Document ID: SEC-2021-0902-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq GEMX, LLC
Posted Date: 2021-06-28T04:00Z

[Federal Register Volume 86, Number 121 (Monday, June 28, 2021)]
[Notices]
[Pages 34104-34107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13655]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92227; File No. SR-GEMX-2021-05]

Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change to Options 2, 
Section 4 (Obligations of Market Makers)

June 22, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 9, 2021, Nasdaq GEMX, LLC (``GEMX'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III, below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 70050 (July 26, 
2013), 78 FR 46622 (August 1, 2013) (Application of Topaz Exchange, 
LLC for Registration as a National Securities Exchange; Findings, 
Opinion, and Order of the Commission).
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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 Options 2, Section 4, Obligations of 
Market Makers. The Exchange also proposes to add a new Options 4C.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/gemx/rules, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Options 2, Section 4, Obligations of 
Market Makers. The Exchange also proposes to add a new Options 4C.
Options 2, Section 4(a)
    The Exchange proposes to remove the following rule text from 
Options 2, Section 4(a), which has been in place since GEMX's 
inception: \3\

. . . Ordinarily, Market Makers are expected to:
    (1) Refrain from purchasing a call option or a put option at a 
price more than $0.25 below parity, although a larger amount may be 
appropriate considering the particular market conditions. In the 
case of calls, parity is measured by the bid in the underlying 
security, and in the case of puts, parity is measured by the offer 
in the underlying security.
    (2) The $0.25 amount above may be increased, or the provisions 
of this Rule may be waived, by the Exchange on a series-by-series 
basis. This proposed rule text also previously existed on Cboe 
Exchange, Inc. within prior Rule 8.7 \4\ and was removed from Cboe's 
Rulebook in 2019.\5\ The Exchange likewise desires to remove this 
restriction on Market Makers which does not exist on Cboe or other 
Nasdaq affiliated markets.\6\ The proposed rule text is currently 
waived on GEMX pursuant to Options 2, Section 4(a)(2). The Exchange 
proposes to remove this rule text from Options 2, Section 4 as the 
Exchange does not desire to enforce this provision in the future. 
The Exchange believes that this market maker provision is no longer 
necessary. Today, GEMX incentivizes Market Makers through allocation 
\7\ to quote tightly in their assigned options series. Primary 
Market Makers and Competitive Market Makers also have other 
obligations with respect to market making \8\ in addition to other 
quoting obligations \9\ that they must abide by when quoting on 
GEMX. Also, since the adoption of the rule, the Exchange has adopted 
the obvious error rule \10\ which permits the Exchange to review a 
transaction as potentially erroneous based on a theoretical price. 
Also, GEMX orders are subject to trade-through compliance, thereby 
limiting the prices at which orders may execute.\11\ Market Makers 
are relied upon to provide liquidity on GEMX, which benefits other 
Members who have the opportunity to interact with the order flow. 
The Exchange believes that the obligation to refrain from purchasing 
a call option or a put option at a price more than $0.25 below 
parity places yet another obligation on GEMX Market Makers that is 
not required on Cboe or other Nasdaq markets. The Exchange believes 
that this additional obligation is not necessary to maintain fair 
and orderly markets and notes the Exchange has waived this 
obligation.
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    \4\ Prior Interpretation and Policy .02 to Rule 8.7 provided, 
``Market-Makers are expected ordinarily to refrain from purchasing a 
call option or a put option at a price more than $0.25 below parity, 
although a larger amount may be appropriate considering the 
particular market conditions. In the case of calls, parity is 
measured by the bid in the underlying security, and in the case of 
puts, parity is measured by the offer in the underlying security. 
The $0.25 amount above may be increased, or the provisions of this 
Interpretation may be waived, by the Exchange on a series-by-series 
basis.''
    \5\ Cboe's rule change merely noted, with respect to the removal 
of Cboe's parity rule, that the filing makes non-substantive changes 
to the rule governing a Market-Maker's general obligations (current 
Rule 8.7, in part), most of which remove redundant provisions that 
are already covered under the umbrella of a Market-Maker's 
obligation to engage in dealing to maintain fair and orderly 
markets. No specific argument is provided with respect to removing 
this provision. See Securities Exchange Act 87024 (September 19, 
2019), 84 FR 50545 (September 25, 2019) (SR-CBOE-2019-059) (Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change to 
Amend Certain Rules Relating To Market-Makers Upon Migration to the 
Trading System Used by Cboe Affiliated Exchanges).
    \6\ See Nasdaq Phlx LLC, The Nasdaq Options Market LLC and 
Nasdaq BX, Inc. at Options 2, Section 4 (Obligations of Market 
Makers).
    \7\ See Options 3, Section 10 (Priority of Quotes and Orders). 
Primary Market Makers are offered an enhanced allocation provided 
the Primary Market Maker is quoting at same price as a non-Priority 
Customer Order or Market Maker quote.
    \8\ See Options 2, Section 4. GEMX Market Makers must for 
example: (1) Compete with other Market Makers to improve the market 
in all series of options classes to which the Market Maker is 
appointed; (2) make markets that, absent changed market conditions, 
will be honored for the number of contracts entered into the 
Exchange's System in all series of options classes to which the 
Market Maker is appointed; (3) update market quotations in response 
to changed market conditions in all series of options classes to 
which the Market Maker is appointed; and (4) price options contracts 
fairly by, among other things, bidding and offering so as to create 
differences of no more than $5 between the bid and offer following 
the opening rotation in an equity or index options contract. See 
Options 2, Section 4(b).
    \9\ See Options 2, Section 5 (Electronic Market Maker 
Obligations and Quoting Requirements). Further, Options 3, Section 
8(c)(3) requires Primary Market Makers to submit a Valid Width Quote 
during the Opening Process.
    \10\ See Options 3, Section 20 (Nullification and Adjustment of 
Options Transactions including Obvious Errors).
    \11\ See Options 3, Section 4(b)(6).
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Bid/Ask Differentials
    The Exchange proposes to amend Options 2, Section 4(b)(4) and 
Options 4A, Section 12(b)(i) to centralize the bid/ask differentials. 
Specifically, the Exchange proposes to state within new Options 2, 
Section 4(b)(4)(iii) that,

[[Page 34105]]

    Bid/ask differentials shall not apply to any options series 
until the time to expiration is less than nine (9) months for equity 
options and exchange-traded products. Bid/ask differentials shall 
not apply to any options series until the time to expiration is less 
than twelve (12) months for index options.

Currently, GEMX Options 4 and Options 4A rules are incorporated by 
reference to Nasdaq ISE, LLC (``ISE''). The Exchange recently filed a 
rule change \12\ to amend ISE Options 4 and Options 4A rules to 
relocate text concerning bid/ask differentials for long-term option 
series from ISE Options 4, Section 8(a) \13\ and ISE Options 4A, 
Section 12(b)(i).\14\ The ISE Rule Change added citations to Options 2, 
Section 4(b)(4)(iii) to ISE Options 4, Section 8(a) and ISE Options 4A, 
Section 12(b)(i). The ISE Rule Change indicated that ISE believes 
relocating the bid/ask differentials to Options 2, Section 4(b)(4)(iii) 
will provide Primary Market Makers and Competitive Market Makers with 
centralized information regarding their bid/ask differential 
requirements.
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    \12\ See SR-ISE-2021-14 (``ISE Rule Change'').
    \13\ ISE Options 4, Section 8(a) describes the bid/ask 
differentials for long-term options series for equity options and 
exchange-traded funds.
    \14\ ISE Options 4A, Section 12(b)(i) describes the bid/ask 
differentials for long-term options series for indexes.
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Business Continuity and Disaster Recovery Plan
    The Exchange proposes to relocate Supplementary Material .02 to 
Options 2, Section 4, concerning business continuity and disaster 
recovery plans, to General 2, Section 12, which is currently reserved. 
The Exchange proposes to title General 2, Section 12 as ``Business 
Continuity and Disaster Recovery Plan Testing Requirements for Members 
Pursuant to Regulation SCI.'' The rule text is being relocated without 
change. The Exchange proposes to relocate this rule text to harmonize 
GEMX's rules with that of Nasdaq PHLX LLC (``Phlx''), Nasdaq BX, Inc. 
and The Nasdaq Stock Market LLC which all have business continuity and 
disaster recovery plans located within General 2, Section 12 of their 
respective rulebooks.\15\ The Exchange also proposes to reserve 
Sections 7-11 and 13-22 within General 2. Harmonizing the rule 
locations of the rules of the Nasdaq affiliated markets will make it 
easier for market participants to review and compare the rules of each 
Nasdaq market.
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    \15\ Similar rule changes will also be made for Nasdaq ISE, LLC 
and Nasdaq MRX, LLC.
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Technical Amendments
    The Exchange proposes to add new Options 4C and mark it as 
reserved. Phlx added a 4C to its Rulebook and this rule change will 
harmonize GEMX's Rulebook structure to Phlx's Rulebook Structure.\16\
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    \16\ See Securities Exchange Act Release No. 91488 (April 6, 
2021), 86 FR 19037 (April 12, 2021) (SR-Phlx-2021-14) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
the Phlx Options Rules at Options 4 Under the Options 4 Title in the 
Exchanges Rulebooks Shell Structure).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\18\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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Options 2, Section 4(a)
    The Exchange's proposal to remove certain rule text from Options 2, 
Section 4(a) that refrains Market Makers from purchasing a call option 
or a put option at a price more than $0.25 below parity is consistent 
with the Act. The Exchange desires to remove this restriction on Market 
Makers which does not exist on Cboe or other Nasdaq affiliated 
markets.\19\ The proposed rule text is currently waived on GEMX 
pursuant to Options 2, Section 4(a)(2). The Exchange believes that this 
market maker provision is no longer necessary. Today, GEMX incentivizes 
Market Makers through allocation \20\ to quote tightly in their 
assigned options series. Primary Market Makers and Competitive Market 
Makers also have other obligations with respect to market making \21\ 
in addition to other quoting obligations \22\ that they must abide by 
when quoting on GEMX. Also, since the adoption of the rule, the 
Exchange has adopted the obvious error rule \23\ which permits the 
Exchange to review a transaction as potentially erroneous based on a 
theoretical price. Also, GEMX orders are subject to trade-through 
compliance, thereby limiting the prices at which orders may 
execute.\24\ Market Makers are relied upon to provide liquidity on 
GEMX, which benefits other Members who have the opportunity to interact 
with the order flow. The Exchange believes that the obligation to 
refrain from purchasing a call option or a put option at a price more 
than $0.25 below parity places yet another obligation on GEMX Market 
Makers that is not required on Cboe or other Nasdaq markets. The 
Exchange believes that this additional obligation is not necessary to 
maintain fair and orderly markets and notes the Exchange has waived 
this obligation and the removal of this provision would remove an 
impediment to and perfect the mechanism of a free and open market and a 
national market system.
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    \19\ See supra note 6.
    \20\ See supra note 7.
    \21\ See supra note 8.
    \22\ See supra note 9.
    \23\ See supra note 10.
    \24\ See supra note 11.
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Bid/Ask Differentials
    The Exchange's proposal to amend Options 2, Section 4(b)(4)(i) and 
Options 4A, Section 12(b)(i) to centralize the bid/ask differentials is 
consistent with the Act. Currently, GEMX Options 4 and Options 4A rules 
are incorporated by reference to ISE. The Exchange recently filed a 
rule change \25\ to amend ISE Options 4 and Options 4A rules to 
relocate text concerning bid/ask differentials for long-term option 
series from ISE Options 4, Section 8(a) and ISE Options 4A, Section 
12(b)(i). The ISE Rule Change added citations to Options 2, Section 
4(b)(4)(i) to ISE Options 4, Section 8(a) and ISE Options 4A, Section 
12(b)(i). GEMX believes centralizing the bid/ask differentials within 
new Options 2, Section 4(b)(4)(i) will provide Primary Market Makers 
and Competitive Market Makers with centralized information regarding 
their bid/ask differential requirements.
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    \25\ See supra note 12.
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Business Continuity and Disaster Recovery Plan
    The Exchange's proposal to relocate Supplementary Material .02 to 
Options 2, Section 4, concerning business continuity and disaster 
recovery plans, to General 2, Section 12, which is currently reserved, 
is consistent with the Act. This rule text will harmonize GEMX's rules 
with that of Phlx, Nasdaq BX, Inc. and The Nasdaq Stock Market LLC 
which all have business continuity and disaster recovery plans located 
within General 2, Section 12 of their respective rulebooks.\26\ 
Harmonizing the rule locations of the rules of the Nasdaq affiliated 
markets will make it easier for market participants to review and 
compare the rules of each Nasdaq market. The Exchange also proposes to 
reserve Sections 7-10 and 13-22 within General 2. These changes are 
non-substantive as the rule text is not being amended.
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    \26\ See supra note 15.

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[[Page 34106]]

Technical Amendments
    Adding Options 4C and reserving it is a non-substantive amendment 
which will harmonize GEMX's Rulebook structure to Phlx's Rulebook 
Structure.\27\
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    \27\ See supra note 16.
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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 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
Options 2, Section 4(a)
    The Exchange's proposal to remove certain rule text from Options 2, 
Section 4(a) that refrains Market Makers from purchasing a call option 
or a put option at a price more than $0.25 below parity does not impose 
an undue burden on competition. The Exchange desires to remove this 
restriction on Market Makers which does not exist on Cboe or other 
Nasdaq affiliated markets.\28\ The proposed rule text is currently 
waived on GEMX pursuant to Options 2, Section 4(a)(2). Market Makers 
are relied upon to provide liquidity on GEMX, which benefits other 
Members who have the opportunity to interact with the order flow. The 
Exchange believes that the obligation to refrain from purchasing a call 
option or a put option at a price more than $0.25 below parity places 
yet another obligation on GEMX Market Makers that is not required on 
Cboe or other Nasdaq markets. The Exchange believes that this 
additional obligation is not necessary to maintain fair and orderly 
markets and notes the Exchange has waived this obligation.
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    \28\ See supra note 5.
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Bid/Ask Differentials
    The Exchange's proposal to amend Options 2, Section 4(b)(4) and 
Options 4A, Section 12(b)(i) to relocate text concerning bid/ask 
differentials for long-term option series does not impose an undue 
burden on competition. The Exchange's proposal will centralize the bid/
ask differentials within new Options 2, Section 4(b)(4)(iii) and add a 
sentence to both Options 4, Section 8(a) and Options 4A, Section 
12(b)(i) that cites to Options 2, Section 4(b)(4)(iii) for information 
on bid/ask differentials for the various products. The Exchange 
believes that this relocation will provide Primary Market Makers and 
Competitive Market Makers with centralized information regarding their 
bid/ask differential requirements.
Business Continuity and Disaster Recovery Plan
    The Exchange's proposal to relocate Supplementary Material .02 to 
Options 2, Section 4, concerning business continuity and disaster 
recovery plans, to General 2, Section 12, which is currently reserved, 
does not impose an undue burden on competition. This rule text will 
harmonize GEMX's rules with that of Phlx, Nasdaq BX, Inc. and The 
Nasdaq Stock Market LLC which all have business continuity and disaster 
recovery plans located within General 2, Section 12 of their respective 
rulebooks.\29\ Harmonizing the rule locations of the rules of the 
Nasdaq affiliated markets will make it easier for market participants 
to review and compare the rules of each Nasdaq market. This change is 
non-substantive as the rule text is not being amended.
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    \29\ See supra note 6.
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Technical Amendments
    Adding Options 4C and reserving it is a non-substantive amendment 
which will harmonize GEMX's Rulebook structure to Phlx's Rulebook 
Structure.\30\
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    \30\ See supra note 16.
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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 either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \31\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\32\
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    \31\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \32\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-GEMX-2021-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-GEMX-2021-05. 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-GEMX-2021-05 and

[[Page 34107]]

should be submitted on or before July 19, 2021.
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    \33\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13655 Filed 6-25-21; 8:45 am]
BILLING CODE 8011-01-P