82 FR 21437 - Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding Quote Mitigation

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 87 (May 8, 2017)

[Federal Register Volume 82, Number 87 (Monday, May 8, 2017)]
[Notices]
[Pages 21437-21439]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-09192]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80573; File No. SR-GEMX-2017-04]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Regarding Quote 
Mitigation

May 2, 2017.
    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 26, 2017, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``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 Rule 804(h) regarding quote 
mitigation.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.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 Rule 804, entitled ``Market 
Maker Quotations,'' to specifically amend Rule 804(h) which addresses 
the Exchange's quote traffic mitigation plan to adopt a

[[Page 21438]]

similar quote mitigation plan to that of NASDAQ PHLX LLC (``Phlx'').
    Topaz implemented its quote mitigation plan in 2013, at the time it 
filed its Form 1 application.\3\ At that time, Topaz adopted the same 
quote mitigation plan that was in effect on ISE.\4\
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    \3\ See Securities Exchange Release Act. No. 70050 (July 26, 
2013), 78 FR 46622 (August 1, 2013) (File No. 10-209) (Application 
of Topaz Exchange, LLC for Registration as a National Securities 
Exchange; Findings, Opinion, and Order of the Commission). This 
pilot has since been extended several times.
    \4\ See Securities Exchange Release Act. No. 55161 (February 1, 
2007), 72 FR 4754 (January 24, 2007) (SR-ISE-2006-62) (Order 
Granting Approval To Proposed Rule Change as Modified by Amendment 
Nos. 1 and 2 Thereto, To Implement a Penny Pilot Program To Quote 
Certain Options in Pennies).
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    Currently, GEMX Rule 804(h) provides that GEMX shall utilize a 
mechanism so that newly-received quotations and other changes to the 
Exchange's best bid and offer are not disseminated for a period of up 
to, but not more than one second. Commencing on February 27, 2017, GEMX 
initiated a migration to Nasdaq's INET system over a six week symbol 
rollout.\5\ GEMX completed its symbol migration to INET and began 
mitigating quotes pursuant to a mitigation strategy utilized by Phlx 
today.\6\ GEMX is no longer utilizing the same mitigation strategy that 
it utilized while it operated on its legacy system. INET does not 
currently support the quote mitigation strategy in the current GEMX 
Rule 804(h). The Exchange is proposing to change its quote mitigation 
strategy to one supported by INET. Phlx operates on INET today, the 
same system that GEMX now operates on. The Exchange proposes to amend 
its current rule to adopt a plan for quote mitigation similar to Phlx's 
rule and properly reflect its mitigation process. Phlx's strategy has 
been operating on the INET platform since 2007.
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    \5\ See Options Trader Alert #2017-13.
    \6\ See Options Technical Update #2017-17.
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    Phlx Rule 1082(a)(ii)(C) sets forth the conditions under which Phlx 
disseminates updated quotations based on changes in the Exchange's 
disseminated price and/or size. Phlx disseminates an updated bid and 
offer price, together with the size associated with such bid and offer, 
when: (1) Phlx's disseminated bid or offer price increases or 
decreases; (2) the size associated with Phlx's disseminated bid or 
offer decreases; or (3) the size associated with Phlx's bid (offer) 
increases by an amount greater than or equal to a percentage (never to 
exceed 20%) \7\ of the size associated with the previously disseminated 
bid (offer). Such percentage, which would never exceed 20%, would be 
determined on an issue-by-issue basis by the Exchange and announced to 
membership via Exchange circular. The percentage size increase 
necessary to give rise to a refreshed quote may vary from issue to 
issue, depending, without limitation, on the liquidity, average volume, 
and average number of quotations submitted in the issue. The mitigation 
would apply to all options traded on GEMX.
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    \7\ Phlx has set its percentage to 10%. See http://www.nasdaqtrader.com/content/phlxmemos/2007/jan/0197-07.pdf.
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    The Exchange will not be adopting Phlx Rule 1082(a)(ii)(C)(4). This 
functionality is not necessary on INET. Phlx adopted 1082(a)(ii)(C)(4) 
when it was not operating on INET, with its subsequent replatform to 
INET functionality, 1082(a)(ii)(C)(4) was no longer necessary because 
of the real-time features which exist on INET. The INET functionality 
rendered the rule text in 1082(a)(ii)(C)(4) as unnecessary.
    With the migration to INET, GEMX has set an initial percentage of 
3% as announced in an Options Trader Alert.\8\ GEMX will continue to 
monitor the quote activity on the market and would not notify 
participants of any incremental increase in the size of the Exchange's 
quote until such quote is disseminated to OPRA.
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    \8\ See Options Technical Update #2017-17.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by reducing the number of options quotations required to be 
submitted on the Exchange and, therefore, mitigating the Exchange's 
quote message traffic and capacity. By adopting a quote mitigation plan 
similar to Phlx, the Exchange will continue to mitigate quotes and 
monitor its quote capacity, as is the case today. While the Phlx method 
differs from that of GEMX's rule, the Exchange believes that Phlx's 
method today successfully mitigates quotes on that market. In addition, 
GEMX desires to adopt a similar mitigation as currently utilized by its 
affiliated market, as it now operates on the same architecture.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Phlx quote mitigation process has been in place since 2007. 
Phlx is operating on the INET system today, the same system that GEMX 
was recently migrated to for its operating system. The Exchange 
believes that Phlx's quote mitigation process has successfully 
controlled Phlx's quote capacity. The Exchange believes that it is 
reasonable to utilize a similar process as Phlx to mitigate quotes for 
GEMX given the system architecture is utilized on both of these 
markets. Nasdaq, Inc., a common parent to Phlx and GEMX, has experience 
with this quote mitigation strategy on INET. The Exchange has selected 
to mitigate GEMX at 3% initially because, unlike Phlx, which is a 
mature market with various auction offerings and higher volumes, GEMX 
is a not as large in volume and has fewer functional offerings, e.g. 
complex orders and floor trading. The Exchange notes that it will 
continue to monitor quotes on GEMX and make adjustments as necessary.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange proposes to 
mitigate all options trading on GEMX. All options exchanges have a 
quote mitigation process in place in connection with their 
participation in the Penny Pilot Program.

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \11\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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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[[Page 21439]]

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \13\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The Commission notes that GEMX (formerly known as Topaz Exchange, LLC) 
was approved as an Exchange on July 26, 2013, and its rules at that 
time provided for a quote mitigation plan.\15\ According to the 
Exchange, GEMX transitioned to a new operating platform (INET) on April 
3, 2017; however, this platform does not support the quote mitigation 
strategy in current GEMX Rule 804(h). The Exchange represents that 
since GEMX transitioned to INET, it has been mitigating quotes pursuant 
to the quote mitigation strategy used by Phlx today. The Exchange 
represents that the proposal would allow the Exchange to operate a 
quote mitigation plan on the INET platform and effectively mitigate the 
amount of options quote traffic on the Exchange. Accordingly, the 
Commission hereby waives the operative delay and designates the 
proposal operative upon filing.\16\
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ See note 3, supra.
    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-GEMX-2017-04 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-2017-04. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-GEMX-2017-04 and should be 
submitted on or before May 30, 2017.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09192 Filed 5-5-17; 8:45 am]
 BILLING CODE 8011-01-P