed Rule 28.100) and
calculated by the Exchange based on market information the Exchange
receives from OPRA.
\92\ See proposed Rule 22.100.
\93\ See MEMX Rule 21.1(l). IEX notes that the ability of the
System to cancel or reject a post only order submitted on a bulk
port with a price that locks or crosses the Exchange best offer
(bid) or ABO (ABB) is substantively identical to MEMX Rule
21.1(l)(3); IEX will also allow the System to reprice a post only
order submitted on a bulk port with a price that locks or crosses
the Exchange best offer (bid) or ABO (ABB), which is substantively
identical to the functionality in CBOE Rule 5.32(b)(1)(B).
---------------------------------------------------------------------------
Cancel Back. The term ``Cancel Back'' is proposed to mean an
instruction a User designates on an order (including bulk messages) to
not be subject to the Price Adjust process pursuant to proposed Rule
22.100(i). The System cancels or rejects an order with a Cancel Back
instruction (immediately at the time the System receives the order or
upon return to the System after being routed away) if displaying the
order on the Book would create a violation of proposed Rule 28.120, or
if the order cannot otherwise be executed or displayed in the Book at
its limit price. The System executes a Book Only--Cancel Back order
against resting orders. The proposed definition of Cancel Back in
proposed Rule 22.100(m) is substantively identical to a Cancel Back
Order defined in MEMX Rule 21.1(m).
Market Opening Procedures. As proposed, the System will accept
quotes, Limit orders with a TIF of DAY and Market orders for inclusion
in the opening process (``Opening Process'') beginning at 8:00 a.m. or
immediately upon trading being halted in an options series due to the
primary listing market for the applicable underlying security declaring
a regulatory trading halt, suspension, or pause with respect to such
security (a ``Regulatory Halt''), and will continue to accept Market
and Limit orders and quotes until such time as the Opening Process is
initiated in
[[Page 26875]]
that options series (the ``Pre-open state'').\94\
---------------------------------------------------------------------------
\94\ See proposed Rule 22.160(a)(13).
---------------------------------------------------------------------------
After the first transaction on the primary listing market after
9:30 a.m. in the securities underlying the options as reported on the
first print disseminated pursuant to an effective national market
system plan or the Regulatory Halt has been lifted, the related options
series will be opened automatically as described below. The Exchange
will conduct its ``Core Open Auction'' for each series of options
contracts upon receipt of an ``Auction Trigger'', i.e., the moment that
the Primary Market for the underlying security first disseminates both
a two-sided quote and a trade of any size that is at or within the
quote (in the case of reopening after a Regulatory Halt, the Auction
Trigger also includes notification that the underlying stock is no
longer halted).\95\ The Exchange will disseminate a message to market
participants indicating the initiation of the opening process, conduct
the opening auction, and then transition to continuous trading for each
series of options contracts.\96\ The proposed market opening procedures
are substantially similar to the market opening procedures specified in
NYSE Arca Options Rule 6.64P-O, subject to several differences, most
notably that any imbalance would be allocated on a pro rata basis.\97\
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\95\ See proposed Rule 22.160(a)(5) and (7).
\96\ See proposed Rule 22.160. IEX notes that pursuant to
proposed Rule 22.160(b)(3), the priority overlays specified in
proposed Rule 22.170(f)(2) and (3) will not be available during an
Auction, but will resume once the Exchange has transitioned to
continuous trading.
\97\ See proposed Rule 22.160(b). Other differences include: IEX
will begin accepting orders for the opening auction at 8:00 a.m.,
while NYSE Arca begins accepting orders for their opening auction at
6:00 a.m. See proposed Rule 22.160(a)(13)(A) versus NYSE Arca
Options Rule 6.64P-O(a)(12)(A). Additionally, IEX will begin
disseminating Auction Imbalance Information at 8:30 a.m., while NYSE
Arca begins disseminating imbalance information at 8:00 a.m. See
proposed Rule 22.160(c)(1) versus NYSE Arca Options Rule 6.64P-
O(c)(1). Further, IEX does not define Far Clearing Price, because
IEX does not propose to have Auction Only orders, to which the Far
Clearing Price relates.
---------------------------------------------------------------------------
Order Display/Matching System. The System will be based upon
functionality currently approved for use in the Exchange's equities
trading system. Specifically, the System will allow Users to enter
Market orders and priced Limit orders to buy (bids) and sell (offers).
All bids or offers made and accepted on IEX Options in accordance with
the Exchange Rules shall constitute binding contracts, subject to
applicable requirements of the Exchange Rules and the Rules of the
Clearing Corporation. Such orders are executable against marketable
contra-side orders in the System.\98\ Resting quotes and orders on the
IEX Options Book will be prioritized according to price. If there are
two or more quotes or orders at the best price, then the options
contracts will be allocated proportionally according to size (in a pro-
rata fashion), rounded down to the nearest contract. If there are
residual options contracts to be filled, the quote or order with the
largest remaining size (based on the pro rata calculation) will receive
the first contract, and each successive contract (if any) will be
allocated to each subsequent quote or order based on size (largest to
smallest). If there are two or more quotes or orders with the same
remaining size, then the quote or order with the first time priority
will be allocated the next options contract. Each successive options
contract (if any) will be allocated in the same manner.\99\
---------------------------------------------------------------------------
\98\ See proposed Rule 22.170.
\99\ See proposed Rule 22.170(b). This pro-rata allocation
methodology is based upon the substantially similar methodology in
MIAX Rule 514(c)(2) and NYSE Amex Rule 964NYP(i)(2).
---------------------------------------------------------------------------
Routing. IEX Options will offer a simple optional routing
functionality to facilitate compliance with applicable regulations and
will not offer other complex routing strategies. Options Members can
designate orders that have not been executed in full by the System
pursuant to proposed Rule 22.170 above as either available for routing
or not available for routing.\100\ IEX Options will support orders that
are designated to be routed to the NBBO as well as orders that will
execute only within IEX Options. Orders that are designated to execute
at the NBBO will be routed to other options markets to be executed when
the Exchange is not at the NBBO \101\ consistent with the Options Order
Protection and Locked/Crossed Market Plan.\102\
---------------------------------------------------------------------------
\100\ See proposed Rule 22.180(a).
\101\ As described infra, if the order is eligible for the Step-
Up Mechanism (set forth in proposed Rule 22.270), the System will
attempt to fill the order before routing it to an away market.
\102\ See supra note 85.
---------------------------------------------------------------------------
Subject to the exceptions contained in proposed Rule 28.110(b), the
System will ensure that an order will not be executed at a price that
trades through another options exchange. An order that is designated by
an Options Member as routable will be routed in compliance with
applicable trade-through restrictions. Any order entered with a price
that would lock or cross a Protected Quotation that is not eligible for
either routing or the price adjust process as defined in proposed Rule
22.100(i) will be cancelled. Bulk messages are not eligible for
routing.
IEX Options will route orders in options via IEX Services LLC
(``IEX Services''), which serves as the Outbound Router of the
Exchange, as defined in Rule 2.220 (IEX Services LLC as Outbound
Router).\103\ The function of the Outbound Router will be to route
orders in options listed and open for trading on IEX Options by
transmitting such orders to one or more routing brokers that are not
affiliated with the Exchange to other options exchanges (``Routing
Services'') pursuant to the Exchange Rules on behalf of IEX
Options.\104\ The Outbound Router is subject to regulation as a
facility of the Exchange, including the requirement to file proposed
rule changes under Section 19 of the Exchange Act.\105\ Parties that do
not desire to use the Routing Services provided by the Exchange must
designate orders as not available for routing.\106\ The Exchange notes
that the proposed rules relating to the routing of orders on IEX
Options to away options markets are substantively identical to the MEMX
Back-Up Order Routing Services described in MEMX Rule 21.9(e).\107\
---------------------------------------------------------------------------
\103\ See proposed Rule 22.180(d).
\104\ Id.
\105\ Id.
\106\ Id.
\107\ MEMX also offers the option of using its outbound router,
MEMX Execution Services, to route directly to other exchanges. See
MEMX Rule 21.9(d). IEX is not proposing to adopt this functionality
because it will only provide for routing through IEX Services to
third party broker dealers.
---------------------------------------------------------------------------
Priority of Routed Orders. Orders that have been routed by the
System to other options exchanges are not ranked and maintained in the
IEX Options Book pursuant to proposed Rule 22.170, and therefore are
not available to execute against incoming orders. Once routed by the
System, an order becomes subject to the rules and procedures of the
destination options exchange including, but not limited to, order
cancellation. If a routed order is subsequently returned, in whole or
in part, that order, or its remainder, shall receive a new time stamp
reflecting the time of its return to the System.\108\
---------------------------------------------------------------------------
\108\ See proposed Rule 22.180(b).
---------------------------------------------------------------------------
Market Access. In connection with the proposed rules regarding
routing to away options exchanges, proposed Rule 22.180(e) provides
that IEX Services has, pursuant to Rule 15c3-5 under the Act,\109\
implemented certain tests designed to mitigate the financial and
regulatory risks associated with providing the Exchange's Users with
access to such away options exchanges. Pursuant to the policies and
procedures developed by IEX Services to comply
[[Page 26876]]
with Rule 15c3-5, if an order or series of orders are deemed to be
erroneous or duplicative, would cause the entering User's credit
exposure to exceed a preset credit threshold, or are non-compliant with
applicable pre-trade regulatory requirements (as defined in Rule 15c3-
5), IEX Services will reject such orders prior to routing and/or seek
to cancel any orders that have been routed. This is consistent with the
routing implementation of other options exchanges, and the Exchange
notes that proposed Rule 22.180(e) is substantively identical to MEMX
Rule 21.9(f).
---------------------------------------------------------------------------
\109\ 17 CFR 240.15c3-5.
---------------------------------------------------------------------------
Order Priority. After the opening, trades on the Exchange will
occur when a buy order/quote and a sell order/quote match on the
Exchange's order book. 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. Pursuant to proposed Rule
22.170, after considering price priority, all options contracts are
allocated proportionally according to size (in a pro-rata fashion). If
the executed quantity cannot be evenly allocated, the remaining options
contracts will be distributed one at a time based upon price-size-time
priority.
In addition, the Exchange supports multiple priority overlays that
apply ahead of the default pro-rata allocation at a given price level.
Pursuant to proposed Rule 22.170(f),\110\ these priority overlays are
made available at the Exchange's discretion on a class-by-class basis:
(1) the Priority Customer overlay,\111\ which provides resting interest
from Priority Customers with priority over all non-Priority Customer
interest at the same price, will always take priority over all other
priority overlays; (2) the Specialist Participation Entitlement
overlay,\112\ which provides the Specialist with priority over interest
from other non-Priority Customers for a certain percentage of contracts
allocated at the same price (entitling the Specialist to 60% of the
allocation if there is another non-Priority Customer at the NBBO or 40%
if there are two or more other non-Priority Customers at the NBBO
\113\) when quoting at the NBBO, inclusive of the case in which the
order is directed to the Specialist; (3) the Directed Market Maker
Participation Entitlement overlay,\114\ which provides a Directed
Market Maker with priority over interest from other non-Priority
Customers for a certain percentage of contracts allocated at the same
price (entitling the DMM to 60% of the allocation if there is another
non-Priority Customer at the NBBO or 40% if there are two or more other
non-Priority Customers at the NBBO \115\) when quoting at the NBBO and
always applies in place of the Specialist Participation Entitlement
overlay when both are in effect and the order is directed to a Directed
Market Maker other than the Specialist; \116\ and (4) the Small-Size
Order Entitlement overlay,\117\ which provides a Specialist quoting at
the NBBO the priority to execute against the entire size of an order or
quote of five or fewer contracts that does not first execute against
any Priority Customer orders at that price, provided that if an order
subject to the Small-Size Order Entitlement is directed to a Directed
Market Maker who is not the Specialist quoting at the NBBO, and the
Directed Market Maker priority overlay is enabled in the series, then
the Directed Market Maker Participation Entitlement priority overlay
will apply instead of the Small-Size Order Entitlement priority
overlay,\118\ and in the case that an order subject to the Small-Size
Order Entitlement is directed to the Specialist, the Small-Size Order
Entitlement priority overlay will apply while the Specialist
Participation Entitlement and Directed Market Maker Entitlement
overlays will not.\119\
---------------------------------------------------------------------------
\110\ Proposed Rule 22.170(f) is based upon and substantially
similar to CBOE Rule 5.32(a)(2), except is different in one respect.
Unlike CBOE, in the event that a Small-Size order is directed to a
Specialist, the IEX Options trading system will apply the Small-Size
Order Entitlement to the order and not the Directed Order guarantee,
meaning the Specialist will have priority to execute against the
entire size of the order that does not execute against any Priority
Customer orders at that price.
\111\ See proposed Rule 22.170(f)(1).
\112\ See proposed Rule 22.170(f)(2). This overlay may only be
in effect if the Priority Customer overlay is also in effect. See
proposed Rule 22.170(f).
\113\ These allocation entitlements are based on MIAX Rule
514(h)(1), after accounting for the additional priorities afforded
market makers on MIAX, as set forth in MIAX Rule 514(e). See supra
note 96 and accompanying text.
\114\ See proposed Rule 22.170(f)(2). This overlay may only be
in effect if the Priority Customer overlay is also in effect. See
proposed Rule 22.170(f).
\115\ These allocation entitlements are based on MIAX Rule
514(h)(1), after accounting for the additional priorities afforded
market makers on MIAX, as set forth in MIAX Rule 514(e). See supra
note 96 and accompanying text.
\116\ Prioritizing the DMM entitlement over the Specialist
entitlement in these circumstances is the same functionality offered
by several other exchanges. See, e.g., NYSE Amex Options Rule
964NYP(h)(1).
\117\ See proposed Rule 22.170(f)(3).
\118\ See proposed Rule 22.170(f)(3)(A).
\119\ See proposed Rule 22.170(f)(3)(B). This is functionally
identical to how NYSE Amex Options allocates small-size Directed
Orders that are directed to a Specialist. See NYSE Amex Options Rule
965NYP(h)(2)(B).
---------------------------------------------------------------------------
After executions resulting from the Priority Overlays described
above, orders and quotes within the System for the accounts of non-
Priority Customers, including Professional Customers, have next
priority. If there is more than one highest bid or more than one lowest
offer on the Options Order Book for the account of a non-Priority
Customer, then such bids or offers will be afforded priority on a size
pro-rata basis, as described above.
Step Up Mechanism. IEX proposes to offer Options Members an
optional Step Up Mechanism (``SUM''), which is a feature within the
System that provides automated order handling in designated classes
trading for qualifying orders that are not automatically executed by
the System.\120\ The Exchange will determine eligibility of an order
for the SUM (including order size, type, capacity, handling
instructions, as well as which classes of options contracts). The
Exchange will not initiate the SUM process if the NBBO is crossed.\121\
SUM automatically processes upon receipt of an eligible order that is
marketable against the BBO that is not the NBBO; or an eligible order
that would improve the Exchange's BBO and that is marketable against
the ABBO. This proposed functionality is substantively identical to the
Step-Up Mechanism offered by CBOE, with the exception that IEX is not
proposing to offer All or None orders.\122\ IEX notes that the optional
SUM mechanism is designed to benefit a routable order that is not
immediately eligible for execution on the Exchange, but if routed to an
away exchange might miss a potential execution on that exchange. And,
because SUM is optional, a Member can choose not to have its order
subject to the SUM mechanism if it determines that the functionality is
not consistent with its objectives. Given the multitude of tradeable
listed options securities (compared to listed equities) not all
available liquidity is always reflected in an exchange's order book,
and the SUM mechanism provides an opportunity to source such additional
liquidity to the benefit of the order in question. Moreover, IEX notes
as well that other options exchanges offer similar mechanisms, and
order flow might be directed to such exchanges if IEX did not offer
such a mechanism.
---------------------------------------------------------------------------
\120\ See proposed Rule 22.270. IEX's proposed Step-Up Mechanism
is substantively identical to CBOE Rule 5.35.
\121\ See proposed Rule 22.270(a).
\122\ See CBOE Rule 5.35.
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Upon receipt of a SUM eligible order, the System will expose the
order at the NBBO upon receipt for a period of time
[[Page 26877]]
determined by the Exchange on a class-by-class basis, which period of
time may not exceed one second. All Users may submit responses to the
exposure message, which must be limited to the size of the order being
exposed, may be modified, cancelled or replaced any time during the
exposure period, and are cancelled back at the end of the exposure
period if unexecuted. Responses priced at the prevailing NBBO or better
will immediately trade against the order in time priority. If during
the exposure period the Exchange receives an unrelated order (or quote)
on the opposite side of the market from the exposed order that could
trade against the exposed order at the prevailing NBBO price or better,
then the orders will trade at the prevailing NBBO price. The exposure
period will not terminate if a quantity remains on the exposed order
after such trade.
Responses that are not immediately executable based on the
prevailing NBBO may become executable during the exposure period based
on changes to the NBBO. In the event of a change to the NBBO and at the
conclusion of the exposure period, the Exchange will evaluate remaining
responses as well as the ABBO and execute any remaining portion of the
exposed order to the fullest extent possible at the best price(s) by
executing against responses and unrelated orders.
Following the exposure period, the Exchange will route the
remaining portion of the exposed order to other exchanges, unless
otherwise instructed by the User. Any portion of a routed order that
returns unfilled shall trade against the Exchange's best bid/offer
unless another exchange is quoting at a better price in which case new
orders shall be generated and routed to trade against such better
prices.
Data Dissemination. The Exchange will disseminate to OPRA the
highest bid and the lowest offer, and the aggregate quotation size
associated therewith that is available, in accordance with the
requirements of Rule 602 of Regulation NMS under the Act.\123\ The
Exchange will also offer three data products: (1) IEX Options DEEP: an
uncompressed data feed that offers depth of book quotations and
execution information based on options orders entered into the System;
(2) IEX Options TOPS: an uncompressed data feed that offers top of book
quotations and execution information based on options orders entered
into the System; and (3) DROP: an uncompressed data feed that offers
information regarding the options trading activity of a specific
User.\124\ DROP is only available to the User to whom the specific data
relates and those recipients expressly authorized by the User.\125\
---------------------------------------------------------------------------
\123\ See proposed Rule 22.240(a).
\124\ See proposed Rule 22.240(b).
\125\ Data products will be subject to fees as specified in an
effective Commission rule filing.
---------------------------------------------------------------------------
Risk Controls. The Exchange also proposes to offer to all Users of
IEX Options the ability to establish certain risk control parameters
and limits that are intended to assist Users in managing their market
risk. All options exchanges recognize the essential role of risk
controls in managing market maker exposure and IEX intends to offer
comparable controls to allow for these risk management protections. The
proposed risk controls are based, in part, on those of the NYSE Arca
and CBOE options exchanges, with certain additions and differences
described below. The proposed risk controls are designed to offer Users
protection from entering orders outside of certain size and price
parameters, as well as certain standard or Exchange-established
parameters based on order type and market conditions.
The proposed risk controls include: (i) pre-trade risk controls;
(ii) activity-based risk controls; and (iii) global risk controls, as
set forth in proposed Rule 22.250.\126\ Pre-trade, activity-based, and
global risk controls may be set before the beginning of a trading
day.\127\ Pre-trade, activity-based, and global risk controls can be
set at the MPID or MPID Group level,\128\ or both, depending on the
risk control.\129\ Additionally, pre-trade risk controls to restrict
the options class(es) transacted must be set per options class.\130\
The following describes each category of risk protection mechanism:
---------------------------------------------------------------------------
\126\ Proposed Rule 22.250 is based upon and substantially
similar to NYSE Arca Rule 6.40P-O.
\127\ See proposed Rule 22.250(b)(1).
\128\ MPID Groups, defined in proposed Rule 22.250(a)(5), are
based upon CBOE Rule 5.34(c)(4)(A), which allows for the setting of
risk control limits for EFID Groups, which are equivalent to MPID
Groups. IEX notes that it proposes to retain the right to limit the
number of MPID Groups an Options Member can configure based upon
potential technical limitations.
\129\ See proposed Rule 22.250(b)(2). IEX notes that while it
allows these risk controls to be set at MPID or MPID Group levels,
NYSE Arca allows the equivalent controls to be set at either the
MPID or the MPID Sub-ID level (a more granular level than the MPID).
\130\ See proposed Rule 22.250(b)(2).
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Pre-Trade Risk Controls.\131\ The pre-trade risk controls mechanism
is a set of optional limits, each of which an Options Member may
utilize with respect to its trading activity on the Exchange. These
controls include controls related to the maximum dollar amount for a
single order to be applied one time and the maximum number of contracts
that may be included in a single order before it can be traded.
Additionally, there are optional controls related to the price of an
order or quote (including percentage-based and dollar-based controls),
controls related to the order types or modifiers that can be utilized,
controls to restrict the options classes transacted, and controls to
prohibit duplicative orders.
---------------------------------------------------------------------------
\131\ See proposed Rule 22.250(a)(1), which is substantively
identical to NYSE Arca Rule 6.40P-O(a)(2).
---------------------------------------------------------------------------
Activity-Based Risk Controls.\132\ The Exchange also proposes to
offer activity-based risk limits that may be applied to orders and
quotes in an options class (when acting as a Market Maker, an Options
Member is required to select at least one of the following controls
\133\) based on specified thresholds measured over the course of a
configurable time period (``Interval''). The Exchange will offer the
following activity-based risk controls: (i) transaction-based risk
limits, which are pre-established limits on the number of an Options
Member's orders and quotes executed in a specified class of options per
Interval; (ii) volume-based risk limits, which are pre-established
limits on the number of contracts of an Options Member's orders and
quotes that can be executed in a specified class of options per
Interval; and (iii) percentage-based risk limits, which are pre-
established limits on the percentage of contracts executed in a
specified class of options as measured against the full size of an
Options Member's orders and quotes executed per Interval. To determine
whether an Options Member has breached the specified percentage limit,
the Exchange calculates the percent of each order or quote in a
specified class of options that is executed during an Interval (each, a
``percentage''), and sums up those percentages. This risk limit will be
breached if the sum of the percentages exceeds the pre-established
limit.
---------------------------------------------------------------------------
\132\ See proposed Rule 22.250(a)(2), which is substantively
identical to NYSE Arca Rule 6.40P-O(a)(3).
\133\ See proposed Rule 22.250(c)(2)(A).
---------------------------------------------------------------------------
Global Risk Control.\134\ The Exchange also proposes to offer a
global risk control, which is a pre-established limit on the number of
times an Options Member may breach its activity-based risk controls per
Interval.
---------------------------------------------------------------------------
\134\ See proposed Rule 22.250(a)(3), which is substantively
identical to NYSE Arca Options Rule 6.40P-O(a)(4).
---------------------------------------------------------------------------
Automated Breach Actions.\135\ Proposed Rule 22.250(c) details the
[[Page 26878]]
``automated breach actions'' the Exchange will take if any of the three
above-described risk controls are breached. Based on User preference,
these actions can include blocking new orders and quotes, canceling
orders and quotes on the Order Book, or notifying the Options Member of
the breach. With respect to the activity-based and global risk controls
(as well as Kill Switch Actions described below), in order to remain
consistent with the firm quote obligations of a broker-dealer pursuant
to Rule 602 of Regulation NMS, any marketable interest that is
executable against an order or quote that is received \136\ prior to
the time the applicable threshold is triggered and processed by the
System will be automatically executed up to the size of the resting
order or quote, regardless of whether the execution would cause the
Options Member to exceed their pre-set risk threshold(s).\137\
---------------------------------------------------------------------------
\135\ See proposed Rule 22.250(c), which is substantively
identical to NYSE Arca Options Rule 6.40P-O(c).
\136\ The time of receipt for an order or quote is the time such
message is processed by the Exchange's order book.
\137\ Pre-trade risk controls are implemented prior to an order
or quote resting on the order book (or being placed on the book
again following an auction) and therefore do not implicate firm
quote obligations.
---------------------------------------------------------------------------
Kill Switch Actions.\138\ Additionally, Options Members may direct
the Exchange to operate a ``kill switch'' to either cancel all
unexecuted orders and quotes on the Order Book, block the entry of any
new order and quote messages, or both.
---------------------------------------------------------------------------
\138\ See proposed Rule 22.250(e), which is substantively
identical to NYSE Arca Options Rule 6.40P-O(e).
---------------------------------------------------------------------------
Limit Order Price Protection.\139\ The Exchange also proposes to
offer price protection mechanisms, as set forth in proposed Rule
22.260.\140\ These protections include Limit Order Price Protection, in
which the System will reject an order or quote upon entry, or cancel at
the conclusion of an auction, if its price exceeds a pre-established,
Exchange-defined ``specified threshold'' amount above or below the
reference price. The Reference Price for calculating Limit Order Price
Protection for an order or quote to buy (sell) will be the NBO (NBB),
provided that, immediately following an auction, the reference price
will be the price at which the auction match occurred, or, if none, the
upper (lower) auction collar price, or, if none, the NBO (NBB).
---------------------------------------------------------------------------
\139\ See proposed Rule 22.260(a), which is substantively
identical to NYSE Arca Options Rule 6.62P-O(a)(3).
\140\ IEX notes that these proposed risk control mechanisms are
based on similar rules of other options exchanges, in particular:
NYSE Arca Options Rules 6.62P-O(a)(3) and 6.41P-O and CBOE Rules
5.34(a)(1), (2) and (4).
---------------------------------------------------------------------------
Market Orders in No-Bid (Offer) Series.\141\ If the System receives
a sell Market order in a series after it is open for trading with an
NBB of zero and an NBO less than or equal to $0.50, then the System
converts the Market order to a Limit order with a limit price equal to
the minimum trading increment applicable to the series and enters the
order into the IEX Options. If the System receives a sell Market order
in a series after it is open for trading with an NBB of zero and an NBO
greater than $0.50, then the System cancels or rejects the Market
order, except if the sell Market order would be subject to the drill-
through protection (as discussed below), in which case the order joins
the ongoing drill-through process. If the System receives a buy Market
order in a series after it is open for trading with an NBO of zero, the
System cancels or rejects the Market order.
---------------------------------------------------------------------------
\141\ See proposed Rule 22.260(b), which is substantively
identical to CBOE Rule 5.34(a)(1).
---------------------------------------------------------------------------
Market Order NBBO Width Protection.\142\ If a User submits a Market
order to the System when the NBBO width is greater than x% of the
midpoint of the NBBO, subject to a minimum and maximum dollar value
(the Exchange determines ``x'' and the minimum and maximum dollar
values on a class-by-class basis), the System cancels or rejects the
Market order.
---------------------------------------------------------------------------
\142\ See proposed Rule 22.260(c), which is substantively
identical to CBOE Rule 5.34(a)(2).
---------------------------------------------------------------------------
Price Reasonability Checks.\143\ Additionally, the Exchange will
apply price reasonability checks to most Limit orders and quotes during
continuous trading on each trading day. One price reasonability check,
the ``arbitrage check,'' will reject order or quote messages to buy put
options if the price of the order is equal to or greater than the
strike price of the option and will reject (or cancel, if resting)
order or quote messages to buy call options if the price of the order
is equal to or greater than the price of the last trade in the
underlying security plus an Exchange-defined specified threshold.\144\
Another price reasonability check, the ``intrinsic value check,'' will
assess the intrinsic value of an option based on the last sale price of
the underlying security (for calls) or the strike price of the option
(for puts), and reject or cancel certain orders or quotes if the price
of the order is dislocated from the intrinsic value of the option by a
certain Exchange-defined specified threshold.\145\
---------------------------------------------------------------------------
\143\ See proposed Rule 22.260(d), which is substantively
identical to NYSE Arca Options Rule 6.41P-O.
\144\ See proposed Rule 22.260(d)(2), which is substantively
identical to NYSE Arca Options Rule 6.41P-O(b).
\145\ See proposed Rule 22.260(d)(3), which is substantively
identical to NYSE Arca Options Rule 6.41P-O(c). IEX notes that like
NYSE Arca Options, the term ``Automated Breach Action'' is used in
two of its risk controls with different meanings: first with respect
to the intrinsic value risk checks for market makers, see NYSE Arca
Options Rule 6.40P-O(d) and proposed Rule 22.260(d)(3)(E); and also
with respect to activity based risk controls. See NYSE Arca Options
Rule 6.41P-O(d) and proposed Rule 22.250(c).
---------------------------------------------------------------------------
Drill-Through Protection. Another proposed price protection
mechanism is drill-through protection, which will prevent an order from
executing beyond a ``buffer amount'' determined based on a drill-
through price.\146\ This rule is based upon and substantially similar
to CBOE Rule 5.34(a)(4), with the distinction that IEX's Drill-Through
Protection will have a finite, Exchange-defined number of iterations,
that are communicated by a Trading Alert with at least 30 days prior
notice.\147\ IEX notes that other exchanges have also set a finite
number of iterations for their Drill-Through Protection.\148\
---------------------------------------------------------------------------
\146\ See proposed Rule 22.260(e).
\147\ IEX notes that other exchanges also have the ability to
change any exchange-determined parameters with a trading alert. See,
e.g., CBOE Rule 1.5.
\148\ See, e.g., Securities Exchange Act Release No. 86923
(September 10, 2019), 84 FR 48664 (September 16, 2019) (SR-CBOE-
2019-057) with respect to CBOE's prior functionality.
---------------------------------------------------------------------------
Options Risk Parameter. In order to address structural challenges
\149\ that Market Makers face in the listed options market, and thereby
incentivize deeper and tighter liquidity, IEX proposes to offer an
optional quote parameter that would augment the standard risk tools
that will be available to Options Market Makers referred to as the
Options Risk Parameter, or ORP. Further, IEX believes that in addition
to mitigating market maker risks from latency arbitrage strategies
(irrespective of whether spreads tighten), the ORP can also help to
reduce barriers to entry for market maker participation and thereby
support competition and reduce market maker concentration risk. This is
particularly important given the options markets' reliance on market
maker provision of liquidity. As proposed, the ORP will be a parameter
that can be applied to a quotation that rests on the Order Book at the
price designated by the Market Maker that entered the quotation. When
the ORP is triggered based on pre-defined criteria, the relevant
quotation(s) will be adjusted or canceled in a manner specified
transparently in IEX's rules, as described below.\150\
---------------------------------------------------------------------------
\149\ See infra note 160.
\150\ See proposed Rule 23.150(h).
---------------------------------------------------------------------------
The ORP would leverage IEX's proprietary mathematical formula--the
[[Page 26879]]
Options Quote Indicator (the ``Indicator'')--which is based on the
preeminent Black-Scholes options pricing model. This Nobel-Prize-
winning approach for evaluating the price of an options contract has
been studied extensively, and is widely considered as a primary
starting point for both academic and industrial options pricing
applications.\151\
---------------------------------------------------------------------------
\151\ See Revolutionary Black-Scholes Option Pricing Model is
Published by Fischer Black, Later a Partner at Goldman Sachs,
available at https://www.goldmansachs.com/our-firm/history/moments/1973-black-scholes.
---------------------------------------------------------------------------
Proposed Rule 23.150(h) sets forth the application of the Indicator
and optional ORP.\152\ The ORP is designed to enable Market Makers to
provide tighter and deeper quotes on IEX by providing protection from
execution against quotes at stale prices by identifying when the best
Protected Bid or best Protected Offer of the Away Markets (as defined
in Proposed Rule 22.160(a)(8)) in a particular options series is
sufficiently dislocated from the price of the underlying security to
indicate that the best Protected Bid or best Protected Offer of the
Away Markets in the options series is likely in transition. The
Exchange believes that the protection provided by the ORP will thus
enable market makers to provide tighter and deeper quotes on IEX to the
benefit of all market participants.
---------------------------------------------------------------------------
\152\ The quote instability calculation is set forth in
Supplementary Material .04 to proposed Rule 23.150(h); the
calculation of implied volatility is set forth in Supplementary
Material .05 to proposed Rule 23.150(h).
---------------------------------------------------------------------------
The Exchange will determine on a class-by-class basis whether to
make the ORP available, which determination will be communicated by
Trading Alert.\153\ This flexibility will therefore allow the Exchange
to focus its technology resources in an impactful manner to ensure the
ORP is available for those classes where its use will achieve its
intended purpose, while excluding its use where it would likely provide
minimal incremental value (for example, for classes with nonstandard
characteristics).\154\
---------------------------------------------------------------------------
\153\ See proposed Rule 23.150(h)(1).
\154\ The Exchange notes that it is not an equities listing
exchange. The Exchange does not believe that making class-by-class
determinations in this context or otherwise creates a conflict of
interest.
---------------------------------------------------------------------------
As proposed, the Exchange will utilize the Indicator, which is a
fixed formula specified transparently in IEX's rules, to assess the
materiality of an imminent change to the current best Protected Bid
\155\ of the Away Markets to a lower price or of an imminent change to
the current best Protected Offer \156\ of the Away Markets to a higher
price for a particular listed options series (i.e., an imminent adverse
price change).\157\
---------------------------------------------------------------------------
\155\ See proposed Rule 28.100(a)(19).
\156\ Id.
\157\ See proposed Rule 23.150(h).
---------------------------------------------------------------------------
The Indicator utilizes real time relative quoting activity of
protected quotations from Signal Exchanges (as defined in IEX Rule
11.190(g)) in securities underlying each listed options series and a
proprietary mathematical calculation (the ``quote instability
calculation''), as described in more detail below, to assess the impact
of a price change in the underlying on the price of a particular
options series. When the quote instability calculation identifies an
imminent adverse price change to the best Protected Bid and/or best
Protected Offer of the Away Markets in a particular listed options
series, it will generate a quote instability determination. A quote
instability determination may only be generated at least 200
microseconds after a prior quote instability determination for a
particular options series on the same side of the market (i.e.,
affecting resting bids or offers). If a quote instability determination
is generated for an options series quoted by a Market Maker and the
quote is above (below) the price level of the quote instability
determination, the quote will be either cancelled or repriced to the
price level of the quote instability determination, as instructed by
the Market Maker.
As proposed, for two aspects of the formula -the Delta Bound Band
\158\ and the Quote Instability Threshold \159\--the Exchange will
specify the possible range of values the Exchange may use for each
aspect as well as the initial value for each aspect. The Exchange may
determine to change such values, within the applicable specified range,
based on its assessment of factors that could optimize effectiveness of
the ORP. In such an event, the Exchange will submit a rule filing
pursuant to Rule 19b-4(f)(1) under the Exchange Act \160\ (or other
appropriate rule filing type) specifying the new value, within the
range of possible values specified in the applicable rule.\161\ Such
change to a value that falls within the range of possible values would
constitute an interpretation with respect to the meaning of an existing
rule, and IEX understands therefore that a filing pursuant to Rule 19b-
4(f)(1) under the Exchange Act would be appropriate. When determining
to modify values within the specified ranges, the Exchange will
consider (as relevant) factors such as the distribution of quote
instability determinations, the precision of quote instability
determinations, system capacity and performance, fill rates, markout
data, and client feedback. In modifying a value, the Exchange will aim
to balance the interests of both liquidity takers and makers.
---------------------------------------------------------------------------
\158\ See Supplementary Material .04(1)(q) to proposed Rule
23.150(h). Delta is a key metric in options trading that measures
the sensitivity of an option's price to changes in the price of the
underlying asset. As proposed, the Delta Bound Band would restrict
the ORP from triggering unless the option's Delta is within the
specified band. The initial value for the Delta Bound Band would be
between 0--1, with the possible range of values between 0--1.
\159\ See Supplementary Material .04(2)(e) to proposed Rule
23.150(h). As proposed, the possible Quote Instability Threshold
range will be within a range of 0%-100%. If the Quote Instability
Threshold is set at 100%, the expected change in the NBB/NBO of the
option resulting from price movement in the underlying must be at
least 100% of the current value of the NBB/NBO of the option for the
ORP to trigger. If the Quote Instability Threshold is set at 0%, ORP
would trigger if there is any expected change to the NBB/NBO of the
option resulting from price movement in the underlying. As proposed,
the initial value for the Quote Instability Threshold would be 0.1%.
When triggered, ORP will only result in the repricing or
cancellation of quotes if the change to the NBB/NBO of the option
resulting from price movement in the underlying is to a different
price level than the current NBB/NBO after rounding to the nearest
minimum price variation.
\160\ See 17 CFR 240.19b-4(f)(1). A rule filing pursuant to Rule
19b-4(f)(1) under the Exchange Act takes effect upon filing with the
Commission.
\161\ Should IEX determine that it needs to apply a value that
falls outside of the range of values that are approved by the
Commission pursuant to this rule filing and disclosed in the rule
book, it would seek to change such value via a filing made pursuant
to either Section 19(b)(3)(A) or Section 19(b)(2) of the Act.
---------------------------------------------------------------------------
Similarly, as proposed, the frequency of calculation of implied
volatility, which is used to calculate Delta will be calculated each
half-hour of system operation.\162\ If the Exchange determines to
update the implied volatility computation more frequently, based on its
assessment of relevant factors discussed above that would optimize
application of the ORP, it will submit a rule filing pursuant to Rule
19b-4(f)(1) under the Exchange Act (or other appropriate rule filing
type) specifying the new timing for implied volatility computation.
---------------------------------------------------------------------------
\162\ See Supplementary Material .05 to proposed Rule 23.150(h).
---------------------------------------------------------------------------
IEX believes that offering this optional risk protection for market
makers is particularly important in the options markets where market
makers are exposed to added risk given their continuous quoting
obligations. Although equities and options exchanges share a number of
similarities, a meaningful difference is that in the listed options
market, liquidity is available only on-exchange and is primarily
displayed and derived from market maker quotes, and options markets,
when compared to equities markets, have a much higher quote to
[[Page 26880]]
trade ratio.\163\ Exchange market makers in the listed options market
play an essential role in providing liquidity. Moreover, given the
sheer difference in magnitude of tradeable instruments in listed
options as compared to equities (approximately 1.5 million listed
options series compared to approximately 11,000 listed equity
securities), the options exchanges often do not have the same sources
of natural liquidity of buyers and sellers for each tradeable
instrument as is generally the case for equities exchanges. Thus,
options market makers are tasked with affirmative obligations to
support the provision of liquidity to options exchanges through
continuous two-sided quotes in large numbers of listed options series.
As a result, IEX understands that options market makers can be subject
to excessive risk of one or more quotes being executed at stale prices
compared to equities market makers or other liquidity providers.\164\
Because options market makers maintain hundreds (and sometimes
thousands) of quotes on options for a given underlying security at any
one time, a sudden market move in the underlying security can leave an
options market maker vulnerable to being executed across multiple
quotes that are stale and dislocated from the price of the underlying
securities. Liquidity takers engaged in latency arbitrage can target
one or more of these quotes at stale prices, with limited risk should
they fail to execute (i.e., lost opportunity vs. trading at a stale
price), before the Market Makers are able to move their quotes (often
hundreds or more for a given underlying) to reflect the price change in
the underlying securities, thereby exposing those Market Makers to
potentially major losses. IEX understands that incurring such losses
over time reduces a market maker's willingness to provide narrow and
deep quotes, which decreases liquidity and price discovery in the
market. Moreover, to the extent that such losses result in market
making firms being less profitable (or unprofitable), they may cease
market making activity or limit the options classes in which they
compete, which can, over time, decrease competition and increase market
maker concentration. IEX believes that by providing incremental risk
reduction, the ORP could help to counter these impacts.\165\
---------------------------------------------------------------------------
\163\ See Staff Report on Equity and Options Market Structure
Conditions in Early 2021 (Oct. 14, 2021) at 4 (explaining that
options market structure is broadly similar to equities market
structure and noting a key difference that displayed liquidity is
primarily derived from market maker quotes), available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf; see also Lehoczky, Sandor and Woods,
Ellen and Russell, Matthew and Nguyen, Mina and Somers, James, Dead
Man's Switch: Making Options Markets Safer with Active Quote
Protection (May 2020) (``Dead Man's Switch''), at 2 (explaining that
options markets ``depend especially on market makers--who account
for 99.9% of open orders--to connect buyers and sellers, due to a
combinatorial explosion of expirations and strike prices'').
\164\ See, e.g., Protecting Liquidity in Options Markets, Market
Structure, Optiver, July 12, 2023 (``Protecting Liquidity''),
(concluding that ``liquidity protection improves options markets''
by safeguarding market makers against ``excessive risk'' that
results from ``liquidity providers maintain[ing] hundreds of quotes
on a given underlying at any one time [and] a sudden market move can
leave them vulnerable to showing stale, or outdated, quotes,''
thereby ``exposing them to potentially major losses'' if unable to
amend or cancel quotes before executed), available at https://optiver.com/insights/protecting-liquidity-in-options-markets/.
\165\ IEX notes that such trends have been in place for some
time. See, e.g., Joint letter from CBOE, SIFMA and The STA to Brett
Redfearn (Director, Division of Trading and Markets, Commission)
dated June 4, 2018, available at
Cboe_Joint_Letter_with_SIFMA_and_The_STA_on_Options_Market_Structure.
pdf, noting that ``. . .[i]n particular over the past several years,
there has been wide discussion in the options industry regarding
market metrics and it has been shown that quoted liquidity has
decreased and spreads have widened. Further many market makers have
consolidated their businesses, reduced their participation, or
stopped making options markets entirely--there are approximately
half as many registered market makers actively participating in the
U.S. options markets than there were five years ago. This trend
obviously has impacted market quality in the U.S. options markets.''
---------------------------------------------------------------------------
More specifically, as discussed above, traders using these specific
strategies can leverage technological and speed advantages to identify
when options prices are in transition and react in microseconds before
others and rapidly execute against resting orders at outdated, stale
prices, before those orders can be modified or cancelled to reflect
updated market conditions, and before others have a fair opportunity to
adjust them. However, these technological and speed advantages are
expensive and challenging to achieve and maintain, and therefore not
readily available to all market participants. The optional ORP is
designed to augment these risk protections with a transparent, rules-
based formula that identifies when a market maker's quote is clearly
mispriced based on a price change in the underlying security and
reprice or cancel the quote in a manner with effects that are
predictable to both market makers and other participants, who expect
the price of an option to change in response to a material change in
price of the underlying security because options are derivative
securities whose prices are based in part on the price of their
underlying security.
Without robust liquidity protection mechanisms to protect against
these risks, market makers may be forced to widen their spreads, show
less liquidity, or simply exit the market. Overall market quality could
deteriorate as a result, and investors would suffer when it becomes too
expensive to transact, or when there is insufficient liquidity to
enable transacting altogether. Accordingly, liquidity protection
mechanisms for market makers, which all options exchanges offer, and
IEX proposes to offer, are vital for achieving a healthy balance
between market makers and liquidity takers in the listed options
market. These include, but are not limited to, activity-based risk
controls, price reasonability checks, and functionality (such as bulk
quoting and purge ports) to facilitate timely quoting, quote updates,
and quote cancellation.
For each options series, the System will maintain a real-time
estimate of the sensitivity of the series to changes in the midpoint of
the best Protected Bid and best Protected Offer of the Signal Exchanges
for the underlying security (based on a Black-Scholes assessment). When
there is a change in the best Protected Bid or best Protected Offer of
the Signal Exchanges for the underlying security, the System will use
the quote instability calculation formula set forth in proposed IEX
Rule 23.150(h) to calculate whether to generate a quote instability
determination for each options series overlying the underlying
security. The System independently assesses whether to generate a quote
instability determination affecting resting bids or offers for each
options series. A quote instability determination is generated by the
System when, pursuant to the quote instability calculation, the quote
instability factor is greater than the defined Quote Instability
Threshold and the delta absolute value is within the Delta Bound
Band.\166\ As proposed, the Delta Bound Band would be uniformly applied
across all options in order to more narrowly tailor deployment of the
ORP to options series at the greatest risk of adverse selection based
on the Exchange's assessment of relevant factors.
---------------------------------------------------------------------------
\166\ See discussion supra on how modifications to these values
will be made.
---------------------------------------------------------------------------
If a Market Maker has opted to utilize the ORP and its quote in an
options series that was the subject of a quote instability
determination is at or above (below) the price level of the quote
instability determination the System will either cancel the Market
Maker's quote or reprice it to the price level of the quote instability
determination,
[[Page 26881]]
pursuant to the Market Maker's instruction.\167\ Regardless of whether
it chooses to use the ORP, a Market Maker will be able to adjust the
price of its quote in the same manner as other Market Makers' quotes
that have not opted to use the ORP.\168\
---------------------------------------------------------------------------
\167\ See proposed Rule 23.150(h)(1)(c).
\168\ The Exchange will comply with Consolidated Audit Trail
reporting requirements in accordance with applicable technical
specifications.
---------------------------------------------------------------------------
One Second Exposure Period. Proposed Rule 23.200 would require
Options Members to expose their customers' orders on the Exchange for
at least one second under certain circumstances before trading against
such orders. During this one second exposure period, other Options
Members will be able to enter orders to trade against the exposed
order. In adopting a one second order exposure period, the Exchange is
proposing a requirement that is consistent with the rules of other
options exchanges.\169\ Thus, the exposure period will allow Options
Members that are members of other options exchanges to comply with
proposed Rule 23.200 without programming separate time parameters into
their systems for order entry or compliance purposes. The Exchange
believes that market participants are sufficiently automated that a one
second exposure period allows an adequate time for market participants
to electronically respond to an order. Also, it is possible that market
participants might wait until the end of the exposure period, no matter
how long, before responding. Thus, the Exchange believes that any
longer than one second would not further the protection of investors or
market participants, but rather, would potentially increase market risk
to investors and other market participants by creating a longer period
of time for the exposed order to be subject to market risk.
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\169\ See, e.g., MEMX Rule 22.11; CBOE Rule 5.9; and MIAX
Options Rule 520(b).
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Options Order Protection and Locked/Crossed Market Plan Rules
The Exchange will participate in the Options Order Protection and
Locked/Crossed Market Plan (the ``Plan''),\170\ and therefore will be
required to comply with the obligations of Participants under the Plan.
The Exchange proposes to adopt rules relating to the Plan that are
substantially similar to the rules in place on all of the options
exchanges that are Participants to the Plan. The Plan essentially
applies the Regulation NMS price-protection provisions to the options
markets. Similar to Regulation NMS, the Plan requires the Plan
Participants to adopt rules ``reasonably designed to prevent Trade-
Throughs'', while exempting ISOs from that prohibition. The Plan's
definition of an ISO is essentially the same as under Regulation NMS.
The remaining exceptions to the trade-through prohibition, discussed
more specifically below, either track those under Regulation NMS or
correspond to unique aspects of the options market, or both.
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\170\ See supra note 85.
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The proposed rules in Chapter 28 (Options Order Protection and
Locked and Crossed Markets Rules) conform to the requirements of the
Plan. Proposed Rule 28.100 sets forth the defined terms for use under
the Plan. Proposed Rule 28.110 prohibits trade-throughs and exempts
ISOs from that prohibition. Proposed Rule 28.110 also contains
additional exceptions to the trade-through prohibition that track the
exceptions under Regulation NMS or correspond to unique aspects of the
options market, or both.
Proposed Rule 28.120 sets forth the general prohibition against
locking/crossing other eligible exchanges as well as certain enumerated
exceptions that permit locked markets in limited circumstances; such
exceptions have been approved by the Commission for inclusion in the
rules of other options exchanges. Specifically, the exceptions to the
general prohibition on locking and crossing occur when: (1) the locking
or crossing quotation was displayed at a time when the Exchange was
experiencing a failure, material delay, or malfunction of its systems
or equipment; (2) the locking or crossing quotation was displayed at a
time when there is a Crossed Market; (3) the Options Member
simultaneously routed an ISO to execute against the full displayed size
of any locked or crossed Protected Bid or Protected Offer; or (4) with
respect to a locking quotation, the order entered on the Exchange that
will lock a Protected Bid or Protected Offer, is: (i) not a Customer
order, and the Exchange can determine via identification available
pursuant to the OPRA Plan that such Protected Bid or Protected Offer
does not represent, in whole or in part, a Customer order; or (ii) a
Customer order, and the Exchange can determine via identification
available pursuant to the OPRA Plan that such Protected Bid or
Protected Offer does not represent, in whole or in part, a Customer
order, and, on a case-by-case basis, the Customer specifically
authorizes the Member to lock such Protected Bid or Protected
Offer.\171\
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\171\ See proposed Rule 28.120(b).
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The Exchange notes that the proposed rules in Chapter 28 (Options
Order Protection and Locked and Crossed Markets Rules) are
substantively identical to the rules of MEMX Options.\172\
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\172\ See MEMX Rule 27.1, 27.2, and 27.3.
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Securities Traded on IEX Options
General Listing Standards. The Exchange proposes to adopt listing
standards for options traded on IEX Options as described in Chapter 20
(Securities Traded on IEX Options), which are substantively identical
to the equivalent MEMX Options rules,\173\ with the exception of: (i)
some language in Supplementary Material .02 to proposed Rule 20.140
concerning the $1 strike price program which is not included in the
equivalent MEMX rule, and therefore borrowed from the equivalent MIAX
rule; \174\ and (ii) the addition of language allowing the Exchange to
list for closing transactions an Options series that is listed but
restricted to closing transactions on another exchange.\175\ The
Exchange will join the Options Listings Procedures Plan and will list
and trade options already listed on other options exchanges. The
Exchange will gradually phase-in its trading of options, beginning with
a selection of actively traded options.
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\173\ See MEMX Rules, Chapter 19. IEX notes that the MEMX Rules
include Chapter 29: Index Rules. IEX is not proposing to adopt
similar rules at this time, and any references to index options in
MEMX Chapter 19 are not in proposed IEX Chapter 20.
\174\ See MIAX Rule 404 Interpretation and Policy .01.
\175\ See Supplementary Material .01 to proposed Rule 20.130,
which mirrors MIAX Rule 403 Interpretation and Policy .01.
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Conduct and Operational Rules for Options Members
The Exchange proposes to adopt rules in Chapter 19 for IEX Options
that are substantively identical to the rules of MEMX Options
regarding: exercises and deliveries as described in Chapter 24
(Exercises and Deliveries); records, reports and audits as described in
Chapter 25 (Records, Reports and Audits); minor rule violations as
described in Chapter 26 (Discipline and Summary Suspensions); doing
business with the public as described in Chapter 27 (Doing Business
With the Public); and margin as described in Chapter 29 (Margin
Requirements).\176\ The Exchange also proposes to adopt rules that are
substantively similar to most of MEMX's Chapter 18 (Business Conduct),
with the exception of proposed Rules 19.160 (Position Limits), 19.170
[[Page 26882]]
(Exemptions from Position Limits), 19.180 (Exercise Limits) that are
substantively similar to MIAX Rules 307, 308, and 309,
respectively.\177\ IEX proposed to adopt MIAX's versions of these rules
because they provided specificity about the types of position limits
the Exchange will apply to Options Members (as opposed to the MEMX
rules, which rely on position limits set by other exchanges).
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\176\ See MEMX Rules, Chapters 23, 24, 25, 26 and 28.
\177\ The Exchange also proposes to adopt provisions comparable
to CBOE Rule 8.30 Interpretation .03(c)(4) in proposed Rule
19.160(f)(2)(D) (regarding control for purposes aggregating
positions held by different accounts for purposes of applying the
position limit rules) and CBOE Rule 8.30 Interpretation .09 in
Supplementary Material .03 to proposed Rule 19.160 (regarding
aggregation of positions in options contacts on the same underlying
security for purposes of position limit rules).
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National Market System
IEX Options will operate as a full and equal participant in the
national market system for options trading established under Section
11A of the Exchange Act.\178\ IEX Options will become a member of the
Options Price Reporting Authority (``OPRA''), the Options Order
Protection and Locked/Crossed Market Plan, the Options Regulatory
Surveillance Authority (``ORSA''), and the Options Listing Procedures
Plan (``OLPP''). The Exchange expects to participate in those plans on
the same terms currently applicable to current members of those plans.
The Exchange is in the process of contacting the leadership of each
options-related national market system plan to begin the membership
process.
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\178\ 15 U.S.C. 78k-1.
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Regulation
The Exchange will leverage many of the structures it established to
operate a national securities exchange trading NMS equities securities,
in compliance with Section 6 of the Exchange Act.\179\ As described in
more detail below, there will be three elements of that regulation: (1)
the Exchange will join the existing options industry agreements
pursuant to Section 17(d) of the Exchange Act prior to commencing
operations,\180\ as it did with respect to equities; (2) the Exchange's
Regulatory Services Agreement (``RSA'') with FINRA will be amended
prior to commencing operations to provide that FINRA will perform
regulatory surveillance, investigation, disciplinary and hearing
services of options trading on IEX subject to oversight by IEX
Regulation, just as it does for equities regulation; and (3) the
Exchange will perform options listing regulation, as well as authorize
Options Members to trade on IEX Options. Section 17(d) of the Exchange
Act and the related Exchange Act rules permit SROs to allocate certain
regulatory responsibilities to avoid duplicative oversight and
regulation. Under Exchange Act Rule 17d-1,\181\ the SEC designates one
SRO to be the Designated Examining Authority, or DEA, for each broker-
dealer that is a member of more than one SRO. The DEA is responsible
for the financial aspects of that broker-dealer's regulatory oversight.
Because IEX Options Members also must be members of at least one other
SRO, the Exchange would generally not expect to be designated as the
DEA for any of its members.\182\
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\179\ 15 U.S.C. 78f.
\180\ 15 U.S.C. 78q(d).
\181\ 17 CFR 240.17d-1.
\182\ If IEX were to be designated as the DEA for any of its
members, FINRA would perform the DEA functions on behalf of IEX
pursuant to the RSA.
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Exchange Act Rule 17d-2 \183\ permits SROs to file with the
Commission plans under which the SROs allocate among each other the
responsibility to receive regulatory reports from, and examine and
enforce compliance with specified provisions of the Exchange Act and
rules thereunder and SRO rules by, firms that are members of more than
one SRO (``common members''). If such a plan is declared effective by
the Commission, an SRO that is a party to the plan is relieved of
regulatory responsibility as to any common member for whom
responsibility is allocated under the plan to another SRO.
---------------------------------------------------------------------------
\183\ 17 CFR 240.17d-2.
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All of the options exchanges, FINRA, and NYSE have entered into the
Options Sales Practices Agreement, a Rule 17d-2 agreement, and the
Exchange intends to join this agreement prior to the commencement of
operations for IEX Options. Under this Agreement, the examining SROs
will examine firms that are common members of the Exchange and the
particular examining SRO for compliance with certain provisions of the
Exchange Act, certain of the rules and regulations adopted thereunder,
certain examining SRO rules, and certain proposed IEX Options rules. In
addition, the proposed IEX Options rules contemplate participation in
this Agreement by requiring that any Options Member also be a member of
at least one of the examining SROs. The Exchange and FINRA are also
party to a bilateral Rule 17d-2 agreement that requires minor
modifications due to the proposed launch of IEX Options. The Exchange
intends to modify and seek Commission approval of the modified
bilateral Rule 17d-2 agreement prior to commencing of operations for
IEX Options. Additionally, all of the options exchanges and FINRA have
entered into the Options-Related Market Surveillance Agreement, a Rule
17d-2 agreement, and the Exchange intends to join this agreement prior
to the commencement of operations for IEX Options.
For those regulatory responsibilities that fall outside the scope
of any Rule 17d-2 agreements, the Exchange will retain full regulatory
responsibility under the Exchange Act. However, the Exchange has
entered into an RSA with FINRA, as discussed above, pursuant to which
FINRA personnel operate as agents for the Exchange in performing
certain of these functions. The Exchange and FINRA will continue to
operate under the RSA that is currently in place but with modifications
as necessary to accommodate the expanded scope of the relationship. The
necessary modifications will be implemented prior to the commencement
of operations of IEX Options. As is the case with the Exchange's
equities market, the Exchange will oversee FINRA and continue to bear
ultimate regulatory responsibility with respect to regulatory functions
not subject to allocation to FINRA or another SRO pursuant to a Rule
17d-2 Agreement for the IEX Options Exchange.
Consistent with the Exchange's existing regulatory structure, the
Exchange's Chief Regulatory Officer, reporting to the Regulatory
Oversight Committee of the Exchange's board of directors, shall have
general supervision of the regulatory operations of IEX Options,
including responsibility for overseeing the surveillance, examination,
and enforcement functions and for administering all regulatory services
agreements applicable to IEX Options. Similarly, the Exchange's
existing Regulatory Oversight Committee will be responsible for
overseeing the adequacy and effectiveness of Exchange's regulatory and
self-regulatory organization responsibilities, including those
applicable to IEX Options.
As it does with equities, the Exchange will monitor trading on IEX
Options, both through internal reports and FINRA surveillances for the
purpose of maintaining a fair and orderly market. As it does with its
equities trading, the Exchange will monitor IEX Options to identify
unusual trading patterns and determine whether particular trading
activity requires further regulatory investigation by FINRA.
Finally, the Exchange will oversee the process for determining and
[[Page 26883]]
implementing trade halts, identifying and responding to unusual market
conditions, and administering the Exchange's process for identifying
and remediating ``obvious errors'' by and among its Options
Members.\184\ The proposed rules in Chapter 21 (Regulation of Trading
on IEX Options) regarding halts,\185\ unusual market conditions,
extraordinary market volatility, obvious errors, audit trail, and rules
regarding prohibited and permissible transfers of options positions off
the Exchange are substantively identical to the approved rules of MEMX
Options.\186\
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\184\ IEX notes that, like MEMX Rule 20.6, proposed Rule 21.150
authorizes the proposed Error Panel to review decisions made under
this rule, which includes decisions to classify a transaction as a
Catastrophic Error.
\185\ Proposed Rule 21.120(b) states that during a trading halt,
the Exchange shall process new and existing orders and quotes in a
series in accordance with proposed Rule 22.160(g). Proposed Rule
22.160(g), which is substantively identical to NYSE Arca Options
Rule 6.64P-O(g), states that during a trading halt, the Exchange
will cancel all resting Market Maker quotes.
\186\ See MEMX Rules, Chapter 20.
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Minor Rule Violation Plan
The Exchange's disciplinary rules, including Exchange Rules
applicable to ``minor rule violations,'' are set forth in Chapter 9 of
the Exchange's current Rules. Such disciplinary rules will apply to
Options Members and their associated persons.
The Commission approved the Exchange's Minor Rule Violation Plan
(``MRVP'') in 2016.\187\ The Exchange's MRVP specifies the uncontested
minor rule violations that are included in the MRVP and have sanctions
not exceeding $2,500. Any violations that are resolved under the MRVP
would not be subject to the provisions of Rule 19d-1(c)(1) under the
Act \188\ requiring that an SRO promptly file notice with the
Commission of any final disciplinary action taken with respect to any
person or organization.\189\ The Exchange's MRVP includes the policies
and procedures included in Exchange Rule 9.216(b) and the violations
included in Rule 9.218.
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\187\ See Securities Exchange Act Release No. 78474 (August 3,
2016), 81 FR 52717 (August 9, 2016) (Order Declaring Effective a
Minor Rule Violation Plan) (File No. 4-701).
\188\ 17 CFR 240.19d-1(c)(1).
\189\ The Commission adopted amendments to paragraph (c) of Rule
19d-1 to allow SROs to submit for Commission approval plans for the
abbreviated reporting of minor disciplinary infractions. See Release
No. 34-21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any
disciplinary action taken by an SRO against any person for violation
of a rule of the SRO which has been designated as a minor rule
violation pursuant to such a plan filed with and declared effective
by the Commission will not be considered ``final'' for purposes of
Section 19(d)(1) of the Act if the sanction imposed consists of a
fine not exceeding $2,500 and the sanctioned person has not sought
an adjudication, including a hearing, or otherwise exhausted his
administrative remedies.
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Under Rule 9.216(b), the Exchange may impose a fine (not to exceed
$2,500) and/or a censure on any Member or associated person with
respect to any rule listed in IEX Rule 9.218. If the FINRA Department
of Enforcement or the Department of Market Regulation, on behalf of the
Exchange, has reason to believe a violation has occurred and if the
Member or associated person does not dispute the violation, the
Department of Enforcement or the Department of Market Regulation may
prepare and request that the Member or associated person execute a
minor rule violation plan letter accepting a finding of violation,
consenting to the imposition of sanctions, and agreeing to waive the
Member's or associated person's right to a hearing before a Hearing
Panel or, if applicable, an Extended Hearing Panel, and any right of
appeal to the IEX Appeals Committee, the Board, the Commission, and the
courts, or to otherwise challenge the validity of the letter, if the
letter is accepted. The letter must describe the act or practice
engaged in or omitted, the rule, regulation, or statutory provision
violated, and the sanction or sanctions to be imposed. Unless the
letter states otherwise, the effective date of any sanction imposed
will be a date to be determined by IEX Regulation staff. In the event
the letter is not accepted by the Member or associated person, or is
rejected by the Office of Disciplinary Affairs, the matter can proceed
in accordance with the Exchange's disciplinary rules, which include
hearing rights for formal disciplinary proceedings.
The Exchange proposes to amend its MRVP and Exchange Rule 9.218 to
add certain rules relating to Options as set forth in proposed Rule
26.120 (Penalty for Minor Rule Violations) to the list of rules
eligible for Minor Rule Violation Plan treatment.\190\ The rules
included in proposed Rule 26.120, as appropriate for disposition under
the Exchange's MRVP, are: (a) position limit and exercise limit
violations; (b) violations regarding the failure to accurately report
position and account information; (c) Market Maker quoting obligations;
(d) violations regarding expiring exercise declarations; (e) violations
relating to the failure to respond to the Exchange's requests for the
submission of trade data; and (f) violations relating to noncompliance
with the Consolidated Audit Trail Compliance Rule requirements. The
rule violations included in proposed Rule 26.120 are the same as the
rule violations included in the MRVPs of other options exchanges.\191\
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\190\ In its proposal to adopt the MRVP, the Exchange requested
that, going forward, to the extent that there are any changes to the
rules applicable to the Exchange's MRVP, the Exchange requests that
the Commission deem such changes to be modifications to the
Exchange's MRVP.
\191\ See, e.g., MEMX Rules, Chapter 25.
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Upon implementation of this proposal, the Exchange will include
violations of the enumerated options trading rules, if any, in an
applicable Exchange's quarterly report of any actions taken on minor
rule violations under the MRVP.\192\ A quarterly report would include:
the Exchange's internal file number for the case, the name of the
individual and/or organization, the nature of the violation, the
specific rule provision violated, the sanction imposed, the number of
times the rule violation has occurred, and the date of disposition. The
Exchange's MRVP, as proposed to be amended herein, is consistent with
Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in
part, that an exchange have the capacity to enforce compliance with,
and provide appropriate discipline for, violations of the rules of the
Commission and of the exchange, 6(b)(6) provides that members and
persons and associated members shall be appropriately disciplined for
violation of the provisions of the rules of the exchange, by expulsion,
suspension, limitation of activities, functions and operations, fine,
censure, being suspended or barred from being associated with a member,
or any other fitting sanction.\193\ Rule violations listed in proposed
Rule 26.120 are minor in nature and will be more appropriately
disciplined through the Exchange's MRVP and therefore proposes to add
them to the list of rules eligible for minor rule fine disposition.
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\192\ To date, the Exchange has not taken any minor rule
violation actions.
\193\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
---------------------------------------------------------------------------
In addition, because Rule 9.216(b) offers procedural rights to a
person sanctioned for a violation listed in proposed Rule 26.120, the
Exchange will provide a fair procedure for the disciplining of members
and associated persons, consistent with Section 6(b)(7) of the
Act.\194\
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\194\ 15 U.S.C. 78f(b)(7). Rule 9.216(b) does not preclude an
Options Member or person associated with an Options Member from
contesting an alleged violation and receiving a hearing on the
matter with the same procedural rights through a litigated
disciplinary proceeding.
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This proposal to include the rules listed in proposed Rule 26.120
in the Exchange's MRVP is consistent with the
[[Page 26884]]
public interest, the protection of investors, or otherwise in
furtherance of the purposes of the Act, as required by Rule 19d-1(c)(2)
under the Act,\195\ because it should strengthen the Exchange's ability
to carry out its oversight and enforcement responsibilities as an SRO
in cases where full disciplinary proceedings are unsuitable in view of
the minor nature of the particular violation. In requesting the
proposed change to the MRVP, the Exchange in no way minimizes the
importance of compliance with Exchange Rules and all other rules
subject to the imposition of fines under the MRVP. Minor rule fines
provide a meaningful sanction for minor or technical violations of
rules when the conduct at issue does not warrant stronger, immediately
reportable disciplinary sanctions. The inclusion of a rule in the
Exchange's MRVP does not minimize the importance of compliance with the
rule, nor does it preclude the Exchange from choosing to pursue
violations of eligible rules through the Exchange's disciplinary rules
if the nature of the violation or prior disciplinary history warrants
more significant sanctions. However, the MRVP provides a reasonable
means of addressing rule violations that do not rise to the level of
requiring formal disciplinary proceedings, while providing greater
flexibility in handling certain violations.\196\ The Exchange will
continue to conduct surveillance with due diligence and make a
determination based on its findings, on a case-by-case basis, whether a
fine of more or less than the recommended amount is appropriate for a
violation under the MRVP or whether a violation requires a formal
disciplinary action.
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\195\ 17 CFR 240.19d-1(c)(2).
\196\ See supra note 188 and accompanying text.
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Section 36 Exemption Request
The Exchange proposes to incorporate by reference as IEX Options
rules certain rules of the Cboe Exchange, Inc. (``CBOE''), the New York
Stock Exchange (``NYSE''), and FINRA. Specifically, proposed Rule
27.250 proposes to incorporate by reference the applicable rules of
FINRA with respect to Communications with Public Customers, and
proposed Rule 29.120 proposes to incorporate by reference initial and
maintenance margin requirements of either CBOE or NYSE. Thus, for
certain IEX Options rules, Exchange members will comply with a IEX
Options rule by complying with the CBOE, NYSE, or FINRA rule
referenced. Using its authority under Section 36 of the Act, the
Commission has previously exempted certain SROs from the requirement to
file proposed rule changes under Section 19(b) of the Act when
incorporating another SRO's rules by reference.\197\ Each such exempt
SRO has agreed to be governed by the incorporated rules, as amended
from time to time, but, has not been required to file a separate
proposed rule change with the Commission each time the SRO whose rules
are incorporated by reference seeks to modify its rules. In addition,
each SRO incorporated by reference only regulatory rules (e.g., margin,
suitability, arbitration), not trading rules, and incorporated by
reference whole categories of rules (i.e., did not ``cherry-pick''
certain individual rules within a category). Last, each exempt SRO had
reasonable procedures in place to provide written notice to its members
each time a change is proposed to the incorporated rules of another SRO
in order to provide its members with notice of a proposed rule change
that affects their interests, so that they would have an opportunity to
comment on it.
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\197\ See, e.g., Securities Exchange Act Release No. 49260
(February 17, 2004), 69 FR 8500 (February 24, 2004). See also
Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR
14521, 14539-40 (March 18, 2008) (order approving SR-NASDAQ-2007-004
and SR-NASDAQ-2007-080) and 53128 (January 13, 2006), 71 FR 3550,
3565-66 (January 23, 2006) (File No. 10-131) (approving The NASDAQ
Stock Market LLC's exchange application).
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In connection with this proposal, the Exchange respectfully
requests, pursuant to Rule 240.0-12 under the Act,\198\ an exemption
under Section 36 of the Act from the rule filing requirements of
Section 19(b) of the Exchange Act for changes to those IEX Options
rules that are effected solely by virtue of a change to a cross-
referenced CBOE, NYSE, or FINRA rule. The Exchange proposes to
incorporate by reference categories of rules (rather than individual
rules within a category) that are not trading rules. The Exchange also
agrees to provide written notice to Options Members prior to the launch
of IEX Options of the specific CBOE, NYSE, and FINRA rules that it will
incorporate by reference. In addition, the Exchange will notify Options
Members whenever CBOE, NYSE, or FINRA proposes a change to a cross-
referenced CBOE, NYSE, or FINRA rule.\199\ For the foregoing reasons,
the Exchange believes that its request for exemptive relief is
consistent with prior requests for, and provision of, similar exemptive
relief.
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\198\ 17 CFR 240.0-12.
\199\ The Exchange will provide such notice through a posting on
the same website location where the Exchange will post its own rule
filings pursuant to Rule 19b-4(f)(l) under the Exchange Act (or
other appropriate rule filing type), within the time frame required
by that rule. The website posting will include a link to the
location on the CBOE, NYSE, or FINRA websites where the proposed
rule change is posted.
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Amendments to Existing Exchange Rules
In addition to the rules of IEX Options proposed above, the
Exchange proposes to amend certain of its existing Exchange Rules that
currently apply to the Exchange's equities market in order to reflect
the Exchange's proposed operation of IEX Options.
First, the Exchange proposes to amend Rule 2.160(i), which
generally requires each Member to register at least two Principals with
the Exchange subject to certain exceptions described therein, to
provide that such paragraph (i) shall not apply to a Member that solely
conducts business on the Exchange as an Options Member, however,
Options Members must comply with the registration requirements set
forth in proposed Rule 18.110. The Exchange notes that proposed Rule
18.110(h), which provides that every Options Member shall have at least
one Options Principal and sets forth the Exchange's Options Principal
registration requirements, is identical to MEMX Rule 17.2(g). In
connection with this proposed change, the Exchange also proposes to
amend Rule 2.160(n) to include Options Principal as a registration
category and to set forth the Exchange's qualification requirements for
an Options Principal, which are the same as those for an Options
Principal on MEMX Options. Additionally, the Exchange proposes to amend
Rule 2.160(p)(a)(4) to set forth the appropriate regulatory element
continuing education module for reregistration as an Options Principal.
The Exchange also proposes to make three modifications to Rule
2.220 (IEX Services LLC as Outbound Router). First, IEX proposes to
remove the word ``directly'' from the first sentence of subparagraph
(a), because IEX Services will continue to route orders to away
markets, but as described above, with respect to options routing, it
will not route those order ``directly'' to the away markets. Second,
consistent with the first change, IEX proposes to insert a new second
sentence in subparagraph (a) that reads: ``When routing options orders,
as set forth in proposed Rule 22.180, IEX Services will transmit such
orders to one or more routing brokers that are not affiliated with the
Exchange; the routing brokers will in turn route the applicable options
orders to other
[[Page 26885]]
securities exchanges that trade options.'' IEX proposes to make this
change to reflect the different nature of how IEX Services will handle
routing options orders from equities orders. And third, IEX proposes to
modify subparagraph (a)(8) of this rule, which states that IEX Services
shall maintain an error account for the purpose of addressing positions
that are the result of an execution or executions that are not clearly
erroneous under Rule 11.270 and result from a technical or systems
issue at IEX Services, the Exchange, a routing destination, or a non-
affiliate third-party routing broker that affects one or more orders
(``Error Positions''). The proposed change to Rule 2.220(a)(8) would
add a reference to the comparable provision to that which governs
review and resolution of clearly erroneous equities transactions (i.e.,
Rule 11.270) but for options transactions, namely proposed Rule 21.150,
which governs review and resolution of options transactions that may
qualify as obvious errors.
The Exchange also proposes to adopt Rule 21.220 (Limitation of
Liability), which is almost identical to the Rule 11.260, the
Limitation of Liability rule in IEX's equities trading rules. The only
difference is to reflect that proposed Rule 21.220 applies to IEX
Options and options trading.
Lastly, the Exchange proposes to amend Rule 9.218 (Violations
Appropriate for Disposition Under Plan Pursuant to Exchange Act Rule
19d-1(c)(2)), which contains the list of Exchange Rule violations and
recommended fine schedule, to include a new paragraph (k) referencing
proposed Rule 26.120 for the recommended fines for minor rule
violations of the Exchange Rules appliable to IEX Options, which the
Exchange notes are the same as those of MEMX Options.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \200\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \201\ in particular, in that
it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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;
and is not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
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\200\ 15 U.S.C. 78f(b).
\201\ 15 U.S.C. 78f(b)(5).
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As described above, the Exchange proposes to operate its options
market much as it operates its equities market today and in a manner
similar to that of other options exchanges, while leveraging IEX's
experience and expertise in understanding the needs of market makers to
offer them additional tools designed to better manage risk and drive
performance. As discussed in the Purpose section, IEX believes that the
proposed enhanced liquidity protection mechanisms will result in market
makers providing more competitive quotes which will benefit all market
participants and thereby support the protection of investors and the
public interest. Also as discussed in the Purpose section, most of the
proposed IEX Options rules are based on the rules of other options
exchanges, primarily MEMX, CBOE, MIAX, NYSE Amex, and NYSE Arca.
Therefore, the Exchange does not believe these aspects of the proposed
rule change that are substantively identical to other exchanges' rules
raise any new or novel issues that have not been previously considered
by the Commission. Moreover, the Exchange believes that the proposed
functionality is consistent with Section 6(b)(5) of the Act because the
System is designed to be efficient and its operation transparent,
thereby facilitating transactions in securities, removing impediments
to and perfecting the mechanisms of a free and open national market
system. As described above, the Exchange's proposed rules, including
the proposed Order Types and Handling Instructions, opening procedures,
routing services, and order matching process are designed to provide a
simplified suite of conventional features and to comply with all
applicable regulatory requirements, including the obligations of the
Options Order Protection and Locked/Crossed Market Plan.\202\
---------------------------------------------------------------------------
\202\ See supra note 85.
---------------------------------------------------------------------------
As discussed in the Purpose section, IEX's proposal includes a de
minimis latency mechanism (or speedbump) on incoming order and quote
messages designed to enable IEX to obtain the most accurate view of the
market prior to processing orders and quotes, and a robust suite of
risk protections, including the ORP, which is designed to protect
market makers from excessive risk due to execution of quotes at stale
prices. IEX believes that the proposed latency mechanism will protect
investors and the public interest in several respects. First, by
enabling IEX to obtain the most accurate view of market data prior to
executing an order or quote, it thereby would support IEX's ability to
accurately account for contemporaneous market data. IEX notes that this
aspect of its functionality is designed to facilitate market
participants executing at current (i.e., not ``stale'') prices. Second,
by enabling the System to perform the Indicator calculation with
current market data, it supports operation of the ORP (as discussed
herein), which is designed to provide Market Makers with an optional
tool to avoid excessive risk that can arise from execution of a quote
at a stale price. As discussed in detail above, IEX believes that this
protection will encourage market makers to post aggressively priced
and/or deeper quotes on the Exchange which will benefit all market
participants. Thus, from a functional perspective, IEX believes that
the operation of the latency mechanism is consistent with the Act.
Further, and as explained below, the proposed latency mechanism of 350
microseconds is well within the geographic delays that exist among and
between the data centers that IEX Options Members and other options
exchanges use \203\ and is consistent with the naturally occurring time
indeterminism that exists in order processing.\204\
---------------------------------------------------------------------------
\203\ See https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf for a description of latencies
between various data centers.
\204\ Accounting for the latency mechanism or speedbump is no
different than accounting for other geographical distances between
exchanges. See Securities Exchange Act Release No. 78101 (June 17,
2016), 81 FR 41142, 41161 (June 23, 2016) (``2016 SEC Approval
Order'') (approving IEX's 350 microsecond speed bump in the
registration of the IEX Exchange as ``well within the range of
geographic and technological latencies that market participants
experience today'' such that ``latency to and from IEX will be
comparable to--and even less than--delays attributable to other
markets that currently are included in the NBBO,'' and finding the
delay to be de minimis, i.e., so short as to not frustrate the
purposes of the Exchange Act by impairing fair and efficient access
to IEX's quotation); see also 2020 SEC Approval Order, supra note
27, at 54441 (determining that IEX's de minimis speed bump when
routing displayed equity orders is ``just like accounting for any
other technological or geographic latency'' and doing so is
consistent with applicable rules and regulations); see also Citadel,
45 F.4th at 37 supra note 27 (ruling in favor of the SEC's approval
of IEX's displayed equity order that traverses a speedbump and
holding that IEX's displayed equity order's delay are ``similar to
the delay that traders' communications already experience when
traveling between various other exchanges across the country.'').
---------------------------------------------------------------------------
IEX also believes that the latency mechanism is consistent with the
Commission Interpretation Regarding Automated Quotations Under
Regulation NMS (``de minimis delay
[[Page 26886]]
interpretation'').\205\ Although options markets do not have the same
automated quotation requirements as in equities, even if they were to
apply, the Commission's reasoning in the de minimis delay
interpretation in the context of NMS automated quotations is
instructive, as the latency mechanism IEX is proposing for the options
exchange is a de minimis delay that does not impair fair and efficient
access to an exchange's quotation. Specifically, the Commission stated
in issuing its interpretation that intentional delays that are well
within the geographic and technological latencies experienced by market
participants when routing orders are de minimis to the extent they
would not impair a market participant's ability to access a displayed
quotation consistent with the goals of NMS Rule 611.\206\ The
Commission also noted that an intentional delay of any duration must be
fully disclosed and codified in a written rule of the exchange, which,
as described below, the latency mechanism will be fully disclosed and
codified in IEX's written rules.\207\
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\205\ See Commission Interpretation Regarding Automated
Quotations Under Regulation NMS, Exchange Act Release No. 34-78102,
81 FR 40,785, 40,792 (June 23, 2016).
\206\ Id.
\207\ Id.
---------------------------------------------------------------------------
IEX believes that its proposed latency mechanism of 350
microseconds is fully consistent with the reasoning in the Commission's
de minimis delay interpretation.\208\ First, the delay is less than the
existing geographic latencies experienced by market participants when
routing orders. For example, latency between and among the data centers
located in New Jersey range up to several hundred microseconds, with
additional latency introduced by technology processing on both sides of
an order or quote route between these data centers.\209\ Accordingly,
the proposed latency mechanism is consistent with this aspect of the
Commission's de minimis interpretation.
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\208\ IEX notes that the D.C. Circuit Court also agreed with the
Commission's interpretation. The Court ruled entirely in favor of
the SEC's approval of IEX's system that includes applying a
speedbump and quote indicator to displayed equity orders. See
Citadel Securities, 45 F.4th at 36, supra note 27 (concluding the
SEC's approval of a 350 microseconds intentional access delay for
displayed orders to be ``de minimis--i.e., a delay so short as to
not frustrate the purposes of Rule 611 by impairing fair and
efficient access to an exchange's quotations''); see also id. (``The
SEC's conclusion that mere de minimis delays do not cause an order
to violate Regulation NMS's immediacy requirement was therefore
reasonable.'').
\209\ See https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf.
---------------------------------------------------------------------------
The proposed latency mechanism also meets the additional prongs of
the de minimis interpretation, that it be fully disclosed and codified
in a written rule of the exchange that has become effective pursuant to
Section 19 of the Act; and that the exchange articulates how the
purpose, operation, and application of the delay is consistent with the
Act and the rules and regulations thereunder applicable to the
exchange. The latency mechanism's operation, as proposed, would be
disclosed and codified in detail in IEX Rules 22.100(n) and 22.170(g).
Those provisions specify that the latency mechanism shall mean a delay
of 350 microseconds that is added to each incoming order and quote
message from a User prior to processing by the System, and that will
not apply to other communications between the Exchange and Users, Away
Markets, data feeds, order processing and order execution on the IEX
Options Book, and outbound communications to the Exchange's proprietary
data feeds and OPRA. As discussed above, the purpose of the latency
mechanism is to provide adequate time for the IEX System to obtain the
most accurate view of market data to enable it to accurately price
orders as well as to perform the Indicator calculation with current
market data.
Consequently, based on the foregoing, the Exchange believes that
the latency mechanism is both de minimis and otherwise consistent with
the Act.
The Exchange believes that the proposed ORP is consistent with
Section 6(b) of the Act \210\ in general, including furthering the
objectives of Section 6(b)(5) of the Act,\211\ as the proposed optional
risk protection mechanism would remove impediments to and perfect the
mechanism of a free and open market and a national market system and
promote just and equitable principles of trade by providing an optional
quote parameter, available to all IEX Options Market Makers, that is
designed to assess the materiality of an adverse price change in a
particular options series so that the System can effectuate the advance
trading instructions provided by the Market Maker to cancel or reprice
its quote to the price level of the quote instability determination, as
selected by the Market Maker. The ORP is an optional, narrowly tailored
approach designed to provide protection from excessive risk of
execution of quotes at stale prices and thereby enable market makers to
make tighter and larger quotes (i.e., quotes at narrower spreads with
greater size) thus enhancing the quality of the IEX Options market, to
the benefit of all market participants. The Exchange believes it is
appropriate to provide market makers with the choice to utilize this
reasonable quote protection, particularly given the continuous quoting
obligations specific to market makers and their importance in providing
liquidity in the listed options market. The Exchange further believes
this risk functionality will encourage market makers to provide
additional depth and liquidity to the Exchange's markets, thereby
removing impediments to and perfecting the mechanisms of a free and
open market and a national market system and, in general, protecting
investors and the public interest.
---------------------------------------------------------------------------
\210\ 15 U.S.C. 78f(b).
\211\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the ORP supports the protection of
investors and public interest goals of the Act. As described in the
Purpose section, based on the structural differences between equities
and listed options markets, the options exchanges often do not have the
same natural liquidity of buyers and sellers for each tradeable
instrument (i.e., options series) as is generally the case in equities.
As a result, market makers with affirmative obligations play a central
role in providing liquidity to options exchanges through continuous
two-sided quotes in large numbers of listed options series, thereby
enabling investors to transact in listed options in accordance with
their investment objectives. Because options market makers are required
to maintain hundreds (and sometimes thousands) of quotes on options
overlying underlying securities at any one time, a sudden market move
in the underlying security can leave them vulnerable to being executed
on quotes at stale prices and dislocated from the price of the
underlying security.\212\ Liquidity takers engaged in latency arbitrage
can target these quotes at stale prices, with limited risk should they
fail, before the market maker has time to move its quotes to reflect
the price change in the
[[Page 26887]]
underlying security exposing them to potentially major losses. Even
high-speed market makers, due to the large number of quotes they are
required to maintain, are susceptible to the risk of being unable to
adjust their quotes fast enough to protect against strategies that can
choose to send ``aggressive'' orders in specific options when they
detect changing market conditions.\213\
---------------------------------------------------------------------------
\212\ See, e.g., Dead Man's Switch, supra note 154 (discussing
the need for quote protection for market makers to allow for a deep
and liquid listed options market and explaining that ``race
conditions'' negatively impact pricing efficiency, ``as market
makers have been shown to quote wider spreads or step back instead
of continually updating with price moves for fear of being ``picked
off.''); see also Market Lens, supra note 21 (explaining the need
for risk management in electronic trading given that ``traders who
place limit orders--the foundation of public price discovery--are
exposed to the risk that their quotations will be executed at an
inopportune time, leading to potential losses'' and that the
``greater the risk of an inopportune execution, the more
compensation is required, which leads to wider bid-ask spreads.
Conversely, anything the trader can do to lower the risk of an
inopportune execution will lower the compensation required, which
leads to narrower bid-ask spreads.'').
\213\ See id.
---------------------------------------------------------------------------
The ORP is designed to supplement the standard proposed risk checks
to provide augmented protection to address the inherent risks faced by
market makers. The Exchange notes that, as proposed, ORP would be an
incremental step in providing further risk protections to market makers
consistent with exchanges' long-standing practice of offering targeted
risk protections to market makers in recognition of their obligations
and the unique risks they face. IEX believes that the operation of the
ORP is similar to price reasonability and activity-based risk checks
offered by other options exchanges (and proposed by IEX herein), in
terms of its impact on a resting quote.\214\ Each of these risk
controls provide that the exchange will cancel an order or quote
pursuant to the member's instructions when the control is triggered
based on a determination that the price of the market maker's quote is
``unreasonable'' because it is no longer reflective of the price of the
underlying security and therefore likely stale (price reasonability
check) or that the execution activity of a market maker's quotes
exceeds the market maker's risk tolerance (activity-based controls).
Additionally, the trading collar and limit order protection rules of
other options exchanges and those similarly proposed by IEX provide for
orders to be repriced.
---------------------------------------------------------------------------
\214\ See, e.g., Market-Maker Protections, Market Structure,
Optiver, July 17, 2023 (``Market Maker Protections''), available at
https://optiver.com/insights/market-maker-protections/ (explaining
that exchanges implement robust market-maker protections to ``assist
market makers in coping with the risks of posting continuous, two-
sided quotes in thousands of financial instruments'' and to provide
the ability to automatically pull or amend their quotes so that
``all quotes falling within the scope of protection still resting on
the book are prohibited from further execution'').
---------------------------------------------------------------------------
Similarly, the ORP will enable IEX to cancel or reprice a Market
Maker's quote based on a trigger in the discrete moments when the
mathematical relationship between the options quote and the underlying
security's price become substantially disconnected, as per the
Indicator formula. However, IEX notes that the proposed ORP would be
more transparent than the activity-based controls in determining when a
market maker quote is potentially subject to cancelation (or
adjustment) because it is based on a transparent formula specified in
IEX's rules. Participants will know that any change in an options quote
based on the ORP will only occur in the circumstances that are defined
and in a predictable way based on the transparent formula. In contrast,
those triggers for an activity-based control are nonpublic and set by
each exchange member. Importantly, the ORP would not impact the
effectiveness of these other risk tools. However, if Market Makers can
better control the risks from latency arbitrage strategies through the
narrowly tailored ORP, they may need to rely less on these other less
transparent tools.
As discussed above, because of the lack of natural sources of
liquidity across the multitude of listed options series, market makers
are subject to affirmative obligations to maintain continuous two-sided
quotes on hundreds or thousands of individual options series. While IEX
proposes to offer bulk quoting and purge port functionality to market
makers (in the same manner as other options exchanges), in a fast-
moving market, the prices of their quotes can nonetheless become stale
almost instantaneously. In those times, a sophisticated liquidity taker
can target one or more market maker quotes at stale prices before the
market maker can update its quotes, thereby exposing the market maker
to potentially major losses. The ORP is designed to assist market
makers with an option to manage this risk, similar to the other risk
controls. While some overlap is expected, IEX believes that the
Indicator would potentially identify additional instances of quotes at
stale prices beyond those identified by the other price reasonability
checks.
Further, IEX notes that the operation of the Indicator is similar
to the manner in which IEX's equities market (the ``Equities System'')
utilizes a ``crumbling quote indicator'' to encourage the provision of
displayed liquidity by providing reasonably tailored protections
against adverse executions.\215\ As with the crumbling quote indicator,
the Indicator will be a transparent formula based on a pre-determined
objective set of circumstances that will be specified in IEX's rules to
identify when the Protected Bid and/or Protected Offer in a particular
options series is likely to move to a less aggressive price.
---------------------------------------------------------------------------
\215\ In 2016, IEX received SEC approval of the IEX's exchange
system that provides a similar quote indicator for equities. See
2016 SEC Approval Order (approving IEX's exchange system in its
registration as a national securities exchange, which included the
approval of IEX's crumbling quote indicator that assesses quote
instability by utilizing a real-time, based on pre-determined,
objective set of conditions that protects orders from unfavorable
executions when the market is moving against them), supra note 195.
In 2020, IEX received SEC approval to apply the quote indicator to
displayed orders in equities. See 2020 SEC Approval Order, supra
note 18 (receiving unanimous support and concluding that the
Exchange's displayed order proposal that included a similar quote
indicator is consistent with the requirements of the Exchange Act
and the rules and regulations thereunder applicable to a national
securities exchange and that is designed to improve market quality,
enhance price discovery, and promote just and equitable principles
of trade).
---------------------------------------------------------------------------
Moreover, the Options System will use the ORP in a manner similar
to the way in which the Equities System applies the crumbling quote
indicator to resting displayed liquidity, which reprices the applicable
order or quote. The functional differences between the crumbling quote
indicator and the Indicator reflect that options pricing is
derivative.\216\ Thus, the Indicator will trigger when it identifies
that a Protected Bid or Protected Offer is likely to move to a less
aggressive price, based on a price change in the underlying security,
thereby exposing the market maker to excessive risk, but, unlike the
crumbling quote indicator, would reprice the quote to the price level
of the quote instability determination or cancel the impacted quote and
not remain ``on'' for a period of time after triggering. IEX believes
that this approach is appropriate in view of the derivative pricing of
options and that it will contribute to more displayed liquidity through
improved execution quality, enhance the public price discovery process,
and promote just and equitable principles of trade.\217\
---------------------------------------------------------------------------
\216\ Because of this difference, the Indicator is designed to
identify when the Protected Bid and/or Protected Offer in an option
series is dislocated from the price of the underlying based on a
price change in the underlying and therefore likely to be in
transition to a less aggressive price, while the crumbling quote
indicator utilizes changes in the protected quote in the security
itself to make such a prediction.
\217\ See, e.g., 2020 SEC Approval Order, supra note 18, at
54443 (concluding that IEX's exchange functionality protects against
adverse selection and incentivizes more displayed liquidity through
improved execution quality for liquidity providers, which
contributes ``to fair and orderly markets'' and supports ``the
public price discovery process''); at 54443 (finding that the
Exchange's speedbump and crumbling quote indicator promotes the
interest of long term investors and inures to the ``benefit of
displayed markets, leading to increased displayed liquidity from
which all market participants ultimately will benefit''); at 54451
(concluding that the Exchange's order protection functionality ``is
designed to encourage market participants to post more priced limit
orders, including displayed orders, on IEX, and thereby promotes
just and equitable principles of trade, removes impediments to and
perfects the mechanism of a free and open market and a national
market, and, in general, protects investors and the public
interest.'').
---------------------------------------------------------------------------
[[Page 26888]]
Further, the ORP would be available, as a quote parameter, only to
market makers and on an optional basis, because the Exchange believes
that it is most appropriate as a tool to address market maker risk. IEX
believes that this approach is appropriate because market makers are
subject to affirmative obligations to provide continuous two-sided
quotes and cannot back away or unduly widen their quotes during periods
of price volatility, as can other liquidity providers.\218\ By offering
market makers this narrowly-tailored, optional tool, IEX believes it
will attract additional displayed liquidity that will be available to
all market participants.
---------------------------------------------------------------------------
\218\ See, e.g., Protecting Liquidity, supra note 155
(explaining that without robust liquidity protection mechanisms for
market makers to protect against the risks of displaying quotes at
stale or outdated prices, ``market makers may be forced to widen
their spreads, show less liquidity or simply exit the market'' and
overall ``market quality can deteriorate'' with the result of
investors suffering).
---------------------------------------------------------------------------
IEX also believes that use of the Indicator in determining when to
trigger the ORP is consistent with the protection of investors and the
public interest because the Indicator is based on the well-recognized
Black-Scholes options pricing model, which IEX believes is an
appropriate methodology to identify when a Market Maker's quote in an
option is dislocated from the price of the underlying security based on
the mathematical relationship between the price of the underlying
security and the overlying options. Thus, when the ORP is triggered,
and IEX changes or cancels a Market Maker quote, such action would be
in the expected time frame and direction based on a change that has
already occurred in the price of the underlying security. ORP action
would not be arbitrary or unexpected but would simply enable the Market
Maker's quote to reflect the most accurate prices available in the
market, which is what they endeavor to do themselves. The ORP action
therefore will likely be more predictable than other risk-based tools,
like ``purge ports'' that can result in wholesale canceling of quotes
for reasons specific to the market maker. Further, the ORP action
should not ``surprise'' market participants and if a potential contra-
party is unable to trade with the quote, they should not have expected
a guaranteed execution in a narrow time frame when other factors,
including risk mitigation functionality alternatives, are available on
other options exchanges.
Moreover, IEX believes that the latency mechanism \219\ (as
discussed above) will serve to enhance the accuracy of the Indicator by
providing adequate time for the IEX System to update its Indicator
calculation with current market data and to enable IEX to obtain the
most accurate view of the market prior to processing orders and quotes.
In this regard, as discussed earlier, IEX notes that the proposed
latency of 350 microseconds is well within the geographic delays that
exist among and between the data centers that IEX Options Members, and
other options exchanges, use and is consistent with the naturally
occurring time indeterminism that exists in order processing.
---------------------------------------------------------------------------
\219\ See proposed Rule 22.170(g).
---------------------------------------------------------------------------
Further, IEX believes that limiting the availability of the ORP to
resting market maker quotes is consistent with the Act for several
reasons. As discussed in depth above, market makers are integral to
providing liquidity on options exchanges, and at the same time subject
to a potentially excessive level of risk from execution of one or more
quotes at stale prices. Additionally, market makers' obligations apply
across all series in their appointed class. Other liquidity providers
are free to concentrate their efforts in a select number of series.
Thus, market makers have greater exposure to latency arbitrage, take on
greater risk, and incur more related capital charges than other
liquidity providers. IEX determined to apply the functionality to
resting quotes only as this approach will best achieve the purpose of
protecting market markets from the excessive risk of executions at
stale prices without disrupting market makers' ability to update their
quotations.
IEX further believes that it is consistent with the fair access and
nondiscriminatory standards of Section 6(b)(5) of the Exchange Act to
offer the ORP for IEX Market Makers' quotes. As discussed above, only
market makers are subject to affirmative quoting obligations which
create unique risks of adverse selection. Market makers play a central
role in the options markets and account for over 99% of all open orders
and quotes.\220\ Market makers, as opposed to proprietary traders as
well as retail and institutional customers, are subject to
disproportionate risk as a consequence of maintaining quotes in a large
number of options. In contrast, IEX understands that retail customers'
market risk is generally a function of individual trading strategies,
without any broader market wide implications on liquidity in the
market. Indeed, the Commission has recognized in a number of contexts
that it is appropriate and consistent with the Act for exchanges to
enhance market quality by providing functionality specific to market
makers to help protect them from these risks in a manner that is
balanced against the obligations to which market makers commit
themselves.\221\
---------------------------------------------------------------------------
\220\ See Dead Man's Switch, supra note 163.
\221\ See discussion supra on prevalence of purge ports and
activity-based risk controls for market makers. See also
``Commission Guidance and Amendment to the Rules Relating to
Organization and Program Management Concerning Proposed Rule Changes
Filed by Self-Regulatory Organizations,'' Securities Exchange Act
Release No. 34-58092 (July 3, 2008), 73 FR 40144, at 40148 (July 11,
2008) noting that ``[m]arket makers can play an important role in
providing liquidity to the market, and an exchange can appropriately
reward them for that as well as the services they provide to the
exchange's market, so long as the rewards are not disproportionate
to the services provided.''
---------------------------------------------------------------------------
IEX further notes that market makers typically manage their
financial exposure risks resulting from their continuous quoting
obligations in very short-term time frames, often measured in micro-
seconds. As such, consistent with the long-standing precedent of
exchanges offering specific tools and benefits to market makers in
recognition of their quoting obligations and concomitant significant
risk exposure, the ORP is designed to mitigate these risks that are
relevant in such high-speed environments. IEX also believes that
because the ORP is designed specifically to mitigate systemic adverse
selection risks faced by market makers that are subject to continuous
quoting obligations in hundreds (and sometimes thousands) of options,
the manner in which it would operate by repricing or canceling quotes
would not generally be beneficial for customers who do not enter orders
in the same scale.
The ORP has been designed as a risk tool for options market makers
based on the unique risks they face in today's options market
structure. Their decisions on whether and when to use the ORP may vary
by class and will be affected by price of the option, the volatility of
the option and underlying, the NBBO spread, and many other factors.
Consequently, as is the case with other risk tools provided by
exchanges, retail investors would not be positioned to determine
whether or when to use the ORP or to monitor the impact of that
decision on their executions. IEX believes that retail investors will
benefit, however, from the availability of any additional liquidity and
competition that results from the use of the ORP by market makers.
The Exchange also believes that applying the Indicator on a class-
by-class basis would remove impediments to, and perfect the mechanism
of, a free and open market and a national market system and promote
just and equitable principles of trade. As discussed in the
[[Page 26889]]
Purpose section, applying the Indicator on a class-by-class basis would
enable the Exchange to appropriately utilize the ORP for classes with a
high potential for adverse selection, while excluding classes
presenting lower risk of adverse selection (such as classes with
relatively lower volumes). This flexibility will therefore allow the
Exchange to focus its technology resources in an impactful manner to
ensure the ORP is available for those classes where its use will
achieve its intended purpose, while excluding its use where it would
likely provide minimal incremental value (for example, for classes with
nonstandard characteristics).
Moreover, IEX notes that the Commission has previously recognized
the utility of IEX providing protection to liquidity providers through
order types that leverage its crumbling quote indicator to
appropriately protect market participants from the risks of transacting
when the market is in transition and thereby incentivize the entry of
liquidity providing orders. The Exchange believes that the proposed ORP
is consistent with this history and is in furtherance of driving
tighter and deeper displayed markets to the benefit of investors, as
well as reducing barriers to entry for market maker participation and
thereby support competition and reduce market maker concentration risk
as discussed in the Purpose section.\222\
---------------------------------------------------------------------------
\222\ See supra notes 212 and 214 and accompanying text.
---------------------------------------------------------------------------
IEX also believes that the proposal is consistent with the firm
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation
NMS.\223\ Specifically, any marketable interest that is executable
against a market maker's quote that has been received by the System
prior to the time that a quote instability determination is received by
System will be automatically executed, subject to processing of any
prior messages, at the price and up to the size of the market maker's
quote. When enabled by a Market Maker, the ORP will operate
automatically when triggered, based on the publicly disclosed formula
without input from the market maker.
---------------------------------------------------------------------------
\223\ See proposed Rule 23.140(d).
---------------------------------------------------------------------------
IEX believes that the proposed ORP is consistent with the
protection of investors and the public interest, fair and orderly
markets, promotion of competition and innovation, and with the Exchange
Act, including furthering the objectives of Section 6(b)(5) of the
Act,\224\ because it is a narrowly-tailored approach designed to
appropriately balance the risks faced by market makers with the
legitimate objectives of liquidity takers by providing additional
optional risk protection to market makers and thereby encourage
aggressive quoting, reduce barriers to entry for market maker
participation, support competition, and reduce market maker
concentration risk.
---------------------------------------------------------------------------
\224\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IEX conducted data analysis on the expected frequency with which it
estimates that the ORP would impact a quote on IEX. The Exchange
replayed OPRA data through its system for all series of over a thousand
options classes of varying levels of volume and activity for various
dates in February 2025 to estimate how often the ORP would impact a
quote on IEX. Among the dates reviewed in February were: the day with
the highest volume, the day with the lowest volume, the day with the
highest CBOE Volatility Index[supreg] \225\ (``VIX'') level, the two
days with the largest interday change in VIX, and Fridays with monthly
and non-monthly settlements.
---------------------------------------------------------------------------
\225\ The VIX is a benchmark index designed to measure the
market's expectation of future volatility.
---------------------------------------------------------------------------
The analysis set the ORP parameters to their most aggressive to
maximize potential impact. Specifically, the Exchange set the Quote
Instability Threshold to 0, the Delta Bound Band to its full range of
0-1, and assumed ORP was enabled across all options classes. Further,
the analysis assumed that: (1) IEX's displayed quote in the options
classes assessed was at the NBBO 100% of the time, (2) IEX's displayed
quote in such options classes was composed exclusively of Market Maker
quotes, and (3) all of those Market Maker quotes were enabled to be
subject to ORP.\226\ Based on the results of this analysis, the
Exchange expects that the ORP would have a de minimis impact, but an
impact that is narrowly tailored to provide protection from latency
arbitrage strategies.
---------------------------------------------------------------------------
\226\ This assumption overstates the estimated ORP impact
because IEX does not believe that any options exchange has quotes at
the NBBO 100% of the trading day in all underlying classes, nor are
such quotes that are in effect comprised exclusively of market maker
quotes. Additionally, IEX does not believe that all IEX Market
Makers would necessarily enable ORP on all of their quotes.
---------------------------------------------------------------------------
Across all classes reviewed, the Exchange estimates that the ORP
would impact IEX Market Maker quotes on average per series
significantly less than 0.001% of the trading day during regular
trading hours (i.e., between 9:30 a.m. to 4:00 p.m.). For options
classes in the Penny Interval Program,\227\ the analysis shows that the
ORP would impact an IEX Market Maker's quote on average for less than
0.01% of the trading day per series. ORP impact for options classes not
in the Penny Interval Program averaged 0.0005% per option. Applying the
analysis to the most active options class, the SPDR[supreg] S&P
500[supreg] ETF Trust (``SPY''),\228\ ORP would impact an IEX Market
Maker's quote for less than 0.2% of the trading day. Thus, the ORP is
designed to be nearly imperceptible to all market participants who are
not specifically seeking to engage in latency arbitrage to execute
against a market maker's quote at a stale price, based on its speed-
based advantage that enables the most technologically low-latency view
of market prices. IEX believes that this analysis supports that the ORP
is a narrowly tailored approach designed to provide appropriate
protection to market makers.
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\227\ Excluding SPY, whose impact is described separately.
\228\ SPY was also the class with the greatest observed ORP
impact.
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The Exchange further believes that offering more risk management
protections to Market Makers would mitigate their exposure to excessive
risk. As discussed in detail above, Market Makers are required to
continuously provide two-sided quotes in substantial numbers of listed
options series that can create large, unintended positions exposing
market makers to excessive risk. Market Maker quotes are critical to
provide liquidity to the market and contribute to price discovery for
investors. Without robust liquidity protection, market makers may be
forced to widen their spreads, show less liquidity or simply exit the
market, which can result in deterioration of market quality and
adversely impact investors' and other liquidity takers' ability to
transact in the options markets.\229\ In sum, liquidity protection for
options market makers is vital for achieving a healthy balance between
liquidity providers and liquidity takers in the options market that
will promote more displayed liquidity from which all market
participants ultimately will benefit.
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\229\ See supra note 215.
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The Exchange believes that the manner in which it will determine
certain of the values related to the Indicator formula (i.e., Delta
Bound Bands, the Quote Instability Threshold, and the frequency of
calculation of implied volatility) provides an appropriate degree of
transparency coupled with the ability to modify those values to respond
to rapidly changing market conditions or system issues in a manner
designed to enable the Exchange to optimize effectiveness of the ORP.
All applicable values and potential ranges will be transparently
[[Page 26890]]
specified in IEX rules with any modifications within such ranges
effectuated through a rule filing pursuant to Rule 19b-4(f)(1) under
the Exchange Act (or other appropriate rule filing type), thereby
removing impediments to and perfecting the mechanisms of a free and
open market and a national market system and, in general, protecting
investors and the public interest.
The Exchange believes that the proposed rules of IEX Options, as
well as the proposed method of monitoring for compliance with and
enforcing such rules is also consistent with the Act, particularly
Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in
part, that an exchange have the capacity to enforce compliance with,
and provide appropriate discipline for, violations of the rules of the
Commission and of the exchange. The Exchange has proposed to adopt
rules necessary to regulate Options Members that are nearly identical
to the approved rules of other options exchanges, as described above.
The Exchange proposes to regulate activity on IEX Options in the same
way it regulates activity on its equities market (and comparable to
other options exchanges), through various Exchange specific functions,
an RSA with FINRA, as well as participation in industry plans,
including plans pursuant to Rule 17d-2 under the Exchange Act.
In conclusion, for the reasons discussed above, IEX believes that
the proposed rule change is consistent with the investor protection and
public interest purposes of Section 6 of the Act. Additionally, IEX
believes that establishing a new options market that participates in
all the current (and any future) national market system plans governing
options trading is consistent with Section 11A of the Act relating to
the establishment of the national market system for securities.\230\ As
proposed, IEX Options will offer a simple alternative to existing
options exchanges that is designed to support competitive quoting to
the benefit of all market participants.
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\230\ 15 U.S.C. 78k-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. To the contrary,
the proposed rule change is designed to enhance competition by
providing for an additional exchange market for the trading of listed
options.
IEX believes that this proposal will enhance competition by
allowing the Exchange to leverage its existing robust technology
platform to provide a resilient, deterministic, and transparent
execution platform for options. The proposed rule change will insert an
additional competitive dynamic to the options landscape by allowing the
Exchange to compete with existing options exchanges and will promote
further initiative and innovation among market centers and market
participants.
Further, the Exchange does not believe that the latency mechanism
or optional Market Maker quote parameter aspect of the proposed rule
change will impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. To the contrary,
these features are designed to enhance IEX Options' competitiveness by
incentivizing the entry of increased Market Maker liquidity. Also,
because the proposed ORP would provide Market Makers with an additional
risk management mechanism, it would potentially increase competition
among market makers by encouraging more market makers to provide
liquidity in the market, as discussed above.
The Exchange does not believe that the proposed rule change will
impose any burden on intra-market competition because it will apply to
all Options Members in the same manner and any Options Member can
perform any specified function subject to meeting applicable
requirements.
The Exchange also does not believe that the proposed latency
mechanism will impose any burden on intra-market competition that is
not necessary or appropriate because it will apply in the same manner
to all incoming orders and quotes.
The Exchange also does not believe that the proposed ORP will
impose any burden on intra-market competition that is not necessary or
appropriate because it will be available in the same manner to all
Market Makers and any Options Member could become a Market Maker,
subject to meeting applicable requirements. The ORP is designed to
mitigate Market Makers' exposure to excessive risk and thereby enable
them to provide more competitive quotes to the benefit of all market
participants. The Exchange also believes that limiting the ORP
functionality to Market Makers will not impose any burden on intra-
market competition that is not necessary and appropriate because Market
Makers are subject to robust affirmative quoting obligations and thus
can uniquely benefit from the protections to be provided by the ORP.
The Exchange thus believes it is reasonable to provide Market Makers
with an additional tool to manage their risk parameters, particularly
given their unique and critical role in the listed options market and
the obligations that Market Makers must satisfy. As discussed in the
Purpose and Statutory Basis sections, the proposed ORP will protect
resting market-maker quotes (which are subject to quoting obligations)
from executions at potentially stale prices, which the Exchange
believes will reduce their risk and encourage Market Makers to provide
more competitive markets on the Exchange, thereby benefitting all
market participants through additional execution opportunities at
prices that reflect the then-current market conditions. The Exchange
expects the proposed rule change to increase liquidity and enhance
competition in the market because Market Makers may be able to quote
more aggressively with added productions from exposure to execution
risk, thereby 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 also does not believe that the proposal will impose
any burden on inter-market competition that is not necessary or
appropriate. Competing exchanges are free to adopt similar
functionality, subject to the Commission rule filing process.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of the original notice in
the Federal Register or within such longer period up to 90 days (i) as
the Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.\231\
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\231\ See supra note 7 (citing to the Commission's order
instituting proceedings to determine whether to disapprove the
proposed rule change). July 20, 2025 is the date by which the
Commission shall issue an order approving, disapproving, or
extending the period for not more than 60 days. See 15 U.S.C.
78s(b)(2)(B)(ii).
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[[Page 26891]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 3, including whether the proposed
rule change as modified by Amendment No. 3 is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-IEX-2025-02 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-IEX-2025-02. 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 (https://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. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-IEX-2025-02 and should be
submitted on or before July 9, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\232\
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\232\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-11525 Filed 6-23-25; 8:45 am]
BILLING CODE 8011-01-P