[Federal Register Volume 90, Number 127 (Monday, July 7, 2025)]
[Notices]
[Pages 29898-29911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-12517]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103363; File No. SR-MX2-2025-01]
Self-Regulatory Organizations; MX2 LLC; Notice of Filing of a
Proposed Rule Change To Adopt Rules To Govern the Trading of Options on
the Exchange for a New Facility Called MX2 Options
July 1, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 18, 2025, MX2 LLC (``MEMX'' or the ``Exchange'') filed
with the Securities and Exchange Commission (the ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposed rule change
to adopt rules to govern the trading of options on the Exchange. The
text of the proposed rule change is provided in Exhibit 5.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to adopt a series of rules in connection
with MX2 Options, which will be a facility of the Exchange. MX2 Options
will operate an electronic trading system developed to trade options
(the ``System'') leveraging the Exchange's [sic] existing robust and
resilient technology platform that it uses to operate MEMX Equities and
MEMX Options. Much of the proposed functionality for MX2 Options is
substantially similar to MEMX Options, thus, the Exchange proposes to
adopt rules applicable to MX2 Options that are substantively identical
or substantially similar to the approved rules of MEMX applicable to
MEMX Options, with certain proposed changes or omissions that are
described below.
The System will provide for the electronic display and execution of
orders, as described below. All Exchange Members will be eligible to
participate in MX2 Options provided that the Exchange specifically
authorizes them to trade in the System. The System will provide a
routing service for orders when marketable trading interest is not
present on MX2 Options and will comply with all applicable securities
laws and regulations and the obligations of the
[[Page 29899]]
Options Order Protection and Locked/Crossed Market Plan.
MX2 Options Members
Pursuant to the proposed rules in Chapter 17 (Participation on MX2
Options), the Exchange will authorize any Exchange Member who 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, MX2 Options.
There will be two types of Options Members--Options Order Entry
Firms (``OEFs'') and Options Market Makers. Options Market Makers, in
turn, will be eligible to participate as Preferred Market Makers, Lead
Market Makers and Market Makers. OEFs will be those Options Members
representing orders as agent on MX2 Options or trading as principal on
MX2 Options. Options Market Makers will be those Options Members
registered with the Exchange as Options Market Makers pursuant to
proposed Rule 22.2.
To become an Options Market Maker, an Options Member is required to
register by filing a written application with the Exchange, and then
may select class appointments to make markets in those classes.
Pursuant to proposed Rule 22.2, the Exchange may appoint one Lead
Market Maker (or ``LMM'') per option class. Market Makers may select
from among any option issues traded on the Exchange to request
appointment as an LMM, subject to the approval of the Exchange. In
considering the approval of the appointment of an LMM in each security,
the Exchange will consider: the Market Maker's preference; the
financial resources available to the Market Maker; the Market Maker's
experience, expertise and past performance in making markets, including
the Market Maker's performance in other securities; the Market Maker's
operational capability; and the maintenance and enhancement of
competition among Market Makers in each security in which they are
registered, including pursuant to the performance standards set forth
in proposed Rule 22.2(i).
Pursuant to proposed Rule 22.2(c), an unlimited number of Market
Makers may be registered in each class unless the number of Market
Makers registered to make a market in a particular option class should
be limited whenever, in the Exchange's judgment, quotation system
capacity in an option class or classes is not sufficient to support
additional Market Makers in such class or classes. The Exchange will
not restrict access in any particular option class until such time as
the Exchange has submitted objective standards for restricting access
to the SEC for its review and approval.
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. Among other things, an Options
Market Maker would generally have to satisfy the following
responsibilities and duties during trading: (1) maintain a continuous
two-sided market in each of its appointed classes; (2) engage, to a
reasonable degree under the existing circumstances, in dealings for its
own accounts when there exists, or it is reasonably anticipated that
there will exist, a lack of price continuity, a temporary disparity
between the supply of (or demand for) a particular option contract, or
a temporary distortion of the price relationships between option
contracts of the same class; (3) compete with other Market Makers in
its appointed classes; (4) enter a size of at least one contract for
its best bid and its best offer; and (5) maintain minimum net capital
in accordance with Commission and Exchange rules. The Exchange proposes
to specify numerically the meaning of ``continuous'' with respect to
maintaining continuous, two-sided quotes. For purposes of Rule 22.6,
the Exchange will consider the continuous quoting requirement fulfilled
if a Market Maker enters continuous bids and offers in 60% of the
cumulative number of seconds, or such higher percentage as the Exchange
may announce in advance, for which that Options Market Maker's
appointed classes are open for trading, excluding any adjusted series,
any intraday add-on series on the day during which such series are
added for trading, any Quarterly Option Series, and any series with an
expiration of greater than 270 days.\3\ Pursuant to proposed Rule
22.5(c), 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 Options
Market Maker's registration as such or its appointment in one or more
of its appointed options classes.
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\3\ The Exchange notes that it also proposes to adopt provisions
that exclude from the calculation of continuous quoting those times
that an Options Market Maker is experiencing a technical failure or
limitation, during a trading halt, suspension or pause in the
underlying security, or when the underlying security is in a limit
up-limit down state. See, e.g., proposed Rule 22.6(d)(2)-(3).
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Options Market Makers receive certain benefits for carrying out
their duties. For example, a Market Maker may be designated by the
Exchange as a Lead Market Maker or may have orders directed to it in
its capacity as a Preferred Market Maker, in each case receiving a
priority advantage over other non-Customer orders to the extent
applicable priority overlays have been implemented, as described below.
In addition, 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. The Exchange notes that the proposed
continuous quoting requirement under proposed Rule 22.6(d) is
substantially identical to that of MEMX Options as well as other
options exchanges, including Cboe EDGX Options (``EDGX Options''),
Nasdaq PHLX LLC (``Phlx''), and Nasdaq ISE, LLC (``ISE'').\4\
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\4\ See MEMX Rule 22.6(d); EDGX Options Rule 22.6(d); Phlx Rule
1081(c) and ISE Rule 804(e).
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Pursuant to proposed Rule 17.2(f), 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
\5\ or in FINRA. OEF's that transact business with Public Customers
must at all times be members of FINRA. Pursuant to proposed Rule
17.2(g), (Requirements for Options Participation, Options Principal),
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 \6\ pursuant to which such other
exchange or association shall be the designated options examining
authority for the OEF. The proposed rules relating to qualification and
participation on MX2 Options as an Options Member (including as an OEF
and an Options Market Maker) are substantively identical to the
relevant rules of MEMX Options.
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\5\ 15 U.S.C. 78f(g).
\6\ 17 CFR 240.17d-2.
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As provided in proposed Rule 16.2, existing Exchange Rules
applicable to
[[Page 29900]]
the MX2 equities market contained in Chapters 1 through 15 of the
Exchange Rules will apply to Options Members unless a specific Exchange
Rule applicable to the MX2 Options market (proposed Chapters 16 through
29 of the Exchange Rules) governs or unless the context otherwise
requires. Options Members can therefore provide sponsored access to the
MX2 Options Exchange to a non-Member (i.e., a Sponsored Participant)
pursuant to Rule 11.3 of the Exchange Rules.
Definitions
The Exchange proposes to define a series of terms under proposed
Rule 16.1 (Definitions), which are to be used in proposed Chapters 16
to 29 relating to the trading of options contracts on the Exchange.
Each of the terms defined in proposed Rule 16.1 is identical to
definitions included in MEMX Rule 16.1.
The definitions under proposed Rule 16.1 are as follows:
ABBO. The term ``ABBO'' means the best bid(s) or offer(s)
disseminated by other Eligible Exchanges (as defined in proposed Rule
27.1) and calculated by the Exchange based on market information the
Exchange receives from OPRA.
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 proposed
Rule 23.1 (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.
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
MX2 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 according to the specifications for MX2
Options.
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 or index.
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
MX2 Options Transactions for other Members of MX2 Options.
Closing Purchase Transaction. The term ``closing purchase
transaction'' means a MX2 Options Transaction that reduces or
eliminates a short position in an options contract.
Closing Writing Transaction. The term ``closing writing
transaction'' means a MX2 Options Transaction that reduces or
eliminates a long position in an options contract.
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.
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 proposed
Rule 23.1 (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'' 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.
Index Option. The term ``index option'' means an options
contract that is an option on a broad-based, narrow-based or micro
narrow-based index of equity securities prices.
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.
MX2 Exchange and Exchange. The terms ``MX2 Exchange'' and
``Exchange'' mean MX2 LLC.
MX2 Exchange Rules and Exchange Rules. The terms ``MX2
Exchange Rules'' and ``Exchange Rules'' mean the rules of the Exchange,
including those for equities and options.
MX2 Options. The term ``MX2 Options'' means the MX2 LLC
Options Market, an options trading facility of the Exchange under
Section 3(a)(2) of the Exchange Act.
MX2 Options Book. The term ``MX2 Options Book'' means the
electronic book of options orders maintained by the Trading System.
MX2 Options Transaction. The term ``MX2 Options
Transaction'' means a transaction involving an options contract that is
effected on or through MX2 Options or its facilities or systems.
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
[[Page 29901]]
by MX2 Options based on market information received by MX2 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 MX2 Options Transaction that creates or increases
a long position in an options contract.
Opening Writing Transaction. The term ``opening writing
transaction'' means a MX2 Options Transaction that creates or increases
a short position in an options contract.
Options Contract. 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-Maker and Market-Maker. The terms ``Options
Market-Maker'' and ``Market Maker'' mean an Options Member registered
with the Exchange for the purpose of making markets in options
contracts traded on the Exchange and that is vested with the rights and
responsibilities specified in proposed Chapter 22.
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
proposed Chapter 17 for purposes of participating in options trading on
MX2 Options as an ``Options Order Entry Firm'' or ``Options Market
Maker.''
Options Member Agreement. The term ``Options Member
Agreement'' means the agreement to be executed by Options Members to
qualify to participate on MX2 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 MX2
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 proposed Rule 21.1(c).
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, in the
case of securities listed on Nasdaq Stock Market, LLC (``Nasdaq''), the
market that is identified as the listing market pursuant to Section
X(d) of the approved national market system plan governing the trading
of Nasdaq-listed securities, and, in the case of securities listed on
another national securities exchange, the market that is identified as
the listing market pursuant to Section XI of the Consolidated Tape
Association Plan.
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.
Protected Quotation. The term ``Protected Quotation'' has
the meaning provided in proposed Rule 27.1.\7\
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\7\ As defined in proposed Rule 27.1, the term ``Protected
Quotation'' refers to a Protected Bid or Protected Offer, and the
terms ``Protected Bid'' and ``Protected Offer'' refer to a Bid or
Offer in an options series, respectively, that: (A) is disseminated
pursuant to the OPRA Plan; and (B) is the highest priced Bid or
lowest priced Offer, respectively, displayed by an Eligible
Exchange.
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Public Customer. The term ``Public Customer'' means a
person that is not a broker or dealer in securities.
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 and Quotation. The terms ``quote'' and ``quotation''
mean 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.
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 MX2 Options. The term ``Rules of MX2 Options''
mean the rules contained in proposed Chapters 16 to 29 of the MX2 LLC
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 and Commission. The terms ``SEC'' and ``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 Option Series. The term ``Short Term Option
Series'' means a series in an option 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, Wednesday 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
[[Page 29902]]
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.
SRO. The term ``SRO'' means a self-regulatory organization
as defined in Section 3(a)(26) of the Exchange Act.
Trading System and System. The terms ``Trading System''
and ``System'' mean the automated trading system used by MX2 Options
for the trading of options contracts.
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 11.3 (Access).
Execution System
The Exchange's options System will leverage the Exchange's current
state-of-the-art technology, including its customer connectivity,
messaging protocols, quotation and execution engine, order router, data
feeds, and network infrastructure. This approach minimizes the
technical effort required for existing Exchange Members to begin
trading options on MX2 Options. As a result, MX2 Options will closely
resemble the Exchange's affiliate, MEMX Options, but will differ in
that MX2 Options will maintain a pro rata allocation model with
execution priority dependent on the capacity of an order (e.g.,
Customer or non-Customer) as well as status as a Lead Market Maker or
Preferred Market Maker, as applicable. The proposed model for MX2
Options is similar to other options exchanges such as EDGX Options,
NYSE American Options (``NYSE American'') and the MIAX Options Exchange
(``MIAX''), which are sometimes referred to as ``classic'' exchanges.
Like the Exchange's [sic] system for MEMX Equities and Options, all
trading interest entered into the System will be automatically
executable. Orders entered into the System will be displayed
anonymously. Thus, the System will offer anonymous trading, however,
options trades are not currently anonymous through settlement.
Accordingly, as set forth in proposed Rule 21.10, aggregated and
individual transaction reports produced by the System will indicate the
details of a User's transactions, including the contra party's
executing firm ID (``EFID''), capacity, and clearing firm account
number.\8\ The Exchange will become an exchange member of the Options
Clearing Corporation (``OCC''). The System will be linked to OCC for
the Exchange to transmit locked-in trades for clearance and settlement.
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\8\ 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 21.10. The Exchange notes that proposed
Rule 21.10 is identical to MEMX Rule 21.10.
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Hours of Operation. As stated in proposed Rule 21.2, the MX2
Options System will begin accepting orders after 9:30 a.m. Eastern Time
pursuant to the market opening procedures described in proposed Rule
21.7.\9\ Orders and bids and offers shall be open and available until
4:00 p.m. Eastern Time except for option contracts on Fund Shares, as
defined in proposed Rule 19.3(i), option contracts on exchange-traded
notes including Index-Linked Securities, as defined in proposed Rule
19.3(l), and option contracts on broad-based indexes, as defined in
proposed Rule 29.1(j), which may close as of 4:15 p.m. Eastern Time.
The proposed hours of operation on MX2 Options are the same as on MEMX
Options.
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\9\ Specifically, Rule 21.7(a) states that the System shall open
options, other than index options, for trading after the System's
observation after 9:30 a.m. Eastern Time of both: (i) the first
transaction on the primary listing market in the security underlying
the option, and (ii) the Limit Up-Limit Down price bands applicable
to the security underlying the option as disseminated by the
applicable Securities Information Processor (``SIP''). With respect
to index options, the System shall open for trading after a time
period (which the Exchange determines for all classes) following the
System's observation after 9:30 a.m. Eastern Time of the first
disseminated index value for the index underlying an index option.
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Units of Trading. As stated in proposed Rule 21.3, the unit of
trading in each series of options traded on MX2 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 MX2 Options is the same as on MEMX Options pursuant to MEMX
Rule 21.3.
Minimum Quotation and Trading Increments. As stated in proposed
Rule 21.5(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 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, unless 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 21.5(b), the Exchange is proposing
that the minimum trading increment for options contracts traded on MX2
Options will be one (1) cent for all series. The Exchange also proposes
to offer trading of Mini Options, and that the minimum trading
increment for Mini Options shall be the same as the minimum trading
increment permitted for standard options on the same underlying
security.\10\ Such proposed minimum quotation and trading increments
are the same as on MEMX Options pursuant to MEMX Rules 21.5(a), (b) and
(c).
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\10\ Per proposed Rule 21.5(c), the minimum trading increment
for Mini Options shall be determined in accordance with
Interpretations and Policies .07 to Rule 19.5.
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Penny Interval Program. As set forth in proposed Rule 21.5(d), the
Exchange is proposing to adopt a Penny Interval Program that is
substantially similar to the penny programs of other exchanges,
including MEMX Options, which includes minimum quoting requirements for
option 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 MX2 Options is launched. The list of
option 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
21.1(d))--Limit Orders and Market Orders--as well as various other
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 on MEMX Equities, MEMX
Options, and on other options exchanges, including EDGX Options, except
where described below. The
[[Page 29903]]
Exchange notes that each of the proposed rules regarding the order
types and order type instructions and modifiers is substantively
identical to the applicable rule for a corresponding order type or
order type instruction or modifier offered by MEMX Options with the
exception of the proposed addition of Reserve Orders, which are not
currently offered on MEMX Options. Proposed Rule 21.1(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 MX2 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.
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 MX2 Options are described in proposed Rule
21.1(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 21.8
(Order Display and Book Processing) or cancelled, as appropriate,
without routing away to another options exchange. Users may designate
bulk messages as Book Only as set forth in proposed Rule 21.1(l).
Post Only. Post Only is an instruction that an order is to
be ranked and executed on the Exchange pursuant to proposed Rule 21.8
(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 MX2 Options Book. The System 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. Users may designate bulk messages as Post
Only as set forth in proposed Rule 21.1(l).
Intermarket Sweep Order (``ISO''). ISOs are orders that
shall have the meaning provided in proposed Rule 27.1, 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 21.9. A Market Order cannot be designated as
an Intermarket Sweep Order. Users may not designate bulk messages as
ISOs.
Reserve Orders. Reserve orders are limit orders that have
both a portion of the quantity displayed (``Display Quantity'') and a
reserve portion of the quantity (``Reserve Quantity'') not displayed.
Both the Display Quantity and Reserve Quantity of the Reserve Order are
available for potential execution against incoming orders. If the
Display Quantity of a Reserve Order is fully executed, the System will,
in accordance with the User's instruction, replenish the Display
Quantity from the Reserve Quantity using either Random Replenishment or
Fixed Replenishment, as directed by the User. Under either instruction,
any order with a Reserve Quantity will be handled as a new order by the
System and a new order identification number will be created each time
a displayed quantity is replenished. The Exchange will obfuscate the
unique order identification number on its data feeds for replenishment
of an order with Reserve Quantity. If the remainder of an order is less
than the replenishment amount, the Exchange will display the entire
remainder of the order. A User must instruct the Exchange as to the
quantity of the order to be initially displayed by the System (``Max
Floor'') when entering an order with a Reserve Quantity, which is also
used to determine the replenishment amount, as set forth below. Users
may not designate bulk messages as Reserve Orders.
With respect to the replenishment instructions, if a User
designates Random Replenishment, the replenishment quantities for the
order are randomly determined by the System within a replenishment
range established by the user, (i.e., the range will be between the Max
floor minus the replenishment value selected by the User and the Max
Floor plus the replenishment value established by the User. Further, a
User must select whether the Random Replenishment be immediate or to
have the time interval of such replenishment randomly set by the
Exchange. If the User selects a random time interval, the System will
randomly replenish the User's displayed replenishment quantity at
different time intervals ranging up to one (1) millisecond following
each execution that triggers replenishment. The nondisplayed portion of
an order subject to Random Replenishment will remain fully executable
prior to the replenishment of a User's displayed quantity.
If the User selects Fixed Replenishment, the System will replenish
the Display Quantity of the order to the Max Floor designated by the
User. As noted above, the Exchange does not currently offer Reserve
Orders on MEMX Options, however, the definition and functionality of
Reserve Orders as proposed in MX2 Rule 21.1(e)(4) are substantively
identical to that in MX2 Rule 11.6(k), as well as MEMX Rule 11.6(k), as
Reserve Orders are provided on MEMX Equities. The Exchange notes that
although Reserve Orders are not currently available on MEMX Options,
they are available on multiple competing options exchanges,\11\ and
Reserve orders operate in the same manner on those exchanges, the only
difference being that the Exchange offers the random time interval
functionality as an option if Random Replenishment is selected.\12\
---------------------------------------------------------------------------
\11\ See., e.g., EDGX Options Rule 21.1(d)(1) and Nasdaq GEMX
Options 3, Section 7(g).
\12\ The Exchange emphasizes that the random time interval
functionality is currently offered on MEMX under Rule 11.6(k) and
MX2 under Rule 11.6(k).
---------------------------------------------------------------------------
Time-in-Force 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 Time-
in-Force 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 Times-in-Force are available on a class or system basis. The
Time-in-Force designations available on MX2 Options are described in
proposed Rule 21.1(g) and will include the following:
[[Page 29904]]
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 MX2 Options Book. IOC orders that are not designated as Book
Only and that cannot be executed in accordance with proposed Rule 21.8
on the System when reaching the Exchange will be eligible for routing
away pursuant to proposed Rule 21.9. Users may designate bulk messages
as IOC.
Day. Day means, for an order so designated, an order to
buy or sell which, if not executed expires at market close. Users may
designate bulk messages as Day.
The Exchange notes that each of the proposed Time-in-Force
designations available on MX2 Options is identical to the same Time-in-
Force designation available on MEMX Options.
Member Match Trade Prevention Modifiers. As with MEMX Options, the
Exchange will allow Users to use certain Match Trade Prevention
(``MTP'') modifiers, which are described in proposed Rule 21.1(h). Any
incoming order designated with an MTP modifier will be prevented from
executing against a resting opposite side order also designated with an
MTP modifier and originating from the same EFID, Exchange Member
identifier, trading group identifier, or Exchange Sponsored Participant
identifier. The Exchange will offer the following MTP modifiers: MTP
Cancel Newest, described in proposed Rule 21.1(h)(1); MTP Cancel
Oldest, described in proposed Rule 21.1(h)(2); and MTP Cancel Both,
described in proposed Rule 21.1(h)(3).
Re-Pricing Mechanism. The Exchange, like MEMX Options, 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. This re-pricing mechanism,
described in proposed Rule 21.1(i), is referred to by the Exchange as
Price Adjust and is identical to the Price Adjust mechanism offered by
MEMX Options pursuant to MEMX Rule 21.1(i).
EFIDs. As proposed in Rule 21.1(j), the term ``EFIDs'' means
Executing Firm IDs 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 EFID. A User may obtain one or more
EFIDs from the Exchange (in a form and manner determined by the
Exchange). The Exchange assigns an EFID to its Users. Each EFID
corresponds to a single User and a single clearing number of a Clearing
Member with the Clearing Corporation. A User may obtain multiple EFIDs,
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 EFIDs may be used for each of its ports. If a User submits an order
or quote through a port with an EFID not enabled for that port, the
System cancels or rejects the order or quote. The Exchange notes that
its proposed Rule 21.1(j) is identical to MEMX Rule 21.1(j).
Ports and Bulk Messages. Proposed Rule 21.1(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 MX2 Options is identical to the same types of ports
on MEMX Options. The Exchange also proposes to offer bulk message
functionality through the same logical ports as Users submit other
messages to the Exchange, as MEMX Options does. Finally, the Exchange
proposes to adopt the same bulk message functionality as is offered by
MEMX Options. The term ``bulk message'' is proposed to mean a bid or
offer included in 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 or
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. Users may submit bulk messages
through a logical port, subject to the following: bulk messages must
contain a Time-in-Force of Day or IOC; a Market Maker with an
appointment in a class must designate a bulk message for that class as
Post Only or Book Only, and a non-appointed Market Maker must designate
a bulk message for that class as Post Only; the System cancels or
rejects a Post Only bulk message bid (offer) with a price that locks or
crosses the Exchange best offer (bid) or ABO (ABB); the System executes
a Book Only bulk message bid (offer) that locks or crosses the ABO
(ABB) against offers (bids) resting in the Book at prices the same as
or better than the ABO (ABB) and then cancels the unexecuted portion of
that bid (offer).
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
21.1(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 27.3, 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
21.1(m) is identical to a Cancel Back Order defined in MEMX Rule
21.1(m).
Market Opening Procedures. As stated in proposed Rule 21.7, the
System shall open options, other than index options, for trading after
the System's observation after 9:30 a.m. Eastern Time of both: (1) the
first transaction on the primary listing market in the security
underlying the option, and (2) the Limit Up-Limit Down price bands
applicable to the security underlying the option as disseminated by the
applicable Securities Information Processor (``SIP''). With respect to
index options, the System shall open for trading after a time period
(which the Exchange determines for all classes) following the System's
observation after 9:30 a.m. Eastern Time of the first disseminated
index value for the index underlying an index option. Because the
Exchange does not propose to adopt an opening cross or similar opening
process, the opening trade that occurs on the Exchange will be a trade
in the ordinary course of dealings on the Exchange. Accordingly, the
System will ensure that the opening trade in an options series will not
trade through a Protected Quotation at another options exchange,
consistent with the general standard regarding trade throughs
articulated in proposed Rule 21.6(e). The proposed market opening
procedures are substantively identical to the market opening procedures
for MEMX Options. Additionally, the Exchange proposes under Rule
21.7(c) that it may delay the commencement of trading in any class of
options in the interests of a fair and orderly market. As stated in
proposed Rule 21.6(c), orders received prior to the opening of the
System will be cancelled. The Exchange believes that it is appropriate
to commence operations on MX2 Options with simplified
[[Page 29905]]
procedures for when the System is open for trading because for a
successful opening process to function, an exchange needs a critical
mass of liquidity from market participants in order to price and
execute opening transactions. In turn, as a new options exchange, MX2
Options does not know the amount of pre-opening interest it will have,
and it will have to gain market share in order to accumulate such
interest. MX2 Options will re-evaluate its opening procedures over time
and may propose to add an opening process through a rule filing
submitted to the Commission in the future.
Order Display/Matching System. The System will be based upon
functionality currently approved for use in the Exchange's equities and
MEMX Options trading systems. Specifically, the System will allow Users
to enter Market Orders and priced Limit Orders to buy and sell MX2
Options-listed options. All orders (including bulk messages) will be
designated for display (price and size) on an anonymous basis by the
Exchange.
Routing. Pursuant to proposed Rule 21.9, the MX2 Options Exchange
will support orders that are designated to be routed to the National
Best Bid and Offer (``NBBO'') as well as orders that will execute only
within MX2 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 consistent with the Options Order
Protection and Locked/Crossed Market Plan. Subject to the exceptions
contained in proposed Rule 27.2(b), (Order Protection, Exceptions to
Trade-Through Liability), 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 21.1(i) will be cancelled. Bulk
messages are not eligible for routing. These rules related to routing
are substantively identical to those of MEMX Options.
Pursuant to proposed Rule 21.9(d), MX2 Options shall route orders
in options via MEMX Execution Services LLC (``MEMX Execution
Services''), which serves as the Outbound Router of the Exchange, as
defined in Rule 2.11. The function of the Outbound Router will be to
route orders in options listed and open for trading on MX2 Options to
other options exchanges pursuant to the proposed rules of MX2 Options
solely on behalf of MX2 Options. 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 Act. Use of MEMX
Execution Services or Routing Services (as defined below) to route
orders to other market centers is optional. In the event the Exchange
is not able to provide order routing services through its affiliated
broker-dealer, the Exchange will route orders to other options
exchanges in conjunction with one or more routing brokers that are not
affiliated with the Exchange (``Routing Services'').\13\ Parties that
do not desire to use MX2 Execution Services or other Routing Services
provided by the Exchange must designate orders as not available for
routing.\14\
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\13\ See proposed Rule 21.9(e).
\14\ See proposed Rule 21.9(d).
---------------------------------------------------------------------------
In connection with the proposed rules regarding routing to away
options exchanges, proposed Rule 21.9(f) provides that MEMX Execution
Services has, pursuant to Rule 15c3-5 under the Act,\15\ 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
MEMX Execution Services to comply 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), MEMX Execution 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 21.9(f) is substantively identical to MEMX Rule 21.9(f).
---------------------------------------------------------------------------
\15\ 17 CFR 240.15c3-5.
---------------------------------------------------------------------------
Order Priority. Upon opening, trades on the Exchange will occur
when a buy order and a sell order 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 21.8(c), after considering
price priority, all orders are matched according to pro-rata priority
according to size. In addition, Customer, Lead Market Maker and/or
Preferred Market Maker priority overlays are also available at the
Exchange's discretion on a class-by-class basis pursuant to proposed
Rule 21.8(d). The Exchange will issue a notice to Options Members which
will specify which classes of options are initially subject to these
additional priority overlays and will provide such Options Members with
reasonable advance notice of any changes to the application of such
overlays.
Specifically, (i) the Customer Overlay provides Customers with
priority over all non-Customer interest at the same price, and if there
are two or more Customer orders for the same options series at the same
price, priority is afforded to the Customer orders in the sequence in
which they were received by the System; \16\ (ii) the Preferred Market
Maker overlay (which may only be in effect if the Customer Overlay is
also in effect and shall only apply to any remaining balance after
Priority Customer Orders have been satisfied provides the Preferred
Market Maker with priority over other Market Makers for a certain
percentage of contracts allocated at the same price (60% or 40%
depending upon the number of other Market Makers at the NBBO); \17\ and
(iii) the Lead Market Maker overlay (which may only be in effect if the
Customer Overlay is also in effect and shall only apply to any
remaining balance after Priority Customer Orders have been satisfied)
provides Lead Market Makers with priority over other Market Makers for
a certain percentage of contracts allocated at the same price (60% or
40% depending upon the number of other Market Makers at the NBBO) \18\
and for small size orders.\19\
---------------------------------------------------------------------------
\16\ See proposed Rule 21.8(d)(1).
\17\ See proposed Rule 21.8(f)(1), which states: For each
incoming order, if the PMM has a priority quote at the NBBO, its
participation entitlement is equal to the greater of (i) the
proportion of the total size at the best price represented by the
size of its quote, or (ii) sixty percent (60%) of the contracts to
be allocated if there is only one (1) other Market Maker quotation
or non-Customer order at the NBBO and forty percent (40%) if there
are two (2) or more other Market Maker quotes and/or non-Customer
orders at the NBBO.
\18\ See proposed Rule 21.8(g)(1), which states: For each
incoming order, if the LMM has a priority quote at the NBBO, its
participation entitlement is equal to the greater of (i) the
proportion of the total size at the best price represented by the
size of its quote, or (ii) sixty percent (60%) of the contracts to
be allocated if there is only one (1) other Market Maker quotation
or non-Customer order at the NBBO and forty percent (40%) if there
are two (2) or more other Market Maker quotes and/or non-Customer
orders at the NBBO.
\19\ See proposed Rule 21.8(g)(2), which states: Small size
orders will be allocated in full to the LMM if the LMM has a
priority quote at the NBBO. The Exchange will review this provision
quarterly and will maintain the small order size at a level that
will not allow small size orders executed by LMMs to account for
more than 40% of the volume executed on the Exchange. Small size
orders are defined as incoming orders of five (5) or fewer
contracts.
---------------------------------------------------------------------------
[[Page 29906]]
After executions resulting from the Priority Overlays described
above, Orders and Quotes within the System for the accounts of non-
Customers, including Professional Customers, have next priority. If
there is more than one highest bid or more than one lowest offer in the
Consolidated Book for the account of a non-Customer, then such bids or
offers will be afforded priority on a ``size pro rata'' basis.\20\
---------------------------------------------------------------------------
\20\ See proposed Rule 21.8(e).
---------------------------------------------------------------------------
In allocating the participation entitlements set forth in proposed
Rule 21.8(h) to the Preferred Market Maker and the Lead Market Maker,
the following shall apply.\21\ In a class of options where both the
Lead Market Maker and the Preferred Market Maker participation
entitlements are in effect and an Options Member has directed an order
to a Preferred Market Maker: (A) if the Preferred Market Maker's
priority quote is at the NBBO, the Preferred Market Maker's
participation entitlement will supersede the Lead Market Maker's
participation entitlements for an order directed to such Preferred
Market Maker; (B) if the Preferred Market Maker's priority quote is not
at the NBBO, the Lead Market Maker's participation entitlement will
apply to that order, provided the Lead Market Maker's priority quote is
at the NBBO; (C) if an order is preferred to the Lead Market Maker
(i.e. the Lead Market Maker is also the Preferred Market Maker), the
Lead Market Maker receives the participation and/or small order
entitlement, as applicable, provided the Lead Market Maker/Preferred
Market Maker's priority quote is at the NBBO; and (D) neither the
Preferred Market Maker's nor the Lead Market Maker's priority quote is
at the NBBO then executed contracts will be allocated in accordance
with the pro-rata allocation methodology as described in paragraphs
21.8(c) and 21.8(e) without regard to any participation entitlement. If
an incoming order has not been preferred to a Preferred Market Maker by
an Options Member, however, then the Lead Market Maker's participation
entitlement will apply to that order, provided the Primary Market
Maker's priority quote is at the NBBO.\22\
---------------------------------------------------------------------------
\21\ See proposed Rule 21.8(h)(1).
\22\ See proposed Rule 21.8(h)(2).
---------------------------------------------------------------------------
As proposed and as noted above, the participation entitlements of
proposed Rule 21.8 shall not be in effect unless the Customer Overlay
is also in effect and the participation entitlements shall only apply
to any remaining balance after Customer orders have been satisfied.\23\
---------------------------------------------------------------------------
\23\ See proposed Rule 21.8(h)(3).
---------------------------------------------------------------------------
Pursuant to proposed Rule 21.8(h)(4), neither the Lead Market Maker
nor the Preferred Market Maker may be allocated a total quantity
greater than the quantity they are quoting at the execution price. If
the Lead Market Maker's or the Preferred Market Maker's allocation of
an order pursuant to its participation entitlement is greater than its
pro-rata share of priority quotes at the best price at the time that
the participation entitlement is granted, neither the Lead Market Maker
nor the Preferred Market Maker shall receive any further allocation of
that order.
In establishing the counterparties to a particular trade, the
participation entitlements must first be counted against the Lead
Market Maker's highest priority bids and offers or the Preferred Market
Maker's highest priority bids or offers.\24\
---------------------------------------------------------------------------
\24\ See proposed Rule 21.8(h)(5).
---------------------------------------------------------------------------
The proposed participation entitlements only apply to the
allocation of executions among competing Market Maker priority quotes
existing on the MX2 Options Book at the time the order is received by
the Exchange. No market participant is allocated any portion of an
execution unless it has an existing interest at the execution price.
Moreover, no market participant can execute a greater number of
contracts than is associated with its interest at a given price.
Accordingly, the Lead Market Maker and the Preferred Market Maker
participation entitlements contained in the proposed Rule are not
guarantees.\25\
---------------------------------------------------------------------------
\25\ See proposed Rule 21.8(h)(6).
---------------------------------------------------------------------------
The Exchange believes that proposed Rule 21.8 governing priority on
the Exchange is consistent with other options exchanges that have
similar market models, including EDGX Options and NYSE American.\26\
---------------------------------------------------------------------------
\26\ See, e.g., EDGX Options Rule 21.8; NYSE American Rule
964NY.
---------------------------------------------------------------------------
Data Feeds. The System will include proprietary data feeds which
will display without attribution to Users' orders on both the bid and
offer side of the market for price levels then within MX2 Options using
the minimum price variation applicable to that security. These data
feeds with include a depth of book quotation and execution feed, a top
of book quotation and executions information feed, a DROP feed which
offers information regarding the options trading activity of a specific
User, and a historical options data feed.\27\
---------------------------------------------------------------------------
\27\ See proposed Rule 21.15(b)(1)-(4).
---------------------------------------------------------------------------
Risk Controls. The Exchange also proposes to offer to all Users of
MX2 Options the ability to establish certain risk control parameters
and limits that are intended to assist Users in managing their market
risk. The proposed risk controls are set forth in proposed Rules 21.16
and 21.17 and are identical to those offered by MEMX Options pursuant
to MEMX Rules 21.16 and 21.17.\28\ 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.
---------------------------------------------------------------------------
\28\ See Securities Exchange Act Release No. 98730 (October 12,
2023) 88 FR 71898 (October 18, 2023) (SR-MEMX-2023-28) and
Securities Exchange Act Release No. 99700 (March 8, 2024) 89 FR
18689 (March 14, 2024) (SR-MEMX-2024-09) for details regarding the
risk controls.
---------------------------------------------------------------------------
Under the proposed Risk Monitor Mechanism, Users may configure risk
limits for various parameters, including number of contracts executed
(``volume''), notional value of executions (``notional''), number of
executions (``count''), number of contracts executed as a percentage of
number of contracts outstanding within an Exchange-designated time
period or during the trading day (``percentage''), and the number of
times the limits on any of the foregoing parameters are reached (``risk
trips''). The System will track each of the parameters within an
underlying for an EFID (``underlying limit''), across all underlyings
for an EFID (``EFID limit''), across all underlyings for a group of
EFIDs (``EFID Group'') (``EFID Group limit''), and/or across a
customized group of orders designated by the User (``Custom Group
Limit''), over a User-established time period (``interval'') and on an
absolute basis for a trading day (``absolute limits'').
When the System determines that a specified parameter has reached
the User-defined risk limit, depending on the User's instructions and
the applicable limit that has been reached, the Risk Monitor Mechanism
either: (1) cancels or rejects such User's orders or quotes in all
series of the applicable underlying(s) and cancels or rejects any
additional orders or quotes from the User in the applicable
underlying(s) until the counting program resets; or (2) suspends all of
a User's resting orders or quotes in all series of the applicable
underlying(s) and cancels or rejects any additional orders or quotes
from the User in the applicable underlying(s) until the Exchange is
instructed to reinstate such bids and offers. A User may also engage
the Risk Monitor
[[Page 29907]]
Mechanism to cancel resting bids and offers, as well as subsequent
orders as set forth in proposed Rule 22.10 (``mass cancellation'') or
to suspend all resting bids and offers until the Exchange is instructed
to reinstate such bids and offers (``mass suspension'').
In addition to the Risk Monitor Mechanism functionality described
above, the Exchange also proposes to offer additional price protection
mechanisms and risk controls that relate to certain standard or
Exchange-established parameters based on order type and market
conditions, which are described in proposed Rule 21.17, as well as
additional controls applicable to options activity, described in Rule
21.17, Interpretations and Policies .01. These controls include a
Market Order NBBO Width Protection, Limit Order Fat Finger Check, Buy
Order Put Check, Drill-Through Price Protection, Market Orders in No-
Bid (Offer) Series control, Bulk Message Fat Finger Check, and
Rejection of Bulk Message Updates, controls related to the maximum
dollar amount for a single order and maximum number of contracts for a
single order, controls related to the order types or modifiers that can
be utilized as well as orders when the market is crossed, controls to
restrict the options classes for which a User may enter orders to test
symbols only, controls prohibiting the entry of duplicative orders,
controls restricting the overall rate of order entry, and credit
controls measuring both gross and net exposure that warn when
approached and, when breached, prevent submission of either all new
orders or Market Orders only.\29\
---------------------------------------------------------------------------
\29\ Id.
---------------------------------------------------------------------------
Proposed Rule 21.17, Interpretation and Policy .02 indicates that
the Exchange will offer risk functionality that permits a user to: to
(i) cancel all unexecuted orders and quotes in the MX2 Options Book, or
(ii) block the entry of any new orders and quotes, or (iii) both cancel
all unexecuted orders and quotes in the MX2 Options Book and block the
entry of any new orders and quotes. In addition to (i), (ii), and
(iii), the Exchange also offers (iv) risk functionality that
automatically cancels a User's open orders and quotes to the extent the
User loses its connection to the Exchange. Further, MX2 Options offers
batch cancel functionality that permits a User to cancel any orders or
quotes in any series of options by requesting the Exchange to affect
such cancellation. A User initiating such a request may also request
that the Exchange block new inbound orders in any series of options.
The block will remain in effect until the User requests the Exchange
remove the block. Finally, proposed Rule 21.17, Interpretation and
Policy .03 indicates that the risk controls provided are meant to
supplement, and not replace, the Member's or User's own internal
systems, monitoring, and procedures related to risk management and are
not designed for compliance with Rule 15c3-5 under the Exchange Act.
Responsibility for compliance with all Exchange and SEC rules remains
with the Member or User.\30\
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\30\ Id.
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One Second Exposure Period. Proposed Rule 22.11 would prohibit
Options Members from executing as principal on MX2 Options orders they
represent as agent unless (i) agency orders are first exposed on MX2
Options for at least one (1) second or (ii) the Options Member has been
bidding or offering on MX2 Options for at least one (1) second prior to
receiving an agency order that is executable against such bid or offer.
As noted above, proposed Rule 22.11 would require Options Members to
expose their customers' orders on the Exchange for at least one second
under certain circumstances. 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, including MEMX Options. Thus, the exposure
period will allow Options Members that are members of other options
exchanges to comply with Rule 22.11 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.
The technology for the Exchange's trading system for MX2 Options
will be the same technology currently used for MEMX Options, and the
Exchange has had ample experience with that trading system to believe
that one second is an adequate exposure period.
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'') and therefore will be
required to comply with the obligations of Participants under 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. The Exchange notes that the proposed rules in Chapter
27 (Options Order Protection and Locked and Crossed Markets Rules) are
identical to the rules of MEMX Options, and as such, the Exchange is
proposing to incorporate Chapter 27 of MEMX's rulebook by reference
into Chapter 27 of the MX2 Rulebook.\31\
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\31\ Specifically, the Exchange shall denote: ``The rules
contained in MEMX Chapter 27, as such rules may be in effect from
time to time, are hereby incorporated by reference into this
Chapter. Members must comply with MEMX Chapter 27 as if such rules
were part of the Rules. Unless the context dictates otherwise, the
following terms, or any variations of these terms, from MEMX Chapter
27 have the following meaning for purposes of this Chapter:
``Exchange'' means ``MX2''; and ``Member'' (i.e., MEMX Member) means
``Member (i.e., MX2 Member).'' The Exchange will copy this language
into the additional MEMX chapters it is proposing to incorporate by
reference into MX2's rulebook, each as further described below.
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Securities Traded on MX2 Options
General Listing Standards. The Exchange proposes to adopt listing
standards for options traded on MX2 Options as described in Chapter 19
(Securities Traded on MX2 Options), as well as for index options as
described in Chapter 29 (Index Rules), which are identical to the
approved rules of MEMX Options.\32\ 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. Given that these rules mirror MEMX completely, the Exchange is
proposing to incorporate the rules of Chapter 19 and Chapter 29 by
reference
[[Page 29908]]
into Chapter 19 and 29 of MX2's rulebook.
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\32\ See MEMX Rules, Chapters 19 and 29.
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Conduct and Operational Rules for Options Members
The Exchange proposes to adopt rules for MX2 Options that are
substantively identical to the rules of MEMX Options regarding:
exercises and deliveries as described in Chapter 18 (Business Conduct);
Chapter 23 (Exercises and Deliveries); records, reports and audits as
described in Chapter 24 (Records, Reports and Audits); doing business
with the public as described in Chapter 26 (Doing Business With the
Public); and margin as described in Chapter 28 (Margin Requirements).
Given that these rules mirror MEMX completely, the Exchange is
proposing to incorporate each of the above chapters by reference into
Chapters 18, 23, 24, 26 and 28 of MX2's rulebook.\33\
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\33\ See MEMX Rules, Chapters 18, 23, 24, 26, and 28.
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National Market System
MX2 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,\34\ just as its equities market participates
today. MX2 Options will become a member of the Options Price Reporting
Authority (``OPRA''), the Options Linkage Authority (``OLA''), the
Options Regulatory Surveillance Authority (``ORSA''), and the Options
Listing Procedures Plan (``OLPP'').
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\34\ 15 U.S.C. 78k-1.
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The Exchange expects to participate in those plans on the same
terms currently applicable to current members of those plans. The
Exchange has contacted the leadership of each options-related national
market system plan to begin the membership process.
Regulation
The Exchange will leverage many of the structures it established to
operate a national securities exchange in compliance with Section 6 of
the Exchange Act.\35\ 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,\36\ as it did with respect
to equities; (2) the Exchange's Regulatory Services Agreement with
FINRA will be amended as necessary prior to commencing operations and
will govern many aspects of the regulation and discipline of Members
that participate in options trading, 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 MX2
Options, and conduct surveillance of options trading as it does today
for equities.
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\35\ 15 U.S.C. 78f.
\36\ 15 U.S.C. 78q(d).
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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,\37\ 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 MX2 Options Members also
must be members of at least one other SRO, the Exchange would generally
not be designated as the DEA for any of its members.
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\37\ 17 CFR 240.17d-1.
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Exchange Act Rule 17d-2 \38\ 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.
---------------------------------------------------------------------------
\38\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------
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 MX2 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 MX2 Options rules. In
addition, the proposed MX2 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 also intends enter
into and seek Commission approval of a bilateral Rule 17d-2 agreement
with FINRA prior to commencing of operations for MX2 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 MX2 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 a Regulatory Services Agreement with FINRA, 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 Regulatory Services Agreement 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 MX2 Options. As
is the case with the Exchange's equities market, the Exchange will
supervise FINRA and continue to bear ultimate regulatory responsibility
for the MX2 Options Exchange.
Consistent with the Exchange's existing regulatory structure, the
Exchange's Chief Regulatory Officer shall have general supervision of
the regulatory operations of MX2 Options, including responsibility for
overseeing the surveillance, examination, and enforcement functions and
for administering all regulatory services agreements applicable to MX2
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 MX2 Options.
Finally, as it does with equities, the Exchange will perform
automated surveillance of trading on MX2 Options for the purpose of
maintaining a fair and orderly market at all times. As it does with its
equities trading, the Exchange will monitor MX2 Options to identify
unusual trading patterns and determine whether particular trading
activity requires further regulatory investigation by FINRA.
In addition, the Exchange will oversee the process for determining
and 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. The proposed rules in Chapter 20 (Regulation of Trading on MX2
Options)
[[Page 29909]]
regarding halts, unusual market conditions, extraordinary market
volatility, obvious errors, audit trail, transfers of positions, and
off-exchange RWA transfers are substantively identical to the approved
rules of MEMX Options.
Minor Rule Violation Plan
The Exchange's disciplinary rules, including Exchange Rules
applicable to ``minor rule violations,'' are set forth in Chapter 8 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 2020.\39\ The Exchange's MRVP specifies those uncontested
minor rule violations with sanctions not exceeding $2,500 that would
not be subject to the provisions of Rule 19d-1(c)(1) under the Act \40\
requiring that an SRO promptly file notice with the Commission of any
final disciplinary action taken with respect to any person or
organization.\41\ The Exchange's MRVP includes the policies and
procedures included in Exchange Rule 8.15 (Imposition of Fines for
Minor Violation(s) of Rules) and in Exchange Rule 8.15, Interpretations
and Policy .01.
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\39\ See Release No. 34-89836 (September 11, 2020), 85 FR 58081
(September 17, 2020) (Order Declaring Effective a Minor Rule
Violation Plan) (``MRVP Order'').
\40\ 17 CFR 240.19d-1(c)(1).
\41\ 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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The Exchange proposes to amend its MRVP and Exchange Rule 8.15,
Interpretation and Policy .01 to include proposed Rule 25.3 (Penalty
for Minor Rule Violations).\42\ The rules included in proposed Rule
25.3 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 rules included in
proposed Rule 25.3 are the same as the rules included in the MRVPs of
MEMX Options and other options exchanges.\43\
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\42\ 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.
\43\ See MEMX Rule 25.3. See also, EDGX Options Rule 25.3 and
Cboe BZX Options (``BZX Options'') Rule 25.3.
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Upon implementation of this proposal, the Exchange will include the
enumerated options trading rule violations in the Exchange's standard
quarterly report of actions taken on minor rule violations under the
MRVP. The quarterly report includes: 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
fine imposed, the number of times the rule violation has occurred, and
the date of disposition. The Exchange's MRVP, as proposed to be
amended, 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.\44\ In
addition, because amended Rule 8.15 will offer procedural rights to a
person sanctioned for a violation listed in proposed Rule 25.3, the
Exchange will provide a fair procedure for the disciplining of members
and associated persons, consistent with Section 6(b)(7) of the Act.\45\
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\44\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
\45\ 15 U.S.C. 78f(b)(7).
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This proposal to include the rules listed in proposed Rule 25.3 in
the Exchange's MRVP is consistent with the 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,\46\ 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. 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. 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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\46\ 17 CFR 240.19d-1(c)(2).
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Section 36 Exemption Request
The Exchange proposes to incorporate by reference as MX2 Options
rules certain rules of the Cboe Exchange, Inc. (``Cboe''), the New York
Stock Exchange (``NYSE''), FINRA, and as described above, its
affiliated exchange, MEMX. Specifically, MX2 Options proposes to
incorporate by reference the applicable rules of MEMX with respect to
Chapter 18 (Business Conduct), Chapter 19 (Securities Traded on MX2
Options), Chapter 23 (Exercises and Deliveries), Chapter 24 (Records,
Reports and Audits), Chapter 26 (Doing Business with the Public),
Chapter 27 (Options Order Protection and Locked and Crossed Markets
Rules), Chapter 28 (Margin Requirements) and Chapter 29 (Index Rules);
\47\ MX2 Options Rule 26.16 proposes to incorporate by reference the
applicable rules of FINRA with respect to Communications with Public
Customers; MX2 Options Rule 28.3 proposes to incorporate by reference
initial and maintenance margin requirements of either Cboe or NYSE; MX2
Options Rule 29.5 proposes to incorporate by reference the applicable
rules of Cboe with respect to position limits for broad based index
options; and MX2 Options Rule 29.7 proposes to incorporate by reference
the applicable rules of Cboe with respect to position limits for
Narrow-Based and Micro-Narrow Based Index Options traded on MX2 Options
and also on Cboe.
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\47\ Each MEMX Chapter incorporated by reference into MX2's
rules will have the same chapter numbers in MX2's rulebook.
---------------------------------------------------------------------------
Thus, for certain MX2 Options rules, Exchange members will comply
with a MX2 Options rule by complying with the MEMX, 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.\48\ Each such
exempt
[[Page 29910]]
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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\48\ 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,\49\ an exemption
under Section 36 of the Act from the rule filing requirements of
Section 19(b) of the Act for changes to those MX2 Options rules that
are effected solely by virtue of a change to a cross-referenced MEMX,
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 MX2
Options of the specific MEMX, Cboe, NYSE, and FINRA rules that it will
incorporate by reference. In addition, the Exchange will notify Options
Members whenever MEMX, Cboe, NYSE, or FINRA proposes a change to a
cross-referenced MEMX, Cboe, NYSE, or FINRA rule.\50\ 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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\49\ 17 CFR 240.0-12.
\50\ 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(l) under Act, within the time frame
required by that rule. The website posting will include a link to
the location on the MEMX, Cboe, NYSE, or FINRA website where the
proposed rule change is posted.
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Amendments to Existing Exchange Rules
In addition to the rules of MX2 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 MX2 Options.
First, the Exchange proposes to amend paragraph (d) of
Interpretations and Policies .01 to Rule 2.5 (Restrictions), 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 (d) 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 17.2(g). The Exchange notes that proposed Rule
17.2(g), 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 paragraph (i) of Interpretations and Policies .01 to Rule 2.5 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.
The Exchange also proposes to modify Rule 2.11(a)(6), which states
that MEMX Execution 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 11.15 and result
from a technical or systems issue at MEMX Execution 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 2.11(a)(6) would add a reference to the
comparable provision to that which governs review and resolution of
clearly erroneous transactions (e.g., for equities, Rule 11.15) but for
options transactions, namely Rule 20.6, which governs review and
resolution of options transactions that may qualify as obvious errors.
Lastly, the Exchange proposes to amend Interpretations and Policies
.01 Rule 8.15 (Imposition of Fines for Minor Violation(s) of Rules),
which contains the list of Exchange Rule violations and recommended
fine schedule pursuant to Rule 8.15, to include a new paragraph (i)
referencing proposed Rule 25.3 for the recommended fines for minor rule
violations of the Exchange Rules appliable to MX2 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 \51\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \52\ 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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\51\ 15 U.S.C. 78f(b).
\52\ 15 U.S.C. 78f(b)(5).
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As described above, the fundamental premise of the proposal is that
the Exchange will operate its options market much in a similar manner
to its affiliated options exchange, MEMX Options, with the exception of
the priority model and certain other limited differences. Those
differences (i.e. pro-rata priority model and the addition of Reserve
orders), are not novel and are offered by other options exchanges.\53\
Further, the proposed Reserve Orders on MX2 Options will operate in the
same manner and have the same functionality as those currently offered
on MEMX \54\ and that have been approved under the Rules of MX2.\55\
The Exchange believes MX2 Options will benefit individual investors,
options trading firms, and the options market generally. The entry of
an innovative, cost competitive market such as MX2 Options will promote
competition, spurring existing exchanges to improve their own
executions systems and reduce trading costs.
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\53\ See supra notes 11 and 26.
\54\ See MEMX Rule 11.6(k).
\55\ See Exchange Rule 11.6(k).
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The basis for a majority of the proposed rules of MX2 Options are
the approved rules of MEMX Options, which have already been found
consistent with the Exchange Act. Therefore, the Exchange does not
believe that any of the proposed order types and order type
functionality raise any new or novel issues that have not
[[Page 29911]]
been previously considered by the Commission.
The Exchange further believes that the functionality that it
proposes to offer 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.
The Exchange believes that the proposed rules of MX2 Options, as
well as the proposed method of monitoring for compliance with and
enforcing such rules is also consistent with the Exchange Act,
particularly Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Exchange 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 MEMX Options other options
exchanges, as described above. The Exchange proposes to regulate
activity on MX2 Options in the same way it regulates activity on MEMX
Options, specifically 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.
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. The Exchange
operates in an intensely competitive global marketplace for transaction
services. Relying on its array of services and benefits, the Exchange
competes for the privilege of providing market services to broker-
dealers. The Exchange's ability to compete in this environment is based
in large part on the quality of its trading systems, the overall
quality of its market and its attractiveness to the largest number of
investors, as measured by speed, likelihood and cost of executions, as
well as spreads, fairness, and transparency.
The Exchange notes that most U.S. options exchanges are owned and
operated by companies that operate more than one options exchange.\56\
The primary reason to operate multiple options exchanges, as is true
with respect to the proposed launch of MX2 Options, is that it allows
an exchange operator to offer multiple market models, including a
price-time market and a pro rata market, often with Customer priority
as a critical component of the latter. Accordingly, the proposed rule
change is intended to enhance competition by allowing the Exchange to
compete with existing options exchanges that operate models based on
Customer priority and pro rata allocations.
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\56\ NYSE operates two options exchanges, NYSE American and NYSE
Arca; Nasdaq operates six options exchanges, ISE, Phlx, Nasdaq
Options Market (``NOM''), Nasdaq MRX (``MRX''), Nasdaq BX Options
(``BX''), and Nasdaq GEMX (``GEMX''), Cboe operates four options
exchanges, Cboe Options, C2 Options Exchange (``C2''), EDGX Options
and BZX Options; and MIAX operates four options exchanges, MIAX,
MIAX Pearl, MIAX Emerald, and MIAX Sapphire.
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The proposed rule change will reduce the overall trading costs and
increase price competition, both pro-competitive developments, and will
promote further initiative and innovation among market centers and
market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this 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 Exchange consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-MX2-2025-01 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-MX2-2025-01. 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-MX2-2025-01 and should be
submitted on or before July 28, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
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\57\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-12517 Filed 7-3-25; 8:45 am]
BILLING CODE 8011-01-P