[Federal Register Volume 85, Number 82 (Tuesday, April 28, 2020)]
[Notices]
[Pages 23545-23553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08941]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88730; File No. SR-GEMX-2020-09]
Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend GEMX Rules
at Options 3, Section 8, Titled Options Opening Process
April 22, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 14, 2020, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend GEMX Rules at Options 3, Section 8,
titled ``Options Opening Process.''
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqgemx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend GEMX Rules at Options 3, Section 8,
titled ``Options Opening Process.'' The
[[Page 23546]]
proposal seeks to amend aspects of the current functionality of the
Exchange's System regarding the opening of trading in an option series.
Each amendment is described below.
Definitions
The Exchange proposes to define the term ``imbalance'' at proposed
Options 3, Section 8(a)(10) as the number of unmatched contracts priced
through the Potential Opening Price. The Exchange believes that the
addition of this defined term will bring greater clarity to the manner
in which the term ``imbalance'' is defined within the System. This
description is consistent with the current System operation. This is a
non-substantive rule change. In conjunction with this rule change, the
Exchange proposes to remove the text within Options 3, Section 8(j)(1)
which seeks to define an imbalance as an unmatched contracts. The
Exchange is proposing a description which is more specific than this
rule text and is intended to bring greater clarity to the term
``imbalance.''
Eligible Interest
Options 3, Section 8(b) describes the eligible interest that will
be accepted during the Opening Process. This includes Valid Width
Quotes, Opening Sweeps and orders. The Exchange proposes to
specifically exclude orders with a Time in Force of ``Immediate-or-
Cancel'' \3\ and Add Liquidity Orders \4\ from the type of orders that
are eligible during the Opening Process. Today, the Exchange does not
accept Immediate-or-Cancel Orders during the Opening Process, except
for Opening Only Orders.\5\ The Exchange does permit orders marked as
Opening Only Orders to be entered as Immediate-or-Cancel. These are the
only acceptable Immediate-or-Cancel Orders for the Opening Process. All
other types of Immediate-or-Cancel Orders may not be entered during the
Opening Process. For example, All-or-None \6\ Orders may not be entered
during the Opening Process because they have a time-in-force
designation of Immediate-or-Cancel. With respect to Add Liquidity
Orders, these orders are not appropriate for the Opening Process
because these orders cannot add liquidity during the Opening Process.
The Exchange notes that today, these orders may not be entered into the
Opening Process. This amendment does not result in a System change. The
Exchange believes the addition of this rule text will clarify which
order types are eligible to be entered during the Opening Process. The
Exchange also proposes to add commas to the second sentence of Options
3, Section 8(b).
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\3\ An Immediate-or-Cancel order is a limit order that is to be
executed in whole or in part upon receipt. Any portion not so
executed is to be treated as cancelled. An Immediate-or-Cancel order
entered by a Market Maker through the Specialized Quote Feed
protocol will not be subject to the Limit Order Price Protection and
Size Limitation Protection as defined in GEMX Options 3, Section
15(b)(2) and (3). See Options 3, Section 7(b)(3).
\4\ An Add Liquidity Order is a limit order that is to be
executed in whole or in part on the Exchange (i) only after being
displayed on the Exchange's limit order book; and (ii) without
routing any portion of the order to another market center. Members
may specify whether an Add Liquidity Order shall be cancelled or re-
priced to the minimum price variation above the national best bid
price (for sell orders) or below the national best offer price (for
buy orders) if, at the time of entry, the order (i) is executable on
the Exchange; or (ii) the order is not executable on the Exchange,
but would lock or cross the national best bid or offer. If at the
time of entry, an Add Liquidity Order would lock or cross one or
more non-displayed orders on the Exchange, the Add Liquidity Order
shall be cancelled or re-priced to the minimum price variation above
the best non-displayed bid price (for sell orders) or below the best
non-displayed offer price (for buy orders). An Add Liquidity Order
will only be re-priced once and will be executed at the re-priced
price. An Add Liquidity Order will be ranked in the Exchange's limit
order book in accordance with Options 3, Section 10. See Options 3,
Section 7(n).
\5\ An Opening Only Order is a limit order that can be entered
for the opening rotation only. Any portion of the order that is not
executed during the opening rotation is cancelled. See Options 3,
Section 7(o).
\6\ An All-Or-None order is a limit or market order that is to
be executed in its entirety or not at all. An All-Or-None Order may
only be entered as an Immediate-or-Cancel Order. See Options 3,
Section 7(c).
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Additionally, the Exchange proposes a non-substantive amendment at
Options 3, Section 8(b)(2) to replace the phrase ``aggregate the size
of all eligible interest for a particular participant category at a
particular price level for trade allocation purposes'' with ``allocate
interest'' pursuant to Options 3, Section 10. Options 3, Section 10
describes the manner in which interest is allocated on GEMX. The
Exchange believes that simply referring to the allocation rule will
accurately describe the manner in which the System will allocate
interest.
Valid Width Quotes
The Exchange proposes to amend the requirements for GEMX Market
Makers \7\ to enter Valid Width Quotes within Options 3, Section 8(c).
Today, a Primary Market Maker is required to enter a Valid Width Quote
within two minutes (or such shorter time as determined by the Exchange
and disseminated to membership on the Exchange's website) of the
opening trade or quote on the market for the underlying security in the
case of equity options or, in the case of index options, within two
minutes of the receipt of the opening price in the underlying index (or
such shorter time as determined by the Exchange and disseminated to
membership on the Exchange's website), or within two minutes of market
opening for the underlying security in the case of U.S. dollar-settled
foreign currency options (or such shorter time as determined by the
Exchange and disseminated to membership on the Exchange's website).
Alternatively, the Valid Width Quote of at least two Competitive Market
Makers entered within the above-referenced timeframe would also open an
option series. Finally, if neither the Primary Market Maker's Valid
Width Quote nor the Valid Width Quotes of two Competitive Market Makers
have been submitted within such timeframe, one Competitive Market Maker
may submit a Valid Width Quote to open the options series.
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\7\ The term ``Market Makers'' refers to ``Competitive Market
Makers'' and ``Primary Market Makers'' collectively. See Options 1,
Section 1(a)(21).
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The Exchange proposes to amend the requirement to submit Valid
Width Quotes in an effort to streamline its current process. The
Exchange proposes to continue to require a Primary Market Maker to
submit a Valid Width Quote, but also would permit the Valid Width Quote
of one Competitive Market Maker to open an option series without
waiting for the two minute timeframe described above to conclude. This
effectively would take the 2 step process for accepting quotes to a one
step process. The Exchange believes this proposal would allow the
market to open more efficiently as well as enable greater participation
by Competitive Market Makers in the Opening Process. As is the case
today, Primary Market Makers are required to ensure each option series
to which it is appointed is opened each day by submitting a Valid Width
Quote.\8\ Moreover, a Primary Market Maker has continuing obligations
to
[[Page 23547]]
quote intra-day pursuant to Options 2, Section 5.
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\8\ Options 3, Section 8(c)(3) provides, ``The PMM assigned in a
particular equity or index option must enter a Valid Width Quote, in
90% of their assigned series, not later than one minute following
the dissemination of a quote or trade by the market for the
underlying security or, in the case of index options, following the
receipt of the opening price in the underlying index. The PMM
assigned in a particular U.S. dollar-settled foreign currency option
must enter a Valid Width Quote, in 90% of their assigned series, not
later than one minute after the announced market opening. Provided
an options series has not opened pursuant to Options 3, Section 8
(c)(1)(ii) or (iii), PMMs must promptly enter a Valid Width Quote in
the remainder of their assigned series, which did not open within
one minute following the dissemination of a quote or trade by the
market for the underlying security or, in the case of index options,
following the receipt of the opening price in the underlying index
or, with respect to U.S. dollar-settled foreign currency options,
following the announced market opening.''
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Potential Opening Price
The Exchange proposes to amend Options 3, Section 8(g) to add an
introductory sentence to the Potential Opening Process paragraph which
provides, ``The Potential Opening Price indicates a price where the
System may open once all other Opening Process criteria is met.'' This
paragraph is not intended to amend the function of the Opening Process,
rather it is intended to provide context to the process and describe a
Potential Opening Price within Options 3, Section 8(g). This is a non-
substantive amendment. The Exchange also proposes to correct the
reference to (h)(3)(i) to (h)(3)(i).
An amendment is proposed to Options 3, Section 8(g)(3) to replace
the words ``Potential Opening Price calculation'' with the more defined
term ``Opening Price.'' The Opening Price is defined within Options 3,
Section 8(a)(3) and provides, ``The Opening Price is described herein
in sections (h) and (j).'' The Exchange notes that ``Opening Price'' is
the more accurate term that represents current System functionality as
compared to Potential Opening Price. Options 3, Section 8(g)(3)
provides that ``the Potential Opening Price calculation is bounded by
the better away market price that may not be satisfied with the
Exchange routable interest.'' In fact, the Opening Price is bounded by
the better away market price that may not be satisfied with Exchange
routable interest pursuant to sections (h) and (j). The Potential
Opening Price indicates a price where the System may open once all
other Opening Process criteria is met. The Potential Opening Price is a
less accurate term and the Exchange proposes to utilize the more
precise term by changing the words in this sentence to ``Opening
Price'' for specificity. This amendment is not substantive, rather it
is clarifying.
Opening Quote Range
The Exchange proposes to add a sentence to Options 3, Section 8(i)
to describe the manner in which the Opening Quote Range or ``OQR'' is
bound. The Exchange proposes to provide, ``OQR is constrained by the
least aggressive limit prices within the broader limits of OQR. The
least aggressive buy order or Valid Width Quote bid and least
aggressive sell order or Valid Width Quote offer within the OQR will
further bound the OQR.'' The Exchange previously described \9\ the OQR
as an additional type of boundary beyond the boundaries mentioned in
Options 3, Section 8 at proposed paragraph (j). OQR is intended to
limit the Opening Price to a reasonable, middle ground price and thus
reduce the potential for erroneous trades during the Opening Process.
Although the Exchange applies other boundaries such as the Best Bid or
Best Offer (``BBO''), the OQR is outside of the BBO. It is meant to
provide a price that can satisfy more size without becoming
unreasonable. The Exchange proposes to add rule text within Options 3,
Section 8 to describe the manner in which today OQR is bound. This
proposed amendment does not change the manner in which GEMX's System
operates today. The Exchange believes that this rule text will bring
greater transparency to the manner in which the Exchange arrives at an
Opening Price. Below is an example of the manner in which OQR is
constrained.
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\9\ See Securities Exchange Commission Release No. 80014
(February 10, 2017), 82 FR 10952 (February 16, 2017) (SR-GEMX-2016-
18).
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Assume the below pre-opening interest:
Primary Market Maker quotes 4.10 (100) x 4.20 (50)
Order 1: Priority Customer Buy 300 @ 4.39
Order 2: Priority Customer Sell 50 @ 4.13
Order 3: Priority Customer Sell 5 @ 4.37
Opening Quote Range configuration in this scenario is +/-0.18
9:30 a.m. events occur, underlying opens
First imbalance message: Buy imbalance @ 4.20, 100 matched, 200
unmatched
Next 4 imbalance messages: Buy imbalance @ 4.37, 105 matched, 195
unmatched
Potential Opening Price calculation would have been 4.20 + 0.18 = 4.38,
but OQR is further bounded by the least aggressive sell order @ 4.37
Order 1 executes against Order 2 50 @ 4.37
Order 1 executes against Primary Market Maker quote 50 @ 4.37
Order 1 executes against Order 3 5 @ 4.37
Remainder of Order 1 cancels as it is through the Opening Price
Primary Market Maker quote purges as its entire offer side volume has
been exhausted
Similarly, the Exchange proposes to amend Options 3, Section
8(i)(3) which currently provides, ``If one or more away markets are
disseminating a BBO that is not crossed (the Opening Process will stop
and an options series will not open if the ABBO becomes crossed
pursuant to (c)(5)) and there are Valid Width Quotes on the Exchange
that are executable against each other or the ABBO:''. The Exchange
proposes to instead state, ``If one or more away markets are
disseminating a BBO that is not crossed (the Opening Process will stop
and an options series will not open if the ABBO becomes crossed
pursuant to (c)(5)) and there are Valid Width Quotes on the Exchange
that cross each other or are marketable against the ABBO:''. The
proposed language more accurately describes the current Opening
Process. Valid Width Quotes are not routable and would not be
executable against the ABBO. A similar change is also proposed to
Options 3, Section 8(i)(4) to replace the words ``are executable
against'' with ``cross''. The Exchange believes that the amended rule
text adds greater transparency to the Opening Process. These are non-
substantive amendments.
The Exchange proposes to replace the phrase ``route'' with ``route
routable'' and also replace the phrase ``in price/time priority to
satisfy the away market'' with ``pursuant to Options 3, Section
10(c)(1)(A)'' at the end of Options 3, Section 8(i)(7). The final
sentence would provide, ``The System will route routable Public
Customer interest pursuant to Options 3, Section 10(c)(1)(A).'' The
current rule text is imprecise. When routing, the Exchange first
determine if the interest is routable. A DNR Order \10\ would not be
routable. Of the routable interest, the Exchange will route the
interest in price/time priority to satisfy the away market interest.
The Exchange believes changing the word ``route'' to ``route routable''
and adding the citation to the allocation rule within Options 3,
Section 10 clarifies the meaning of this sentence and better explains
the System handling. This is a non-substantive amendment which is
intended to bring greater clarity to the Exchange's Rules.
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\10\ The manner in which the System will handle orders marked
with the instruction ``Do-Not-Route'' (``DNR'' Orders) is described
in Options 3, Section 8(j)(6).
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Price Discovery Mechanism
The Exchange proposes to add new rule text to Options 3, Section
8(j)(1)(A) to describe the information conveyed in an Imbalance
Message. The Exchange proposes to provide at Options 3, Section
8(j)(1)(A),
An Imbalance Message will be disseminated showing a ``0'' volume
and a $0.00 price if: (1) No executions are possible but routable
interest is priced at or through the ABBO; (2) internal quotes are
crossing each other; or (3) there is a Valid Width
[[Page 23548]]
Quote, but there is no Quality Opening Market. Where the Potential
Opening Price is through the ABBO, an imbalance message will display
the side of interest priced through the ABBO.
This rule text is consistent with the current operation of the System.
The purpose of this proposed text is to provide greater information to
market participants to explain the information that is being conveyed
when an imbalance message indicates ``0'' volume. The Exchange believes
that explaining the potential scenarios which led to the dissemination
of a ``0'' volume, such as (1) when no executions are possible and
routable interest is priced at or through the ABBO; (2) internal quotes
are crossing; and (3) there is a Valid Width Quote, but there is no
Quality Opening Market, will provide greater detail to the potential
state of the interest available. The Exchange further clarifies in this
new rule text, ``Where the Potential Opening Price is through the ABBO,
an imbalance message will display the side of interest priced through
the ABBO.'' The Exchange believes that this proposed text will bring
greater transparency to the information available to market
participants during the Opening Process.
The Exchange proposes to amend Options 3, Section 8(j)(3)(ii) to
remove the phrase ``at the Opening Price'' within the paragraph in two
places. The current second sentence of paragraph 8(j)(3)(ii) states,
``If during the Route Timer, interest is received by the System which
would allow the Opening Price to be within OQR without trading through
away markets and without trading through the limit price(s) of interest
within OQR which is unable to be fully executed at the Opening Price,
the System will open with trades at the Opening Price and the Route
Timer will simultaneously end.'' The Exchange proposes to remove the
words ``at the Opening Price'' because while anything traded on GEMX
would be at the Opening Price, the trades that are routed away would be
at an ABBO price which may differ from the GEMX Opening Price. To avoid
any confusion, the Exchange is amending the sentence to remove the
reference to the Opening Price. In addition, the Exchange proposes to
add the phrase ``and orders'' to Options 3, Section 8(j)(3)(ii) which
currently only references quotes. During the Price Discovery Mechanism,
both quotes and orders are considered.
The Exchange proposes to amend the last sentence of Options 3,
Section 8(j)(5) to add the phrase ``if consistent with the Member's
instructions'' to the end of the paragraph to make clear that the
instructions provided by a Member in terms of order types and routing
would be applicable to interest entered during the Opening Process
which remains eligible for intra-day trading. This amendment brings
greater clarity to the Exchange's Rules.
The Exchange proposes to amend the last sentence of Options 3,
Section 8(j)(6) which provides, ``The System will only route non-
contingency Public Customer orders, except that only the full volume of
Public Customer Reserve Orders may route.'' The Exchange proposes to
instead provide, ``The System will only route non-contingency Public
Customer orders, except that Public Customer Reserve Orders may route
up to their full volume.'' The Exchange is rewording the current
sentence to make clear that Public Customer Reserve Orders may route up
to their full volume. The current sentence is awkward in that is seems
to imply that only full volume would route. This was not the intent of
the sentence. As revised, the sentence more clearly conveys its intent.
The Exchange believes that this amendment brings greater clarity to the
rule.
The Exchange proposes to add an introductory sentence of Options 3,
Section 8(j)(6)(i) which provides, ``For contracts that are not
routable, pursuant to Options 3, Section 8(j)(6), such as DNR Orders
and orders priced through the Opening Price. . .''. The addition of
this sentence is intended to provide context to the handling of orders.
The Exchange opens and routes simultaneously during its Opening
Process. This proposed sentence is a transition sentence from Options
3, Section 8(j)(6), wherein the System executes and routes orders.
Options 3, Section 8(j)(6)(i) describes DNR Orders, which are not
routed. The proposed introductory sentence would reflect that Options
3, Section 8(j)(6) is intended to make clear that as DNR Orders and
orders priced through the Opening Price are not routable orders that
will cancel. The System will cancel any portion of a Do-Not-Route order
that would otherwise have to be routed to the exchange(s) disseminating
the ABBO for an opening to occur. An order or quote that is priced
through the Opening Price will also be cancelled. All other interest
will be eligible for trading after opening. This amended rule text is
consistent with the behavior of the System. This non-substantive
amendment is intended to add greater clarity to the Exchange's Rules.
The Exchange also proposes to remove the phrase ``will be cancelled'',
which is duplicative, and add the words ``or quote'' to the first
sentence so it would provide, ``[t]he System will cancel (1) any
portion of a Do-Not-Route order that would otherwise have to be routed
to the exchange(s) disseminating the ABBO for an opening to occur, or
(2) any order or quote that is priced through the Opening Price. All
other interest will be eligible for trading after opening.'' Today, any
order or quote that is priced through the Opening Price will be
cancelled. This new rule text makes clear that all interest applies.
The Exchange proposes to renumber current Options 3, Section 8(k)
as Section 8(j)(6)(ii) and renumber current Options 3, Section 8(l) as
Section 8(j)(6)(iii).
The Exchange proposes to add a new paragraph at Options 3, Section
8(j)(6)(iv) which provides, ``Remaining contracts which are not priced
through the Exchange Opening Price after routing a number of contracts
to satisfy better priced away contracts will be posted to the Order
Book at the better of the away market price or the order's limit
price.'' The Exchange notes that this paragraph describes current
System behavior. This rule text accounts for orders which routed away
and were returned unsatisfied to GEMX as well as interest that was
unfilled during the Opening Process, provided it was not priced through
the Opening Price. This sentence is being included to account for the
manner in which all interest is handled today by GEMX and how certain
interest rests on the order book once the Opening Process is complete.
The Exchange notes that the posted interest will be priced at the
better of the away market price or the order's limit price. This
additional clarity will bring greater transparency to the Rules and is
consistent with the Exchange's current System operation. The Exchange
believes that this detail will provide market participants with all
possible scenarios that may occur once GEMX opens an options series.
Opening Process Cancel Timer
The Exchange proposes to adopt an Opening Process Cancel Timer
within Options 3, Section 8(k), similar to The Nasdaq Options Market
LLC's (``NOM'') Rules and Nasdaq BX, Inc.'s (``BX'') at Options 3,
Section 8(c).\11\ The Exchange proposes to add a process whereby if an
[[Page 23549]]
options series has not opened before the conclusion of the Opening
Process Cancel Timer, a Member may elect to have orders returned by
providing written notification to the Exchange. The Opening Process
Cancel Timer would be established by the Exchange and posted on the
Exchange's website. Similar to NOM and BX, orders submitted through
OTTO or FIX with a TIF of Good-Till-Canceled \12\ or ``GTC'' or Good-
Till-Date \13\ or ``GTD'' may not be cancelled. GEMX has monitored the
operation of the Opening Process to identify instances where market
efficiency can be enhanced. The Exchange believes that adopting a
cancel timer similar to NOM and BX will increase the efficiency of
GEMX's Opening Process. This provision would provide for the return of
orders for un-opened options symbols. This enhancement will provide
market participants the ability to elect to have orders returned,
except for non-GTC/GTD Orders, when options do not open. It provides
Members with choice about where, and when, they can send orders for the
opening that would afford them the best experience. The Exchange
believes that this additional feature will attract additional order
flow to the Exchange. The proposed changes should prove to be very
helpful to market participants, particularly those that are involved in
adding liquidity during the Opening Cross. These proposed enhancements
will allow GEMX to continue to have a robust Opening Process.
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\11\ NOM Options 3, Section 8(c) provides, ``Absence of Opening
Cross. If an Opening Cross in a symbol is not initiated before the
conclusion of the Opening Process Cancel Timer, a firm may elect to
have orders returned by providing written notification to the
Exchange. These orders include all non GTC orders received over the
FIX protocol. The Opening Process Cancel Timer represents a period
of time since the underlying market has opened, and shall be
established and disseminated by Nasdaq on its website.'' BX Options
3, Section 8 is worded similarly.
\12\ An order to buy or sell that remains in force until the
order is filled, canceled or the option contract expires; provided,
however, that GTC Orders will be canceled in the event of a
corporate action that results in an adjustment to the terms of an
option contract. See Options 3, Section 7(r).
\13\ A Good-Till-Date Order is a limit order to buy or sell
which, if not executed, will be cancelled at the sooner of the end
of the expiration date assigned to the order, or the expiration of
the series. See Options 3, Section 7(p).
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Implementation
The Exchange proposes to implement the amendments proposed herein
prior to Q3 2020. The Exchange will issue an Options Trader Alert
announcing the date of implementation.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\14\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\15\ in particular, in that it is designed to
promote just and equitable principles of trade and to protect investors
and the public interest by enhancing its Opening Process. The Exchange
believes that the proposed changes significantly improve the quality of
execution of GEMX's opening.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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Definitions
The Exchange's proposal to define the term ``imbalance'' at
proposed Options 3, Section 8(a)(10) and remove the text within Options
3, Section 8(j)(1), which seeks to define an imbalance as an unmatched
contract, will bring greater clarity to the manner in which the term
``imbalance'' is defined within the System. This is a non-substantive
rule change and represents current System functionality. Today, the
term ``imbalance'' is simply defined as unmatched contracts. The
proposed definition is more precise in its representation of the
current System functionality.
Eligible Interest
The Exchange's proposal to amend Options 3, Section 8(b) which
describes the eligible interest that will be accepted during the
Opening Process is consistent with the Act. Specifically, only
accepting Opening Only Orders and excluding all other orders with a
Time in Force of ``Immediate-or-Cancel'' is the manner in which the
System operates today. The Exchange proposes to specifically note
within the Opening Process that all other Immediate-or-Cancel Orders
would not be acceptable if they are not Opening Only Orders.
Notwithstanding the foregoing, Opening Only Orders would be accepted.
Further, Add Liquidity Orders are not accepted from the Opening Process
because these orders cannot add liquidity during the Opening Process.
The Exchange notes that today, both of these types of orders may not be
entered into the Opening Process. The Exchange believes making clear
which orders are not accepted within the Opening Process will bring
greater transparency for market participants who desire to enter
interest and understand the System handling.
The proposed amendment to Options 3, Section 8(b)(2) to replace the
phrase ``aggregate the size of all eligible interest for a particular
participant category at a particular price level for trade allocation
purposes'' with ``allocate interest pursuant to Options 3, Section 10
is consistent with the Act. This amendment is non-substantive and
merely points to Options 3, Section 10, which today describes the
manner in which interest is allocated on GEMX. The Exchange believes
that simply referring to the allocation rule will accurately describe
the manner in which the System will allocate interest.
Valid Width Quotes
The Exchange's proposal to amend the requirements within Options 3,
Section 8(c) for GEMX Market Makers to enter Valid Width Quotes by
permitting the Valid Width Quote of one Competitive Market Maker to
open an option series without waiting for the two minute timeframe is
consistent with the Act. This proposal would allow the market to open
more efficiently as well as enable greater participation by Competitive
Market Makers in the Opening Process. A Primary Market Maker has
continuing obligations to quote throughout the trading day pursuant to
Options 2, Section 5. In addition, Primary Market Makers are required
to ensure each option series to which it is appointed is opened each
day GEMX is open for business by submitting a Valid Width Quote.\16\
Primary Market Makers will continue to remain responsible to open an
options series, unless it is otherwise opened by a Competitive Market
Maker. A Competitive Market Maker also has obligations to quote intra-
day, once they commence quoting for that day.\17\ The Exchange notes if
Competitive Market Makers entered quotes during the Opening Process to
open an option series, those quote must qualify as Valid Width Quotes.
This ensures that the quotations that are entered are in alignment with
standards that help ensure a quality opening. The Exchange believes
that allowing one Competitive Market Maker to enter a quotation
continues to protect investors and the general public because the
Competitive Market Maker will be held to the same standard for entering
quotes as a Primary Market Maker and the process will also ensure an
efficient and timely opening, while continuing to hold Primary Market
Makers responsible for entering Valid Width Quotes during the Opening
Process.
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\16\ See note 9 above.
\17\ See Options 2, Section 5.
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Potential Opening Price
The Exchange's proposal to amend Options 3, Section 8(g) to add an
introductory sentence to the Potential Opening Process which provides,
``The Potential Opening Price indicates a price where the System may
open once all other Opening Process criteria is met,'' is consistent
with the Act. This paragraph is not intended to amend the current
function of the Opening Process, rather it is intended to provide
context to the process described within Options 3, Section 8(g).
Specifically, the new text describes a Potential Opening Price.
[[Page 23550]]
This rule text is consistent with the current operation of the System.
This is a non-substantive amendment.
Further, the amendment to Options 3, Section 8(g)(3) to replace the
words ``Potential Opening Price calculation'' with the more defined
term ``Opening Price'' is consistent with the Act. ``Opening Price'' is
the more accurate term that represents current System functionality.
The Opening Price is bounded by any better away market price that may
not be satisfied with the Exchange routable interest. Changing the
words in this sentence to ``Opening Price'' will make this statement
accurate. This amendment is not substantive.
Opening Quote Range
The Exchange's proposal to add a sentence to Options 3, Section
8(i) to describe the manner in which the OQR is bound will bring
greater clarity to the manner in which OQR is calculated. OQR is an
additional type of boundary beyond the boundaries mentioned within the
Opening Process rule. The System will calculate an OQR for a particular
option series that will be utilized in the Price Discovery Mechanism if
the Exchange has not opened, pursuant to the provisions in Options 3,
Section 8(c)-(h). OQR would broaden the range of prices at which the
Exchange may open to allow additional interest to be eligible for
consideration in the Opening Process. OQR is intended to limit the
Opening Price to a reasonable, middle ground price and thus reduce the
potential for erroneous trades during the Opening Process. Although the
Exchange applies other boundaries such as the BBO, the OQR provides a
range of prices that may be able to satisfy additional contracts while
still ensuring a reasonable Opening Price. More specifically, the
Exchange's Opening Price is bounded by the OQR without trading through
the limit price(s) of interest within OQR, which is unable to fully
execute at the Opening Price in order to provide participants with
assurance that their orders will not be traded through. The Exchange
seeks to execute as much volume as is possible at the Opening Price.
The Exchange's method for determining the Potential Opening Price and
Opening Price is consistent with the Act because the proposed process
seeks to discover a reasonable price and considers both interest
present in System as well as away market interest. The Exchange's
method seeks to validate the Opening Price and avoid opening at
aberrant prices. The rule provides for opening with a trade, which is
consistent with the Act because it enables an immediate opening to
occur within a certain boundary without the need for the price
discovery process. The boundary provides protections while still
ensuring a reasonable Opening Price. The Exchange's proposal protects
investors and the general public by more clearly describing how the
boundaries are handled by the System. This proposed amendment does not
change the manner in which GEMX's System operates today. The Exchange
believes that this rule text will bring greater transparency to the
manner in which the Exchange arrives at an Opening Price.
The Exchange's proposal to amend Options 3, Section 8(i)(3) to
replace the phrase ``that are executable against each other or the
ABBO:'' with ``that cross each other or are marketable against the
ABBO:'' will more accurately describes the current Opening Process.
Valid Width Quotes are not routable and would not be executable against
the ABBO. This rule text is more specific than ``executable against
each other.'' The Exchange believes that this rule text adds greater
transparency to the Opening Process. This is a non-substantive
amendment.
The Exchange's proposal to make a similar change to Options 3,
Section 8(i)(4) to replace the words ``are executable against'' with
``cross,'' is consistent with the Act. The Exchange believes that the
amended rule text adds greater transparency to the Opening Process.
These are non-substantive amendments.
The Exchange's proposal to replace the phrase ``route'' with
``route routable'' and also replace the phrase ``in price/time priority
to satisfy the away market'' with ``pursuant to Options 3, Section
10(c)(1)(A)'' at the end of Options 3, Section 8(i)(7) is consistent
with the Act. The current rule text is imprecise. When allocating, the
Exchange first determines if the interest is routable, it may be marked
as a DNR Order, which is not routable. Of the routable interest, the
Exchange will route the interest in price/time priority to satisfy the
away market interest. The Exchange believes changing the word ``route''
to ``route routable'' and adding the citation to the allocation rule
within Options 3, Section 10 clarifies the meaning of this sentence and
better explains the System handling. The final sentence would provide,
``The System will route routable Public Customer interest pursuant to
Options 3, Section 10(c)(1)(A).'' This is a non-substantive amendment
which is intended to bring greater clarity to the Exchange's Rules.
Price Discovery Mechanism
The Exchange's proposal to add new rule text at Options 3, Section
8(j)(1)(A) to describe the current operation of the System with respect
to imbalance messages is consistent with the Act. The purpose of this
proposed text is to provide greater information to market participants
to explain the information that is being conveyed when an imbalance
message indicates ``0'' volume. An imbalance process is intended to
attract liquidity to improve the price at which an option series will
open, as well as to maximize the number of contracts that can be
executed on the opening. This process will only occur if the Exchange
has not been able to otherwise open an option series utilizing the
other processes available in Options 3, Section 8. The Imbalance Timer
is intended to provide a reasonable time for participants to respond to
the Imbalance Message before any opening interest is routed to away
markets and, thereby, maximize trading on the Exchange. The Exchange
believes that the proposed rule text provides market participants with
additional information as to the imbalance message. The following
potential scenarios, which may lead to the dissemination of a ``0''
volume, include (1) when no executions are possible and routable
interest is priced at or through the ABBO: (2) Internal quotes are
crossing; and (3) there is a Valid Width Quote, but there is no Quality
Opening Market. The Exchange believes adding this detail will provide
greater information as to the manner in which Imbalance Messages are
disseminated today. The Exchange's process of disseminating zero
imbalance messages is consistent with the Act because the Exchange is
seeking to identify a price on the Exchange without routing away, yet
which price may not trade through another market and the quality of
which is addressed by applying the OQR boundary. Announcing a price of
zero will permit market participants to respond to the Imbalance
Message, which interest would be considered in determining a fair and
reasonable Opening Price.
The Exchange further proposes to clarify its current System
functionality by stating, ``Where the Potential Opening Price is
through the ABBO, an imbalance message will display the side of
interest priced through the ABBO.'' The Exchange believes that this
proposed text will bring greater transparency to the information
available to market participants during the Opening Process.
[[Page 23551]]
The Exchange's proposal to amend Options 3, Section 8(j)(3)(ii) to
remove the phrase ``at the Opening Price'' within the paragraph in two
places is consistent with the Act because removing the current phrase
will avoid confusion. The Exchange notes that anything traded on GEMX
would be at the Opening Price, the trades that are routed away would be
at an ABBO price, which differs from the GEMX Opening Price. To avoid
any confusion the Exchange is amending the sentence to remove the
reference to the Opening Price. In addition, the Exchange proposes to
add the phrase ``and orders'' to Options 3, Section 8(j)(3)(ii) which
currently only references quotes. During the Price Discovery Mechanism
both quotes and orders are considered.
The Exchange's proposal to amend the last sentence of Options 3,
Section 8(j)(5) to amend the phrase ``if consistent with the Member's
instructions'' to the end of the paragraph will make clear that the
instructions provided by a Member in terms of order types and routing
would be applicable to interest entered during the Opening Process
which remains eligible for intra-day trading. This proposal is
consistent with the Act and will add greater clarity to the Exchange's
Rules.
The Exchange's proposal to amend the last sentence of Options 3,
Section 8(j)(6) to provide, ``The System will only route non-
contingency Public Customer orders, except that Public Customer Reserve
Orders may route up to their full volume,'' is consistent with the Act.
The Exchange is re-wording the current sentence to make clear that
Public Customer Reserve Orders may route up to their full volume. The
current sentence is awkward in that is seems to imply that only full
volume would route. This was not the intent of the sentence. As
revised, the sentence more clearly conveys its intent. The Exchange
believes that this amendment is non-substantive and is a more precise
manner of expressing the quantity of Reserve Orders that may route.
The Exchange's proposal to add an introductory phrase to Options 3,
Section 8(j)(6)(i) which provides, ``For contracts that are not
routable, pursuant to Options 3, Section 8(j)(6), such as DNR Orders
and orders priced through the Opening Price . . . ,'' is consistent
with the Act. The addition of this sentence is intended simply to
provide context to the handling of orders. The prior paragraph, Options
3, Section 8(j)(6), describes how the System executes and routes
orders. This proposed new text explains why DNR Orders are cancelled.
This sentence is being added to indicate that at this stage in the
Opening Process, routable interest would have routed, non-routable
interest does not route and may not execute if priced through the
Opening Price. This information is currently not contained within the
rules, however the rule text is consistent with the behavior of the
System. This non-substantive amendment is consistent with the Act
because it adds greater clarity to the Exchange's Rules.
The proposal to remove the duplicative text ``will be cancelled''
and add the words ``or quote'' to the second sentence are non-
substantive rule changes. All other interest will be eligible for
trading after opening,'' is consistent with the Act. Today, any order
or quote that is priced through the Opening Price will be cancelled.
This rule text is consistent with the System's current operation. This
amendment is intended to add greater clarity to the Exchange's Rules.
The Exchange's proposal to add a new paragraph at Options 3,
Section 8(j)(6)(iv) which provides, ``Remaining contracts which are not
priced through the Exchange Opening Price after routing a number of
contracts to satisfy better priced away contracts will be posted to the
Order Book at the better of the away market price or the order's limit
price,'' will bring greater transparency to the handling of orders once
an option series is opened for trading. After away interest is cleared
by routable interest and the opening cross has occurred, DNR Orders are
handled by the System. DNR Order interest will rest on the Order Book,
provided it was not priced through the Opening Price. This rule text
accounts for orders which have routed away and returned to GEMX
unsatisfied and also accounts for interest that remains unfilled during
the Opening Process, provided it was not priced through the Opening
Price. The Exchange notes that the posted interest will be priced at
the better of the away market price or the order's limit price. This
additional clarity will protect investors and the general public by
adding greater transparency to the Exchange's current System operation
by explaining how all interest is handled during the Opening Process.
The Exchange believes that this detail will provide market participants
with all possible scenarios that may occur once GEMX opens its options
series. This amendment represents the System's current function.
Opening Process Cancel Timer
The Exchange's proposal to adopt an Opening Process Cancel Timer
within Options 3, Section 8(k), similar to NOM's and BX's Rules at
Options 3, Section 8(c) is consistent with the Act. The Exchange's
proposal to add a process whereby if an options series has not opened
before the conclusion of the Opening Process Cancel Timer, a Member may
elect to have orders returned by providing written notification to the
Exchange is consistent with the Act. GEMX believes that this amendment
will promote just and equitable principles of trade and to protect
investors and the public interest by enhancing its Opening Process.
Adopting a cancel timer similar to NOM and BX will increase the
efficiency of GEMX's Opening Process by providing Members with the
ability to elect to have orders returned, except for non-GTC/GTD
orders. This functionality provides Members with choice, when symbols
do not open, about where, and when, they can send orders for the
opening that would afford them the best experience. The Exchange
believes that this additional feature will attract additional order
flow to the Exchange. The proposed changes should prove to be very
helpful to market participants, particularly those that are involved in
adding liquidity during the Opening Cross. These proposed enhancements
will allow GEMX to continue to have a robust Opening Process.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. While the Exchange does not
believe that the proposal should have any direct impact on competition,
it believes the proposal will enhance the Opening Process by making it
more efficient and beneficial to market participants. Moreover, the
Exchange believes that the proposed amendments will significantly
improve the quality of execution of GEMX's Opening Process. The
proposed amendments provide market participants more choice about
where, and when, they can send orders for the opening that would afford
them the best experience. The Exchange believes that this should
attract new order flow.
The Exchange's s proposal to define the term ``imbalance'' at
proposed Options 3, Section 8(a)(10) and remove the text within Options
3, Section 8(j)(1), which seeks to define an imbalance as an unmatched
contract does not impose an undue burden on competition. The Exchange
believes that the addition of this defined term will bring greater
clarity to the manner in which the term ``imbalance'' is defined
[[Page 23552]]
within the System. This description is consistent with the current
System operation. This is a non-substantive rule change.
The Exchange's proposal to specifically exclude orders with a Time
in Force of ``Immediate-or-Cancel'' and Add Liquidity Orders from the
type of orders that are eligible during the Opening Process does not
impose an undue burden on competition. The Exchange notes that today
all market participants may enter Opening Only Orders. Today, the
Exchange does not permit Immediate-or-Cancel Orders to be entered
unless they are Opening Only Orders. With respect to Add Liquidity
Orders, these orders are not appropriate for the Opening Process
because these orders cannot add liquidity during the Opening Process
and would not be accepted from any market participant today. The
addition of these exceptions does not impact any market participant as
today all market participants are restricted from utilizing
``Immediate-or-Cancel''or Add Liquidity Orders.
The Exchange's proposal to amend the requirements within Options 3,
Section 8(c) for GEMX Market Makers to enter Valid Width Quotes by
permitting the Valid Width Quote of one Competitive Market Maker to
open an option series without waiting for the two minute timeframe does
not impose an undue burden on competition. This proposal would allow
the market to open more efficiently as well as enable greater
participation by Competitive Market Makers in the Opening Process.
Primary Market Makers continue to remain obligated to open their
appointed options series. Competitive Market Maker may participate in
the Opening Process, as is the case today, provided they enter Valid
Width Quotes, which is intended to ensure a quality opening. The
Exchange does not believe this proposal would burden the ability of
market participants who enter quotes to participate in the Opening
Process.
The Exchange's proposal to add a sentence to Options 3, Section
8(i) to describe the manner in which the OQR is bound does not impose
an undue burden on competition. OQR is intended to limit the Opening
Price to a reasonable, middle ground price and thus reduce the
potential for erroneous trades during the Opening Process. The
Exchange's method seeks to validate the Opening Price and avoid opening
at aberrant prices for the protection of all investors. This proposed
amendment does not change the manner in which GEMX's System operates
today. The Exchange believes that this rule text will bring greater
transparency to the manner in which the Exchange arrives at an Opening
Price.
The Exchange's proposal to add new rule text at Options 3, Section
8(j)(1)(A) to describe the current operation of the System with respect
to imbalance messages does not impose an undue burden on competition.
The purpose of this proposed text is to provide greater information to
market participants to explain the information that is being conveyed
when an imbalance message indicates ``0'' volume. All market
participants are able to respond to an imbalance messages and have
their interest considered in determining a fair and reasonable Opening
Price.
The Exchange's proposal to adopt an Opening Process Cancel Timer
within Options 3, Section 8(k), similar to NOM's and BX's Rules at
Options 3, Section 8(c), does not impose an undue burden on
competition. Adopting a cancel timer similar to NOM and BX will
increase the efficiency of GEMX's Opening Process for all market
participants. All market participants will have the ability to elect to
have orders returned, except for non-GTC/GTD orders, when symbols do
not open. This feature provides Members with choice about where, and
when, they can send orders for the opening that would afford them the
best experience. The Exchange believes that this additional feature
will attract additional order flow to the Exchange.
The remainder of the proposed rule text is intended to bring
greater transparency to the Opening Process rule while also adding
additional detail and clarity and therefore does not have an impact on
competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-GEMX-2020-09 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-GEMX-2020-09. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be
[[Page 23553]]
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
GEMX-2020-09 and should be submitted on or before May 19, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08941 Filed 4-27-20; 8:45 am]
BILLING CODE 8011-01-P