Document ID: SEC-2021-1552-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2021-11-04T04:00Z

[Federal Register Volume 86, Number 211 (Thursday, November 4, 2021)]
[Notices]
[Pages 60926-60930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-24018]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93472; File No. SR-NYSEArca-2021-91]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change to Amend Rule 6.87-O

October 29, 2021.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on October 20, 2021, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the 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

    The Exchange proposes to amend Rule 6.87-O to improve the operation 
of the Rule. The proposed change is available on the Exchange's website 
at www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, the 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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The purpose of this rule change is to amend Rule 6.87-O 
``Nullification and Adjustment of Options Transactions including 
Obvious Errors'' to improve the operation of the Rule. Following 
discussions with other exchanges and a cross-section of industry 
participants and in coordination with the Listed Options Market 
Structure Working Group (``LOMSWG'') (collectively, the ``Industry 
Working Group''), the Exchange proposes: (1) To amend section (b)(3) of 
the Rule to permit the Exchange to determine the Theoretical Price of a 
Customer option transaction in a wide market so long as a narrow market 
exists at any point during the 10-second period after an opening or re-
opening; and (2) to amend section (c)(4)(B) of the Rule to adjust, 
rather than nullify, Customer transactions in Obvious Error situations, 
provided the adjustment does not violate the limit price. The Exchange 
understands that upon approval of this proposal, other options 
exchanges will also submit substantively identical proposals to the 
Commission.
Proposed Change to Section (b)(3)
    Rule 6.87-O has been part of various harmonization efforts by the 
Industry Working Group.\4\ These efforts have often centered around the 
Theoretical Price for which an options transaction should be compared 
to determine whether an Obvious Error has occurred. For instance, all 
options exchanges have adopted language comparable to Commentary 
.06,\5\ which explains how an exchange is to determine Theoretical 
Price at the open, when there are no valid quotes, and when there is a 
wide quote. This includes at times the use of a singular third-party 
vendor, known as a TP Provider (currently CBOE Livevol, LLC).
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    \4\ See, e.g., Securities Exchange Act Release Nos. 74921 (May 
8, 2015), 80 FR 27747 (May 14, 2015) (SR-NYSEArca-2015-41); 80496 
(April 20, 2017), 82 FR 19282 (April 26, 2017) (SR-NYSEArca-2017-
42).
    \5\ See, e.g., Securities Exchange Act Release No. 81580 
(September 12, 2017), 82 FR 43578 (September 18, 2017) (SR-NYSEArca-
2017-101).
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    Similarly, section (b)(3) of Rule 6.87-O was previously harmonized 
across all options exchanges to handle situations where executions 
occur in markets that are wide (as set forth in the rule).\6\ Under 
that section, the Exchange

[[Page 60927]]

determines the Theoretical Price if the NBBO for the subject series is 
wide immediately before execution and a narrow market (as set forth in 
the rule) existed ``during the 10 seconds prior to the transaction.'' 
The rule goes on to clarify that, should there be no narrow quotes 
``during the 10 seconds prior to the transaction,'' the Theoretical 
Price for the affected series is the NBBO that existed at the time of 
execution (regardless of its width).
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    \6\ See, e.g., Securities Exchange Act Release No. 74921 (May 8, 
2015), 80 FR 27747 (May 14, 2015) (SR-NYSEArca-2015-41).
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    In recent discussions, the Industry Working Group has identified 
proposed changes to section (b)(3) of Rule 6.87-O that would improve 
the Rule's functioning. Currently, section (b)(3) does not permit the 
Exchange to determine the Theoretical Price unless there is a narrow 
quote 10 seconds prior to the transaction. However, in the first 
seconds of trading, there is no 10-second period ``prior to the 
transaction.'' Further, the Industry Working Group has observed that 
prices in certain series can be disjointed at the start of trading. 
Accordingly, the Exchange proposes to provide additional protections to 
trading in certain circumstances immediately after the opening before 
liquidity has had a chance to enter the market. The Exchange proposes 
to amend section (b)(3) to allow the Exchange to determine the 
Theoretical Price in a wide market so long as a narrow market exists at 
any point during the 10-second period after an opening or re-opening.
    Specifically, the Exchange proposes that the existing text of 
section (b)(3) would become sub-section ``A.'' The Exchange proposes to 
add the following heading and text as sub-section ``B.'':

    B. Customer Transactions Occurring Within 10 Seconds or less 
After an Opening or Re-Opening:
    (i) The Exchange will determine the Theoretical Price if the 
bid/ask differential of the NBB and NBO for the affected series just 
prior to the Customer's erroneous transaction was equal to or 
greater than the Minimum Amount set forth in paragraph A above and 
there was a bid/ask differential less than the Minimum Amount during 
the 10 seconds prior to the transaction.
    (ii) If there was no bid/ask differential less than the Minimum 
Amount during the 10 seconds prior to the transaction, then the 
Exchange will determine the Theoretical Price if the bid/ask 
differential of the NBB and NBO for the affected series just prior 
to the Customer's erroneous transaction was equal to or greater than 
the Minimum Amount set forth in paragraph A above and there was a 
bid/ask differential less than the Minimum Amount anytime during the 
10 seconds after an opening or re-opening.
    (iii) If there was no bid/ask differential less than the Minimum 
Amount during the 10 seconds following an Opening or Re-Opening, 
then the Theoretical Price of an option series is the last NBB or 
NBO just prior to the Customer transaction in question, as set forth 
in paragraph (b) above.
    (iv) Customer transactions occurring more than 10 seconds after 
an opening or re-opening are subject to paragraph A above.

    The following examples illustrate the functioning of the proposed 
rule change. Consider that the NBBO of a series opens as $0.01 at 
$4.00. A marketable limit order to buy one contract arrives one second 
later and is executed at $4.00. In the third second of trading, the 
NBBO narrows from $0.01 at $4.00 to $2.00 at $2.10. While the execution 
occurred in a market with wide widths, there was no tight market within 
the 10 seconds prior to execution. Accordingly, under the current rule, 
the trade would not qualify for obvious error review, in part due to 
the fact that there was only a single second of trading before the 
execution. Under the proposal, since a tight market existed at some 
point in the first 10 seconds of trading (i.e., in the third second), 
the Exchange would be able to determine the Theoretical Price as 
provided in Commentary .06.
    As another example, the NBBO for a series opens as $0.01 at $4.00. 
In the seventh second of trading, a marketable limit order is received 
to buy one contract and is executed at $4.00. Five seconds later (i.e., 
in the twelfth second of trading), the NBBO narrows from $0.01 at $4.00 
to $2.00 at $2.10. While the execution occurred in a market with wide 
widths, there was no tight market within 10 seconds prior to execution. 
Accordingly, under the current rule, the trade would not qualify for 
obvious error review. Under the proposal, since no tight market existed 
at any point during the first 10 seconds of trading (i.e., the narrow 
market occurred in the twelfth second), the trade would not qualify for 
obvious error review.
    The proposed rule change would also better harmonize section (b)(3) 
with section (b)(1) of the Rule. Under section (b)(1), the Exchange is 
permitted to determine the Theoretical Price for transactions occurring 
as part of the opening auction process (as defined in Rule 6.64-O) if 
there is no NBB or NBO for the affected series just prior to the 
erroneous transaction. However, under the current version of section 
(b)(3), a core trading transaction could occur in the same wide market 
but the Exchange would not be permitted to determine the Theoretical 
Price. Consider an example where one second after the Exchange opens a 
selected series, the NBBO is $1.00 at $5.00. At 9:30:03, a customer 
submits a marketable buy order to the Exchange and pays $5.00. At 
9:30:03, a different exchange runs an opening auction that results in a 
customer paying $5.00 for the same selected series. At 9:30:06, the 
NBBO changes from $1.00 at $5.00 to $1.35 at $1.45. Under the current 
version of section (b)(3), the Exchange would not be able to determine 
the Theoretical Price for the trade occurring during core trading. 
However, the trade on the other exchange could be submitted for review 
under (b)(1) and that exchange would be able to determine the 
Theoretical Price. If the proposed change to section (b)(3) were 
approved, both of the trades occurring at 9:30:03 (on the Exchange 
during core trading and on another exchange via auction) would also be 
entitled to the same review regarding the same Theoretical Price based 
upon the same time.
    The proposal would not change any obvious error review beyond the 
first 10 seconds of an opening or re-opening.
Proposed Change to Section (c)(4)(B)
    The Exchange proposes to amend section (c)(4)(B)--the ``Adjust or 
Bust'' rule for Customer transactions in Obvious Error situations--to 
adjust rather than nullify such orders, provided the adjustment does 
not violate the Customer's limit price.
    Currently, the Rule provides that in Obvious Error situations, 
transactions involving non-Customers should be adjusted, while 
transactions involving Customers are nullified, unless a certain 
condition applies.\7\ The Industry Working Group has concluded that the 
treatment of these transactions should be harmonized under the Rule, 
such that transactions involving Customers may benefit from adjustment, 
just as non-Customer transactions currently do, except where such 
adjustment would violate the Customer's limit price; in that instance, 
the trade would be nullified.
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    \7\ Specifically, the current Rule provides at section (c)(4)(C) 
that if an OTP Holder has 200 or more Customer transactions under 
review concurrently and the orders resulting in such transactions 
were submitted during the course of 2 minutes or less, where at 
least one party to the Obvious Error is a non-Customer, then the 
Exchange will apply the non-Customer adjustment criteria found in 
section (c)(4)(A).
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    Specifically, the Exchange proposes to amend the text of section 
(c)(4)(B) to add that where at least one party to the Obvious Error is 
a Customer, ``the execution price of the transaction will be adjusted 
by the Official pursuant to the table immediately above. Any Customer 
Obvious Error exceeding 50 contracts will be subject to the Size 
Adjustment Modifier defined in sub-paragraph (a)(4) above. However, if 
such adjustment(s) would result in an execution price higher (for buy

[[Page 60928]]

transactions) or lower (for sell transactions) than the Customer's 
limit price,'' the trade will be nullified. The ``table immediately 
above'' referenced in the proposed text refers to the table at current 
Section (c)(4)(A), which provides for the adjustment of prices a 
specified amount away from the Theoretical Price, rather than adjusting 
the Theoretical Price.
    The Exchange proposes no other changes at this time.
Implementation Date
    The Exchange will announce the effective date of the proposed 
changes in a Trader Update distributed to all OTP Holders and OTP 
Firms. The effective date will be no sooner than six months from the 
approval of this proposal.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\9\ in particular, because 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 because it is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed change to section (b)(3) of 
the Rule would remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
protect investors and the public interest because it provides a method 
for addressing Obvious Error Customer transactions that occur in a wide 
market at the opening of trading. Generally, a wide market is an 
indication of a lack of liquidity in the market such that the market is 
unreliable. Current section (b)(3) recognizes that a persistently wide 
quote (i.e., more than 10 seconds) should be considered the reliable 
market regardless of its width, but does not address transactions that 
occur in a wide market in the first seconds of trading, where there is 
no preceding 10-second period to reference. Accordingly, in the first 
10 seconds of trading, there is no opportunity for a wide quote to have 
persisted for a sufficiently lengthy period such that the market should 
consider it a reliable market for the purposes of determining an 
Obvious Error transaction.
    The proposed change would rectify this disparity and permit the 
Exchange to consider whether a narrow quote is present at any time 
during the 10-second period after an opening or re-opening. The 
presence of such a narrow quote would indicate that the market has 
gained sufficient liquidity and that the previous wide market was 
unreliable, such that it would be appropriate for the Exchange to 
determine the Theoretical Price of an Obvious Error transaction. In 
this way, the proposed rule harmonizes the treatment of Customer 
transactions that execute in an unreliable market at any point of the 
trading day, by making them uniformly subject to Exchange determination 
of the Theoretical Price.
    The Exchange believes that the proposed change to section (c)(4)(B) 
of the Rule would remove impediments to and perfect the mechanism of a 
free and open market and a national market system and enhance the 
protection of investors by harmonizing the treatment of non-Customer 
transactions and Customer transactions under the Rule. Under the 
current Rule, Obvious Error situations involving non-Customer 
transactions are adjusted, while those involving Customer transactions 
are generally nullified, unless they meet the additional requirements 
of section (c)(4)(C) (i.e., where an OTP Holder has 200 or more 
Customer transactions under review concurrently and the orders 
resulting in such transactions were submitted during the course of 2 
minutes or less). The proposal would harmonize the treatment of non-
Customer and Customer transactions by providing for the adjustment of 
all such transactions, except where such adjustment would violate the 
Customer's limit price.
    When it proposed the current rule in 2015, the Exchange believed 
there were sound reasons for treating non-Customer transactions and 
Customer transactions differently. At the time, the Exchange stated its 
belief that ``Customers are not necessarily immersed in the day-to-day 
trading of the markets, are less likely to be watching trading activity 
in a particular option throughout the day, and may have limited funds 
in their trading accounts,'' and that nullifying Obvious Error 
transactions involving Customers would give Customers ``greater 
protections'' than adjusting such transactions by eliminating the 
possibility that a Customer's order will be adjusted to a significantly 
different price. The Exchange also noted its belief that ``Customers 
are . . . less likely to have engaged in significant hedging or other 
trading activity based on earlier transactions, and thus, are less in 
need of maintaining a position at an adjusted price than non-
Customers.'' \10\
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    \10\ Securities Exchange Act Release No. 74921 (May 9, 2015), 80 
FR 27747, 27761 (May 14, 2015) (SR-NYSEArca-2015-41).
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    Those assumptions about Customer trading and hedging activity no 
longer hold. The Exchange and the Industry Working Group believe that 
over the course of the last five years, Customers that use options have 
become more sophisticated, as retail broker-dealers have enhanced the 
trading tools available. Pursuant to OCC data, volumes clearing in the 
Customer range have expanded from 12,022,163 ADV in 2015 to 35,081,130 
ADV in 2021. This increase in trading activity underscores the greater 
understanding of options by Customers as a trading tool and its use in 
the markets. Customers who trade options today largely are more 
educated, have better trading tools, and have better access to 
financial news than any time prior.\11\ The proposed rule would extend 
the hedging protections currently enjoyed by non-Customers to 
Customers, by allowing them to maintain an option position at an 
adjusted price, which would in turn prevent a cascading effect by 
maintaining the hedge relationship between the option transaction and 
any other transactions in a related security.
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    \11\ See ``Retail Traders Adopt Options En Masse'' by Dan Raju, 
available at https://www.nasdaq.com/articles/retail-traders-adopt-options-en-masse-2020-12-08.
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    The Exchange believes that extending such hedging protections to 
Customer transactions would remove impediments to and perfect the 
mechanism of a free and open market and a national market system and 
enhance the protection of investors by providing greater certainty of 
execution for all participants to options transactions. Under the 
current Rule, a Customer that believes its transaction was executed 
pursuant to an Obvious Error may be disincentivized from submitting the 
transaction for review, since during the review process, the Customer 
would be uncertain whether the trade would be nullified, and if so, 
whether market conditions would still permit the opportunity to execute 
a related order at a better price after the nullification ruling is 
finalized. In contrast, under the proposed rule, the Customer would 
know that the only likely outcomes of submitting a trade to Obvious 
Error review would be that the

[[Page 60929]]

trade would stand or be re-executed at a better price; the trade would 
only be nullified if the adjustment would violate the order's limit. 
Similarly, under the current Rule, during the review period, a market 
maker who traded contra to the Customer would be uncertain if it should 
retain any position executed to hedge the original trade, or attempt to 
unwind it, possibly at a significant loss. Under the proposed rule 
change, this uncertainty is largely eliminated, and the question would 
be whether the already-executed and hedged trade would be adjusted to a 
better price for the Customer, or if it would stand as originally 
executed. In this way, the proposed rule enhances the protection of 
investors and removes impediments to and perfects the mechanism of a 
free and open market and a national market system.
    The proposed rule also addresses the concern the Exchange cited in 
its 2015 filing that adjusting, rather than nullifying, Customer 
transactions could lead to a Customer's order being adjusted to a 
significantly different price. To address that concern, the proposed 
rule would prevent Customer transactions from being adjusted to a price 
that violates the order's limit; if the adjustment would violate a 
Customer's limit, the trade would instead be nullified. The Exchange 
believes it is in the best interest of investors to expand the 
availability of adjustments to Customer transactions in all Obvious 
Error situations except where the adjustment would violate the 
Customer's limit price.
    Further, the Exchange believes that, with respect to such proposed 
adjustments to Customer transactions, it is appropriate to use the same 
form of adjustment as is currently in place with respect to non-
Customer transactions as laid out in the table in section (c)(4)(A). 
That is, the Exchange believes that it is appropriate to adjust to 
prices a specified amount away from the Theoretical Price rather than 
to adjust the Theoretical Price, even though the Exchange has 
determined a given trade to be erroneous in nature, because the parties 
in question should have had some expectation of execution at the price 
or prices submitted. Also, it is common that by the time it is 
determined that an Obvious Error has occurred, additional hedging and 
trading activity has already occurred based on the executions that 
previously happened. The Exchange believes that providing an adjustment 
to the Theoretical Price in all cases would not appropriately 
incentivize market participants to maintain appropriate controls to 
avoid potential errors, while adjusting to prices a specified amount 
away from the Theoretical Price would incentivize such behavior.
    The Exchange believes that the proposal is not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers. 
The proposed change to section (b)(3) would apply to all instances of a 
wide market occurring within the first 10 seconds of trading followed 
by a narrow market at any point in the subsequent 10-second period, 
regardless of the types of market participants involved in such 
transactions. The proposed change to section (c)(4)(B) would harmonize 
the treatment of Obvious Error transactions involving Customers and 
non-Customers, no matter what type of market participants those parties 
may be.
    For these reasons, the Exchange believes that the proposal is 
consistent with the Act.

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

    The Exchange believes that the proposal will not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of Section 6(b)(8) of the Act.\12\ The Exchange 
anticipates that the other options exchanges will adopt substantively 
similar proposals, such that there would be no burden on intermarket 
competition from the Exchange's proposal. Accordingly, the proposed 
change is not meant to affect competition among the options exchanges. 
For these reasons, the Exchange believes that the proposed rule change 
reflects this competitive environment and does not impose any undue 
burden on intermarket competition.
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    \12\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or up to 90 days.
    (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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2021-91 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-NYSEArca-2021-91. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2021-91 and should be submitted 
on or before November 26, 2021.

[[Page 60930]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-24018 Filed 11-3-21; 8:45 am]
BILLING CODE 8011-01-P