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[Federal Register Volume 90, Number 12 (Tuesday, January 21, 2025)]
[Notices]
[Pages 7205-7227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-01290]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102190; File No. SR-IEX-2025-02]

Self-Regulatory Organizations; Investors Exchange LLC; Notice of 
Filing of a Proposed Rule Change to Adopt Rules to Govern the Trading 
of Options on the Exchange for a New Facility Called IEX Options

January 14, 2025.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on January 10, 2025, the Investors Exchange LLC (``IEX'' 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 self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 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

    Pursuant to the provisions of Section 19(b)(1) under the Act,\4\ 
and Rule 19b-4 thereunder,\5\ the Exchange is filing with the 
Commission a rule change proposal to adopt rules to govern the trading 
of options on IEX Options LLC, a facility of the Exchange that will be 
established in a separate rule filing (referred to herein as ``IEX 
Options''). As proposed, the Exchange will operate IEX Options as a 
fully automated trading system built on the core functionality of the 
Exchange's approved equities platform, and in a manner similar to that 
of other options exchanges. In addition, IEX Options will utilize a de 
minimis delay on incoming order and quote messages designed to enable 
IEX to update its view of the market prior to processing orders and 
quotes, and an optional Market Maker quote parameter designed to 
protect Market Makers from excessive risk due to execution of stale 
quotes, in addition to other risk protections substantially similar to 
those offered by other options exchanges.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available at the Exchange's 
website at https://www.iexexchange.io/resources/regulation/rule-filings, 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 the 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Overview
    The Exchange proposes to adopt a series of rules in connection with 
IEX Options, which will be a facility of the Exchange.\6\ As proposed, 
the Exchange will operate IEX Options as a fully automated trading 
system built on the core functionality of the Exchange's approved 
equities platform, and in a manner similar to that of other options 
exchanges.\7\
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    \6\ IEX will file a separate proposed rule change with the 
Commission pursuant to Section 19 of the Act to provide that IEX 
Options will be operated by IEX Options LLC, a Delaware limited 
liability company wholly owned by the Exchange, as a facility of the 
Exchange as that term is defined in Section 3(a)(2) of the Act.
    \7\ The IEX Options proposed rules are largely based on the 
rules of other options exchanges, as described herein. When a 
particular proposed rule is described as ``substantively identical'' 
to a rule(s) of another exchanges that means that the substance of 
the proposed IEX Options rule is identical to the referenced rule of 
the other exchange, with differences only to reflect terminology and 
numbering. When a particular proposed rule is described as 
``substantially similar'' to a rule(s) of another exchange this rule 
filing describes the relevant differences.
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    As proposed, IEX Options will operate an electronic trading system 
to list and trade options issued by the Options Clearing Corporation 
(``Clearing Corporation'' or ``OCC''). Specifically, IEX proposes to 
operate a fully automated, pro-rata priority options market in a manner 
similar to that of other options exchanges. In addition, IEX Options 
will utilize a de minimis delay on incoming order and quote messages 
designed to enable IEX to update its view of the market prior to 
processing orders and quotes, and an optional Market Maker quote 
parameter designed to protect Market Makers from

[[Page 7206]]

excessive risk due to execution of stale quotes, in addition to other 
risk protections substantially similar to those offered by other 
options exchanges.
    The Exchange proposes to adopt rules applicable to IEX Options that 
are substantially similar to the approved rules of the MEMX, C1, MIAX, 
and NYSE Amex and Arca options exchanges, with the material proposed 
differences described herein.\8\
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    \8\ See rulebooks of MEMX LLC (``MEMX''), Cboe Exchange, Inc. 
(``C1''), Miami International Securities Exchange, LLC (``MIAX''), 
NYSE Arca, Inc. (``NYSE Arca Options''), and NYSE American LLC 
(``NYSE Amex Options''). However, IEX is not proposing to trade 
index options at this time and therefore is not proposing rules for 
the listing and trading of index options.
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    As provided in proposed Rule 17.110 (Applicability), existing 
Exchange Rules \9\ applicable to the IEX equities market contained in 
Chapters 1 through 16 of the Exchange Rules will apply to Options 
Members unless a specific Exchange Rule applicable to the IEX Options 
market (in proposed Chapters 17 through 29 of the Exchange Rules) 
governs or unless the context otherwise requires.
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    \9\ See IEX Rule 1.160(jj).
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    The IEX Options Trading System \10\ will provide for the electronic 
display and execution of orders on a pro-rata basis. All Exchange 
Members will be eligible to participate in IEX Options by qualifying as 
Options Members \11\ and obtaining one or more trading permits for 
their activity on IEX Options, in accordance with applicable IEX 
Options rules. The IEX Options Trading System will provide an optional 
routing service for orders when trading interest is not present on IEX 
Options and will comply with all applicable securities laws and 
regulations and the obligations of the Options Order Protection and 
Locked/Crossed Market Plan.
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    \10\ See proposed Rule 22.100(a).
    \11\ See proposed Rule 17.100.
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IEX Options Members
    Pursuant to the proposed rules in Chapter 18 (Participation on IEX 
Options), the Exchange will authorize any Exchange Member that meets 
certain enumerated qualification requirements (any such Member, an 
``Options Member'') and any Options Member's Sponsored Participants to 
obtain access to, and transact business on, IEX Options.\12\
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    \12\ See proposed Rules 18.100, 18.110, 18.120, and 18.130.
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    There will be three types of Options Members--Options Order Entry 
Firms (``OEFs''), Options Market Makers, and Options Clearing Members. 
Options Members may act in one, two, or all such capacities. OEFs will 
be those Options Members representing Customer Orders as agent on IEX 
Options or trading as principal on IEX Options. Options Market Makers, 
in turn, will be eligible to participate as Registered Market Makers or 
Specialists, as set forth in Rule 23.100. Additionally, all Options 
Market Makers may participate as Directed Marker Makers.\13\ Clearing 
Members will be those Options Members that have been admitted to 
membership in the Clearing Corporation pursuant to the provisions of 
the Rules of the Clearing Corporation and are self-clearing or that 
clear IEX Options Transactions for other Options Members.
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    \13\ Directed Market Makers are subject to enhanced quoting 
obligations (as compared to Registered Market Makers) as set forth 
in proposed Rule 23.150(e)(3), which is substantively identical to 
NYSE Amex Options Rule 964.1NYP.
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    IEX proposes to issue different types of Trading Permits to Options 
Members that allow the Trading Permit Holders to: (i) trade one or more 
products authorized for trading on the Exchange; (ii) act in one or 
more trading functions authorized by the Rules of IEX Options; and/or 
(iii) act as a Clearing Member.\14\ Trading Permits shall be for the 
types and terms as shall be determined by the Exchange from time to 
time, and subject to effectiveness of one or more rule filings pursuant 
to Section 19(b) of the Act. The proposed rule governing IEX's Trading 
Permits, 18.140, is based on C1 Rule 3.1.\15\
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    \14\ See proposed Rule 18.140.
    \15\ On C1, part of the process of applying to be a Trading 
Permit Holder is for a broker-dealer to qualify as a participant or 
member of the exchange. IEX's proposed rule therefore differs from 
C1 Rule 3.1 because it does not include the membership 
qualification-related provisions that are addressed elsewhere in 
IEX's proposed Chapter 18. In particular, IEX is not proposing to 
incorporate C1 Rule 3.1(a)(3)'s language regarding jurisdiction over 
Trading Permit Holders because it is covered by Rule 2.120 
(requiring all IEX Members to consent to the Exchange's 
jurisdiction) and proposed Rule 18.140(e) (applying the Exchange's 
jurisdictional authority to all Options Members). In addition, C1's 
rule includes limitations on the number of trading permits the 
exchange may issue. IEX is not proposing such limitations.
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    The rules governing Registered Market Makers and Specialists are 
substantially based on MIAX and C1 rules.\16\ To become an Options 
Market Maker, an Options Member will be required to register by filing 
a written application and obtain any required trading permits.\17\ The 
Exchange will not place any limit on the number of entities that may 
become Options Market Makers, the number of appointments an Options 
Market Maker may have, or the number of Options Market Makers that may 
have appointments in a class unless the Exchange determines to impose 
any such limit based on system constraints, capacity restrictions, or 
other factors relevant to protecting the integrity of the Trading 
System. The Exchange will not impose any such limitations until it has 
submitted objective standards for imposing the limits to the Commission 
for its review and approval.\18\
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    \16\ See MIAX Rules 600-609 (regarding market maker 
qualifications and obligations) and MIAX Rules 514(d),(e), and (g) 
(regarding market maker quoting and priority). The primary 
differences between these MIAX rules and IEX's proposed Market Maker 
rules are: (1) MIAX has three tiers of market makers, while IEX 
proposes to have two tiers; (2) MIAX puts Market Makers at a 
priority level above other non-Priority Customer interest, while IEX 
will not (IEX's proposed rules are substantively identical to the 
priority rules in C1 Rule 5.32 as it pertains to C1's Preferred 
Market Makers); (3) IEX proposes to allocate participation 
entitlements for Specialists with a priority quote based on the 
amount of non-Priority customer interest (which is how C1 Rule 
5.32(a)(2)(B) allocates priority overlays), while MIAX only looks at 
the amount of other market maker interest; and (4) MIAX offers a 
Market Turner priority overlay which IEX is not proposing to adopt.
    \17\ See proposed Rules 23.100 and 18.140.
    \18\ This provision is substantively identical to MEMX Rule 
22.2(c) and MIAX Rule 600(d).
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    As proposed, the Exchange shall appoint Registered Market Makers to 
one or more classes of options contracts traded on the Exchange. In 
making such appointments the Exchange shall consider the financial 
resources available to the Registered Market Maker, the Registered 
Market Maker's experience and expertise in market making or options 
trading, the preferences of the Registered Market Maker to receive 
appointments in specific options classes, and the maintenance and 
enhancement of competition among Registered Market Makers in each class 
of options contracts to which they are appointed.\19\
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    \19\ See proposed Rule 23.120(a)(1).
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    While there may be several Registered Market Makers appointed to a 
particular class of options contracts, the Exchange may appoint only 
one Specialist to each options class traded on the Exchange.\20\ To be 
appointed as a Specialist, an Options Member must first satisfy the 
criteria for appointment as a Registered Market Maker set forth in Rule 
23.120(a)(1) and then must participate in the Specialist Qualification 
Process conducted by the Exchange and detailed in proposed Rule 
23.130(b).\21\ Factors to

[[Page 7207]]

be considered for selection as a Specialist include, but are not 
limited to, representations regarding capital operations, personnel or 
technical resources.\22\ After designating certain Market Makers as 
Specialists, the Exchange will conduct a process to determine which 
options classes to allocate to which Specialist, based upon which 
candidate appears best able to perform the functions of a Specialist in 
the designated options classes. Factors to be considered in the 
allocation of options classes to Specialists by the Exchange include, 
but are not limited to the following: experience with trading the 
options issue; adequacy of capital; willingness to promote the Exchange 
as a marketplace; operational capacity; support personnel; history of 
adherence to Exchange rules and securities laws; and evaluations made 
pursuant to Rule 23.130(f).\23\ The Exchange will also consider the 
number and quality of issues that have been allocated, reallocated or 
transferred to a Specialist and the Specialist's willingness to promote 
the Exchange as a marketplace.\24\
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    \20\ See proposed Rule 23.130(g)(1)(A), which is substantively 
identical to NYSE Amex Options Rule 923NY(b). The language providing 
that the Exchange ``may'' appoint only one Specialist to each 
options class is based upon and substantively identical to NYSE Amex 
Options Rule 923NY(b).
    \21\ IEX based the proposed Specialist rule (23.130) on NYSE 
Amex Options Rules 927NY, 927.1NY, and 927.2NY because these rules 
provide clear instructions to prospective Specialist candidates 
about the manner in which the Exchange selects and evaluates 
Specialists, and detailed rules about Specialist rights and 
obligations.
    \22\ See proposed Rule 23.130(b)(1). This rule is substantively 
identical to NYSE Amex Options Rule 927NY, with the exception that 
IEX is not proposing to obligate Specialists to make FLEX quotes, 
because those are not offered by the Exchange.
    \23\ See proposed Rule 23.130(g). This rule is substantively 
identical to NYSE Amex Options Rule 927.2NY
    \24\ Id.
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    The Exchange will also evaluate the performance of Specialists, and 
upon a finding that a Specialist failed to meet minimum performance 
standards, may take adverse action against the Specialist; Specialists 
shall have the right to appeal any adverse actions against them 
pursuant to IEX Rule Series 9.500, which governs adverse actions.\25\
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    \25\ See proposed Rule 23.130(b)(2), and (f). These rules are 
substantively identical to NYSE Amex Options Rules 927NY(b)(2) and 
927.1NY, respectively.
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    Quotations may only be entered by a Market Maker and only in 
classes of options contracts to which the Market Maker is 
appointed.\26\ Market Makers may also submit orders in classes of 
options contracts to which the Market Maker is appointed, which shall 
constitute a quote, and thus would help to satisfy the Market Maker's 
quoting obligation.\27\ In addition, an Options Market Maker with an 
OEF trading permit may submit orders in classes of options in which the 
Market Maker has no appointment, provided that the total number of such 
orders executed by the Market Maker do not exceed 25% of all contracts 
the Market Maker executes on the Exchange in any calendar quarter.\28\
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    \26\ See proposed Rule 23.150(a).
    \27\ See proposed Rule 17.100 (defining ``Quote'' to include 
orders entered by a Market Maker in the option series to which such 
Market Maker is registered).
    \28\ See proposed Rule 23.150(g).
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    Options Market Makers will be required to electronically engage in 
a course of dealing reasonably calculated to contribute to the 
maintenance of fair and orderly markets.\29\ IEX does not propose to 
incorporate MIAX's requirement that Market Makers refrain from 
purchasing an option at a price more than $0.25 below parity,\30\ 
because IEX does not believe the restriction is necessary to the 
maintenance of fair and orderly markets requirement, and notes that 
other exchanges do not include this restriction.\31\ Market Makers will 
be required to maintain a two-sided market on a continuous basis \32\ 
in at least 60% of the non-adjusted options series to which they are 
appointed as Registered Market Makers and at least 90% of the non-
adjusted options series to which they are appointed as Specialists, 
provided the options classes have a time to expiration of less than 
nine months.\33\ And, as noted above, Directed Market Makers are 
subject to enhanced quoting obligations compared to Registered Market 
Makers.\34\ Market Makers and Specialists may use quotes and orders to 
meet the applicable quoting requirements. These obligations will not 
apply to an intra-day add-on series on the day during which such series 
was added for trading. Market Maker quotes must be firm quotes that 
comply with enumerated price and size rules.\35\ These obligations also 
will not apply when an Options series is halted because the underlying 
security has entered a Limit or Straddle state.\36\ Registered Market 
Makers and Specialists also must maintain minimum net capital in 
accordance with Commission and Exchange rules.\37\ Substantial or 
continued failure by an Options Market Maker to meet any of its 
obligations and duties will subject the Options Market Maker to 
disciplinary action, suspension, or revocation of the Market Maker's 
registration as such or its appointment in one or more of its appointed 
options classes.\38\
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    \29\ See proposed Rule 23.140(a).
    \30\ See MIAX rule 603(a).
    \31\ See, e.g., NYSE Arca Options Rule 6.37-O.
    \32\ ``Continuous quoting'' is defined as 90% of the time. See 
proposed Rule 23.150(e).
    \33\ See proposed Rule 23.150(e)(2) and (e)(1). Proposed Rule 
23.150(e)(1) is based upon and substantively identical to NYSE Amex 
Options Rule 925.1NYP(b) and proposed Rule 23.150(e)(2) is based 
upon and substantively identical to NYSE Amex Options Rule 
925.1NYP(c).
    \34\ See supra note 13.
    \35\ See proposed Rule 23.150(b) and (d).
    \36\ See Supplementary Material .01 to proposed Rule 23.150(h), 
which is substantively identical to MIAX Rule 530(f)(1).
    \37\ See proposed Rule 23.180 ($200,000 net capital requirement 
for Registered Market Makers), which is substantively identical to 
MEMX Rule 22.9 and proposed Rule 23.130(c)(1)(H) ($1,000,000 net 
capital requirement for Specialists), which is substantively 
identical to Amex Options Rule 927NY(c)(10).
    \38\ See proposed Rule 23.120(f). NYSE Amex Options Rule 
927.1NY(1)(B) specifies that NYSE Amex Options provides its 
specialists information related to their market share in allocated 
issues on a monthly basis as part of the evaluation process. IEX is 
not proposing to include this provision because it understands that 
Specialist firms are well-equipped to monitor their market share and 
performance on IEX and other markets.
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    As on other exchanges, Options Market Makers receive certain 
benefits for carrying out their duties. For example, a lender may 
extend credit to a broker-dealer without regard to the restrictions in 
Regulation T of the Board of Governors of the Federal Reserve System if 
the credit is to be used to finance the broker-dealer's activities as a 
specialist or market maker on a national securities exchange. Thus, an 
Options Market Maker has a corresponding obligation to hold itself out 
as willing to buy and sell options for its own account on a regular or 
continuous basis to justify this favorable treatment.
    Every Options Member shall at all times maintain membership in 
another registered options exchange that is not registered solely under 
Section 6(g) of the Exchange Act or in FINRA.\39\ OEFs and other 
Options Members that transact business with Public Customers must at 
all times be members of FINRA. Pursuant to proposed Rule 18.110(h), 
every Options Member will be required to have at least one registered 
Options Principal who satisfies the criteria of that rule, including 
the satisfaction of a proper qualification examination. An OEF may only 
transact business with Public Customers if such Options Member also is 
an Options Member of another registered national securities exchange or 
association with which the Exchange has entered into an agreement under 
Rule 17d-2 under the Exchange Act \40\ pursuant to which such other 
exchange or association shall be the designated options examining 
authority for the OEF.\41\
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    \39\ See proposed Rule 18.110(g).
    \40\ 17 CFR 240.17d-2.
    \41\ See Rule 27.100.
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    The proposed rules relating to qualification and participation on 
IEX Options as an Options Member (including as an OEF, Options Market

[[Page 7208]]

Maker, or Clearing Member) are substantively identical to the relevant 
rules of MEMX Options.\42\
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    \42\ See MEMX Rulebook Chapters 17 and 22.
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    As provided in proposed Rule 17.110, existing Exchange Rules 
applicable to the IEX equities market contained in Chapters 1 through 
16 of the Exchange Rules will apply to Options Members unless a 
specific Exchange Rule applicable to the IEX Options market (proposed 
Chapters 17 through 29 of the Exchange Rules) governs or unless the 
context otherwise requires. Options Members can therefore provide 
sponsored access to the IEX Options Exchange to a non-Member (i.e., a 
Sponsored Participant) pursuant to Rule 11.130 of the Exchange Rules.
Definitions
    The Exchange proposes to define a series of terms under proposed 
Rule 17.100 (Definitions), which are to be used in proposed Chapters 17 
to 29 relating to the trading of options contracts on the Exchange. 
Unless otherwise indicated, all of the terms defined in proposed Rule 
17.100 are either identical or substantially similar to definitions 
included in MEMX Rule 16.1. Any modifications to the MEMX definitions, 
or definitions based upon the rules of other exchanges are specifically 
indicated below.
    The definitions under proposed Rule 17.100 are as follows:
     ABBO. The term ``ABBO'' or ``Away Best Bid or Offer'' 
means the best bid(s) or offer(s) disseminated by other Eligible 
Exchanges (as defined in Rule 28.100) and calculated by the Exchange 
based on market information the Exchange receives from OPRA.\43\
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    \43\ IEX notes that this definition differs from the MEMX 
definition of ABBO by spelling out the phrase ``Away Best Bid or 
Offer'' that ABBO refers to for added clarity.
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     Aggregate Exercise Price. The term ``Aggregate Exercise 
Price'' means the exercise price of an options contract multiplied by 
the number of units of the underlying security covered by the options 
contract.
     American-Style Option. The term ``American-Style'' option 
means an options contract that, subject to the provisions of Rule 
24.100 (relating to the cutoff time for exercise instructions) and to 
the Rules of the Clearing Corporation, may be exercised at any time 
from its commencement time until its expiration.
     Associated Person and Person Associated with an Options 
Member. The terms ``associated person'' and ``person associated with an 
Options Member'' mean any partner, officer, director, or branch manager 
of an Options Member (or any person occupying a similar status or 
performing similar functions), any person directly or indirectly 
controlling, controlled by, or under common control with an Options 
Member or any employee of an Options Member, except that any person 
associated with an Options Member whose functions are solely clerical 
or ministerial shall not be included in the meaning of such term for 
purposes of these Rules.
     Bid. The term ``bid'' means a Limit order to buy one or 
more options contracts.
     Board. The term ``Board'' means the Board of Directors of 
Investors' Exchange LLC.
     Call. The term ``call'' means an options contract under 
which the holder of the option has the right, in accordance with the 
terms of the option, to purchase from the Clearing Corporation the 
number of shares of the underlying security covered by the options 
contract.
     Capacity. The term ``capacity'' means the capacity in 
which a User submits an order, which the User specifies by applying the 
corresponding code to the order. The capacity codes available on IEX 
Options will be listed in publicly available specifications and 
published in a Regulatory Circular.
     Class of Options. The terms ``class'' or ``class of 
options'' mean all options contracts with the same unit of trading 
covering the same underlying security.
     Clearing Corporation and OCC. The terms ``Clearing 
Corporation'' and ``OCC'' mean The Options Clearing Corporation.
     Clearing Member. The term ``Clearing Member'' means an 
Options Member that is self-clearing or an Options Member that clears 
IEX Options Transactions for other Options Members.
     Closing Purchase Transaction. The term ``closing purchase 
transaction'' means an IEX Options Transaction that reduces or 
eliminates a short position in an options contract.
     Closing Writing Transaction. The term ``closing writing 
transaction'' means an IEX Options Transaction that reduces or 
eliminates a long position in an options contract.
     Control. The term ``control'' means the power to exercise 
a controlling influence over the management or policies of a person, 
unless such power is solely the result of an official position with 
such person. Any person who owns beneficially, directly or indirectly, 
more than 20% of the voting power in the election of directors of a 
corporation, or more than 25% of the voting power in the election of 
directors of any other corporation which directly or through one or 
more affiliates owns beneficially more than 25% of the voting power in 
the election of directors of such corporation, shall be presumed to 
control such corporation.\44\
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    \44\ This definition is substantively identical to the 
definition in C1 Rule 1.1. IEX proposes to incorporate this 
definition, because the term is not specifically defined in the MEMX 
rulebook and IEX believes that term would provide helpful context to 
Options Members with respect to other rules that use the term, e.g., 
proposed IEX Rule 19.200.
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     Covered Short Position. The term ``covered short 
position'' means (i) an options position where the obligation of the 
writer of a call option is secured by a ``specific deposit'' or an 
``escrow deposit'' meeting the conditions of Rules 610(f) or 610(g), 
respectively, of the Rules of the Clearing Corporation, or the writer 
holds in the same account as the short position, on a share-for-share 
basis, a long position either in the underlying security or in an 
options contract of the same class of options where the exercise price 
of the options contract in such long position is equal to or less than 
the exercise price of the options contract in such short position; and 
(ii) an options position where the writer of a put option holds in the 
same account as the short position, on a share-for-share basis, a long 
position in an options contract of the same class of options where the 
exercise price of the options contract in such long position is equal 
to or greater than the exercise price of the options contract in such 
short position.
     Customer. The term ``Customer'' means a Public Customer or 
a broker-dealer.
     Customer Order. The term ``Customer order'' means an 
agency order for the account of a Customer.
     Directed Order. The term ``Directed Order'' is an order 
entered into the Trading System by an Options Member with a designation 
for a Market Maker in that class (referred to as a ``Directed Market 
Maker'' or ``DMM''). To qualify as a Directed Order, an order must be 
entered on behalf of a Priority Customer.\45\
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    \45\ This definition is based upon the definition in MIAX 
Options Exchange (``MIAX'') Rule 100, with the distinction that IEX 
proposes to make any Market Maker eligible to receive a Directed 
Order, while MIAX only allows their Lead Market Makers (akin to 
IEX's proposed ``Specialists'') and Primary Lead Market Makers 
eligible; this aspect of IEX's proposed rule change is based upon 
and substantially similar to C1 Rule 5.32. Additionally, IEX 
proposes to include language in the last sentence of this definition 
based on NYSE Amex Rule 900.3NYP(i)(4) to clarify that an order 
submitted on behalf of a non-Priority Customer would be treated as a 
non-Directed Order.
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     Discretion. The term ``discretion'' means the authority of 
a broker or dealer to determine for a Customer the type of

[[Page 7209]]

option, the class or series of options, the number of contracts, or 
whether options are to be bought or sold.
     European-Style Option. The term ``European-style option'' 
means an options contract that, subject to the provisions of Rule 
24.100 (relating to the cutoff time for exercise instructions) and to 
the Rules of the Clearing Corporation, can be exercised only on its 
expiration date.
     Exchange Act. The term ``Exchange Act'' or ``Act'' means 
the Securities Exchange Act of 1934, as amended, or Rules thereunder.
     Exercise Price. The term ``exercise price'' means the 
specified price per unit at which the underlying security may be 
purchased or sold upon the exercise of an options contract.
     He, Him, and His. The terms ``he,'' ``him'' and ``his'' 
are deemed to refer to persons of female as well as male gender, and to 
include organizations, as well as individuals, when the context so 
requires.
     IEX Exchange and Exchange. The terms ``IEX Exchange'' and 
``Exchange'' mean Investors' Exchange LLC, a registered national 
securities exchange.
     IEX Options. The term ``IEX Options'' means IEX Options 
LLC, a Delaware limited liability company wholly owned by the Exchange, 
which operates as an options trading facility of the Exchange under 
Section 3(a)(2) of the Exchange Act.
     IEX Options Book. The term ``IEX Options Book'' means the 
electronic book of options orders maintained by the Trading System.\46\
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    \46\ This definition is substantively identical to the 
equivalent definition in the MEMX rulebook, except that it refers to 
IEX, not MEMX.
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     IEX Options Transaction. The term ``IEX Options 
Transaction'' means a transaction involving an options contract that is 
effected on or through IEX Options or its facilities or systems.\47\
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    \47\ This definition is substantively identical to the 
equivalent definition in the MEMX rulebook, except that it refers to 
IEX, not MEMX.
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     Individual Equity Option. The term ``individual equity 
option'' means an options contract which is an option on an equity 
security.
     Long Position. The term ``long position'' means a person's 
interest as the holder of one or more options contracts.
     Market Makers (and Options Market Makers). The terms 
``Market Makers'' or ``Options Market Makers'' refer collectively to 
Options Members registered, pursuant to Rule 23.100, as either a 
``Registered Market Maker'' or a ``Specialist''.\48\
---------------------------------------------------------------------------

    \48\ This definition is substantively identical to the 
definition in the MIAX rulebook, except that MIAX has three classes 
of Market Makers (Registered Market Makers, Lead Market Makers, and 
Primary Lead Market Makers) while IEX proposes to have two classes 
of Market Makers: Registered Market Makers (equivalent to MIAX 
Registered Market Maker) and Specialists (which is based on MIAX's 
Lead Market Maker and Primary Lead Market Maker rules). IEX proposes 
to incorporate this definition, because the Market Maker rules 
proposed herein are substantially based upon the rules of MIAX.
---------------------------------------------------------------------------

     MPID. The term ``MPID'' means unique market participant 
identifier assigned to an Options Member.
     NBB, NBO, and NBBO. The term ``NBB'' means the national 
best bid, the term ``NBO'' means the national best offer, and the term 
``NBBO'' means the national best bid or offer as calculated by IEX 
Options based on market information received by IEX Options from OPRA.
     Offer. The term ``offer'' means a Limit order to sell one 
or more options contracts.
     OPRA. The term ``OPRA'' means the Options Price Reporting 
Authority.
     Opening Purchase Transaction. The term ``opening purchase 
transaction'' means a IEX Options Transaction that creates or increases 
a long position in an options contract.
     Opening Writing Transaction. The term ``opening writing 
transaction'' means a IEX Options Transaction that creates or increases 
a short position in an options contract.
     Options Contracts. The term ``options contract'' means a 
put or a call issued, or subject to issuance by the Clearing 
Corporation pursuant to the Rules of the Clearing Corporation.
     Options Market Close and Market Close. The terms ``options 
market close'' and ``market close'' mean the time the Exchange 
specifies for the end of a trading session on the Exchange on that 
trading day.
     Options Market Open and Market Open. The terms ``options 
market open'' and ``market open'' mean the time the Exchange specifies 
for the beginning of a trading session on the Exchange on that trading 
day.
     Options Member. The term ``Options Member'' means a firm, 
or organization that is registered with the Exchange pursuant to 
Chapter 18 of these Rules for purposes of participating in options 
trading on IEX Options as an ``Options Order Entry Firm'', ``Options 
Market Maker'', or ``Clearing Member.''
     Options Member Agreement. The term ``Options Member 
Agreement'' means the agreement to be executed by Options Members to 
qualify to participate on IEX Options.
     Options Order Entry Firm, Order Entry Firm, and OEF. The 
terms ``Options Order Entry Firm'' and ``Order Entry Firm'' or ``OEF'' 
mean those Options Members representing as agent Customer Orders on IEX 
Options and those non-Market Maker Members conducting proprietary 
trading.
     Options Principal. The term ``Options Principal'' means a 
person engaged in the management and supervision of the Options 
Member's business pertaining to options contracts that has 
responsibility for the overall oversight of the Options Member's 
options related activities on the Exchange.
     Order. The term ``order'' means a firm commitment to buy 
or sell options contracts as defined in Rule 22.100.
     Outstanding. The term ``outstanding'' means an options 
contract which has been issued by the Clearing Corporation and has 
neither been the subject of a closing writing transaction nor has 
reached its expiration date.
     Primary Market. The term ``primary market'' means the 
primary exchange on which an underlying security is listed.\49\
---------------------------------------------------------------------------

    \49\ This definition is based on the definition in C1 Rule 1.1, 
because IEX believed the definition was easier to understand than 
the equivalent definition in the MEMX rulebook.
---------------------------------------------------------------------------

     Priority Customer and Priority Customer Order. The term 
``Priority Customer'' means any person or entity that is not: (A) a 
broker or dealer in securities; or (B) a Professional. The term 
``Priority Customer Order'' means an order for the account of a 
Priority Customer.
     Professional. The term ``Professional'' means any person 
or entity that (A) is not a broker or dealer in securities; and (B) 
places more than 390 orders in listed options per day on average during 
a calendar month for its own beneficial account(s). All Professional 
orders shall be appropriately marked by Options Members.\50\
---------------------------------------------------------------------------

    \50\ See Proposed Supplementary Material .01 to Rule 17.100, 
which sets forth the methodology for calculation of Professional 
orders.
---------------------------------------------------------------------------

     Protected Quotation. The term ``Protected Quotation'' has 
the meaning provided in Rule 28.100.
     Public Customer and Public Customer Order. The term 
``Public Customer'' means a person that is not a broker or dealer in 
securities. The term ``Public Customer Order'' means an order for the 
account of a Public Customer.
     Put. The term ``put'' means an options contract under 
which the holder of the option has the right, in accordance with the 
terms and provisions of the option and the Rules of the OCC, to sell to 
the Clearing Corporation the number of units of the underlying security 
covered by the

[[Page 7210]]

options contract, at a price per unit equal to the exercise price, upon 
the timely exercise of such option.
     Quarterly Options Series. The term ``Quarterly Options 
Series'' means a series in an options class that is approved for 
listing and trading on the Exchange in which the series is opened for 
trading on any business day and expires at the close of business on the 
last business day of a calendar quarter.
     Quote or Quotation. The terms ``quote'' or ``quotation'' 
means a bid or offer entered by a Market Maker as a firm order that 
updates the Market Maker's previous bid or offer, if any. When the term 
order is used in these Rules and a bid or offer is entered by the 
Market Maker in the options series to which such Market Maker is 
registered, such order shall, as applicable, constitute a quote or 
quotation for purposes of these Rules. A quote or quotation may be 
canceled or repriced in accordance with Rules 22.250, 22.260, or 
23.150, if so designated by the Market Maker to assist in its risk 
management.
     Registered Market Maker. The term ``Registered Market 
Maker'' means an Options Member registered with the Exchange for the 
purpose of making markets in securities traded on the Exchange, who is 
vested with the rights and responsibilities specified in Chapter 23 of 
these Rules with respect to Registered Market Makers.\51\
---------------------------------------------------------------------------

    \51\ This definition is substantively identical to the 
definition in MIAX Rule 100. IEX proposes to incorporate this 
definition, because the Market Maker rules proposed herein are 
substantially based upon the rules of MIAX.
---------------------------------------------------------------------------

     Responsible Person. The term ``Responsible Person'' means 
a U.S.-based officer, director, or management-level employee of an 
Options Member, who is registered with the Exchange as an Options 
Principal, responsible for the direct supervision and control of 
associated persons of that Options Member.
     Rules of IEX Options. The term ``Rules of IEX Options'' 
mean the rules contained in Chapters 17 to 29 of the Investors Exchange 
Rules governing the trading of options on the Exchange.
     Rules of the Clearing Corporation and Rules of the OCC. 
The terms ``Rules of the Clearing Corporation'' and ``Rules of the 
OCC'' mean the Certificate of Incorporation, the By-Laws and the Rules 
of the Clearing Corporation, and all written interpretations thereof, 
as may be in effect from time to time.
     SEC or Commission. The terms ``SEC'' or ``Commission'' 
mean the United States Securities and Exchange Commission.
     Series of Options. The terms ``series'' or ``series of 
options'' mean all options contracts of the same class that are the 
same type of options and have the same exercise price and expiration 
date.
     Short Position. The term ``short position'' means a 
person's interest as the writer of one or more options contracts.
     Short Term Options Series. The term ``Short Term Options 
Series'' means a series in an options class that is approved for 
listing and trading on the Exchange in which the series is opened for 
trading on any Monday, Tuesday, Wednesday, Thursday or Friday that is a 
business day and that expires on the Monday, Tuesday, Wednesday, 
Thursday or Friday of the next business week, or, in the case of a 
series that is listed on a Friday and expires on a Monday, is listed 
one business week and one business day prior to that expiration. If a 
Tuesday, Wednesday, Thursday or Friday is not a business day, the 
series may be opened (or shall expire) on the first business day 
immediately prior to that Tuesday, Wednesday, Thursday or Friday, 
respectively. For a series listed pursuant to this section for Monday 
expiration, if a Monday is not a business day, the series shall expire 
on the first business day immediately following that Monday.
     Specialist. The term ``Specialist'' means a Market Maker 
appointed by the Exchange to act as the primary lead Market Maker for 
the purpose of making markets in securities traded on the Exchange. The 
Specialist is vested with the rights and responsibilities specified in 
Chapter 23 of these Rules with respect to Specialists.\52\
---------------------------------------------------------------------------

    \52\ This definition is substantively identical to the 
definition of Lead Market Makers and Primary Lead Market Makers in 
MIAX Rule 100. As discussed above, IEX proposes to incorporate the 
MIAX definitions for both Lead Market Makers and Primary Lead Market 
Makers into its definition for Specialists, because the Market Maker 
rules proposed herein are substantially based upon the rules of 
MIAX.
---------------------------------------------------------------------------

     SRO. The term ``SRO'' means a self-regulatory organization 
as defined in Section 3(a)(26) of the Exchange Act.
     Timestamp. The term ``timestamp'' means the effective time 
sequence assigned to an order for purposes of determining its priority 
ranking.
     Trading Permit. The term ``Trading Permit'' means a 
license issued by the Exchange to an Options Member that grants the 
Trading Permit Holder (``TPH'') the right to access one or more of the 
facilities of the Exchange for the purpose of effecting transactions in 
options traded on the Exchange without the services of another person 
acting as broker, and otherwise to access the facilities of the 
Exchange for purposes of trading or reporting transactions or 
transmitting orders or quotations in options traded on the Exchange, or 
to engage in other activities that, under the Rules of IEX Options, may 
only be engaged in by the TPH that satisfies any applicable 
qualification requirements to exercise those rights. A Trading Permit 
conveys no ownership interest in the Exchange, is only available 
through the Exchange, and is subject to the terms and conditions set 
forth in Rule 18.140.\53\
---------------------------------------------------------------------------

    \53\ This definition is substantively identical to the 
definition in C1 Rule 1.1. IEX proposes to incorporate this 
definition, because its proposed Trading Permit rule (Rule 18.140), 
is substantively similar to the equivalent C1 Rule (C1 Rule 3.1).
---------------------------------------------------------------------------

     Trading Permit Holder. The term ``Trading Permit Holder'' 
or ``TPH'' means the holder of a Trading Permit, as described in IEX 
Rule 18.140.\54\
---------------------------------------------------------------------------

    \54\ This definition is substantively identical to the 
definition in C1 Rule 1.1. IEX proposes to incorporate this 
definition, because its proposed Trading Permit rule (Rule 18.140), 
is substantively similar to the equivalent C1 Rule (C1 Rule 3.1).
---------------------------------------------------------------------------

     Trading System. The term ``Trading System'' means the 
automated trading system used by IEX Options for the trading of options 
contracts.
     Type of Option. The term ``type of option'' means the 
classification of an options contract as either a put or a call.
     Uncovered. The term ``uncovered'' means a short position 
in an options contract that is not covered.
     Underlying Security. The term ``underlying security'' 
means the security that the Clearing Corporation shall be obligated to 
sell (in the case of a call option) or purchase (in the case of a put 
option) upon the valid exercise of an options contract.
     User. The term ``User'' means any Options Member or 
Sponsored Participant who is authorized to obtain access to the Trading 
System pursuant to Rule 11.130 (Access).
Execution System
    IEX Options will utilize a pro-rata allocation model with execution 
priority dependent on the size and capacity of an order; specifically, 
Priority Customer or non-Priority Customer, as well as status as a 
Registered Market Maker or Specialist, as applicable. The proposed pro-
rata allocation model is similar to the MIAX and NYSE Amex options 
exchanges.\55\
---------------------------------------------------------------------------

    \55\ See infra note 79.
---------------------------------------------------------------------------

    The Exchange will become an exchange member of the OCC. The Trading 
System will be linked to OCC

[[Page 7211]]

for the Exchange to transmit locked-in trades for clearance and 
settlement.\56\
---------------------------------------------------------------------------

    \56\ Proposed Rule 22.220(a) notes that all Options transactions 
shall be submitted for clearance to the Clearing Corporation, and 
the Exchange shall assume no responsibility with respect to any 
unmatched trade or for any delays or errors in the reporting to it 
of trade information. This provision is based upon and substantively 
identical to MIAX Rule 524.
---------------------------------------------------------------------------

    IEX Options will include a de minimis delay on incoming order and 
quote messages designed to enable IEX to update its view of the market 
prior to processing orders and quotes, and an optional Market Maker 
quote parameter designed to protect Market Makers from excessive risk 
due to execution of stale quotes, in addition to other risk protections 
substantially similar to those offered by other options exchanges.
Anonymity
    As set forth in proposed Rule 22.190, aggregated and individual 
transaction reports produced by the Trading System will indicate the 
details of a User's transactions, including the contra party's unique 
market participant identifier (``MPID''), capacity, and clearing firm 
account number.\57\
---------------------------------------------------------------------------

    \57\ The Exchange shall also reveal a User's identity: (i) when 
a registered clearing agency ceases to act for a participant, or the 
User's clearing firm, and the registered clearing agency determines 
not to guarantee the settlement of the User's trades; and (ii) for 
regulatory purposes or to comply with an order of an arbitrator or 
court. See proposed Rule 22.190. The Exchange notes that proposed 
Rule 22.190 is identical to MEMX Rule 21.10.
---------------------------------------------------------------------------

Latency Mechanism \58\
---------------------------------------------------------------------------

    \58\ See proposed Rule 22.100(n).
---------------------------------------------------------------------------

    IEX's proposal includes a de minimis hardware based latency 
mechanism (or speedbump) of up to 350 microseconds added to each 
incoming order and quote message \59\ designed to enable IEX to update 
its view of the market prior to processing orders and quotes as well as 
to perform the Options Quote Indicator (``Indicator'') calculation with 
current market data.\60\ The specific amount of latency provided by the 
latency mechanism will be communicated by Trading Alert with at least 
30 days prior notice; however, the amount of latency will not exceed 
350 microseconds.\61\ If the Exchange determines to increase the 
duration of the maximum delay, it will do so only pursuant to an 
effective rule filing submitted to the Commission pursuant to Section 
19 of the Exchange Act.\62\
---------------------------------------------------------------------------

    \59\ As it does for with equities trading (which applies a 
constant inbound latency of 350 microseconds), IEX will subject 
incoming order and quote messages to a de minimis delay using coiled 
optical fiber. See Rule 11.510(a).
    \60\ See infra for more information about the Indicator.
    \61\ In determining the amount of latency, the Exchange will 
seek to achieve a healthy balance between liquidity providers and 
liquidity takers. Due to force majeure events and acts of third 
parties, the Exchange does not guarantee that the delay will always 
be consistent. The Exchange will periodically monitor such latency 
and will make adjustments to the latency as reasonably necessary to 
achieve consistency with the target latency (i.e., the latency that 
has been communicated) as soon as commercially practicable.
    \62\ The latency mechanism will not apply to outbound 
communications from the Exchange to a User, inbound and outbound 
communications between the Exchange and an Away Market regarding a 
routed order, inbound communications from data feeds, order 
processing and order execution on the IEX Options Order Book, 
outbound communications to the Exchange's proprietary data feeds or 
OPRA.
---------------------------------------------------------------------------

Hours of Operation
    As provided in proposed Rule 22.110(a), the IEX Options Trading 
System will begin accepting orders and quotes beginning at 8:00 
a.m.\63\ pursuant to the market opening procedures described in 
proposed Rule 22.160. Orders and bids and offers shall be open and 
available until 4:00 p.m. except for options contracts on Fund Shares, 
as defined in proposed Rule 20.120(i), which may close as of 4:15 p.m. 
The Proposed Hours of Operation rule is based on MEMX Rule 21.2, except 
that MEMX does not allow for submission of quotes before the market 
opens for trading; IEX notes that other exchanges begin accepting 
orders and quotes before the market opens, for example C1 begins 
accepting quotes at 7:30 a.m.\64\ Except as set forth above, IEX 
Options shall operate during the normal business days and hours set 
forth in the rules of the primary market trading the securities 
underlying options traded on IEX Options, absent unusual conditions as 
may be determined by the Exchange.\65\ IEX Options will not be open for 
business on any holiday observed by the Exchange.\66\
---------------------------------------------------------------------------

    \63\ All times in this filing refer to the Eastern time zone.
    \64\ See C1 Rule 5.7.
    \65\ See Proposed IEX Rule 22.110(b).
    \66\ See Proposed IEX Rule 22.110(c).
---------------------------------------------------------------------------

Units of Trading
    As stated in proposed Rule 22.120, the unit of trading in each 
series of options traded on IEX Options will be the unit of trading 
established for that series by the OCC pursuant to the rules of the OCC 
and the agreements of the Exchange with the OCC. The proposed 
determination of the unit of trading for a series of options traded on 
IEX Options is the same as on MEMX Options pursuant to MEMX Rule 21.3.
Minimum Quotation and Trading Increments
    As stated in proposed Rule 22.140(a), the Exchange is proposing to 
apply the following quotation increments: (1) if the options series is 
trading at less than $3.00, five (5) cents; (2) if the options series 
is trading at $3.00 or higher, ten (10) cents; and (3) if the options 
series is trading pursuant to the Penny Interval Program one (1) cent 
if the options series is trading at less than $3.00, five (5) cents if 
the options series is trading at $3.00 or higher, except for QQQ, SPY, 
or IWM where the minimum quoting increment will be one (1) cent for all 
series. In addition, as stated in proposed Rule 22.140(b), the Exchange 
is proposing that the minimum trading increment for options contracts 
traded on IEX Options will be one (1) cent for all series. Such 
proposed minimum quotation and trading increments are the same as on 
MEMX Options pursuant to MEMX Rules 21.5(a) and (b).
Penny Interval Program
    As set forth in proposed Rule 22.140(c), the Exchange is proposing 
to adopt a Penny Interval Program that is substantially similar to the 
penny programs of other exchanges, including MEMX Options pursuant to 
MEMX Rule 21.5(d), which includes minimum quoting requirements for 
options classes listed under the Penny Interval Program. However, 
eligibility for inclusion in the Penny Interval Program will be limited 
to those classes already operating under penny programs of other 
options exchanges at the time IEX Options is launched. The list of 
options classes included in the Penny Interval Program will be 
announced by the Exchange via circular distributed to Options Members 
and published by the Exchange on its website.
Order Types and Handling Instructions
    The Trading System will make available to Users two Order Types (as 
defined in proposed Rule 22.100(d))--Limit orders and Market orders--as 
well as various order instructions and modifiers that can be appended 
to such orders. The characteristics and functionality of each Order 
Type is substantially similar to what is currently approved for use in 
the Exchange's equities trading facility or on other options exchanges, 
including MEMX Options, except where described below.
    IEX Options will support bulk messages for Options Market Makers as 
specified in the description of each Order Type or other instruction. 
Proposed Rule 22.100(d) includes the

[[Page 7212]]

following details with respect to Limit orders and Market orders:
     Limit order. Limit orders are orders (including bulk 
messages) to buy or sell an option at a specified price or better. A 
Limit order is marketable when, for a Limit order to buy, at the time 
it is entered into the Trading System, the order is priced at the 
current inside offer or higher, or for a Limit order to sell, at the 
time it is entered into the Trading System, the order is priced at the 
current inside bid or lower.
     Market order. Market orders are orders to buy or sell at 
the best price available at the time of execution. Market orders to buy 
or sell an option traded on IEX Options will be rejected if they are 
received when the underlying security is subject to a ``Limit State'' 
or ``Straddle State'' as defined in the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act 
(the ``Limit Up-Limit Down Plan''). Bulk messages may not be Market 
orders.
    Pursuant to Rule 22.100(d)(3), Users have the option to designate 
an order as ``attributable'' to that User's MPID. Attributable orders 
are Market or Limit orders which display the User's MPID for purposes 
of trading on the Exchange. Use of attributable orders is voluntary. 
Attributable orders may not be available for all Exchange processes. 
The Exchange will distribute a circular to Options Members specifying 
the processes for which the attributable order-type shall be 
available.\67\
---------------------------------------------------------------------------

    \67\ The proposed definition is substantively identical to the 
definition in MIAX Rule 516(e). IEX proposes to incorporate this 
definition and functionality, because MEMX Options does not have 
Attributable Orders.
---------------------------------------------------------------------------

    The Trading System will also make available to Users several 
additional instructions that can be designated on an order (``Handling 
Instructions''). A Handling Instruction applied to a bulk message 
applies to each bid and offer within that bulk message. The Handling 
Instructions available on IEX Options are described in proposed Rule 
22.100(e) and will include the following:
     Book Only. Book Only is an instruction that an order is to 
be ranked and executed on the Exchange pursuant to proposed Rule 22.170 
(Order Display and Book Processing) or to be repriced or cancelled, as 
appropriate, without routing away to another options exchange.
     Post Only. Post Only is an instruction that an order is to 
be ranked and executed on the Exchange pursuant to proposed Rule 22.170 
(Order Display and Book Processing) or cancelled, as appropriate, 
without routing away to another options exchange except that the order 
will not remove liquidity from the IEX Options Book. The Trading System 
reprices, cancels or rejects a bid (offer) designated as Post Only with 
a price that locks or crosses the Exchange's best offer (bid). A Market 
order cannot be designated as Post Only.
     Intermarket Sweep Order (``ISO''). ISOs are orders that 
shall have the meaning provided in proposed Rule 28.100, which relates 
to intermarket trading. Such orders may be executed at one or multiple 
price levels in the Trading System without regard to Protected 
Quotations at other options exchanges (i.e., may trade through such 
quotations). The Exchange relies on the marking of an order as an ISO 
order when handling such order, and thus, it is the entering Options 
Member's responsibility, not the Exchange's responsibility, to comply 
with the requirements relating to ISOs. ISOs are not eligible for 
routing pursuant to proposed Rule 22.180. A Market order cannot be 
designated as an Intermarket Sweep Order. Users may not designate bulk 
messages as ISOs.
    The Exchange notes that each of the proposed Order Types and 
Handling Instructions available on IEX Options are based upon and 
substantially similar to those of MEMX, with the exception of the 
Attributable Orders not offered by MEMX.
Time-in-Force (``TIF'') Designations
    Users entering orders into the Trading System may designate such 
orders to remain in force and available for display and/or potential 
execution for varying periods of time. Unless cancelled earlier, once 
these time periods expire, the order (or the unexecuted portion 
thereof) is returned to the entering party. A TIF applied to a bulk 
message applies to each bid and offer within that bulk message. Unless 
otherwise specified in the Exchange Rules or the context indicates 
otherwise, the Exchange determines which of the following TIFs are 
available on a class or system basis. The TIF designations available on 
IEX Options are described in proposed Rule 22.100(g) and will include 
the following:
     Immediate Or Cancel (``IOC''). IOC means, for an order so 
designated, an order that is to be executed in whole or in part as soon 
as such order is received. The portion not so executed immediately on 
the Exchange or another options exchange is cancelled and is not posted 
to the IEX Options Book. IOC orders that are not designated as Book 
Only and that cannot be executed in accordance with proposed Rule 
22.170 on the Trading System when reaching the Exchange will be 
eligible for routing away pursuant to proposed Rule 22.180.
     Day. Day means, for an order so designated, an order to 
buy or sell which, if not executed expires at market close. Market 
Makers may designate bulk messages as Day.
    The Exchange notes that each of the proposed TIF designations 
available on IEX Options is identical to the same TIF designations 
available on MEMX Options, except that they are applied differently in 
one respect. Specifically, MEMX Options allows bulk messages to have a 
TIF of IOC. IEX is proposing to only allow bulk messages to have a TIF 
of DAY so that Market Makers do not take liquidity with quotes 
submitted via bulk messages, and which are meant for liquidity 
provision by Market Makers, which by definition the Exchange believes 
constitutes orders resting on the Order Book.
Anti-Internalization Qualifier (``AIQ'') Modifiers
    As with its equities market, the Exchange will allow Users to use 
certain AIQ modifiers, which are described in proposed Rule 22.100(h). 
Any incoming order designated with an AIQ modifier will be prevented 
from executing against a resting opposite side order also designated 
with an AIQ modifier and originating from the same MPID, Options Member 
identifier, trading group identifier, or Sponsored Participant 
identifier. The Exchange will offer the following AIQ modifiers: AIQ 
Cancel Newest, described in proposed Rule 22.100(h)(1); AIQ Cancel 
Oldest, described in proposed Rule 22.100(h)(2); AIQ Cancel Both, 
described in proposed Rule 22.100(h)(3); and AIQ Cancel Smallest, 
described in proposed Rule 22.100(h)(4). The Exchange notes that each 
of the proposed AIQ modifiers available on IEX Options is substantially 
similar to the same modifiers available on MEMX Options \68\, with the 
distinction that on MEMX a market maker may include the AIQ modifier on 
bulk messages, while IEX is proposing to not allow AIQ modifiers to be 
included on bulk messages because it would be meaningless on IEX where 
bulk messages will only be for liquidity adding quotes, and the AIQ 
modifier that dictates the AIQ interaction is determined by the 
liquidity removing order.\69\
---------------------------------------------------------------------------

    \68\ MEMX does not offer an AIQ Cancel Smallest modifier, but it 
is offered by other exchanges such as C1. See C1 Rule 5.6 (Match 
Trade Prevention Modifier--MTP Cancel Smallest).
    \69\ MEMX calls them ``Match Trade Prevention'' modifiers. See 
MEMX Rule 21.1(h).

---------------------------------------------------------------------------

[[Page 7213]]

Re-Pricing Mechanism
    Like other options exchanges, the Exchange proposes to offer a re-
pricing mechanism to Users to comply with the order protection and 
trade through restrictions of the Options Order Protection and Locked/
Crossed Market Plan.\70\ This re-pricing mechanism, described in 
proposed Rule 22.100(i), is referred to by the Exchange as Price Adjust 
and is substantially similar to the Price Adjust mechanism offered by 
MEMX Options pursuant to MEMX Rule 21.1(i), with the exception that IEX 
will only allow the ranked price and displayed price of an order that 
has been repriced to be adjusted to a more aggressive price one 
additional time (unlike MEMX, which allows multiple adjustments).\71\
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    \70\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (Aug. 6, 2009) (File No. 4-546).
    \71\ The Exchange notes that this behavior is substantially 
similar to the ``single price adjust'' behavior in C1 Rule 
5.32(b)(2)(A).
---------------------------------------------------------------------------

MPIDs
    As proposed in Rule 22.100(j), the term ``MPID'' means the unique 
market participant identifier assigned to a User and shall refer to 
what the Trading System uses to identify the User and the clearing 
number for the execution of orders and quotes submitted to the Trading 
System with that MPID. Each MPID corresponds to a single User and a 
single clearing number of a Clearing Member with the Clearing 
Corporation. A User may obtain multiple MPIDs, which may be for the 
same or different clearing numbers. A User is able (in a form and 
manner determined by the Exchange) to designate which of its MPIDs may 
be used for each of its ports. If a User submits an order or quote 
through a port with an MPID not enabled for that port, the Trading 
System cancels or rejects the order or quote. The Exchange notes that 
its proposed Rule 22.100(j) is identical to MEMX Rule 21.1(j) except 
that MEMX uses the term EFID rather than MPID.
Ports and Bulk Messages
    Proposed Rule 22.100(k) defines two types of ports: (1) a 
``physical port,'' which provides a physical connection to the Trading 
System and may provide access to multiple logical ports; and (2) a 
``logical port'' or ``application session,'' which provides Users with 
the ability within the Trading System to accomplish a specific function 
through a connection, such as order entry, data receipt, or access to 
information. The Exchange notes that each of the proposed types of 
ports available on IEX Options is identical to the same types of ports 
on MEMX Options.
    The term ``bulk message'' is proposed to mean a single electronic 
message a User submits with a Market Maker Capacity to the Exchange in 
which the User may enter, modify, or cancel up to an Exchange-specified 
number of bids and offers (which number the Exchange will announce via 
Exchange notice and publicly available technical specifications). The 
Trading System handles a bulk message in the same manner as it handles 
an order or quote, unless the Exchange Rules specify otherwise.
    Only Market Makers may submit bulk messages through a logical port 
in a class in which the Market Maker has an appointment. In addition, 
bulk messages have a default TIF of Day and a default designation of 
Post Only. As proposed, the Trading System will cancel, reject, or 
reprice a Post Only bulk message bid (offer) with a price that locks or 
crosses the Exchange best offer (bid) or ABO (ABB).\72\ These 
provisions are similar to the manner in which market maker bulk 
messages are handled by MEMX, which allows bulk messages to also have a 
TIF of IOC, a designation as book only, and post only bulk messages in 
unassigned classes.\73\
---------------------------------------------------------------------------

    \72\ See proposed IEX Rule 22.100.
    \73\ See MEMX Rule 21.1(l). IEX notes that the ability of the 
Trading System to cancel or reject a post only order submitted on a 
bulk port with a price that locks or crosses the Exchange best offer 
(bid) or ABO (ABB) is substantively identical to MEMX Rule 
21.1(l)(3); IEX will also allow the Trading System to reprice a post 
only order submitted on a bulk port with a price that locks or 
crosses the Exchange best offer (bid) or ABO (ABB), which is 
substantively identical to the functionality in C1 Rule 
5.32(b)(1)(B).
---------------------------------------------------------------------------

Cancel Back
    The term ``Cancel Back'' is proposed to mean an instruction a User 
designates on an order (including bulk messages) to not be subject to 
the Price Adjust process pursuant to proposed Rule 22.100(i). The 
Trading System cancels or rejects an order with a Cancel Back 
instruction (immediately at the time the Trading System receives the 
order or upon return to the Trading System after being routed away) if 
displaying the order on the Book would create a violation of proposed 
Rule 28.120, or if the order cannot otherwise be executed or displayed 
in the Book at its limit price. The Trading System executes a Book 
Only--Cancel Back order against resting orders. The proposed definition 
of Cancel Back in proposed Rule 22.100(m) is substantively identical to 
a Cancel Back Order defined in MEMX Rule 21.1(m).
Market Opening Procedures
    As proposed, the Trading System will accept quotes, Limit orders 
with a TIF of DAY and Market orders for inclusion in the opening 
process (``Opening Process'') beginning at 8:00 a.m. or immediately 
upon trading being halted in an options series due to the primary 
listing market for the applicable underlying security declaring a 
regulatory trading halt, suspension, or pause with respect to such 
security (a ``Regulatory Halt''), and will continue to accept Market 
and Limit orders and quotes until such time as the Opening Process is 
initiated in that options series (the ``Pre-open state'').\74\
---------------------------------------------------------------------------

    \74\ See proposed Rule 22.160(a)(13).
---------------------------------------------------------------------------

    After the first transaction on the primary listing market after 
9:30 a.m. in the securities underlying the options as reported on the 
first print disseminated pursuant to an effective national market 
system plan or the Regulatory Halt has been lifted, the related options 
series will be opened automatically as described below. The Exchange 
will conduct its ``Core Open Auction'' for each series of options 
contracts upon receipt of an ``Auction Trigger'', i.e., the moment that 
the Primary Market for the underlying security first disseminates both 
a two-sided quote and a trade of any size that is at or within the 
quote (in the case of reopening after a Regulatory Halt, the Auction 
Trigger also includes notification that the underlying stock is no 
longer halted).\75\ The Exchange will disseminate a message to market 
participants indicating the initiation of the opening process, conduct 
the opening auction, and then transition to continuous trading for each 
series of options contracts.\76\ The proposed market opening procedures 
are substantially similar to the market opening procedures specified in 
NYSE Arca Options Rule 6.64P-O, subject to several differences, most 
notably that any imbalance would be allocated on a pro rata basis.\77\
---------------------------------------------------------------------------

    \75\ See proposed Rule 22.160(a)(5) and (7).
    \76\ See proposed Rule 22.160. IEX notes that pursuant to 
proposed Rule 22.160(b)(3), the priority overlays specified in 
proposed Rule 22.170(f)(2) and (3) will not be available during an 
Auction, but will resume once the Exchange has transitioned to 
continuous trading.
    \77\ See proposed Rule 22.160(b). Other differences include: IEX 
will begin accepting orders for the opening auction at 8:00 a.m., 
while NYSE Arca begins accepting orders for their opening auction at 
6:00 a.m. See proposed Rule 22.160(a)(13)(A) versus NYSE Arca 
Options Rule 6.64P-O(a)(12)(A). Additionally, IEX will begin 
disseminating Auction Imbalance Information at 8:30 a.m., while NYSE 
Arca begins disseminating imbalance information at 8:00 a.m. See 
proposed Rule 22.160(c)(1) versus NYSE Arca Options Rule 6.64P-
O(c)(1). Further, IEX does not define Far Clearing Price, because 
IEX does not propose to have Auction Only orders, to which the Far 
Clearing Price relates.

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[[Page 7214]]

Order Display/Matching System
    The Trading System will be based upon functionality currently 
approved for use in the Exchange's equities trading system. 
Specifically, the Trading System will allow Users to enter Market 
orders and priced Limit orders to buy (bids) and sell (offers). All 
bids or offers made and accepted on IEX Options in accordance with the 
Exchange Rules shall constitute binding contracts, subject to 
applicable requirements of the Exchange Rules and the Rules of the 
Clearing Corporation. Such orders are executable against marketable 
contra-side orders in the Trading System.\78\ Resting quotes and orders 
on the IEX Options Book will be prioritized according to price. If 
there are two or more quotes or orders at the best price, then the 
options contracts will be allocated proportionally according to size 
(in a pro-rata fashion), rounded down to the nearest contract. If there 
are residual options contracts to be filled, the quote or order with 
the largest remaining size (based on the pro rata calculation) will 
receive the first contract, and each successive contract (if any) will 
be allocated to each subsequent quote or order based on size (largest 
to smallest). If there are two or more quotes or orders with the same 
remaining size, then the quote or order with the first time priority 
will be allocated the next options contract. Each successive options 
contract (if any) will be allocated in the same manner.\79\
---------------------------------------------------------------------------

    \78\ See proposed Rule 22.170.
    \79\ See proposed Rule 22.170(b). This pro-rata allocation 
methodology is based upon the substantially similar methodology in 
MIAX Rule 514(c)(2) and NYSE Amex Rule 964NYP(i)(2).
---------------------------------------------------------------------------

Routing
    IEX Options will offer a simple optional routing functionality to 
facilitate compliance with applicable regulations and will not offer 
other complex routing strategies. Options Members can designate orders 
that have not been executed in full by the Trading System pursuant to 
Rule 22.170 above as either available for routing or not available for 
routing.\80\ IEX Options will support orders that are designated to be 
routed to the NBBO as well as orders that will execute only within IEX 
Options. Orders that are designated to execute at the NBBO will be 
routed to other options markets to be executed when the Exchange is not 
at the NBBO \81\ consistent with the Options Order Protection and 
Locked/Crossed Market Plan.\82\
---------------------------------------------------------------------------

    \80\ See proposed Rule 22.180(a).
    \81\ As described infra, if the order is eligible for the Step-
Up Mechanism (set forth in proposed Rule 22.270), the Trading System 
will attempt to fill the order before routing it to an away market.
    \82\ See supra note 70.
---------------------------------------------------------------------------

    Subject to the exceptions contained in proposed Rule 28.110(b), the 
Trading System will ensure that an order will not be executed at a 
price that trades through another options exchange. An order that is 
designated by an Options Member as routable will be routed in 
compliance with applicable trade-through restrictions. Any order 
entered with a price that would lock or cross a Protected Quotation 
that is not eligible for either routing or the price adjust process as 
defined in proposed Rule 22.100(i) will be cancelled. Bulk messages are 
not eligible for routing.
    IEX Options will route orders in options via IEX Services LLC 
(``IEX Services''), which serves as the Outbound Router of the 
Exchange, as defined in Rule 2.220 (IEX Services LLC as Outbound 
Router).\83\ The function of the Outbound Router will be to route 
orders in options listed and open for trading on IEX Options by 
transmitting such orders to one or more routing brokers that are not 
affiliated with the Exchange to other options exchanges (``Routing 
Services'') pursuant to the Exchange Rules on behalf of IEX 
Options.\84\ The Outbound Router is subject to regulation as a facility 
of the Exchange, including the requirement to file proposed rule 
changes under Section 19 of the Exchange Act.\85\ Parties that do not 
desire to use the Routing Services provided by the Exchange must 
designate orders as not available for routing.\86\ The Exchange notes 
that the proposed rules relating to the routing of orders on IEX 
Options to away options markets are substantively identical to the MEMX 
Back-Up Order Routing Services described in MEMX Rule 21.9(e).\87\
---------------------------------------------------------------------------

    \83\ See proposed Rule 22.180(d).
    \84\ Id.
    \85\ Id.
    \86\ Id.
    \87\ MEMX also offers the option of using its outbound router, 
MEMX Execution Services to route directly to other exchanges. See 
MEMX Rule 21.9(d). IEX is not proposing to adopt this functionality, 
because it will only provide for routing through IEX Services to 
third party broker dealers.
---------------------------------------------------------------------------

Priority of Routed Orders
    Orders that have been routed by the Trading System to other options 
exchanges are not ranked and maintained in the IEX Options Book 
pursuant to Rule 22.170, and therefore are not available to execute 
against incoming orders. Once routed by the Trading System, an order 
becomes subject to the rules and procedures of the destination options 
exchange including, but not limited to, order cancellation. If a routed 
order is subsequently returned, in whole or in part, that order, or its 
remainder, shall receive a new time stamp reflecting the time of its 
return to the Trading System.\88\
---------------------------------------------------------------------------

    \88\ See proposed Rule 22.180(b).
---------------------------------------------------------------------------

Market Access
    In connection with the proposed rules regarding routing to away 
options exchanges, proposed Rule 22.180(e) provides that IEX Services 
has, pursuant to Rule 15c3-5 under the Act,\89\ implemented certain 
tests designed to mitigate the financial and regulatory risks 
associated with providing the Exchange's Users with access to such away 
options exchanges. Pursuant to the policies and procedures developed by 
IEX Services to comply with Rule 15c3-5, if an order or series of 
orders are deemed to be erroneous or duplicative, would cause the 
entering User's credit exposure to exceed a preset credit threshold, or 
are non-compliant with applicable pre-trade regulatory requirements (as 
defined in Rule 15c3-5), IEX Services will reject such orders prior to 
routing and/or seek to cancel any orders that have been routed. This is 
consistent with the routing implementation of other options exchanges, 
and the Exchange notes that proposed Rule 22.180(e) is substantively 
identical to MEMX Rule 21.9(f).
---------------------------------------------------------------------------

    \89\ 17 CFR 240.15c3-5.
---------------------------------------------------------------------------

Order Priority
    After the opening, trades on the Exchange will occur when a buy 
order/quote and a sell order/quote match on the Exchange's order book. 
The Trading System shall execute trading interest within the Trading 
System in price priority, meaning it will execute all trading interest 
at the best price level within the Trading System before executing 
trading interest at the next best price. Pursuant to proposed Rule 
22.170, after considering price priority, all options contracts are 
allocated proportionally according to size (in a pro-rata fashion). If 
the executed quantity cannot be evenly allocated, the remaining options 
contracts will be distributed one at a time based upon price-size-time 
priority.
    In addition, the Exchange supports multiple priority overlays that 
apply ahead of the default pro-rata allocation at a given price level. 
Pursuant to proposed Rule 22.170(f),\90\ these priority

[[Page 7215]]

overlays are made available at the Exchange's discretion on a class-by-
class basis: (1) the Priority Customer overlay,\91\ which provides 
resting interest from Priority Customers with priority over all non-
Priority Customer interest at the same price, will always take priority 
over all other priority overlays; (2) the Specialist Participation 
Entitlement overlay,\92\ which provides the Specialist with priority 
over interest from other non-Priority Customers for a certain 
percentage of contracts allocated at the same price (entitling the 
Specialist to 60% of the allocation if there is another non-Priority 
Customer at the NBBO or 40% if there are two or more other non-Priority 
Customers at the NBBO \93\) when quoting at the NBBO, inclusive of the 
case in which the order is directed to the Specialist; (3) the Directed 
Market Maker Participation Entitlement overlay,\94\ which provides a 
Directed Market Maker with priority over interest from other non-
Priority Customers for a certain percentage of contracts allocated at 
the same price (entitling the DMM to 60% of the allocation if there is 
another non-Priority Customer at the NBBO or 40% if there are two or 
more other non-Priority Customers at the NBBO \95\) when quoting at the 
NBBO and always applies in place of the Specialist Participation 
Entitlement overlay when both are in effect and the order is directed 
to a Directed Market Maker other than the Specialist; \96\ and (4) the 
Small-Size Order Entitlement overlay,\97\ which provides a Specialist 
quoting at the NBBO the priority to execute against the entire size of 
an order or quote of five or fewer contracts that does not first 
execute against any Priority Customer orders at that price, provided 
that if an order subject to the Small-Size Order Entitlement is 
directed to a Directed Market Maker who is not the Specialist quoting 
at the NBBO, and the Directed Market Maker priority overlay is enabled 
in the series, then the Directed Market Maker Participation Entitlement 
priority overlay will apply instead of the Small-Size Order Entitlement 
priority overlay \98\, and in the case that an order subject to the 
Small-Size Order Entitlement is directed to the Specialist, the Small-
Size Order Entitlement priority overlay will apply while the Specialist 
Participation Entitlement and Directed Market Maker Entitlement 
overlays will not.\99\
---------------------------------------------------------------------------

    \90\ Proposed Rule 22.170(f) is based upon and substantially 
similar to C1 Rule 5.32(a)(2), except is different in one respect. 
Unlike C1, in the event that a Small-Size order is directed to a 
Specialist, the IEX Options trading system will apply the Small-Size 
Order Entitlement to the order and not the Directed Order guarantee, 
meaning the Specialist will have priority to execute against the 
entire size of the order that does not execute against any Priority 
Customer orders at that price.
    \91\ See proposed Rule 22.170(f)(1).
    \92\ See proposed Rule 22.170(f)(2). This overlay may only be in 
effect if the Priority Customer overlay is also in effect. See 
proposed Rule 22.170(f).
    \93\ These allocation entitlements are based on MIAX Rule 
514(h)(1), after accounting for the additional priorities afforded 
market makers on MIAX, as set forth in MIAX Rule 514(e). See supra 
note 79 and accompanying text.
    \94\ See proposed Rule 22.170(f)(2). This overlay may only be in 
effect if the Priority Customer overlay is also in effect. See 
proposed Rule 22.170(f).
    \95\ These allocation entitlements are based on MIAX Rule 
514(h)(1), after accounting for the additional priorities afforded 
market makers on MIAX, as set forth in MIAX Rule 514(e). See supra 
note 79 and accompanying text.
    \96\ Prioritizing the DMM entitlement over the Specialist 
entitlement in these circumstances is the same functionality offered 
by several other exchanges. See, e.g., NYSE Amex Options Rule 
964NYP(h)(1).
    \97\ See proposed Rule 22.170(f)(3).
    \98\ See proposed Rule 22.170(f)(3)(A).
    \99\ See proposed Rule 22.170(f)(3)(B). This is functionally 
identical to how NYSE Amex Options allocates small-size Directed 
Orders that are directed to a Specialist. See NYSE Amex Options Rule 
965NYP(h)(2)(B).
---------------------------------------------------------------------------

    After executions resulting from the Priority Overlays described 
above, orders and quotes within the Trading System for the accounts of 
non-Priority Customers, including Professional Customers, have next 
priority. If there is more than one highest bid or more than one lowest 
offer on the Options Order Book for the account of a non-Priority 
Customer, then such bids or offers will be afforded priority on a size 
pro-rata basis, as described above.
Step Up Mechanism
    IEX proposes to offer Options Members an optional Step Up Mechanism 
(``SUM''), which is a feature within the Trading System that provides 
automated order handling in designated classes trading for qualifying 
orders that are not automatically executed by the Trading System.\100\ 
The Exchange will determine eligibility of an order for the SUM 
(including order size, type, capacity, handling instructions, as well 
as which classes of options contracts). The Exchange will not initiate 
the SUM process if the NBBO is crossed.\101\ SUM automatically 
processes upon receipt of an eligible order that is marketable against 
the BBO that is not the NBBO; or an eligible order that would improve 
the Exchange's BBO and that is marketable against the ABBO. This 
proposed functionality is substantively identical to the Step-Up 
Mechanism offered by C1, with the exception that IEX is not proposing 
to offer All or None orders.\102\ IEX notes that the optional SUM 
mechanism is designed to benefit a routable order that is not 
immediately eligible for execution on the Exchange, but if routed to an 
away exchange might miss a potential execution on that exchange. And, 
because SUM is optional, a Member can choose not to have its order 
subject to the SUM mechanism if it determines that the functionality is 
not consistent with its objectives. Given the multitude of tradeable 
listed options securities (compared to listed equities) not all 
available liquidity is always reflected in an exchange's order book, 
and the SUM mechanism provides an opportunity to source such additional 
liquidity to the benefit of the order in question. Moreover, IEX notes 
as well that other options exchanges offer similar mechanisms, and 
order flow might be directed to such exchanges if IEX did not offer 
such a mechanism.
---------------------------------------------------------------------------

    \100\ See proposed Rule 22.270. IEX's proposed Step-Up Mechanism 
is substantively identical to C1 Rule 5.35.
    \101\ See proposed Rule 22.270(a).
    \102\ See C1 Rule 5.35.
---------------------------------------------------------------------------

    Upon receipt of a SUM eligible order, the Trading System will 
expose the order at the NBBO upon receipt for a period of time 
determined by the Exchange on a class-by-class basis, which period of 
time may not exceed one second. All Users may submit responses to the 
exposure message, which must be limited to the size of the order being 
exposed, may be modified, cancelled or replaced any time during the 
exposure period, and are cancelled back at the end of the exposure 
period if unexecuted. Responses priced at the prevailing NBBO or better 
will immediately trade against the order in time priority. If during 
the exposure period the Exchange receives an unrelated order (or quote) 
on the opposite side of the market from the exposed order that could 
trade against the exposed order at the prevailing NBBO price or better, 
then the orders will trade at the prevailing NBBO price. The exposure 
period will not terminate if a quantity remains on the exposed order 
after such trade.
    Responses that are not immediately executable based on the 
prevailing NBBO may become executable during the exposure period based 
on changes to the NBBO. In the event of a change to the NBBO and at the 
conclusion of the exposure period, the Exchange will evaluate remaining 
responses as well as the ABBO and execute any remaining portion of the 
exposed order to the fullest extent possible at the best price(s) by 
executing against responses and unrelated orders.
    Following the exposure period, the Exchange will route the 
remaining

[[Page 7216]]

portion of the exposed order to other exchanges, unless otherwise 
instructed by the User. Any portion of a routed order that returns 
unfilled shall trade against the Exchange's best bid/offer unless 
another exchange is quoting at a better price in which case new orders 
shall be generated and routed to trade against such better prices.
Data Dissemination
    The Exchange will disseminate to OPRA the highest bid and the 
lowest offer, and the aggregate quotation size associated therewith 
that is available, in accordance with the requirements of Rule 602 of 
Regulation NMS under the Act.\103\ The Exchange will also offer three 
data products: (1) IEX Options DEEP: an uncompressed data feed that 
offers depth of book quotations and execution information based on 
options orders entered into the Trading System; (2) IEX Options TOPS: 
an uncompressed data feed that offers top of book quotations and 
execution information based on options orders entered into the Trading 
System; and (3) DROP: an uncompressed data feed that offers information 
regarding the options trading activity of a specific User.\104\ DROP is 
only available to the User to whom the specific data relates and those 
recipients expressly authorized by the User.\105\
---------------------------------------------------------------------------

    \103\ See proposed Rule 22.240(a).
    \104\ See proposed Rule 22.240(b).
    \105\ Data products will be subject to fees as specified in an 
effective Commission rule filing.
---------------------------------------------------------------------------

Risk Controls
    The Exchange also proposes to offer to all Users of IEX Options the 
ability to establish certain risk control parameters and limits that 
are intended to assist Users in managing their market risk. The 
proposed risk controls are based, in part, on those of the NYSE Arca 
and C1 options exchanges, with certain additions and differences 
described below. The proposed risk controls are designed to offer Users 
protection from entering orders outside of certain size and price 
parameters, as well as certain standard or Exchange-established 
parameters based on order type and market conditions.
    The proposed risk controls include: (i) pre-trade risk controls; 
(ii) activity-based risk controls; and (iii) global risk controls, as 
set forth in proposed Rule 22.250.\106\ Pre-trade, activity-based, and 
global risk controls may be set before the beginning of a trading 
day.\107\ Pre-trade, activity-based, and global risk controls can be 
set at the MPID or MPID Group level,\108\ or both, depending on the 
risk control.\109\ Additionally, pre-trade risk controls to restrict 
the options class(es) transacted must be set per options class.\110\ 
The following describes each category of risk protection mechanism:
---------------------------------------------------------------------------

    \106\ Proposed Rule 22.250 is based upon and substantially 
similar to NYSE Arca Rule 6.40P-O.
    \107\ See proposed Rule 22.250(b)(1).
    \108\ MPID Groups, defined in proposed Rule 22.250(a)(5), are 
based upon C1 Rule 5.34(c)(4)(A), which allows for the setting of 
risk control limits for EFID Groups, which are equivalent to MPID 
Groups. IEX notes that it proposes to retain the right to limit the 
number of MPID Groups an Options Member can configure based upon 
potential technical limitations.
    \109\ See proposed Rule 22.250(b)(2). IEX notes that while it 
allows these risk controls to be set at MPID or MPID Group levels, 
NYSE Arca allows the equivalent controls to be set at either the 
MPID or the MPID Sub-ID level (a more granular level than the MPID).
    \110\ See proposed Rule 22.250(b)(2).
---------------------------------------------------------------------------

Pre-Trade Risk Controls \111\
---------------------------------------------------------------------------

    \111\ See proposed Rule 22.250(a)(1), which is substantively 
identical to NYSE Arca Rule 6.40P-O(a)(2).
---------------------------------------------------------------------------

    The pre-trade risk controls mechanism is a set of optional limits, 
each of which an Options Member may utilize with respect to its trading 
activity on the Exchange. These controls include controls related to 
the maximum dollar amount for a single order to be applied one time and 
the maximum number of contracts that may be included in a single order 
before it can be traded. Additionally, there are optional controls 
related to the price of an order or quote (including percentage-based 
and dollar-based controls), controls related to the order types or 
modifiers that can be utilized, controls to restrict the options 
classes transacted, and controls to prohibit duplicative orders.
Activity-Based Risk Controls \112\
---------------------------------------------------------------------------

    \112\ See proposed Rule 22.250(a)(2), which is substantively 
identical to NYSE Arca Rule 6.40P-O(a)(3).
---------------------------------------------------------------------------

    The Exchange also proposes to offer activity-based risk limits that 
may be applied to orders and quotes in an options class (when acting as 
a Market Maker, an Options Member is required to select at least one of 
the following controls \113\) based on specified thresholds measured 
over the course of a configurable time period (``Interval''). The 
Exchange will offer the following activity-based risk controls: (i) 
transaction-based risk limits, which are pre-established limits on the 
number of an Options Member's orders and quotes executed in a specified 
class of options per Interval; (ii) volume-based risk limit, which are 
pre-established limits on the number of contracts of an Options 
Member's orders and quotes that can be executed in a specified class of 
options per Interval; and (iii) percentage-based risk limits, which are 
pre-established limits on the percentage of contracts executed in a 
specified class of options as measured against the full size of an 
Options Member's orders and quotes executed per Interval. To determine 
whether an Options Member has breached the specified percentage limit, 
the Exchange calculates the percent of each order or quote in a 
specified class of options that is executed during an Interval (each, a 
``percentage''), and sums up those percentages. This risk limit will be 
breached if the sum of the percentages exceeds the pre-established 
limit.
---------------------------------------------------------------------------

    \113\ See proposed Rule 22.250(c)(2)(A).
---------------------------------------------------------------------------

Global Risk Control \114\
---------------------------------------------------------------------------

    \114\ See proposed Rule 22.250(a)(3), which is substantively 
identical to NYSE Arca Options Rule 6.40P-O(a)(4).
---------------------------------------------------------------------------

    The Exchange also proposes to offer a global risk control, which is 
a pre-established limit on the number of times an Options Member may 
breach its activity-based risk controls per Interval.
Automated Breach Actions \115\
---------------------------------------------------------------------------

    \115\ See proposed Rule 22.250(c), which is substantively 
identical to NYSE Arca Options Rule 6.40P-O(c).
---------------------------------------------------------------------------

    Proposed Rule 22.250(c) details the ``automated breach actions'' 
the Exchange will take if any of the three above-described risk 
controls are breached. Based on User preference, these actions can 
include blocking new orders and quotes, canceling orders and quotes on 
the Order Book, or notifying the Options Member of the breach. With 
respect to the activity-based and global risk controls (as well as Kill 
Switch Actions described below), in order to remain consistent with the 
firm quote obligations of a broker-dealer pursuant to Rule 602 of 
Regulation NMS, any marketable interest that is executable against an 
order or quote that is received \116\ prior to the time the applicable 
threshold is triggered and processed by the Trading System will be 
automatically executed up to the size of the resting order or quote, 
regardless of whether the execution would cause the Member to exceed 
their pre-set risk threshold(s).\117\
---------------------------------------------------------------------------

    \116\ The time of receipt for an order or quote is the time such 
message is processed by the Exchange's order book.
    \117\ Pre-trade risk controls are implemented prior to an order 
or quote resting on the order book (or being placed on the book 
again following an auction) and therefore do not implicate firm 
quote obligations.

---------------------------------------------------------------------------

[[Page 7217]]

Kill Switch Actions \118\
---------------------------------------------------------------------------

    \118\ See proposed Rule 22.250(e), which is substantively 
identical to NYSE Arca Options Rule 6.40P-O(e).
---------------------------------------------------------------------------

    Additionally, Options Members may direct the Exchange to operate a 
``kill switch'' to either cancel all unexecuted orders and quotes on 
the Order Book, block the entry of any new order and quote messages, or 
both.
Limit Order Price Protection \119\
---------------------------------------------------------------------------

    \119\ See proposed Rule 22.260(a), which is substantively 
identical to NYSE Arca Options Rule 6.62P-O(a)(3).
---------------------------------------------------------------------------

    The Exchange also proposes to offer price protection mechanisms, as 
set forth in proposed Rule 22.260.\120\ These protections include Limit 
Order Price Protection, in which the Trading System will reject an 
order or quote upon entry, or cancel at the conclusion of an auction, 
if its price exceeds a pre-established, Exchange-defined ``specified 
threshold'' amount above or below the reference price. The Reference 
Price for calculating Limit Order Price Protection for an order or 
quote to buy (sell) will be the NBO (NBB), provided that, immediately 
following an auction, the reference price will be the price at which 
the auction match occurred, or, if none, the upper (lower) auction 
collar price, or, if none, the NBO (NBB).
---------------------------------------------------------------------------

    \120\ IEX notes that these proposed risk control mechanisms are 
based on similar rules of other options exchanges, in particular: 
NYSE Arca Options Rules 6.62P-O(a)(3) and 6.41P-O and C1 Rules 
5.34(a)(1), (2) and (4).
---------------------------------------------------------------------------

Market Orders in No-Bid (Offer) Series \121\
---------------------------------------------------------------------------

    \121\ See proposed Rule 22.260(b), which is substantively 
identical to C1 Rule 5.34(a)(1).
---------------------------------------------------------------------------

    If the Trading System receives a sell Market order in a series 
after it is open for trading with an NBB of zero and an NBO less than 
or equal to $0.50, then the Trading System converts the Market order to 
a Limit order with a limit price equal to the minimum trading increment 
applicable to the series and enters the order into the IEX Options. If 
the Trading System receives a sell Market order in a series after it is 
open for trading with an NBB of zero and an NBO greater than $0.50, 
then the Trading System cancels or rejects the Market order, except if 
the sell Market order would be subject to the drill-through protection 
(as discussed below), in which case the order joins the ongoing drill-
through process. If the Trading System receives a buy Market order in a 
series after it is open for trading with an NBO of zero, the Trading 
System cancels or rejects the Market order.
Market Order NBBO Width Protection \122\
---------------------------------------------------------------------------

    \122\ See proposed Rule 22.260(c), which is substantively 
identical to C1 Rule 5.34(a)(2).
---------------------------------------------------------------------------

    If a User submits a Market order to the Trading System when the 
NBBO width is greater than x% of the midpoint of the NBBO, subject to a 
minimum and maximum dollar value (the Exchange determines ``x'' and the 
minimum and maximum dollar values on a class-by-class basis), the 
Trading System cancels or rejects the Market order.
Price Reasonability Checks \123\
---------------------------------------------------------------------------

    \123\ See proposed Rule 22.260(d), which is substantively 
identical to NYSE Arca Options Rule 6.41P-O.
---------------------------------------------------------------------------

    Additionally, the Exchange will apply price reasonability checks to 
most Limit orders and quotes during continuous trading on each trading 
day. One price reasonability check, the ``arbitrage check'', will 
reject order or quote messages to buy put options if the price of the 
order is equal to or greater than the strike price of the option and 
will reject (or cancel, if resting) order or quote messages to buy call 
options if the price of the order is equal to or greater than the price 
of the last trade in the underlying security plus an Exchange-defined 
specified threshold.\124\ Another price reasonability check, the 
``intrinsic value check'', will assess the intrinsic value of an option 
based on the last sale price of the underlying security (for calls) or 
the strike price of the option (for puts), and reject or cancel certain 
orders or quotes if the price of the order is dislocated from the 
intrinsic value of the option by a certain Exchange-defined specified 
threshold.\125\
---------------------------------------------------------------------------

    \124\ See proposed Rule 22.260(d)(2), which is substantively 
identical to NYSE Arca Options Rule 6.41P-O(b).
    \125\ See proposed Rule 22.260(d)(3), which is substantively 
identical to NYSE Arca Options Rule 6.41P-O(c). IEX notes that like 
NYSE Arca Options, the term ``Automated Breach Action'' is used in 
two of its risk controls with different meanings: first with respect 
to the intrinsic value risk checks for market makers, see NYSE Arca 
Options Rule 6.40P-O(d) and proposed Rule 22.260(d)(3)(E); and also 
with respect to activity based risk controls. See NYSE Arca Options 
Rule 6.41P-O(d) and proposed Rule 22.250(c).
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Drill-Through Protection
    Another proposed price protection mechanism is drill-through 
protection, which will prevent an order from executing beyond a 
``buffer amount'' determined based on a drill-through price.\126\ This 
rule is based upon and substantially similar to C1 Rule 5.34(a)(4), 
with the distinction that IEX's Drill-Through Protection will have a 
finite, Exchange-defined number of iterations, that are communicated by 
a Trading Alert with at least 30 days prior notice.\127\ IEX notes that 
other exchanges have also set a finite number of iterations for their 
Drill-Through Protection.\128\
---------------------------------------------------------------------------

    \126\ See proposed Rule 22.260(e).
    \127\ IEX notes that other exchanges also have the ability to 
change any exchange-determined parameters with a trading alert. See, 
e.g., C1 Rule 1.5.
    \128\ See, e.g., Securities Exchange Act Release No. 86923 
(September 10, 2019), 84 FR 48664 (September 16, 2019) (SR-CBOE-
2019-057) with respect to C1 prior functionality.
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Options Risk Parameter
    In order to provide additional protection to Market Makers to 
address structural challenges \129\ they face in the listed options 
market, IEX proposes to offer an optional quote parameter that would 
augment the standard risk tools that will be available to Options 
Market Makers referred to as the Options Risk Parameter (``ORP''). As 
proposed, the ORP will be a parameter that can be applied to a 
quotation that rests on the Order Book at the price designated by the 
Market Maker that entered the quotation. When the ORP is triggered 
based on pre-defined criteria, the relevant quotation(s) will be 
adjusted in a manner specified transparently in IEX's rules and related 
Trading Alerts, as described below.\130\
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    \129\ See infra note 135.
    \130\ See proposed IEX Rule 23.150(h).
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    The ORP would leverage IEX's proprietary mathematical formula--the 
Options Quote Indicator (the ``Indicator'')--which is based on the 
preeminent Black-Scholes options pricing model. This Nobel-Prize-
winning approach for evaluating the price of an options contract has 
been studied extensively, and is widely considered as a primary 
starting point for both academic and industrial options pricing 
applications.\131\
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    \131\ See Revolutionary Black-Scholes Option Pricing Model is 
Published by Fischer Black, Later a Partner at Goldman Sachs, 
available at https://www.goldmansachs.com/our-firm/history/moments/1973-black-scholes.
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    Proposed Rule 23.150(h) sets forth the application of the Indicator 
and optional ORP. As with the standard risk checks, the ORP is designed 
to enable Market Makers to provide tighter and deeper quotes on IEX by 
providing protection from execution against stale quotes by identifying 
when the best Protected Bid or best Protected Offer of the Away Markets 
(as defined in Proposed Rule 22.160(a)(8)) in a particular options 
series is sufficiently dislocated from the price of the underlying 
security to indicate that the best Protected Bid or best Protected 
Offer of the Away Markets in the options series is likely in 
transition.

[[Page 7218]]

    As proposed, the Exchange will utilize the Indicator, which is a 
fixed formula specified transparently in IEX's rules and related 
Trading Alerts, to assess the probability of an imminent change to the 
current best Protected Bid \132\ of the Away Markets to a lower price 
or of an imminent change to the current best Protected Offer \133\ of 
the Away Markets to a higher price for a particular listed options 
series (i.e., an imminent adverse price change).\134\ The Indicator 
utilizes real time relative quoting activity of protected quotations 
from Signal Exchanges (as defined in IEX Rule 11.190(g)) in securities 
underlying each listed options series and a proprietary mathematical 
calculation (the ``quote instability calculation''), as described in 
more detail below, to make such assessments. When the quote instability 
calculation identifies an imminent adverse price change to the best 
Protected Bid and/or best Protected Offer of the Away Markets in a 
particular listed options series, it will generate a quote instability 
determination. A quote instability determination may only be generated 
at least 200 microseconds after a prior quote instability determination 
for a particular options series on the same side of the market (i.e., 
affecting resting bids or offers).
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    \132\ See supra note 70 at 39370.
    \133\ Id.
    \134\ See proposed IEX Rule 23.150(h). Two aspects of the 
formula--including the frequency of calculation of implied 
volatility and the quote instability threshold--will be periodically 
determined by the Exchange and communicated by Trading Alert with at 
least 30 days' notice. The Exchange believes that providing at least 
30 days' notice of these discrete identified aspects will provide 
appropriate notice to market participants and give the Exchange the 
ability to adapt to changing market conditions and optimize the 
protections provided. The Exchange further notes that other options 
exchanges specify various rule-based values by similar publication 
approaches, see, e.g., NYSE Amex Rule 994NY (providing that the 
exposure period for its Broadcast Order Liquidity Delivery Mechanism 
is determined and released by the exchange); see also MIAX Rule 
515(c)(1) (providing price protections where certain minimum price 
variations are determined by MIAX within a specified range and 
announced through regulatory circulars); see also Nasdaq Stock 
Market LLC Dynamic M-ELO algorithm (providing updates that include 
determining the holding period for impacted orders that are 
announced by trading alerts).
    \135\ See Staff Report on Equity and Options Market Structure 
Conditions in Early 2021, (Oct. 14, 2021) at 4 (explaining that 
options market structure is broadly similar to equities market 
structure and noting a key difference that displayed liquidity is 
primarily derived from market maker quotes), available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf; see also Lehoczky, Sandor and Woods, 
Ellen and Russell, Matthew and Nguyen, Mina and Somers, James, Dead 
Man's Switch: Making Options Markets Safer with Active Quote 
Protection (May 2020) at 2 (explaining that options markets ``depend 
especially on market makers--who account for 99.9% of open orders--
to connect buyers and sellers, due to a combinatorial explosion of 
expirations and strike prices''), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3675849.
    \136\ See, e.g., Protecting Liquidity in Options Markets, Market 
Structure, Optiver, July 12, 2023 (concluding that ``liquidity 
protection improves options markets'' by safeguarding market makers 
against ``excessive risk'' that results from ``liquidity providers 
maintain[ing] hundreds of quotes on a given underlying at any one 
time [and] a sudden market move can leave them vulnerable to showing 
stale, or outdated, quotes,'' thereby ``exposing them to potentially 
major losses'' if unable to amend or cancel quotes before executed), 
available at https://optiver.com/insights/protecting-liquidity-in-options-markets/.
---------------------------------------------------------------------------

    IEX believes that offering this optional risk protection for market 
makers is particularly important in the options markets where market 
makers are exposed to added risk given their continuous quoting 
obligations. Although equities and options exchanges share a number of 
similarities, a meaningful difference is that in the listed options 
market, liquidity is available only on-exchange and is primarily 
displayed and derived from market maker quotes, and options markets, 
when compared to equities markets, have a much higher quote to trade 
ratio.\135\ Exchange market makers in the listed options market play an 
essential role in providing liquidity. Moreover, given the sheer 
difference in magnitude of tradeable instruments in listed options as 
compared to equities (approximately 1.5 million listed options series 
compared to approximately 11,000 listed equity securities), the options 
exchanges often do not have the same sources of natural liquidity of 
buyers and sellers for each tradeable instrument as is generally the 
case for equities exchanges. Thus, options market makers are tasked 
with affirmative obligations to support the provision of liquidity to 
options exchanges through continuous two-sided quotes in large numbers 
of listed options series. As a result, IEX understands that options 
market makers can be subject to excessive risk of one or more quotes 
being executed at stale prices compared to equities market makers or 
other liquidity providers.\136\ Because options market makers maintain 
hundreds (and sometimes thousands) of quotes on options for a given 
underlying security at any one time, a sudden market move in the 
underlying security can leave an options market maker vulnerable to 
being executed across multiple quotes that are stale and dislocated 
from the price of the underlying securities. Liquidity takers can 
target one or more of these stale quotes, with limited risk should they 
fail to execute (i.e., lost opportunity vs. trading at a stale price), 
before the Market Makers are able to move their quotes (often hundreds 
or more for a given underlying) to reflect the price change in the 
underlying securities, thereby exposing those Market Makers to 
potentially major losses.
    Without robust liquidity protection mechanisms to protect against 
these risks, Market Makers may be forced to widen their spreads, show 
less liquidity, or simply exit the market. Overall market quality could 
deteriorate as a result, and investors would suffer when it becomes too 
expensive to transact, or when there is insufficient liquidity to 
enable transacting altogether. Accordingly, liquidity protection 
mechanisms for market makers, which all options exchanges offer, and 
IEX proposes to offer, are vital for achieving a healthy balance 
between market makers and liquidity takers in the listed options 
market. These include, but are not limited to, activity-based risk 
controls, price reasonability checks, and functionality (such as bulk 
quoting and purge ports) to facilitate timely quoting, quote updates, 
and quote cancelation.
    For each options series, the Trading System will maintain a real-
time estimate of the sensitivity of the series to changes in the 
midpoint of the best Protected Bid and best Protected Offer of the 
Signal Exchanges for the underlying security (based on a Black-Scholes 
assessment). When there is a change in the best Protected Bid or best 
Protected Offer of the Signal Exchanges for the underlying security, 
the Trading System will use the quote instability calculation formula 
set forth in proposed IEX Rule 23.150(h) to calculate whether to 
generate a quote instability determination for each options series 
overlying the underlying security. The Trading System independently 
assesses whether to generate a quote instability determination 
affecting resting bids or offers for each options series. A quote 
instability determination is generated by the Trading System when, 
pursuant to the quote instability calculation, the quote instability 
factor is greater than the defined quote instability threshold.
    If a Market Maker has opted to utilize the ORP and its quote in an 
options series that was the subject of a quote instability 
determination is at or above (below) the price level of the quote 
instability determination for the options series, the Trading System 
will either cancel the Market Maker's quote or reprice it to one MPV 
\137\ below (above) the price level of the quote instability 
determination, pursuant to the Market

[[Page 7219]]

Maker's instruction. Notwithstanding this functionality, a Market Maker 
will be able to adjust the price of its quote in the same manner as 
other Market Maker quotes that have not opted into the ORP.
One Second Exposure Period
    Proposed Rule 23.200 would require Options Members to expose their 
customers' orders on the Exchange for at least one second under certain 
circumstances before trading against such orders. During this one 
second exposure period, other Options Members will be able to enter 
orders to trade against the exposed order. In adopting a one second 
order exposure period, the Exchange is proposing a requirement that is 
consistent with the rules of other options exchanges.\138\ Thus, the 
exposure period will allow Options Members that are members of other 
options exchanges to comply with proposed Rule 23.200 without 
programming separate time parameters into their systems for order entry 
or compliance purposes. The Exchange believes that market participants 
are sufficiently automated that a one second exposure period allows an 
adequate time for market participants to electronically respond to an 
order. Also, it is possible that market participants might wait until 
the end of the exposure period, no matter how long, before responding. 
Thus, the Exchange believes that any longer than one second would not 
further the protection of investors or market participants, but rather, 
would potentially increase market risk to investors and other market 
participants by creating a longer period of time for the exposed order 
to be subject to market risk.
---------------------------------------------------------------------------

    \137\ See proposed IEX Rule 22.140(a).
    \138\ See, e.g., MEMX Rule 22.11; C1 Rule 5.9; and MIAX Options 
Rule 520(b).
---------------------------------------------------------------------------

Options Order Protection and Locked/Crossed Market Plan Rules

    The Exchange will participate in the Options Order Protection and 
Locked/Crossed Market Plan (the ``Plan''),\139\ and therefore will be 
required to comply with the obligations of Participants under the Plan. 
The Exchange proposes to adopt rules relating to the Plan that are 
substantially similar to the rules in place on all of the options 
exchanges that are Participants to the Plan. The Plan essentially 
applies the Regulation NMS price-protection provisions to the options 
markets. Similar to Regulation NMS, the Plan requires the Plan 
Participants to adopt rules ``reasonably designed to prevent Trade-
Throughs'', while exempting ISOs from that prohibition. The Plan's 
definition of an ISO is essentially the same as under Regulation NMS. 
The remaining exceptions to the trade-through prohibition, discussed 
more specifically below, either track those under Regulation NMS or 
correspond to unique aspects of the options market, or both.
---------------------------------------------------------------------------

    \139\ See supra note 70.
---------------------------------------------------------------------------

    The proposed rules in Chapter 28 (Options Order Protection and 
Locked and Crossed Markets Rules) conform to the requirements of the 
Plan. Proposed Rule 28.100 sets forth the defined terms for use under 
the Plan. Proposed Rule 28.110 prohibits trade-throughs and exempts 
ISOs from that prohibition. Proposed Rule 28.110 also contains 
additional exceptions to the trade-through prohibition that track the 
exceptions under Regulation NMS or correspond to unique aspects of the 
options market, or both.
    Proposed Rule 28.120 sets forth the general prohibition against 
locking/crossing other eligible exchanges as well as certain enumerated 
exceptions that permit locked markets in limited circumstances; such 
exceptions have been approved by the Commission for inclusion in the 
rules of other options exchanges. Specifically, the exceptions to the 
general prohibition on locking and crossing occur when: (1) the locking 
or crossing quotation was displayed at a time when the Exchange was 
experiencing a failure, material delay, or malfunction of its systems 
or equipment; (2) the locking or crossing quotation was displayed at a 
time when there is a Crossed Market; (3) the Options Member 
simultaneously routed an ISO to execute against the full displayed size 
of any locked or crossed Protected Bid or Protected Offer; or (4) with 
respect to a locking quotation, the order entered on the Exchange that 
will lock a Protected Bid or Protected Offer, is: (i) not a Customer 
order, and the Exchange can determine via identification available 
pursuant to the OPRA Plan that such Protected Bid or Protected Offer 
does not represent, in whole or in part, a Customer order; or (ii) a 
Customer order, and the Exchange can determine via identification 
available pursuant to the OPRA Plan that such Protected Bid or 
Protected Offer does not represent, in whole or in part, a Customer 
order, and, on a case-by-case basis, the Customer specifically 
authorizes the Member to lock such Protected Bid or Protected 
Offer.\140\
---------------------------------------------------------------------------

    \140\ See proposed Rule 28.120(b).
---------------------------------------------------------------------------

    The Exchange notes that the proposed rules in Chapter 28 (Options 
Order Protection and Locked and Crossed Markets Rules) are 
substantively identical to the rules of MEMX Options.\141\
---------------------------------------------------------------------------

    \141\ See MEMX Rule 27.1, 27.2, and 27.3.
---------------------------------------------------------------------------

Securities Traded on IEX Options

General Listing Standards
    The Exchange proposes to adopt listing standards for options traded 
on IEX Options as described in Chapter 20 (Securities Traded on IEX 
Options), which are substantively identical to the equivalent MEMX 
Options rules,\142\ with the exception of: (i) some language in 
Supplementary Material .02 to proposed Rule 20.140 concerning the $1 
strike price program which is not included in the equivalent MEMX rule, 
and therefore borrowed from the equivalent MIAX rule; \143\ and (ii) 
the addition of language allowing the Exchange to list for closing 
transactions an Options series that is listed but restricted to closing 
transactions on another exchange.\144\ The Exchange will join the 
Options Listings Procedures Plan and will list and trade options 
already listed on other options exchanges. The Exchange will gradually 
phase-in its trading of options, beginning with a selection of actively 
traded options.
---------------------------------------------------------------------------

    \142\ See MEMX Rules, Chapter 19. IEX notes that the MEMX Rules 
include Chapter 29: Index Rules. IEX is not proposing to adopt 
similar rules at this time, and any references to index options in 
MEMX Chapter 19 are not in proposed IEX Chapter 20.
    \143\ See MIAX Rule 404 Interpretation and Policy .01.
    \144\ See Supplementary Material .01 to proposed Rule 20.130, 
which mirrors MIAX Rule 403 Interpretation and Policy .01.
---------------------------------------------------------------------------

Conduct and Operational Rules for Options Members

    The Exchange proposes to adopt rules in Chapter 19 for IEX Options 
that are substantively identical to the rules of MEMX Options 
regarding: exercises and deliveries as described in Chapter 24 
(Exercises and Deliveries); records, reports and audits as described in 
Chapter 25 (Records, Reports and Audits); minor rule violations as 
described in Chapter 26 (Discipline and Summary Suspensions); doing 
business with the public as described in Chapter 27 (Doing Business 
With the Public); and margin as described in Chapter 29 (Margin 
Requirements).\145\ The Exchange also proposes to adopt rules that are 
substantively similar to most of MEMX's Chapter 18 (Business Conduct), 
with the exception of proposed Rules 19.160 (Position Limits), 19.170 
(Exemptions from Position Limits), 19.180 (Exercise Limits) that are

[[Page 7220]]

substantively similar to MIAX Rules 307, 308, and 309, respectively. 
IEX proposed to adopt MIAX's versions of these rules because they 
provided specificity about the types of position limits the Exchange 
will apply to Options Members (as opposed to the MEMX rules, which rely 
on position limits set by other exchanges).
---------------------------------------------------------------------------

    \145\ See MEMX Rules, Chapters 23, 24, 25, 26 and 28.
---------------------------------------------------------------------------

National Market System

    IEX Options will operate as a full and equal participant in the 
national market system for options trading established under Section 
11A of the Exchange Act.\146\ IEX Options will become a member of the 
Options Price Reporting Authority (``OPRA''), the Options Linkage 
Authority (``OLA''), the Options Regulatory Surveillance Authority 
(``ORSA''), and the Options Listing Procedures Plan (``OLPP''). The 
Exchange expects to participate in those plans on the same terms 
currently applicable to current members of those plans. The Exchange is 
in the process of contacting the leadership of each options-related 
national market system plan to begin the membership process.
---------------------------------------------------------------------------

    \146\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

Regulation

    The Exchange will leverage many of the structures it established to 
operate a national securities exchange trading NMS equities securities, 
in compliance with Section 6 of the Exchange Act.\147\ As described in 
more detail below, there will be three elements of that regulation: (1) 
the Exchange will join the existing options industry agreements 
pursuant to Section 17(d) of the Exchange Act prior to commencing 
operations,\148\ as it did with respect to equities; (2) the Exchange's 
Regulatory Services Agreement (``RSA'') with FINRA will be amended 
prior to commencing operations to provide that FINRA will perform 
regulatory surveillance, investigation, disciplinary and hearing 
services of options trading on IEX subject to oversight by IEX 
Regulation, just as it does for equities regulation; and (3) the 
Exchange will perform options listing regulation, as well as authorize 
Options Members to trade on IEX Options. Section 17(d) of the Exchange 
Act and the related Exchange Act rules permit SROs to allocate certain 
regulatory responsibilities to avoid duplicative oversight and 
regulation. Under Exchange Act Rule 17d-1,\149\ the SEC designates one 
SRO to be the Designated Examining Authority, or DEA, for each broker-
dealer that is a member of more than one SRO. The DEA is responsible 
for the financial aspects of that broker-dealer's regulatory oversight. 
Because IEX Options Members also must be members of at least one other 
SRO, the Exchange would generally not expect to be designated as the 
DEA for any of its members.\150\
---------------------------------------------------------------------------

    \147\ 15 U.S.C. 78f.
    \148\ 15 U.S.C. 78q(d).
    \149\ 17 CFR 240.17d-1.
    \150\ If IEX were to be designated as the DEA for any of its 
members, FINRA would perform the DEA functions on behalf of IEX 
pursuant to the RSA.
---------------------------------------------------------------------------

    Exchange Act Rule 17d-2 \151\ permits SROs to file with the 
Commission plans under which the SROs allocate among each other the 
responsibility to receive regulatory reports from, and examine and 
enforce compliance with specified provisions of the Exchange Act and 
rules thereunder and SRO rules by, firms that are members of more than 
one SRO (``common members''). If such a plan is declared effective by 
the Commission, an SRO that is a party to the plan is relieved of 
regulatory responsibility as to any common member for whom 
responsibility is allocated under the plan to another SRO.
---------------------------------------------------------------------------

    \151\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    All of the options exchanges, FINRA, and NYSE have entered into the 
Options Sales Practices Agreement, a Rule 17d-2 agreement, and the 
Exchange intends to join this agreement prior to the commencement of 
operations for IEX Options. Under this Agreement, the examining SROs 
will examine firms that are common members of the Exchange and the 
particular examining SRO for compliance with certain provisions of the 
Exchange Act, certain of the rules and regulations adopted thereunder, 
certain examining SRO rules, and certain proposed IEX Options rules. In 
addition, the proposed IEX Options rules contemplate participation in 
this Agreement by requiring that any Options Member also be a member of 
at least one of the examining SROs. The Exchange and FINRA are also 
party to a bilateral Rule 17d-2 agreement that requires minor 
modifications due to the proposed launch of IEX Options. The Exchange 
intends to modify and seek Commission approval of the modified 
bilateral Rule 17d-2 agreement prior to commencing of operations for 
IEX Options. Additionally, all of the options exchanges and FINRA have 
entered into the Options-Related Market Surveillance Agreement, a Rule 
17d-2 agreement, and the Exchange intends to join this agreement prior 
to the commencement of operations for IEX Options.
    For those regulatory responsibilities that fall outside the scope 
of any Rule 17d-2 agreements, the Exchange will retain full regulatory 
responsibility under the Exchange Act. However, the Exchange has 
entered into an RSA with FINRA, as discussed above, pursuant to which 
FINRA personnel operate as agents for the Exchange in performing 
certain of these functions. The Exchange and FINRA will continue to 
operate under the RSA that is currently in place but with modifications 
as necessary to accommodate the expanded scope of the relationship. The 
necessary modifications will be implemented prior to the commencement 
of operations of IEX Options. As is the case with the Exchange's 
equities market, the Exchange will oversee FINRA and continue to bear 
ultimate regulatory responsibility with respect to regulatory functions 
not subject to allocation to FINRA or another SRO pursuant to a Rule 
17d-2 Agreement for the IEX Options Exchange.
    Consistent with the Exchange's existing regulatory structure, the 
Exchange's Chief Regulatory Officer, reporting to the Regulatory 
Oversight Committee of the Exchange's board of directors, shall have 
general supervision of the regulatory operations of IEX Options, 
including responsibility for overseeing the surveillance, examination, 
and enforcement functions and for administering all regulatory services 
agreements applicable to IEX Options. Similarly, the Exchange's 
existing Regulatory Oversight Committee will be responsible for 
overseeing the adequacy and effectiveness of Exchange's regulatory and 
self-regulatory organization responsibilities, including those 
applicable to IEX Options.
    As it does with equities, the Exchange will monitor trading on IEX 
Options, both through internal reports and FINRA surveillances for the 
purpose of maintaining a fair and orderly market. As it does with its 
equities trading, the Exchange will monitor IEX Options to identify 
unusual trading patterns and determine whether particular trading 
activity requires further regulatory investigation by FINRA.
    Finally, the Exchange will oversee the process for determining and 
implementing trade halts, identifying and responding to unusual market 
conditions, and administering the Exchange's process for identifying 
and remediating ``obvious errors'' by and among its Options 
Members.\152\ The proposed rules in Chapter 21

[[Page 7221]]

(Regulation of Trading on IEX Options) regarding halts,\153\ unusual 
market conditions, extraordinary market volatility, obvious errors, 
audit trail, and rules regarding prohibited and permissible transfers 
of options positions off the Exchange are substantively identical to 
the approved rules of MEMX Options.\154\
---------------------------------------------------------------------------

    \152\ IEX notes that like MEMX Rule 20.6, proposed Rule 21.150 
authorizes the proposed Error Panel to review decisions made under 
this rule, which includes decisions to classify a transaction as a 
Catastrophic Error.
    \153\ Proposed Rule 21.120(b) states that during a trading halt, 
the Exchange shall process new and existing orders and quotes in a 
series in accordance with proposed Rule 22.160(g). Proposed Rule 
22.160(g), which is substantively identical to NYSE Arca Options 
Rule 6.64P-O(g), states that during a trading halt, the Exchange 
will cancel all resting Market Maker quotes.
    \154\ See MEMX Rules, Chapter 20.
---------------------------------------------------------------------------

Minor Rule Violation Plan

    The Exchange's disciplinary rules, including Exchange Rules 
applicable to ``minor rule violations,'' are set forth in Chapter 9 of 
the Exchange's current Rules. Such disciplinary rules will apply to 
Options Members and their associated persons.
    The Commission approved the Exchange's Minor Rule Violation Plan 
(``MRVP'') in 2016.\155\ The Exchange's MRVP specifies the uncontested 
minor rule violations that are included in the MRVP and have sanctions 
not exceeding $2,500. Any violations that are resolved under the MRVP 
would not be subject to the provisions of Rule 19d-1(c)(1) under the 
Act \156\ requiring that an SRO promptly file notice with the 
Commission of any final disciplinary action taken with respect to any 
person or organization.\157\ The Exchange's MRVP includes the policies 
and procedures included in Exchange Rule 9.216(b) and the violations 
included in Rule 9.218.
---------------------------------------------------------------------------

    \155\ See Securities Exchange Act Release No. 78474 (August 3, 
2016), 81 FR 52717 (August 9, 2016) (Order Declaring Effective a 
Minor Rule Violation Plan) (File No. 4-701).
    \156\ 17 CFR 240.19d-1(c)(1).
    \157\ The Commission adopted amendments to paragraph (c) of Rule 
19d-1 to allow SROs to submit for Commission approval plans for the 
abbreviated reporting of minor disciplinary infractions. See Release 
No. 34-21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any 
disciplinary action taken by an SRO against any person for violation 
of a rule of the SRO which has been designated as a minor rule 
violation pursuant to such a plan filed with and declared effective 
by the Commission will not be considered ``final'' for purposes of 
Section 19(d)(1) of the Act if the sanction imposed consists of a 
fine not exceeding $2,500 and the sanctioned person has not sought 
an adjudication, including a hearing, or otherwise exhausted his 
administrative remedies.
---------------------------------------------------------------------------

    Under Rule 9.216(b), the Exchange may impose a fine (not to exceed 
$2,500) and/or a censure on any Member or associated person with 
respect to any rule listed in IEX Rule 9.218. If the Financial Industry 
Regulatory Authority Department of Enforcement or the Department of 
Market Regulation, on behalf of the Exchange, has reason to believe a 
violation has occurred and if the Member or associated person does not 
dispute the violation, the Department of Enforcement or the Department 
of Market Regulation may prepare and request that the Member or 
associated person execute a minor rule violation plan letter accepting 
a finding of violation, consenting to the imposition of sanctions, and 
agreeing to waive the Member's or associated person's right to a 
hearing before a Hearing Panel or, if applicable, an Extended Hearing 
Panel, and any right of appeal to the IEX Appeals Committee, the Board, 
the Commission, and the courts, or to otherwise challenge the validity 
of the letter, if the letter is accepted. The letter must describe the 
act or practice engaged in or omitted, the rule, regulation, or 
statutory provision violated, and the sanction or sanctions to be 
imposed. Unless the letter states otherwise, the effective date of any 
sanction imposed will be a date to be determined by IEX Regulation 
staff. In the event the letter is not accepted by the Member or 
associated person, or is rejected by the Office of Disciplinary 
Affairs, the matter can proceed in accordance with the Exchange's 
disciplinary rules, which include hearing rights for formal 
disciplinary proceedings.
    The Exchange proposes to amend its MRVP and Exchange Rule 9.218 to 
add certain rules relating to Options as set forth in proposed Rule 
26.120 (Penalty for Minor Rule Violations) to the list of rules 
eligible for Minor Rule Violation Plan treatment.\158\ The rules 
included in proposed Rule 26.120, as appropriate for disposition under 
the Exchange's MRVP, are: (a) position limit and exercise limit 
violations; (b) violations regarding the failure to accurately report 
position and account information; (c) Market Maker quoting obligations; 
(d) violations regarding expiring exercise declarations; (e) violations 
relating to the failure to respond to the Exchange's requests for the 
submission of trade data; and (f) violations relating to noncompliance 
with the Consolidated Audit Trail Compliance Rule requirements. The 
rule violations included in proposed Rule 26.120 are the same as the 
rule violations included in the MRVPs of other options exchanges.\159\
---------------------------------------------------------------------------

    \158\ In its proposal to adopt the MRVP, the Exchange requested 
that, going forward, to the extent that there are any changes to the 
rules applicable to the Exchange's MRVP, the Exchange requests that 
the Commission deem such changes to be modifications to the 
Exchange's MRVP.
    \159\ See, e.g., MEMX Rules, Chapter 25.
---------------------------------------------------------------------------

    Upon implementation of this proposal, the Exchange will include 
violations of the enumerated options trading rules, if any, in an 
applicable Exchange's quarterly report of any actions taken on minor 
rule violations under the MRVP.\160\ A quarterly report would include: 
the Exchange's internal file number for the case, the name of the 
individual and/or organization, the nature of the violation, the 
specific rule provision violated, the sanction imposed, the number of 
times the rule violation has occurred, and the date of disposition. The 
Exchange's MRVP, as proposed to be amended herein, is consistent with 
Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in 
part, that an exchange have the capacity to enforce compliance with, 
and provide appropriate discipline for, violations of the rules of the 
Commission and of the exchange, 6(b)(6) provides that members and 
persons and associated members shall be appropriately disciplined for 
violation of the provisions of the rules of the exchange, by expulsion, 
suspension, limitation of activities, functions and operations, fine, 
censure, being suspended or barred from being associated with a member, 
or any other fitting sanction.\161\ Rule violations listed in proposed 
Rule 26.120 are minor in nature and will be more appropriately 
disciplined through the Exchange's MRVP and therefore proposes to add 
them to the list of rules eligible for minor rule fine disposition.
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    \160\ To date, the Exchange has not taken any minor rule 
violation actions.
    \161\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
---------------------------------------------------------------------------

    In addition, because Rule 9.216(b) offers procedural rights to a 
person sanctioned for a violation listed in proposed Rule 26.120, the 
Exchange will provide a fair procedure for the disciplining of members 
and associated persons, consistent with Section 6(b)(7) of the 
Act.\162\
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    \162\ 15 U.S.C. 78f(b)(7). Rule 9.216(b) does not preclude an 
Options Member or person associated with an Options Member from 
contesting an alleged violation and receiving a hearing on the 
matter with the same procedural rights through a litigated 
disciplinary proceeding.
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    This proposal to include the rules listed in proposed Rule 26.120 
in the Exchange's MRVP is consistent with the public interest, the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act, as required by Rule 19d-1(c)(2) under the Act,\163\ because it 
should strengthen the Exchange's ability to carry out its oversight and 
enforcement

[[Page 7222]]

responsibilities as an SRO in cases where full disciplinary proceedings 
are unsuitable in view of the minor nature of the particular violation. 
In requesting the proposed change to the MRVP, the Exchange in no way 
minimizes the importance of compliance with Exchange Rules and all 
other rules subject to the imposition of fines under the MRVP. Minor 
rule fines provide a meaningful sanction for minor or technical 
violations of rules when the conduct at issue does not warrant 
stronger, immediately reportable disciplinary sanctions. The inclusion 
of a rule in the Exchange's MRVP does not minimize the importance of 
compliance with the rule, nor does it preclude the Exchange from 
choosing to pursue violations of eligible rules through the Exchange's 
disciplinary rules if the nature of the violation or prior disciplinary 
history warrants more significant sanctions. However, the MRVP provides 
a reasonable means of addressing rule violations that do not rise to 
the level of requiring formal disciplinary proceedings, while providing 
greater flexibility in handling certain violations.\164\ The Exchange 
will continue to conduct surveillance with due diligence and make a 
determination based on its findings, on a case-by-case basis, whether a 
fine of more or less than the recommended amount is appropriate for a 
violation under the MRVP or whether a violation requires a formal 
disciplinary action.
---------------------------------------------------------------------------

    \163\ 17 CFR 240.19d-1(c)(2).
    \164\ See supra note 159.
---------------------------------------------------------------------------

Section 36 Exemption Request

    The Exchange proposes to incorporate by reference as IEX Options 
rules certain rules of the Cboe Exchange, Inc. (``CBOE''), the New York 
Stock Exchange (``NYSE''), and FINRA. Specifically, proposed Rule 
27.250 proposes to incorporate by reference the applicable rules of 
FINRA with respect to Communications with Public Customers, and 
proposed Rule 29.120 proposes to incorporate by reference initial and 
maintenance margin requirements of either CBOE or NYSE. Thus, for 
certain IEX Options rules, Exchange members will comply with a IEX 
Options rule by complying with the CBOE, NYSE, or FINRA rule 
referenced. Using its authority under Section 36 of the Act, the 
Commission has previously exempted certain SROs from the requirement to 
file proposed rule changes under Section 19(b) of the Act when 
incorporating another SRO's rules by reference.\165\ Each such exempt 
SRO has agreed to be governed by the incorporated rules, as amended 
from time to time, but, has not been required to file a separate 
proposed rule change with the Commission each time the SRO whose rules 
are incorporated by reference seeks to modify its rules. In addition, 
each SRO incorporated by reference only regulatory rules (e.g., margin, 
suitability, arbitration), not trading rules, and incorporated by 
reference whole categories of rules (i.e., did not ``cherry-pick'' 
certain individual rules within a category). Last, each exempt SRO had 
reasonable procedures in place to provide written notice to its members 
each time a change is proposed to the incorporated rules of another SRO 
in order to provide its members with notice of a proposed rule change 
that affects their interests, so that they would have an opportunity to 
comment on it.
---------------------------------------------------------------------------

    \165\ See, e.g., Securities Exchange Act Release No. 49260 
(February 17, 2004), 69 FR 8500 (February 24, 2004). See also 
Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 
14521, 14539-40 (March 18, 2008) (order approving SR-NASDAQ-2007-004 
and SR-NASDAQ-2007-080) and 53128 (January 13, 2006), 71 FR 3550, 
3565-66 (January 23, 2006) (File No. 10-131) (approving The NASDAQ 
Stock Market LLC's exchange application).
---------------------------------------------------------------------------

    In connection with this proposal, the Exchange respectfully 
requests, pursuant to Rule 240.0-12 under the Act,\166\ an exemption 
under Section 36 of the Act from the rule filing requirements of 
Section 19(b) of the Act for changes to those IEX Options rules that 
are effected solely by virtue of a change to a cross-referenced CBOE, 
NYSE, or FINRA rule. The Exchange proposes to incorporate by reference 
categories of rules (rather than individual rules within a category) 
that are not trading rules. The Exchange also agrees to provide written 
notice to Options Members prior to the launch of IEX Options of the 
specific CBOE, NYSE, and FINRA rules that it will incorporate by 
reference. In addition, the Exchange will notify Options Members 
whenever CBOE, NYSE, or FINRA proposes a change to a cross-referenced 
CBOE, NYSE, or FINRA rule.\167\ For the foregoing reasons, the Exchange 
believes that its request for exemptive relief is consistent with prior 
requests for, and provision of, similar exemptive relief.
---------------------------------------------------------------------------

    \166\ 17 CFR 240.0-12.
    \167\ The Exchange will provide such notice through a posting on 
the same website location where the Exchange will post its own rule 
filings pursuant to Rule 19b-4(l) under Act, within the time frame 
required by that rule. The website posting will include a link to 
the location on the CBOE, NYSE, or FINRA websites where the proposed 
rule change is posted.
---------------------------------------------------------------------------

Amendments to Existing Exchange Rules

    In addition to the rules of IEX Options proposed above, the 
Exchange proposes to amend certain of its existing Exchange Rules that 
currently apply to the Exchange's equities market in order to reflect 
the Exchange's proposed operation of IEX Options.
    First, the Exchange proposes to amend Rule 2.160(i), which 
generally requires each Member to register at least two Principals with 
the Exchange subject to certain exceptions described therein, to 
provide that such paragraph (i) shall not apply to a Member that solely 
conducts business on the Exchange as an Options Member, however, 
Options Members must comply with the registration requirements set 
forth in proposed Rule 18.110. The Exchange notes that proposed Rule 
18.110(h), which provides that every Options Member shall have at least 
one Options Principal and sets forth the Exchange's Options Principal 
registration requirements, is identical to MEMX Rule 17.2(g). In 
connection with this proposed change, the Exchange also proposes to 
amend Rule 2.160(n) to include Options Principal as a registration 
category and to set forth the Exchange's qualification requirements for 
an Options Principal, which are the same as those for an Options 
Principal on MEMX Options. Additionally, the Exchange proposes to amend 
Rule 2.160(p)(a)(4) to set forth the appropriate regulatory element 
continuing education module for reregistration as an Options Principal.
    The Exchange also proposes to make three modifications to Rule 
2.220 (IEX Services LLC as Outbound Router). First, IEX proposes to 
remove the word ``directly'' from the first sentence of subparagraph 
(a), because IEX Services will continue to route orders to away 
markets, but as described above, with respect to options routing, it 
will not route those order ``directly'' to the away markets. Second, 
consistent with the first change, IEX proposes to insert a new second 
sentence in subparagraph (a) that reads: ``When routing options orders, 
as set forth in Rule 22.180, IEX Services will transmit such orders to 
one or more routing brokers that are not affiliated with the Exchange; 
the routing brokers will in turn route the applicable options orders to 
other securities exchanges that trade options.'' IEX proposes to make 
this change to reflect the different nature of how IEX Services will 
handle routing options orders from equities orders. And third, IEX 
proposes to modify subparagraph (a)(8) of this rule, which states that 
IEX Services

[[Page 7223]]

shall maintain an error account for the purpose of addressing positions 
that are the result of an execution or executions that are not clearly 
erroneous under Rule 11.270 and result from a technical or systems 
issue at IEX Services, the Exchange, a routing destination, or a non-
affiliate third-party routing broker that affects one or more orders 
(``Error Positions''). The proposed change to Rule 2.220(a)(8) would 
add a reference to the comparable provision to that which governs 
review and resolution of clearly erroneous equities transactions (i.e., 
Rule 11.270) but for options transactions, namely Rule 21.150, which 
governs review and resolution of options transactions that may qualify 
as obvious errors.
    The Exchange also proposes to adopt Rule 21.220 (Limitation of 
Liability), which is almost identical to the Rule 11.260, the 
Limitation of Liability rule in IEX's equities trading rules. The only 
difference is to reflect that proposed Rule 21.220 applies to IEX 
Options and options trading.
    Lastly, the Exchange proposes to amend Rule 9.218 (Violations 
Appropriate for Disposition Under Plan Pursuant to Exchange Act Rule 
19d-1(c)(2)), which contains the list of Exchange Rule violations and 
recommended fine schedule, to include a new paragraph (k) referencing 
proposed Rule 26.120 for the recommended fines for minor rule 
violations of the Exchange Rules appliable to IEX Options, which the 
Exchange notes are the same as those of MEMX Options.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \168\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \169\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest; 
and is not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \168\ 15 U.S.C. 78f(b).
    \169\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As described above, the Exchange proposes to operate its options 
market much as it operates its equities market today and in a manner 
similar to that of other options exchanges, while leveraging IEX's 
experience and expertise in understanding the needs of market makers to 
offer them additional tools designed to better manage risk and drive 
performance. As discussed in the Purpose section, IEX believes that the 
proposed enhanced liquidity protection mechanisms will result in market 
makers providing more competitive quotes which will benefit all market 
participants and thereby support the protection of investors and the 
public interest. Also as discussed in the Purpose section, most of the 
proposed IEX Options rules are based on the rules of other options 
exchanges, primarily MEMX, C1, MIAX, NYSE Amex, and NYSE Arca. 
Therefore, the Exchange does not believe these aspects of the proposed 
rule change that are substantively identical to other exchanges' rules 
raise any new or novel issues that have not been previously considered 
by the Commission. Moreover, the Exchange believes that the proposed 
functionality is consistent with Section 6(b)(5) of the Act because the 
Trading System is designed to be efficient and its operation 
transparent, thereby facilitating transactions in securities, removing 
impediments to and perfecting the mechanisms of a free and open 
national market system. As described above, the Exchange's proposed 
rules, including the proposed Order Types and Handling Instructions, 
opening procedures, routing services, and order matching process are 
designed to provide a simplified suite of conventional features and to 
comply with all applicable regulatory requirements, including the 
obligations of the Options Order Protection and Locked/Crossed Market 
Plan.\170\
---------------------------------------------------------------------------

    \170\ See supra note 70.
---------------------------------------------------------------------------

    As discussed in the Purpose section, IEX's proposal includes a de 
minimis latency mechanism (or speedbump) on incoming order and quote 
messages designed to enable IEX to update its view of the market prior 
to processing orders and quotes, and a robust suite of risk 
protections, including the ORP, which is designed to protect market 
makers from excessive risk due to execution of stale quotes.
    IEX believes that the proposed latency mechanism will protect 
investors and the public interest in several respects. First, by 
enabling IEX to update its view of market data prior to executing an 
order or quote, it thereby would support IEX's ability to accurately 
account for contemporaneous market data. IEX notes that this aspect of 
its functionality is designed to facilitate market participants 
executing at current (i.e., not ``stale'') prices. Second, by enabling 
the Trading System to perform the Indicator calculation with current 
market data, it supports operation of the ORP (as discussed herein), 
which is designed to provide Market Makers with an optional tool to 
avoid excessive risk that can arise from execution of a stale quote. As 
discussed in detail above, IEX believes that this protection will 
encourage market makers to post aggressively priced and/or deeper 
quotes on the Exchange which will benefit all market participants. 
Thus, from a functional perspective, IEX believes that the operation of 
the latency mechanism is consistent with the Act.
    Further, and as explained below, the proposed latency mechanism of 
up to a maximum of 350 microseconds is well within the geographic 
delays that exist among and between the data centers that IEX Options 
Members and other options exchanges use \171\ and is consistent with 
the naturally occurring time indeterminism that exists in order 
processing.\172\ And, as noted in the Purpose section, the Exchange 
will seek to achieve a healthy balance between the interests of 
liquidity providers and liquidity takers in determining the actual 
length of the latency, considering

[[Page 7224]]

primarily markouts \173\ and IEX fill rate \174\ data.
---------------------------------------------------------------------------

    \171\ See https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf for a description of latencies 
between various data centers.
    \172\ Accounting for the latency mechanism or speedbump is no 
different than accounting for other geographical distances between 
exchanges. See Securities Exchange Act Release No. 78101 (June 17, 
2016), 81 FR 41142, 41161 (June 23, 2016) (``2016 SEC Approval 
Order'') (approving IEX's 350 microsecond speed bump in the 
registration of the IEX Exchange as ``well within the range of 
geographic and technological latencies that market participants 
experience today'' such that ``latency to and from IEX will be 
comparable to--and even less than--delays attributable to other 
markets that currently are included in the NBBO,'' and finding the 
delay to be de minimis, i.e., so short as to not frustrate the 
purposes of the Exchange Act by impairing fair and efficient access 
to IEX's quotation); see also Securities and Exchange Act Release 
No. 34-89686 (August 26, 2020) (``2020 SEC Approval Order'') at 15 
(determining that IEX's de minimis speed bump when routing displayed 
equity orders is ``just like accounting for any other technological 
or geographic latency'' and doing so is consistent with applicable 
rules and regulations); see also Citadel Securities LLC v. 
Securities and Exchange Commission, 45 F.4th 27, 37 (D.C. Circuit 
2022) (July 29, 2022) (ruling in favor of the SEC's approval of 
IEX's displayed equity order that traverses a speedbump and holding 
that IEX's displayed equity order's delay are ``similar to the delay 
that traders' communications already experience when traveling 
between various other exchanges across the country.'').
    \173\ Markouts measure the direction and degree to which the 
market moved after an execution, and are often measured as the 
difference between the execution price and the midpoint of the NBBO 
at various time intervals after a trade. Markouts are typically used 
as a way to measure the ``quality'' of a trade. In particular, 
short-term markouts of several milliseconds after the time of 
execution, are often used to assess whether an order was subject to 
``adverse selection'' that can occur when a liquidity providing 
order is executed at a price that was about to become stale as a 
result of certain speed-based trading strategies.
    \174\ Fill rate data measures the degree to which incoming 
orders are able to execute against a resting order on a venue, and 
are a measure of the percent of shares of an order that are filled 
(or executed) by such venue, adjusting for factors such as the size 
of the order compared to the size of a venue's displayed quote. The 
maximum fill rate for an order is 100%.
---------------------------------------------------------------------------

    IEX also believes that the latency mechanism is consistent with the 
Commission Interpretation Regarding Automated Quotations Under 
Regulation NMS (``de minimis delay interpretation'').\175\ Although 
options markets do not have the same automated quotation requirements 
as in equities, even if they were to apply, the Commission's reasoning 
in the de minimis delay interpretation in the context of NMS automated 
quotations is instructive, as the latency mechanism IEX is proposing 
for the options exchange is a de minimis delay that does not impair 
fair and efficient access to an exchange's quotation. Specifically, the 
Commission stated in issuing its interpretation that intentional delays 
that are well within the geographic and technological latencies 
experienced by market participants when routing orders are de minimis 
to the extent they would not impair a market participant's ability to 
access a displayed quotation consistent with the goals of NMS Rule 
611.\176\ The Commission also noted that an intentional delay of any 
duration must be fully disclosed and codified in a written rule of the 
exchange, which, as described below, the latency mechanism will be 
fully disclosed and codified in IEX's written rules.\177\
---------------------------------------------------------------------------

    \175\ See Commission Interpretation Regarding Automated 
Quotations Under Regulation NMS, Exchange Act Release No. 34-78102, 
81 FR 40785, 40792 (June 23, 2016).
    \176\ Id.
    \177\ Id.
---------------------------------------------------------------------------

    IEX believes that its proposed latency mechanism of up to 350 
microseconds is fully consistent with the reasoning in the Commission's 
de minimis delay interpretation.\178\ First, the maximum delay is less 
than the existing geographic latencies experienced by market 
participants when routing orders. For example, latency between and 
among the data centers located in New Jersey range up to several 
hundred microseconds, with additional latency introduced by technology 
processing on both sides of an order or quote route between these data 
centers.\179\ Accordingly, the proposed latency mechanism is consistent 
with this aspect of the Commission's de minimis interpretation.
---------------------------------------------------------------------------

    \178\ IEX notes that the D.C. Circuit Court also agreed with the 
Commission's interpretation. The Court ruled entirely in favor of 
the SEC's approval of IEX's system that includes applying a 
speedbump and quote indicator to displayed equity orders. See 
Citadel Securities, 45 F.4th at 36 (concluding the SEC's approval of 
a 350 microseconds intentional access delay for displayed orders to 
be ``de minimis--i.e., a delay so short as to not frustrate the 
purposes of Rule 611 by impairing fair and efficient access to an 
exchange's quotations''); see also id. (``The SEC's conclusion that 
mere de minimis delays do not cause an order to violate Regulation 
NMS's immediacy requirement was therefore reasonable.'')
    \179\ See https://www.ice.com/publicdocs/ICE_Global_Network_Factsheet.pdf.
---------------------------------------------------------------------------

    The proposed latency mechanism also meets the additional prongs of 
the de minimis interpretation, that it be fully disclosed and codified 
in a written rule of the exchange that has become effective pursuant to 
Section 19 of the Act (or in a publicly-issued Trading Alert); and that 
the exchange articulates how the purpose, operation, and application of 
the delay is consistent with the Act and the rules and regulations 
thereunder applicable to the exchange. The latency mechanism's 
operation, as proposed, would be disclosed and codified in detail in 
IEX Rules 22.100(n) and 22.170(g). Those provisions specify that the 
latency mechanism shall mean a delay that is equivalent to up to 350 
microseconds of latency that is added to each incoming order and quote 
message from a User prior to processing by the Trading System, with the 
specific amount of latency communicated by Trading Alert (with at least 
30 days prior notice), and that will not apply to other communications 
between the Exchange and Users, Away Markets, data feeds, order 
processing and order execution on the IEX Options Book, and outbound 
communications to the Exchange's proprietary data feeds and OPRA. As 
discussed above, the purpose of the latency mechanism is to provide 
adequate time for the IEX Trading System to update its view of market 
data to enable it to accurately price orders as well as to perform the 
Indicator calculation with current market data.
    Consequently, based on the foregoing, the Exchange believes that 
the latency mechanism is both de minimis and otherwise consistent with 
the Act.
    The Exchange believes that the proposed ORP is consistent with 
Section 6(b) of the Act \180\ in general, including furthering the 
objectives of Section 6(b)(5) of the Act,\181\ as the proposed optional 
risk protection mechanism would remove impediments to and perfect the 
mechanism of a free and open market and a national market system and 
promote just and equitable principles of trade by providing an optional 
quote parameter, available to all IEX Options market makers, that is 
designed to identify when a quote is likely mispriced so that the 
Trading System can effectuate the advance trading instructions provided 
by the Market Maker to cancel or reprice its quote, as selected by the 
Market Maker. The ORP is an optional, narrowly tailored approach 
designed to provide protection from excessive risk of execution of 
stale quotes and thereby enable market makers to make tighter and 
larger quotes (i.e., quotes at narrower spreads with greater size) thus 
enhancing the quality of IEX Options markets to the benefit of all 
market participants. The Exchange believes it is appropriate to provide 
market makers with the choice to utilize this reasonable quote 
protection, particularly given the continuous quoting obligations 
specific to market makers and their importance in providing liquidity 
in the listed options market. The Exchange further believes this risk 
functionality will encourage market makers to provide additional depth 
and liquidity to the Exchange's markets, thereby removing impediments 
to and perfecting the mechanisms of a free and open market and a 
national market system and, in general, protecting investors and the 
public interest.
---------------------------------------------------------------------------

    \180\ 15 U.S.C. 78f(b).
    \181\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the ORP supports the protection of 
investors and public interest goals of the Act. As described in the 
Purpose section, based on the structural differences between equities 
and listed options markets, the options exchanges often do not have the 
same natural liquidity of buyers and sellers for each tradeable 
instrument (i.e., options series) as is generally the case in equities. 
As a result, market makers with affirmative obligations play a central 
role in providing liquidity to options exchanges through continuous 
two-sided quotes in large numbers of listed options series, thereby 
enabling investors to transact in listed options in accordance with 
their investment objectives. Because options market makers are required 
to maintain hundreds (and sometimes thousands) of quotes on options 
overlying underlying securities at any one time, a sudden

[[Page 7225]]

market move in the underlying security can leave them vulnerable to 
being executed on quotes that are stale and dislocated from the price 
of the underlying security.\182\ Liquidity takers can target these 
stale quotes, with limited risk should they fail, before the market 
maker has time to move its quotes to reflect the price change in the 
underlying security exposing them to potentially major losses.
---------------------------------------------------------------------------

    \182\ See, e.g., Lehoczky, Sandor and Woods, Ellen and Russell, 
Matthew and Nguyen, Mina and Somers, James, Dead Man's Switch: 
Making Options Markets Safer with Active Quote Protection (May 2020) 
at 2-3, 6, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3675849 (discussing the need for quote 
protection for market makers to allow for a deep and liquid listed 
options market and explaining that ``race conditions'' negatively 
impact pricing efficiency, ``as market makers have been shown to 
quote wider spreads or step back instead of continually updating 
with price moves for fear of being ``picked off.''); see also 
Citadel Securities, Market Lens, July 2020, available at https://www.citadel.com/securities/wp-content/uploads/sites/2/2020/07/Market-Lens-Order-Cancellation-White-Paper_FINAL.pdf (explaining the 
need for risk management in electronic trading given that ``traders 
who place limit orders--the foundation of public price discovery--
are exposed to the risk that their quotations will be executed at an 
inopportune time, leading to potential losses'' and that the 
``greater the risk of an inopportune execution, the more 
compensation is required, which leads to wider bid-ask spreads. 
Conversely, anything the trader can do to lower the risk of an 
inopportune execution will lower the compensation required, which 
leads to narrower bid-ask spreads.'').
---------------------------------------------------------------------------

    The ORP is designed to supplement the standard proposed risk checks 
to provide augmented protection to address the inherent risks faced by 
market makers. IEX believes that the operation of the ORP is similar to 
activity-based and price reasonability risk checks offered by other 
options exchanges (and proposed by IEX herein), in terms of its 
objective and impact on a resting quote.\183\ Each of these risk 
controls will cancel an order when the control is triggered based on a 
determination that the price of the market maker's quote is 
``unreasonable'' because it is no longer reflective of the price of the 
underlying security and therefore likely stale (price reasonability 
check) or that the execution activity of a market maker's quotes 
exceeds the market maker's risk tolerance (activity-based controls). 
Additionally, the trading collar and limit order protection rules of 
other options exchanges and those similarly proposed by IEX provide for 
orders to be repriced.
---------------------------------------------------------------------------

    \183\ See, e.g., Market-Maker Protections, Market Structure, 
Optiver, July 17, 2023, available at https://optiver.com/insights/market-maker-protections/ (explaining that exchanges implement 
robust market-maker protections to ``assist market makers in coping 
with the risks of posting continuous, two-sided quotes in thousands 
of financial instruments'' and to provide the ability to 
automatically pull or amend their quotes so that ``all quotes 
falling within the scope of protection still resting on the book are 
prohibited from further execution'').
---------------------------------------------------------------------------

    However, IEX notes that the proposed ORP would be more transparent 
than the activity-based controls in determining when a market maker 
quote is potentially subject to cancelation (or adjustment) because it 
is based on a transparent formula specified in IEX's rules and related 
Trading Alerts. In contrast, those triggers for an activity-based 
control are nonpublic and set by each exchange member.
    As discussed above, because of the lack of natural sources of 
liquidity across the multitude of listed options series, market makers 
are subject to affirmative obligations to maintain continuous two-sided 
quotes on hundreds or thousands of individual options series. While IEX 
proposes to offer bulk quoting and purge port functionality to market 
makers (in the same manner as other options exchanges), in a fast-
moving market, their quotes can nonetheless become stale almost 
instantaneously. In those times, a sophisticated liquidity taker can 
target one or more stale market maker quotes before the market maker 
can update its quotes, thereby exposing the market maker to potentially 
major losses. The ORP is designed to assist market makers with an 
option to manage this risk, similar to the other risk controls. While 
some overlap is expected, IEX believes that the Indicator would 
potentially identify additional instances of stale quotes beyond those 
identified by the other price reasonability checks.
    Further, IEX notes that the operation of the Options Quote 
Indicator is similar to the manner in which IEX's equities market (the 
``Equities System'') utilizes a ``crumbling quote indicator'' to 
encourage the provision of displayed liquidity by providing reasonably 
tailored protections against adverse executions.\184\ As with the 
crumbling quote indicator, the Indicator will be a transparent formula 
based on a pre-determined objective set of circumstances that will be 
specified in IEX's rules to identify when the Protected Bid and/or 
Protected Offer in a particular options series is likely to move to a 
less aggressive price.
---------------------------------------------------------------------------

    \184\ In 2016, IEX received SEC approval of the IEX's exchange 
system that provides a similar quote indicator for equities. See 
Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 
41142, 41161 (June 23, 2016) (``2016 SEC Approval Order'') 
(approving IEX's exchange system in its registration as a national 
securities exchange, which included the approval of IEX's crumbling 
quote indicator that assesses quote instability by utilizing a real-
time, based on pre-determined, objective set of conditions that 
protects orders from unfavorable executions when the market is 
moving against them). In 2020, IEX received SEC approval to apply 
the quote indicator to displayed orders in equities. See 2020 SEC 
Approval Order, supra note 172, at 6-7 (receiving unanimous support 
and concluding that the Exchange's displayed order proposal that 
included a similar quote indicator is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange and that is 
designed to improve market quality, enhance price discovery, and 
promote just and equitable principles of trade).
---------------------------------------------------------------------------

    Moreover, the Options Trading System will use the ORP in a manner 
similar to the way in which the Equities System applies the crumbling 
quote indicator to resting displayed liquidity, which reprices the 
applicable order or quote. The functional differences between the 
crumbling quote indicator and the Indicator reflect that options 
pricing is derivative.\185\ Thus, the Indicator will trigger when it 
identifies that a Protected Bid or Protected Offer is likely to move to 
a less aggressive price, based on a price change in the underlying 
security, thereby exposing the market maker to excessive risk, but, 
unlike the crumbling quote indicator, would reprice or cancel the 
impacted quote and not remain ``on'' for a period of time after 
triggering. IEX believes that this approach is appropriate in view of 
the derivative pricing of options and that it will contribute to more 
displayed liquidity through improved execution quality, enhance the 
public price discovery process, and promote just and equitable 
principles of trade.\186\
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    \185\ Because of this difference, the Indicator is designed to 
identify when the Protected Bid and/or Protected Offer in an option 
is dislocated from the price of the underlying based on a price 
change in the underlying and therefore likely to be in transition to 
a less aggressive price, while the Crumbling Quote Indicator 
utilizes changes in the protected quote in the security itself to 
make such a prediction.
    \186\ See, e.g., 2020 SEC Approval Order, supra note 172, at 19 
(concluding that IEX's exchange functionality protects against 
adverse selection and incentivizes more displayed liquidity through 
improved execution quality for liquidity providers, which 
contributes ``to fair and orderly markets'' and supports ``the 
public price discovery process''); at 26 (finding that the 
Exchange's speedbump and crumbling quote indicator promotes the 
interest of long term investors and inures to the ``benefit of 
displayed markets, leading to increased displayed liquidity from 
which all market participants ultimately will benefit''); at 52 
(concluding that the Exchange's order protection functionality ``is 
designed to encourage market participants to post more priced limit 
orders, including displayed orders, on IEX, and thereby promotes 
just and equitable principles of trade, removes impediments to and 
perfects the mechanism of a free and open market and a national 
market, and, in general, protects investors and the public 
interest.'').
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    Further, the ORP would be available, as a quote parameter, only to 
market makers and on an optional basis, because the Exchange believes 
that it is most appropriate as a tool to address market maker risk. IEX 
believes that this approach is appropriate because market

[[Page 7226]]

makers are subject to affirmative obligations to provide continuous 
two-sided quotes and cannot back away or unduly widen their quotes 
during periods of price volatility, as can other liquidity 
providers.\187\ By offering market makers this narrowly-tailored, 
optional tool, IEX believes it will attract additional displayed 
liquidity that will be available to all market participants.
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    \187\ See, e.g., Protecting Liquidity in Options Markets, Market 
Structure, Optiver, July 12, 2023, available at https://optiver.com/insights/protecting-liquidity-in-options-markets/ (explaining that 
without robust liquidity protection mechanisms for market makers to 
protect against the risks of displaying stale or outdated quotes, 
``market makers may be forced to widen their spreads, show less 
liquidity or simply exit the market'' and overall ``market quality 
can deteriorate'' with the result of investors suffering).
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    IEX also believes that use of the Indicator in determining when to 
trigger the ORP is consistent with the protection of investors and the 
public interest because the Indicator is based on the well-recognized 
Black-Scholes options pricing model, which IEX believes is an 
appropriate methodology to identify when a market maker's quote in an 
option is dislocated from the price of the underlying security based on 
the mathematical relationship between the price of the underlying 
security and the overlying options. Moreover, IEX believes that the 
access delay \188\ (as discussed above) will serve to enhance the 
accuracy of the Indicator by providing adequate time for the IEX 
Trading System to update its Indicator calculation with current market 
data. In this regard, as discussed earlier, IEX notes that the proposed 
access delay of up to a maximum of 350 microseconds is well within the 
geographic delays that exist among and between the data centers that 
IEX Options Members, and other options exchanges, use and is consistent 
with the naturally occurring time indeterminism that exists in order 
processing.
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    \188\ See proposed IEX Rule 22.170(g).
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    Further, IEX believes that limiting the availability of the ORP to 
resting market maker quotes is consistent with the Act for several 
reasons. As discussed in depth above, market makers are integral to 
providing liquidity on options exchanges, and at the same time subject 
to a potentially excessive level of risk from execution of one or more 
stale quotes. Additionally, Market Makers' obligations apply across all 
series in their appointed class. Other liquidity providers are free to 
concentrate their efforts in a select number of series. Thus, Market 
Makers have greater exposure to latency arbitrage, take on greater 
risk, and incur more related capital charges than other liquidity 
providers. IEX determined to apply the functionality to resting quotes 
only as this approach will best achieve the purpose of protecting 
market markets from the excessive risk of executions at stale prices 
without disrupting market makers' ability to update their quotations.
    Moreover, IEX notes that the Commission has previously recognized 
the utility of IEX providing protection to liquidity providers through 
order types that leverage its crumbling quote indicator to 
appropriately protect market participants from the risks of transacting 
when the market is in transition and thereby incentivize the entry of 
liquidity providing orders. The Exchange believes that the proposed ORP 
is consistent with this history and is in furtherance of driving 
tighter and deeper displayed markets to the benefit of investors.\189\
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    \189\ See supra notes 184 and 186 and accompanying text.
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    IEX also believes that the proposal is consistent with the firm 
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation 
NMS.\190\ Specifically, any marketable interest that is executable 
against a market maker's quote that has been received by the Trading 
System prior to the time that a quote instability determination is 
received by Trading System will be automatically executed, subject to 
processing of any prior messages, at the price and up to the size of 
the market maker's quote.
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    \190\ See proposed IEX Rule 23.140(d).
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    IEX believes that the proposed ORP is consistent with the 
protection of investors and the public interest, and is consistent with 
the Exchange Act, including furthering the objectives of Section 
6(b)(5) of the Act,\191\ because it is a narrowly-tailored approach 
designed to appropriately balance the risks faced by market makers with 
the legitimate objectives of liquidity takers by providing additional 
optional risk protection to market makers and thereby encourage 
aggressive quoting. The Exchange further believes that offering more 
risk management protections to Market Makers would mitigate their 
exposure to excessive risk. As discussed in detail above, Market Makers 
are required to continuously provide two-sided quotes in substantial 
numbers of listed options series that can create large, unintended 
positions exposing market makers to excessive risk. Market Maker quotes 
are critical to provide liquidity to the market and contribute to price 
discovery for investors. Without robust liquidity protection, market 
makers may be forced to widen their spreads, show less liquidity or 
simply exit the market, which can result in deterioration of market 
quality and adversely impact investors' and other liquidity takers' 
ability to transact in the options markets. In sum, liquidity 
protection for options market makers is vital for achieving a healthy 
balance between liquidity providers and liquidity takers in the options 
market that will promote more displayed liquidity from which all market 
participants ultimately will benefit.
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    \191\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rules of IEX Options, as 
well as the proposed method of monitoring for compliance with and 
enforcing such rules is also consistent with the Act, particularly 
Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, in 
part, that an exchange have the capacity to enforce compliance with, 
and provide appropriate discipline for, violations of the rules of the 
Commission and of the exchange. The Exchange has proposed to adopt 
rules necessary to regulate Options Members that are nearly identical 
to the approved rules of other options exchanges, as described above. 
The Exchange proposes to regulate activity on IEX Options in the same 
way it regulates activity on its equities market (and comparable to 
other options exchanges), through various Exchange specific functions, 
an RSA with FINRA, as well as participation in industry plans, 
including plans pursuant to Rule 17d-2 under the Exchange Act.
    In conclusion, for the reasons discussed above, IEX believes that 
the proposed rule change is consistent with the investor protection and 
public interest purposes of Section 6 of the Act. Additionally, IEX 
believes that establishing a new options market that participates in 
all the current (and any future) national market system plans governing 
options trading is consistent with Section 11A of the Act relating to 
the establishment of the national market system for securities.\192\ As 
proposed, IEX Options will offer a simple alternative to existing 
options exchanges that is designed to support competitive quoting to 
the benefit of all market participants.
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    \192\ 15 U.S.C. 78k-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
the proposed rule change is designed to enhance competition by

[[Page 7227]]

providing for an additional exchange market for the trading of listed 
options.
    IEX believes that this proposal will enhance competition by 
allowing the Exchange to leverage its existing robust technology 
platform to provide a resilient, deterministic, and transparent 
execution platform for options. The proposed rule change will insert an 
additional competitive dynamic to the options landscape by allowing the 
Exchange to compete with existing options exchanges and will promote 
further initiative and innovation among market centers and market 
participants.
    Further, the Exchange does not believe that the latency mechanism 
or optional Market Maker quote parameter aspect of the proposed rule 
change will impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
these features are designed to enhance IEX Option's competitiveness by 
incentivizing the entry of increased Market Maker liquidity.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intra-market competition because it will apply to 
all Options Members in the same manner and any Options Member can 
perform any specified function subject to meeting applicable 
requirements.
    The Exchange also does not believe that the proposed latency 
mechanism will impose any burden on intra-market competition that is 
not necessary or appropriate because it will apply in the same manner 
to all incoming orders and quotes. Further, as noted in the Purpose 
section, the Exchange will determine the length of the latency 
mechanism with a view towards achieving a healthy balance between 
liquidity providers and liquidity takers.
    The Exchange also does not believe that the proposed ORP will 
impose any burden on intra-market competition that is not necessary or 
appropriate because it will be available in the same manner to all 
Market Makers and any Options Member could become a Market Maker, 
subject to meeting applicable requirements. The ORP is designed to 
mitigate Market Makers' exposure to excessive risk and thereby enable 
them to provide more competitive quotes to the benefit of all market 
participants. The Exchange also believes that limiting the ORP 
functionality to Market Makers will not impose any burden on intra-
market competition that is not necessary and appropriate because Market 
Makers are subject to robust affirmative quoting obligations and thus 
can uniquely benefit from the protections to be provided by the ORP. 
The Exchange thus believes it is reasonable to provide Market Makers 
with an additional tool to manage their risk parameters, particularly 
given their unique and critical role in the listed options market and 
the obligations that Market Makers must satisfy. As discussed in the 
Purpose and Statutory Basis sections, the proposed ORP will protect 
resting market-maker quotes (which are subject to quoting obligations) 
from executions at potentially stale prices, which the Exchange 
believes will reduce their risk and encourage Market Makers to provide 
more competitive markets on the Exchange, thereby benefitting all 
market participants through additional execution opportunities at 
prices that reflect the then-current market conditions. The Exchange 
expects the proposed rule change to increase liquidity and enhance 
competition in the market because Market Makers may be able to quote 
more aggressively with added productions from exposure to execution 
risk, thereby remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
    The Exchange also does not believe that the proposal will impose 
any burden on inter-market competition that is not necessary or 
appropriate. Competing exchanges are free to adopt similar 
functionality, subject to the Commission rule filing process.

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

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-IEX-2025-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-IEX-2025-02. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-IEX-2025-02 and should be 
submitted on or before February 11, 2025.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\193\
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    \193\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-01290 Filed 1-17-25; 8:45 am]
BILLING CODE 8011-01-P
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