[Federal Register Volume 82, Number 145 (Monday, July 31, 2017)]
[Notices]
[Pages 35557-35562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81204; File No. SR-MRX-2017-02]
Self-Regulatory Organizations; Nasdaq MRX, LLC; Order Approving
Proposed Rule Change To Amend Various Rules in Connection With a System
Migration to Nasdaq INET Technology
July 25, 2017.
I. Introduction
On May 17, 2017, the Nasdaq MRX, LLC (``MRX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend various Exchange rules in connection with a system migration to
Nasdaq, Inc. (``Nasdaq'') supported technology. The proposed rule
change was published for comment in the Federal Register on June 5,
2017.\3\ On July 14, 2017, the Commission designated a longer period
for Commission action on the proposed rule change, until September 3,
2017.\4\ The Commission received no comment letters on the proposed
rule change. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 80815 (May 30,
2017), 82 FR 25827 (``Notice'').
\4\ See Securities Exchange Act Release No. 81151 (July 14,
2017, 82 FR 33527 (July 20, 2017).
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II. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.\5\
In particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\6\ which requires, among
other things, that the rules of a national securities exchange be
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 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
[[Page 35558]]
general, to protect investors and the public interest. As noted above,
the Commission received no comment letters regarding the proposed rule
change.
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\5\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\6\ 15 U.S.C. 78f(b)(5).
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The Exchange proposes to amend various Exchange rules to reflect
the MRX system migration to a Nasdaq INET technology.\7\ In connection
this system migration, as discussed below, the Exchange intends to
adopt certain trading functionality currently utilized on Nasdaq
Exchanges.\8\
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\7\ INET is utilized across Nasdaq's markets, including The
NASDAQ Options Market LLC (``NOM''), NASDAQ PHLX LLC (``Phlx''), and
NASDAQ BX, Inc. (collectively, the ``Nasdaq Exchanges''). See
Notice, supra note 3, at 25827. The Commission also recently
approved Nasdaq ISE, LLC's (formerly International Securities
Exchange, LLC) (``ISE'') and Nasdaq GEMX, LLC's (formerly ISE
Gemini, LLC) migrations to INET. See Securities Exchange Act Release
Nos. 80225 (March 13, 2017), 82 FR 14243 (March 17, 2017) (SR-ISE-
2017-02); 80432 (April 11, 2017), 82 FR 18191 (April 17, 2017) (SR-
ISE-2017-03); 80011 (February 10, 2017), 82 FR 10927 (February 16,
2017) (SR-ISEGemini-2016-17); 80014 (February 10, 2017), 82 FR 10952
(February 16, 2017) (SR-ISEGemini-2016-18).
\8\ See Notice, supra note 3, at 25827. The Exchange anticipates
that it will begin implementation of the proposed rule changes in
the third quarter of 2017. See id. According to the Exchange, the
system migration will be on a symbol by symbol basis. The Exchange
will issue an alert to members in the form of an Options Trader
Alert to provide notification of the symbols that will migrate and
the relevant dates. See id. The Exchange has also separately filed a
companion proposed rule change to amend the Exchange's opening
process in connection with the system migration to INET technology.
See Securities Exchange Act Release No. 80937 (June 15, 2017), 82 FR
28113 (June 20, 2017) (SR-MRX-2017-01). The Exchange proposes to
replace its current opening process at Rule 701 with Phlx's opening
process. See Phlx Rule 1017.
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A. Trading Halts
1. Cancellation of Quotes
The Exchange proposes to amend MRX Rule 702 (Trading Halts) to
conform the treatment of orders and quotes on the Exchange to Phlx Rule
1047(f). Specifically, the Exchange proposes to amend Rule 702(a)(2) to
provide that during a halt the Exchange will maintain existing orders
on the book but not existing quotes. Pursuant to the revision, during
the halt, the Exchange will accept orders and quotes and, for such
orders and quotes, process cancels and modifications. Currently, the
Exchange maintains existing orders and quotes during a trading halt.
With respect to cancels and modifications during a trading halt, the
Exchange represents that the current process on MRX will not change
under the proposed rule change.\9\
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\9\ See Notice, supra note 3, at 25827.
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The Exchange represents that its proposal to maintain existing
orders on the book but not existing quotes during a halt would provide
market participants with clarity as to the manner in which interests
will be handled by the system.\10\ The Exchange believes that, during a
trading halt, the market may move and create risk to market
participants with respect to resting interests.\11\
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\10\ See Notice, supra note 3, at 25834.
\11\ See id.
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The Commission believes that that cancelling existing quotes during
a trading halt would provide market participants the opportunity to
update potentially stale quotes. Further, the Commission notes that the
Exchange will process cancels and modifications for orders as well as
quotes received during a halt. Finally, the Commission further notes
that the proposed treatment of quotes during a halt is consistent with
existing Phlx Rule 1047(f).
2. Limit Up-Limit Down
The Exchange proposes to replace existing MRX Rule 703A (Trading
During Limit Up-Limit Down States in Underlying Securities) with
proposed MRX Rule 702(d).\12\ Specifically, proposed MRX Rule 702(d)
will provide that during a Limit State and Straddle State in the
underlying NMS stock \13\ the Exchange will not open an affected
option.\14\ However, provided the Exchange has opened an affected
option for trading, the Exchange will: (i) Reject Market Orders \15\
and notify members of the reason for such rejection; \16\ (ii) continue
to process Market Orders exposed at the NBBO, pursuant to Supplementary
Material .02 to ISE Rule 1901, pending in the system, and cancel such
Market Order if at the end of the exposure period the affected
underlying is in a Limit or Straddle State; \17\ and (iii) elect Stop
Orders if the condition as provided in MRX Rule 715(d) is met, and,
because such orders become Market Orders, cancel them back and notify
members of the reason for such rejection.\18\ Moreover, when the
security underlying an option class is in a Limit State or Straddle
State, the Exchange will suspend the maximum quotation spread
requirements for market maker quotes in MRX Rule 803(b)(4) and the
continuous quotation requirements in MRX Rule 804(e).\19\ Additionally,
the Exchange will not consider the time periods associated with Limit
States and Straddle States when evaluating whether a market maker has
complied with its continuous quotation requirements in MRX Rule
804(e).\20\
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\12\ The Exchange represents that proposed MRX Rule 702(d) is
similar to Phlx Rule 1047(d). See Notice, supra note 3, at 25828.
\13\ Proposed MRX Rule 702(d) states that capitalized terms used
in Rule 702(d) will have the same meaning as provided for in the
Plan to Address Extraordinary Market Volatility Pursuant to Rule 608
of Regulation NMS, as it may be amended from time to time.
\14\ See proposed MRX Rule 702(d)(1). The Exchange states that
its rules do not currently address the opening rotation in the event
that the underlying NMS stock is open but has entered into a Limit
or Straddle State. See Notice, supra note 3, at 25828.
\15\ For the definition of the term ``Market Orders,'' see MRX
Rule 715(a).
\16\ See proposed MRX Rule 702(d)(2).
\17\ See proposed MRX Rule 702(d)(2). If the affected underlying
is no longer in a Limit or Straddle State after the exposure period,
the Market Order will be processed with normal handling. See id. The
Exchange currently cancels Market Orders pending in the system upon
initiation of a Limit or Straddle State. See Notice, supra note 3,
at 25828.
\18\ See proposed MRX Rule 702(d)(3). MRX currently does not
elect Stop Orders that are pending in the system during a Limit or
Straddle State. Under the proposal, the Exchange will elect Stop
Orders that are pending in the system during a Limit or Straddle
State, if conditions for such election are met; however, because
such orders become Market Orders, they will be cancelled back to the
member with a reason for such rejection. See Notice, supra note 3,
at 25828.
\19\ See proposed MRX Rule 702(d)(4).
\20\ See id.
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The Commission believes that the proposed Rule 702(d) would provide
certainty to market participants regarding the manner in which Limit or
Straddle States would impact the opening process as well as Market
Orders and Stop Orders. The Commission believes that the rejection of
Market Orders (including elected Stop Orders) is reasonably designed to
potentially prevent executions of un-priced orders during times of
significant volatility.\21\ The Commission also notes that processing
rather than cancelling existing Market Orders is reasonable because
these Market Orders are only pending in the system if they are exposed
at the NBBO pursuant to Supplementary Material .02 to ISE Rule 1901 and
would, in any case, be cancelled if at the end of the exposure period
the affected underlying is still in a Limit or Straddle State.\22\
Further, the Commission believes that it is reasonable to permit the
election of Stop Orders that are pending in the system during a Limit
or Straddle State, since, upon election, the orders would be cancelled
back to the members.\23\ Lastly, the Commission notes that proposed MRX
Rule 702(d)(4) is substantively identical to existing MRX Rule 703A(c),
which is being deleted.
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\21\ See Notice, supra note 3, at 25834.
\22\ See Notice, supra note 3, at 25835.
\23\ See id.
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[[Page 35559]]
3. Auction Handling During a Trading Halt
The Exchange proposes to amend certain rules to account for the
impact of a trading halt on the Exchange's auction mechanisms. First,
the Exchange proposes to amend MRX Rule 723 (Price Improvement
Mechanism for Crossing Transactions) regarding the manner in which a
trading halt will impact an order entered into the Price Improvement
Mechanism (``PIM''). Today, if a trading halt is initiated after an
order is entered into the PIM, the Exchange terminates such auction and
eligible interest is executed.\24\ The Exchange proposes to amend the
current process by terminating the auction and not executing eligible
interest when a trading halt occurs.\25\ Similarly, the Exchange also
proposes to amend to MRX Rule 716 (Block Trades) to state that, if a
trading halt is initiated after an order is entered into the Block
Order Mechanism, Facilitation Mechanism, or Solicited Order Mechanism,
the Exchange will automatically terminate such auction without
execution.\26\
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\24\ See Notice, supra note 3, at 25829.
\25\ See proposed MRX Rule 723(d)(5).
\26\ See proposed subsections (c)(3), (d)(3)(iv), and (e)(2)(iv)
of MRX Rule 716. The Exchange represents that this proposed
amendment represents the current process on MRX and is generally
consistent with Phlx Rule 1047(c). See Notice, supra note 3, at
25829.
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The Exchange believes that its proposal to terminate the PIM
auction, Block Order Mechanism, Facilitation Mechanism, and Solicited
Order Mechanism and not execute eligible interest when a trading halt
occurs will provide certainty to participants regarding how their
interest will be handled.\27\ The Exchange believes that, during a
trading halt, the market may move and create risk to market
participants with respect to resting interest.\28\ The Commission
believes that the proposed rule is consistent with the Act and provides
transparency and clarity regarding the handling of these orders during
a trading halt.
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\27\ See Notice, supra note 3, at 25835.
\28\ See id.
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B. Market Order Spread Protection
The Exchange proposes to amend MRX Rule 711 (Acceptance of Quotes
and Orders) by adopting a new mandatory risk protection entitled Market
Order Spread Protection which will apply to Market Orders.\29\ Pursuant
to proposed MRX Rule 711(c), if the NBBO is wider than a preset
threshold at the time a Market Order is received by the Exchange, the
Exchange will reject the order. The Exchange will notify members of the
threshold with a notice, and, thereafter, will notify members of any
subsequent changes to the threshold.\30\ The Exchange represents that
the Market Order Spread Protection will be the same for all options
traded on the Exchange and is applicable to all members that submit
Market Orders.\31\
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\29\ The Exchange states that this mandatory feature is
currently offered on NOM to protect Market Orders from being
executed in very wide markets. See Notice, supra note 3, at 25829.
See also NOM Rules at Chapter VI, Section 6(c).
\30\ See Notice, supra note 3, at 25829. The Exchange proposes
to initially set the threshold to $5, similar to the threshold set
on NOM. See id. The Exchange states that NOM set the differential at
$5 to match the maximum bid/ask differential permitted for quotes on
that exchange. See id. MRX also uses a similar $5 differential. See
id.
\31\ See Notice, supra note 3, at 25829.
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The Exchange believes, and the Commission concurs, that the
proposed Market Order Spread Protection would help mitigate risks
associated with trading errors and help reduce the number of executions
at dislocated prices.\32\ The Commission also notes that the protection
is similar to a mandatory feature currently offered on NOM.\33\
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\32\ See Notice, supra note 3, at 25835.
\33\ See NOM Rules at Chapter VI, Section 6(c).
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C. Acceptable Trade Range
Today, MRX offers a Price Level Protection that places a limit on
the number of price levels at which an incoming order or quote to sell
(buy) would be executed automatically when there are no bids (offers)
from other exchanges at any price for the options series.\34\ The
Exchange proposes to replace the current Price Level Protection with
Phlx's Acceptable Trade Range.\35\ The Exchange states that the
proposed Acceptable Trade Range is a mechanism designed to prevent the
system from experiencing dramatic price swings by preventing the market
from moving beyond set thresholds.\36\ The system will calculate an
Acceptable Trade Range to limit the range of prices at which an order
or quote will be allowed to execute.\37\ Upon receipt of a new order or
quote, the Acceptable Trade Range is calculated by taking the reference
price, plus or minus a value to be determined by the Exchange, where
the reference price is the National Best Bid (``NBB'') for sell orders/
quotes and the National Best Offer (``NBO'') for buy orders/quotes.
Accordingly, the Acceptable Trade Range is: the reference price - (x)
for sell orders/quotes; and the reference price + (x) for buy
orders.\38\ If an order or quote reaches the outer limit of the
Acceptable Trade Range (the ``Threshold Price'') without being fully
executed, then any unexecuted balance will be cancelled.\39\ The
Acceptable Trade Range will not be available for All-or-None
Orders.\40\
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\34\ See Notice, supra note 3, at 25829; MRX Rule 714(b)(1).
\35\ See Phlx Rule 1080(p). Unlike Phlx, MRX does not offer a
general continuous re-pricing mechanism. See id. Accordingly, the
Exchange states that the proposed Acceptable Trade Range will not
include the posting period functionality available today on Phlx.
See Notice, supra note 3, at 25830, n.15. The Exchange will not post
interest that exceeds the outer limit of the Acceptable Trade Range;
rather the interest will be cancelled. See Notice, supra note 3, at
25830. Orders that do not exceed the outer limit of the Acceptable
Trade Range will post to the order book and will reside on the order
book at such price until they are either executed in full or
cancelled by the member. See id.
\36\ See Notice, supra note 3, at 25830.
\37\ See proposed MRX Rule 714(b)(1)(i).
\38\ The Exchange states that the Acceptable Trade Range
settings are tied to the option premium. See Notice, supra note 3,
at 25830, n.16. A table consisting of several steps based on the
premium of an option will be displayed on the Exchange Web site and
used to determine how far the market for a given option will be
allowed to move. See Notice, supra note 3, at 25831. Updates to the
table would be announced via an Exchange alert, generally the prior
day. See id.
\39\ See proposed MRX Rule 714(b)(1)(ii).
\40\ See proposed MRX Rule 714(b)(1)(ii). Today, MRX's Price
Level Protection rule is also not available for All-or-None Orders.
See Notice, supra note 3, at 25830, n.17.
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The Exchange represents that it will set the Acceptable Trade Range
at levels to ensure that it is triggered infrequently.\41\ While the
Acceptable Trade Range settings will be tied to the option premium,
other factors will be considered when determining the exact
settings.\42\ For example, the Exchange states that acceptable ranges
may change if market-wide volatility is high or if overall market
liquidity is low based on historical trends.\43\ To ensure a well-
functioning market, the Exchange believes that different market
conditions may require adjustments to the threshold amounts from time
to time.\44\ Further, while the Acceptable Trade Range settings will
generally be the same across all options traded on the Exchange, MRX
proposes to set them separately based on characteristics of the
underlying security.\45\ For example, the Exchange has generally
observed that options subject to the Penny Pilot program quote with
tighter spreads than options not subject to the Penny Pilot.
Accordingly, the Exchange will set Acceptable Trade Ranges for three
categories of options: (1) Penny Pilot Options trading in one cent
increments for options trading at less than $3.00 and increments of
five cents for options trading at $3.00 or more; (2) Penny Pilot
[[Page 35560]]
Options trading in one-cent increments for all prices; and (3) Non-
Penny Pilot Options.\46\
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\41\ See Notice, supra note 3, at 25830.
\42\ See Notice, supra note 3, at 25831.
\43\ See id.
\44\ See id.
\45\ See id.
\46\ See proposed MRX Rule 714(b)(1)(iii).
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The Exchange represents that the Acceptable Trade Range should
prevent the system from experiencing dramatic price swings by
preventing the market from moving beyond set thresholds.\47\ The
Commission believes that the Acceptable Trade Range is reasonably
designed to prevent executions of orders and quotes at prices that are
significantly worse than the NBBO at the time of an order's submission
and may reduce the potential negative impacts of unanticipated
volatility in individual options. Further, the Commission notes that
the proposed Acceptable Trade Range is similar to an existing mechanism
on Phlx.\48\
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\47\ See Notice, supra note 3, at 25835.
\48\ See Notice, supra note 3, at 25829; Phlx Rule 1080(p).
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D. PMM Order Handling and Opening Obligations
The Exchange proposes to eliminate the Primary Market Maker
(``PMM'') order handling and opening obligations in MRX Rule
803(c).\49\ As described above, with the migration of MRX to the Nasdaq
INET architecture, the Exchange is adopting the Acceptable Trade Range
and opening rotation functionality currently offered on NOM and Phlx,
which do not contain similar requirements for the PMMs as in MRX Rule
803(c).
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\49\ MRX Rule 803(c) provides that, in addition to the
obligations contained in Rule 803 for market makers generally, for
options classes to which a market maker is the appointed PMM, the
PMM shall have the responsibility to: (1) As soon as practical,
address Priority Customer Orders that are not automatically executed
pursuant to Rule 714(b)(1) in a manner consistent with its
obligations under Rule 803(b) by either (i) executing all or a
portion of the order at a price that at least matches the NBBO and
that improves upon the Exchange's best bid (in the case of a sell
order) or the Exchange's best offer (in the case of a buy order); or
(ii) releasing all or a portion of the order for execution against
bids and offers on the Exchange; and (2) initiate trading in each
series pursuant to Rule 701 (Trading Rotations).
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The Exchange represents that PMMs' current obligations are no
longer necessary due to the introduction of the Acceptable Trade Range
and proposed changes to the Exchange's opening process.\50\ The
Exchange states that its proposal to conform the Exchange's opening
process to Phlx Rule 1017 will result in an opening initiated by the
receipt of an appropriate number of valid width quotes by the PMM or
Competitive Market Maker, instead of an opening process initiated by a
PMM.\51\ Similarly, the Exchange believes the proposed Acceptable Trade
Range functionality will continue to provide order protection to
members without imposing any PMM obligations.\52\ The Exchange further
represents that NOM and Phlx do not impose similar PMM order handling
and opening obligations.\53\ Accordingly, the Commission believes that
these changes are consistent with the Act.
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\50\ See Notice, supra note 3, at 25832. See also supra note 8.
\51\ See Notice, supra note 3, at 25831-32. See also supra note
8.
\52\ See Notice, supra note 3, at 25832. The Exchange states
that Phlx does not currently have similar roles for a Specialist on
its market. See id.
\53\ See Notice, supra note 3, at 25831.
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E. Back-Up PMM
The Exchange proposes to amend Supplementary Material .03 to MRX
Rule 803 to eliminate Back-Up PMMs. Today, any MRX member that is
approved to act in the capacity of a PMM or an ``Alternative Primary
Market Maker'' may voluntarily act as a Back-Up PMM in an options
series in which it is quoting as a Competitive Market Maker
(``CMM'').\54\ With the technology migration, the Exchange believes
that a Back-Up PMM is no longer necessary because under INET the
Exchange will not utilize the order handling obligations present on the
Exchange today.\55\ The Exchange further represents that the proposed
new opening process obviates the importance of such a role because it
would no longer rely on a market maker to initiate the opening
process.\56\ Accordingly, the Commission believes that these changes
are consistent with the Act.
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\54\ See MRX Rule 803, Supplementary Material .03.
\55\ See Notice, supra note 3, at 25832.
\56\ See Notice, supra note 3, at 25832. See also supra note 8.
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F. Market Maker Speed Bump
The Exchange proposes to amend MRX Rule 804 (Market Maker
Quotations) to establish default parameters for certain risk
functionality. The Exchange currently offers a risk protection
mechanism for market maker quotes that removes a member's quotes in an
options class if a specified number of curtailment events occur during
a set time period (``Market Maker Speed Bump'').\57\ In addition, the
Exchange offers a market-wide risk protection that removes a market
maker's quotes across all classes if a number of curtailment events
occur (``Market-Wide Speed Bump'').\58\ MRX Rule 804(g) currently
requires that market makers set curtailment parameters for both the
Market Maker Speed Bump and the Market-Wide Speed Bump. Today, if a
market maker does not set these parameters, for each Market Maker Speed
Bump and the Market-Wide Speed Bump, the system rejects their
quotes.\59\ With the technology migration, the Exchange proposes to
provide default curtailment parameters, which will be determined by the
Exchange and announced to members.\60\ The Commission believes that
this change is consistent with the Act and notes that, although the
Exchange will establish default curtailment settings, market makers
will have discretion to set different curtailment settings appropriate
for their trading and risk tolerance.
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\57\ See MRX Rule 804(g)(1).
\58\ See MRX Rule 804(g)(2).
\59\ See Notice, supra note 3, at 25832.
\60\ See id.
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G. Anti-Internalization
The Exchange proposes to amend Supplementary Material .03 to MRX
Rule 804 (Market Maker Quotations) to adopt an anti-internalization
rule. Today, MRX's functionality prevents Immediate-or-Cancel orders
entered by a market maker from trading with the market maker's own
quote.\61\ The Exchange proposes to replace this self-trade protection
with anti-internalization functionality currently offered on Phlx.\62\
The Exchange proposes to provide that quotes and orders entered by
market makers using the same member identifier will not be executed
against quotes and orders entered on the opposite side of the market by
the same market maker using the same member identifier. In such a case,
the system will cancel the resting quote or order back to the entering
party prior to execution. The proposed anti-internalization
functionality will not apply in any auction. The Exchange states that
this proposed functionality does not modify the duty of best execution
owed to public customer orders.\63\
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\61\ See id.
\62\ See Phlx Rule 1080(p)(2).
\63\ See Notice, supra note 3, at 25833.
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The Exchange represents that the proposal is designed to assist
market makers in reducing trading costs from unwanted executions
potentially resulting from the interaction of executable interest from
the same firm performing the same market making function.\64\ The
Commission believes that the proposed rule is reasonably designed to
prevent the unwanted execution of quotes and orders entered
[[Page 35561]]
by market makers using the same member identifier.
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\64\ See Notice, supra note 3, at 25833, n.33.
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H. Minimum Execution Quantity Orders
The Exchange proposes to amend MRX Rule 715 (Types of Orders) to
remove minimum quantity orders in subpart (q).\65\ The Exchange states
that members have not adopted this feature, and therefore proposes to
remove this order type.\66\ Furthermore, the Exchange proposes to
remove two references to minimum quantity orders in Supplementary
Material .02 to MRX Rule 713 and in Supplementary Material .04 to MRX
Rule 717.
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\65\ A Minimum Quantity Order is an order that is initially
available for partial execution only for a specified number of
contracts or greater. A member may specify whether any subsequent
executions of the order must also be for the specified number of
contracts or greater, or if the balance may be executed as a regular
order. If all executions are to be for the specified number of
contracts or greater and the balance of the order after one or more
partial execution(s) is less than the minimum, such balance is
treated as all-or-none. See MRX Rule 715(q).
\66\ See Notice, supra note 3, at 25833.
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The Exchange states that removing the minimum quantity order type
would simplify functionality available on the Exchange and reduce the
complexity of its order types.\67\ The Exchange further represents that
members have not adopted this feature.\68\ Accordingly, the Commission
believes it is appropriate for the Exchange to remove references to the
minimum quantity order type.
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\67\ See Notice, supra note 3, at 25836.
\68\ See Notice, supra note 3, at 25833.
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I. Cancel and Replace Orders
The Exchange proposes to amend Supplementary Material .02 to MRX
Rule 715 (Types of Orders) to memorialize how the Exchange system will
handle cancel and replace orders in connection with the Exchange's
technology migration to INET.\69\ Currently, Exchange members can send
a Cancel and Replace Order in one message, which allows the replacement
order to retain the time priority of the cancelled order, subject to
certain exceptions.\70\ However, currently the Exchange does not apply
price or other reasonability checks to the replacement order for all
Cancel and Replace Orders.\71\ For example, the Exchange notes that
currently, a Cancel and Replace Order which reduced the size of an
original order from 600 to 300 contracts would not be subject to price
or other reasonability checks.\72\
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\69\ See id.
\70\ See id. The Exchange notes that, instead of sending a
Cancel and Replace Order, a Member can separately send a
cancellation message and a new order, for which the Exchange would
apply price or other reasonability checks, but the new order would
not retain the priority of the original order. See id. This behavior
will not change. See id.
\71\ See Notice, supra note 3, at 25833.
\72\ See id.
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The Exchange now proposes to define the Cancel and Replace Order to
ensure that price and other reasonability checks are applied to Cancel
and Replace Orders.\73\ The Exchange proposes to define a Cancel and
Replace Order as a single message for the immediate cancellation of a
previously received order and the replacement of that order with a new
order. If the previously placed order is already partially filled or in
its entirety, the replacement order is automatically canceled or
reduced by the number of contracts that were executed. Additionally,
the replacement order will retain the priority of the cancelled order,
if the order posts to the order book, provided the price is not
amended, size is not increased, or in the case of Reserve Orders, size
is not changed. However, if the replacement portion of a Cancel and
Replace Order does not satisfy the system's price or other
reasonability checks the existing order will be cancelled and not
replaced.\74\
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\73\ See proposed MRX Rule 715, Supplementary Material .02.
\74\ Price and reasonability checks that would be applied
include MRX Rule 710 (Minimum Trading Increments), MRX Rule 711(c)
(proposed Market Order Spread Protection) and MRX Rule 714(b)(2)
(Limit Order Price Protection). See Notice, supra note 3 at 25833,
n.40. The Exchange also notes that, as for other orders, the
Exchange may cancel an order because it does not satisfy a format or
other requirement specified in the Exchange's rules and
specifications. See id.
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The Exchange represents that conducting price or other
reasonability checks for all Cancel and Replace Orders will validate
orders against current market conditions prior to proceeding with the
request to modify the order.\75\ The Exchange further believes that
memorializing Cancel and Replace Order handling will add transparency
to the Exchange's rules and reduce the potential for investor
confusion.\76\
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\75\ See Notice, supra note 3 at 25836.
\76\ See id.
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The Commission notes that other exchanges with a similar order type
permit an order to retain priority if only the size of the order is
decremented.\77\ Accordingly, the Commission believes it is appropriate
for the Exchange to define Cancel and Replace Orders in the manner
proposed.
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\77\ See id.; see Phlx Rule 1080(b)(i)(A).
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J. All-Or-None Orders
The Exchange proposes to amend MRX Rule 715(c) to provide that All-
Or-None Orders\78\ may only be entered into the Exchange's system with
a time-in-force designation of Immediate-Or-Cancel.\79\ Currently, the
Exchange allows users to submit All-Or-None Orders with any time-in-
force designation. As proposed, an All-Or-None Order would be required
to be submitted as an Immediate-Or-Cancel Order and thus will either
execute in its entirety or be cancelled. Because All-Or-None Orders
will either be executed or cancelled, the Exchange also proposes to
remove language stating that All-Or-None Orders can be maintained in
the system in Supplementary Material .02 to MRX Rule 713 and to delete
Supplementary Material .04 to Rule 717, which concerns the exposure of
non-marketable All-Or-None Orders.\80\
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\78\ An All-Or-None Order is a limit or market order that is to
be executed in its entirety or not at all. See MRX Rule 715(c).
\79\ An Immediate-Or-Cancel Order is a limit order that is to be
executed in whole or in part upon receipt, and any portion not so
executed is to be treated as cancelled. See MRX Rule 715(b)(3).
\80\ See Notice, supra note 3, at 25834.
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The Exchange states that this change would remove uncertainty with
respect to the manner in which All-Or-None Orders would be handled in
the order book, because the All-Or-None Order would be canceled if it
cannot be immediately executed in its entirety.\81\ Accordingly, the
Commission believes it is appropriate for the Exchange to require that
All-Or-None Orders be entered with a time-in-force designation of
Immediate-Or-Cancel.
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\81\ See Notice, supra note 3, at 25837.
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K. Delay of Implementation of Directed Orders
Currently, MRX rules provide for the use of Directed Orders.\82\
The Exchange proposes to amend MRX Rule 811 (Directed Orders) to note
that this functionality will not be available as of a certain date in
the third quarter of 2017 to be announced in a notice. The Exchange
represents that it will recommence the Directed Orders functionality on
MRX within one year from the date of the filing of the proposed rule
change. Otherwise, the Exchange will file a rule proposal with the
Commission to remove these rules.
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\82\ See MRX Rule 811.
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The Exchange represents that it proposes to delay the
implementation of the Directed Order functionality on MRX to provide
the Exchange additional time to rebuild the required technology on the
new platform.\83\ The Exchange further represents that members have
been given adequate notice of the implementation dates and
[[Page 35562]]
that the Exchange will provide further notifications to members to
ensure clarity about the delay of implementation of these
functionalities.\84\ The Commission believes that the proposed rule
change helps ensure clarity about the delay of implementation of this
functionality.
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\83\ See Notice, supra note 3, at 25836.
\84\ See id.
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For these reasons, the Commission believes that the proposed rule
change is consistent with the Act.
IV. Conclusion
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\85\ that the proposed rule change (SR-MRX-2017-02) be, and hereby
is, approved.
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\85\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\86\
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\86\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15994 Filed 7-28-17; 8:45 am]
BILLING CODE 8011-01-P