Document ID: SEC-2018-1782-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq GEMX, LLC
Posted Date: 2018-11-20T05:00Z

[Federal Register Volume 83, Number 224 (Tuesday, November 20, 2018)]
[Notices]
[Pages 58657-58662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-25233]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84581; File No. SR-GEMX-2018-37]

Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Its Rules 
Related to Market Maker Quoting Obligations

November 14, 2018.
    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 October 30, 2018, 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.
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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 its rules related to Market Maker 
(i.e., Primary Market Maker and Competitive Market Maker) quoting 
obligations.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqgemx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The purpose of the proposed rule change is to amend Rule 804(e) to 
provide greater detail regarding the quoting obligations of Market 
Makers and the manner in which they are calculated, and to restructure 
the current rules to conform to rule text used on its affiliated 
options market, Nasdaq Phlx (``Phlx'').\3\ The Exchange seeks to make 
conforming changes to Rule 804(e) to promote structural consistency of 
the Exchange's rules with those of its affiliated options markets, and 
to allow its members to quickly compare quoting obligations across the 
Nasdaq, Inc. affiliated options markets.\4\ The Exchange notes that it 
is generally including additional detail in its rules on the existing 
obligations and process using the same format as Phlx Rule 1081(c). 
Other than one modification to allow the Exchange to announce in 
advance a higher percentage of quoting compliance standards as further 
described below, no changes to the current practice or to the current 
quoting obligations are being contemplated by this rule change. 
Accordingly, to the extent there are other differences between the 
proposed rule text and the current language, the Exchange is in those 
cases either conforming to Phlx Rule 1081(c) or codifying current 
practice explicitly within the proposed rule, as further discussed 
below.
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    \3\ See Phlx Rule 1081(c). See also Securities Exchange Act 
Release No. 83209 (May 10, 2018), 83 FR 22717 (May 16, 2018) (SR-
Phlx-2018-22) (order granting approval of proposed rule change to 
amend Phlx's quoting requirements, among other changes).
    \4\ Nasdaq ISE, LLC (``ISE'') and Nasdaq MRX, LLC will file 
similar proposals.
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Rule 804(e)
    The Exchange first proposes to remove the word ``continuous'' from 
the title of Rule 804(e) and retitle the Rule as ``Intra-day Quotes.'' 
The Exchange is replacing the word ``continuous'' with ``intra-day'' 
because the Exchange notes that Market Makers quote a percentage of the 
day and therefore the word ``continuous'' may not accurately reflect 
the manner in which Market Makers quote on GEMX. The Exchange also 
proposes related changes to replace the word ``continuous'' with 
``intra-day'' within the Rulebook, specifically in Rules 701(c)(3) and 
(4), and Rule 702(d)(4).\5\
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    \5\ The Exchange notes that as part of a parallel ISE filing 
that also proposes to amend the quoting obligations, ISE proposes to 
replace the word ``continuous'' with ``intra-day'' within ISE Rule 
1614(b)(10). ISE Chapter 16, including ISE Rule 1614, is 
incorporated by reference into the Exchange's Rulebook. As such, the 
proposed amendment to ISE Rule 1614 will also apply to GEMX Rule 
1614. See SR-ISE-2018-90.
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    The Exchange also proposes to amend Rule 804(e) by deleting the 
introductory sentence: ``A market maker must enter continuous 
quotations for the options classes to which it is appointed pursuant to 
the following.'' The Exchange proposes to specifically detail a Market 
Maker's quoting obligations in new rule text within paragraph (e) and 
therefore believes that the deleted language is not necessary given 
that the following sentences will replace this language, as described 
below.
    The Exchange proposes to add new rule text to Rule 804(e). The 
first new sentence will provide, similar to Phlx Rule 1081(c): ``A 
market maker must enter bids and offers for the options to which it is 
appointed, except in an assigned options series listed intra-day \6\ on 
the Exchange.'' The Exchange believes this sentence is clearer than the 
current Rule 804(e) because it excepts intra-day quotes. The Exchange 
notes that this is the case today, where a Market Maker is not held to 
quote an intra-day add of a series because the options series was not 
available for trading the entire day. The Exchange is adding this 
exception to the rule text to make clear that Market Makers would not 
be responsible for quoting an intra-day addition on the day it was 
added. The Exchange does not count intra-day adds of a series that were 
not available for the entire day of trading because the Market Maker 
would not have the opportunity to trade that particular options series 
for the entire trading day, and therefore could not have anticipated 
the impact such intra-day adds would have on the calculation of its 
quoting obligations.
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    \6\ An intra-day listing or add of a series means, for purposes 
of this Rule 804(e), as an option series that is added manually on 
the same day the series begins trading. The Exchange notes that an 
intra-day add of a series would be counted the following trading day 
(next business day after the intra-day add of a series was listed) 
when the options series would be available for a full trading day.
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    The Exchange also proposes to note within the new rule text the 
specific quoting obligations for each type of Market Maker by adding: 
``On a daily basis, a Market Maker must make markets consistent with 
the applicable quoting requirements specified below.'' The Exchange 
proposes to note within the new rule text the specific quoting

[[Page 58658]]

obligations for each type of Market Maker. The Exchange is also adding 
rule text to explain the interplay between the quoting obligations for 
Competitive Market Makers, Primary Market Makers, and Competitive 
Market Makers that are Preferred Market Makers.\7\ Specifically, the 
Exchange proposes to add, similar to Phlx Rules: \8\ ``A Member will be 
required to meet each market making obligation separately. A 
Competitive Market Maker who is also the Primary Market Maker will be 
held to the Primary Market Maker obligations in the options series in 
which the Primary Market Maker is assigned and will be held to 
Competitive Market Maker obligations in all other options series where 
assigned. A Competitive Market Maker who receives a Preferenced Order, 
as described in Supplementary Material .03 to Rule 713, (``Preferred 
CMM'') shall be held to the standard of a Preferred CMM in the options 
series of any assigned options class in which it receives the 
Preferenced Order.'' This is the case today, even though the current 
rule text does not explicitly state that each obligation is separate. 
As such, the Exchange is proposing to make clear that a member who is a 
Competitive Market Maker, Primary Market Maker, or Preferred CMM will 
have quoting obligations which may need to be separately met depending 
on the role.
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    \7\ Supplementary Material .03 to Rule 713 allows an Electronic 
Access Member to designate a ``Preferred Market Maker'' on orders it 
enters into the System (``Preferenced Orders''). A Preferred Market 
Maker may be the Primary Market Maker appointed to the options class 
or any Competitive Market Maker appointed to the options class.
    \8\ See Phlx Rule 1081(c).
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Rule 804(e)(1)
    To align its rule structure with Phlx Rule 1081(c), the Exchange 
proposes to relocate the quoting obligations of Competitive Market 
Makers currently in subparagraph (2) of Rule 804(e) to subparagraph 
(1), and set forth the rule text currently in subparagraphs (2)(i) and 
(2)(ii) therein, with a non-substantive modification from the current 
``intraday'' to ``intra-day'' for consistency throughout the Rule. As 
such, proposed Rule 804(e)(1) will read: ``On any given day, a 
Competitive Market Maker is not required to enter quotations in the 
options classes to which it is appointed. A Competitive Market Maker 
may initiate quoting in options classes to which it is appointed intra-
day.'' \9\
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    \9\ The quoting obligations of Primary Market Makers currently 
in subparagraph (1) of Rule 804(e) and Supplementary Material to 
Rule 804 will be set forth in new subparagraph (2) under the 
Exchange's proposal, as further discussed below.
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    The Exchange also proposes to remove the following sentence in Rule 
804(e)(2)(iii): ``Whenever a Competitive Market Maker enters a quote in 
an options class to which it is appointed, it must maintain continuous 
quotations in that class for 60% of the time the class is open for 
trading on the Exchange; provided, however, that a Competitive Market 
Maker shall be required to maintain continuous quotations for 90% of 
the time the class is open for trading on the Exchange in any options 
class in which it receives Preferenced Orders (see Supplementary 
Material .03 to Rule 713 regarding Preferenced Orders).'' The Exchange 
proposes to replace this language with language in Rule 804(e)(1) that 
more technically defines a Competitive Market Maker's quoting 
obligation.\10\ The Exchange proposes the following rule text: ``If a 
Competitive Market Maker initiates quoting in an options class, the 
Competitive Market Maker, associated with the same Member, is 
collectively required to provide two-sided quotations in 60% of the 
cumulative number of seconds, or such higher percentage as the Exchange 
may announce in advance, for which that Member's assigned options class 
is open for trading.'' The 60% quoting requirement and the manner in 
which it is calculated as a percentage of time is not being 
amended.\11\ The only change from current practice is to allow the 
Exchange to announce in advance a higher percentage than the current 
60% quoting requirement, which would bring the Exchange's rule in line 
with Phlx Rule 1081(c)(ii)(A). The Exchange believes it may be 
appropriate to apply a higher standard if doing so would be in the 
interest of a fair and orderly market.\12\ Otherwise, the proposed 
amendments described above are either stylistic in nature or clarifying 
changes that are intended to more specifically state the current 
quoting obligations as 60% of the cumulative number of seconds rather 
than 60% of the time the class is open for trading on the Exchange.\13\ 
While the current rule more generally indicates that the Exchange 
currently reviews quoting as a percentage of the time the class is open 
for trading on the Exchange, the two standards are otherwise 
equivalent. Furthermore, the Exchange adopted the Market Maker quoting 
requirements as part of its application to be registered as a national 
securities exchange under its previous name of Topaz Exchange, LLC.\14\ 
In approving the Market Maker quoting requirements, the Commission 
noted that the Exchange's Market Maker requirements were identical to 
ISE's rules.\15\ ISE in its adopting rule filing for the 60% standard 
stated that it would ``calculate the percentage of time a market maker 
quotes by dividing the number of minutes a Market Maker quotes in 
series of an options class (numerator) by the total minutes all series 
of the options class were open for trading on the Exchange 
(denominator).'' \16\ As such, the proposed changes for GEMX will 
explicitly state the same standard (expressed in seconds) within the 
rule text itself. Adding ``associated with the same Member'' conforms 
to Phlx Rule 1081(c)(ii)(A) and also makes clear that the obligation is 
at the firm level and that all associated Competitive Market Makers 
will be counted in arriving at the calculation for quoting obligations.
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    \10\ The proviso setting forth the 90% quoting obligation for 
Competitive Market Makers with Preferenced Orders currently in 
subparagraph (2)(iii) will be replaced with more detailed language 
in proposed Rule 804(e)(3), as further described below.
    \11\ As further discussed below, the Exchange will go from 
minutes to seconds as a way to express how it will calculate this 
percentage of time. See note 16 below, with accompanying text.
    \12\ Any such higher percentage would involve appropriate 
advance announcement, which would then be available on the 
Exchange's website.
    \13\ Phlx Rule 1081(c)(ii)(A) similarly sets forth the quoting 
obligations as a percentage of the cumulative number of seconds.
    \14\ See Securities Exchange Act Release No. 70050 (July 26, 
2013), 78 FR 46622 (August 1, 2013) (File No. 10-209). The Exchange 
subsequently changed its name to ISE Gemini and then later to Nasdaq 
GEMX.
    \15\ Id. at 46635.
    \16\ See Securities Exchange Act Release No. 69175 (March 19, 
2013), 78 FR 17988 (March 25, 2013) (SR-ISE-2013-17) (``2013 ISE 
Proposal'') at 17989. See also SR-ISE-2018-90.
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    The Exchange also proposes to add in Rule 804(e)(1): 
``Notwithstanding the foregoing, a Competitive Market Maker shall not 
be required to make two-sided markets pursuant to this Rule 804(e)(1) 
in any Quarterly Options Series, any adjusted option series, and any 
option series with an expiration of nine months or greater for options 
on equities and exchange-traded funds (``ETFs'') or with an expiration 
of twelve months or greater for index options.'' These exceptions exist 
today for GEMX and are being carried over into proposed Rule 804(e)(1) 
from current Supplementary Material .02 to Rule 804 with some 
modifications to conform to Phlx Rule 1081(c)(ii)(A). The majority of 
the changes from the current rule text are stylistic in nature to 
conform to Phlx's language and to define ETFs within the rule text 
itself. The Exchange also proposes to add Quarterly Options Series, 
which is defined in Rule 100(a)(55), to the list of exceptions to

[[Page 58659]]

the quoting obligations for Competitive Market Makers. Quarterly 
Options Series are excluded from a Competitive Market Maker's quoting 
obligations today, and the Exchange therefore seeks to codify its 
current practice within the proposed rule text. The Exchange notes that 
Quarterly Options Series are similarly excluded from the market maker 
quoting obligations on Phlx.\17\
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    \17\ See Phlx Rule 1081(c)(ii)(A).
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    The Exchange also proposes to add to Rule 804(e)(1): ``Competitive 
Market Makers may choose to quote such series in addition to regular 
series in the options class, but such quotations will not be considered 
when determining whether a Competitive Market Maker has met the 
obligation contained in this paragraph (e)(1).'' This language is being 
relocated from current Supplementary Material .02 to Rule 804, with a 
modification to update the cross-reference.
    Further, the definition of adjusted options series currently within 
Supplementary Material .02 to Rule 804 will be relocated to 
subparagraph (1)(ii) of Rule 804(e), and will be defined as ``Adjusted 
Options Series'' throughout Rule 804(e). The Exchange also proposes to 
use the defined term ``Exchange-Traded Fund Shares,'' which is defined 
in Rule 502(h), instead of ``exchange-traded fund shares'' in the 
proposed definition of Adjusted Options Series for consistency with the 
rest of the Exchange's Rulebook.
    Finally, the Exchange proposes to relocate current subparagraph 
(2)(iv) in Rule 804(e) to proposed subparagraph (1)(ii). The Exchange 
is not proposing any amendments to the rule text itself other than to 
replace the word ``continuous'' with ``intra-day'' for the reasons 
discussed above.
Rule 804(e)(2)
    As noted above, the Exchange proposes to set forth the quoting 
obligations of Primary Market Makers in Rule 804(e)(2). Currently as 
set forth in Rule 804(e)(1), Primary Market Makers must enter 
continuous quotations in all of the series of the options classes to 
which they are appointed.\18\ Pursuant to Supplementary Material .01 to 
Rule 804, Primary Market Makers are deemed to have provided continuous 
quotes if they provide two-sided quotes for 90% of the time that an 
options class is open for trading on the Exchange. Similar to the 
quoting obligations for Competitive Market Makers, the Exchange 
proposes to replace this language with language in Rule 804(e)(2) that 
more technically defines a Primary Market Maker's quoting obligations. 
Proposed Rule 804(e)(2) will provide that Primary Market Makers, 
associated with the same Member, are collectively required to provide 
two-sided quotations in 90% of the cumulative number of seconds, or 
such higher percentage as the Exchange may announce in advance, for 
which that Member's assigned options class is open for trading.\19\ 
Similar to the proposed changes to the 60% quoting requirement for 
Competitive Market Makers discussed above, the 90% quoting requirement 
for Primary Market Makers and the manner in which it is calculated as a 
percentage of time is not being amended. The only change from current 
practice is to allow the Exchange to announce in advance a higher 
percentage than the current 90% quoting obligation, which would bring 
the Exchange's rule in line with Phlx Rule 1081(c)(ii)(B). As discussed 
above for the Competitive Market Maker quoting obligations, the 
Exchange believes it may be appropriate to apply a higher standard if 
doing so would be in the interest of a fair and orderly market.\20\ 
Otherwise, the Exchange does not propose to amend the current 90% 
quoting requirement; rather, the Exchange proposes to more specifically 
state the current quoting obligations as 90% of the cumulative number 
of seconds rather than 90% of the time the class is open for trading on 
the Exchange. While the current rule in Supplementary Material .01 to 
Rule 804 more generally indicates that the Exchange currently reviews 
quoting as a percentage of the time the class is open for trading on 
the Exchange, the two standards are otherwise equivalent.\21\ 
Accordingly, the proposed changes will explicitly state the same 
standard (expressed in seconds) within the rule text itself. Adding 
``associated with the same Member'' to the first sentence conforms to 
Phlx Rule 1081(c)(ii)(B) and also makes clear that the obligation is at 
the firm level and that all associated Primary Market Makers will be 
counted in arriving at the calculation for quoting obligations.
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    \18\ This means that the Primary Market Maker quoting 
requirement includes all series of an appointed options class, 
including the options series that are currently excluded from the 
quoting requirements of Competitive Market Makers and Preferred CMMs 
(i.e., Quarterly Options Series, Adjusted Options Series, and long-
term options). As discussed below, the Exchange will explicitly 
state that a Primary Market Maker's quoting obligations will include 
these specified options series.
    \19\ Phlx Rule 1081(c)(ii)(B) similarly sets forth the quoting 
obligations as a percentage of the cumulative number of seconds.
    \20\ See note 12 above.
    \21\ See 2013 ISE Proposal, footnote 16 (providing that to 
calculate whether a Primary Market Maker has maintained quotations 
for at least 90% of the time, the Exchange will divide the total 
number of minutes a Primary Market Maker maintained quotations in 
options series of a class (numerator) by the total minutes all 
series of the options class were open for trading on the Exchange 
(denominator)). As discussed above, GEMX's quoting requirements are 
identical to ISE's requirements.
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    The Exchange also proposes to more specifically state within Rule 
804(e)(2) that Primary Market Makers shall be required to make two-
sided markets pursuant to Rule 804(e)(2) in any Quarterly Options 
Series, any Adjusted Options Series, and any options series with an 
expiration of nine months or greater for options on equities and ETFs 
or with an expiration of twelve months or greater for index options. 
The proposed changes do not amend the current quoting obligations of 
Primary Market Makers with respect to these options series. As 
discussed above, Supplementary Material .02 to Rule 804 currently 
excludes adjusted options series and long-term options series from the 
quoting obligations of Competitive Market Makers and Preferred CMMs. As 
noted above, while the current rule in paragraph (e)(1) implicitly 
provides that these exceptions do not apply to Primary Market Makers 
and that their quoting obligations include such series, the Exchange 
proposes to explicitly state that Primary Market Makers are required to 
make two-sided markets in the specified options series. Furthermore, 
Primary Market Makers are required to make two-sided markets in 
Quarterly Options Series today. Accordingly, the Exchange seeks to add 
Quarterly Options Series to the Rule 804(e)(2) to codify its current 
practice. The Exchange notes that Phlx Specialists are similarly 
required to make two-sided markets in Quarterly Options Series.\22\
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    \22\ See Phlx Rule 1081(c)(ii)(B).
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Rule 804(e)(3)
    Currently as set forth in Rule 804(e)(2)(iii), a Competitive Market 
Maker is required to maintain continuous quotations for 90% of the time 
the class is open for trading on the Exchange in any options class in 
which it receives the Preferenced Order pursuant to Supplementary 
Material .03 to Rule 713. The Exchange now proposes to replace this 
language with language that more technically defines the quoting 
obligations of the Competitive Market Maker that receives the 
Preferenced Order (i.e., Preferred CMM) in new Rule 804(e)(3). The 
Exchange proposes to add in Rule 804(e)(3) that Preferred CMMs, 
associated with the same Member, are collectively required to provide 
two-sided quotations in 90% of the

[[Page 58660]]

cumulative number of seconds, or such higher percentage as the Exchange 
may announce in advance, for which that Member's assigned options class 
is open for trading. A Member shall be considered preferenced in an 
assigned options class once the Member receives a Preferenced Order in 
any option class in which they are assigned and shall be considered a 
preferenced for that day in all series for that option class in which 
it received the Preferenced Order. Notwithstanding the foregoing, a 
Preferred CMM shall not be required to make two-sided markets pursuant 
to Rule 804(e)(3) in any Quarterly Options Series, any Adjusted Options 
Series, and any options series with an expiration of nine months or 
greater for options on equities and ETFs or with an expiration of 
twelve months or greater for index options.
    The Exchange notes that similar to the proposed language for the 
Competitive Market Maker and Primary Market Maker quoting obligations 
discussed above, the only change from current practice is to allow the 
Exchange to announce in advance a higher percentage than the current 
90% quoting obligation, which would bring the Exchange's rule in line 
with Phlx Rule 1081(c)(ii)(C). As discussed above for the Competitive 
Market Maker and Primary Market Maker quoting obligations, the Exchange 
believes it may be appropriate to apply a higher standard if doing so 
would be in the interest of a fair and orderly market.\23\ Otherwise, 
the 90% quoting requirement for Preferred CMMs and the manner in which 
it is calculated as a percentage of time is not being amended; rather, 
the Exchange proposes to more specifically express the current quoting 
obligations as 90% of the cumulative number of seconds rather than 90% 
of the time the class is open for trading on the Exchange.\24\ As noted 
above for Competitive Market Makers and Primary Market Makers, the two 
standards are equivalent even though the current rule more generally 
expresses that the Exchange reviews quoting as a percentage of time. As 
such, the proposed changes will explicitly state the same standard 
(expressed in seconds) within the rule text itself.
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    \23\ See note 12 above.
    \24\ Phlx Rule 1081(c)(ii)(C) similarly sets forth the quoting 
obligations as a percentage of the cumulative number of seconds.
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    Adding ``associated with the same Member'' conforms to Phlx Rule 
1081(c)(ii)(C) and also makes clear that the obligation is at the firm 
level and that all associated Preferred CMMs will be counted in 
arriving at the calculation for quoting obligations. Furthermore, the 
proposed language is being added to clarify when a Preferred CMM is 
considered to be preferenced in an assigned options class, and does not 
amend the Exchange's current practice. The Exchange, similar to today, 
will exclude any Quarterly Options Series, any Adjusted Options Series, 
and any options series with an expiration of nine months or greater for 
options on equities and ETFs or with an expiration of twelve months or 
greater for index options from the quoting obligations of Preferred 
CMMs.\25\ As discussed above, Supplementary Material .02 to Rule 804 
currently provides an exception from the quoting obligations in 
adjusted options series and any long-term options series for Preferred 
CMMs. As such, proposed Rule 804(e)(3) makes clear that such Members 
are not required to make two-sided markets in these options series. In 
addition, Preferred CMMs are not required to make two-sided markets in 
Quarterly Options Series today. Accordingly, the Exchange seeks to add 
Quarterly Options Series to the list of exceptions in proposed Rule 
804(e)(3) to codify its current practice.\26\
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    \25\ This exception is currently set forth in Supplementary 
Material .02 to Rule 804.
    \26\ Directed SQTs and Directed RSQTs on Phlx are similarly 
excluded from making two-sided markets in Quarterly Options Series. 
See Phlx Rule 1081(c)(ii)(C).
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    The Exchange will add in proposed Rule 804(e)(3) similar language 
for Preferred CMMs as proposed for Competitive Market Makers in Rule 
804(e)(1) that Preferred CMMs may choose to quote such series in 
addition to regular series in the options class, but such quotations 
will not be considered when determining whether a Preferred CMM has met 
the obligation contained in this paragraph (e)(3). This language is 
currently in Supplementary Material .02 to Rule 804, and applies to the 
quoting obligations for both Competitive Market Makers and Preferred 
CMMs. Finally, the Exchange proposes to relocate language from 
Supplementary Material .02 to Rule 804 into new paragraph (e)(3), with 
some modifications to update a cross-reference and remove redundant 
language, as follows: ``A Preferred CMM may be preferenced in such 
series and receive enhanced allocations pursuant to Nasdaq GEMX Rule 
713, Supplementary Material .03, only if it complies with the 
heightened 90% quoting requirement contained in this paragraph 
(e)(3).''
Rule 804(e)(4)
    The Exchange proposes to add new rule text at Rule 804(e)(4) to 
provide the method by which the Exchange will calculate the Market 
Maker quoting obligations contained in proposed subparagraphs (1)-(3) 
of Rule 804(e). The Exchange proposes to state that the Exchange will 
(i) take the total number of seconds the Member disseminates quotes in 
each assigned options series, excluding, for Competitive Market Makers 
and Preferred CMMs, Quarterly Option Series, any Adjusted Option 
Series, and any option series with an expiration of nine months or 
greater for options on equities and ETFs or with an expiration of 
twelve months or greater for index options; and (ii) divide that time 
by the eligible total number of seconds each assigned option series in 
the options class is open for trading that day. Similar to Phlx Rule 
1081(c)(ii)(D), the Exchange believes that the addition of this 
language will bring greater transparency to the manner in which the 
Exchange calculates the quoting obligation. The Exchange is not 
amending the manner in which the quoting obligation is calculated; 
rather the Exchange is simply adding to the current rule the exact 
manner in which the Exchange determines the quoting percentage. The 
Exchange also proposes to add the following in Rule 804(e)(4): 
``Quoting is not required in every assigned options series.'' This 
sentence is not currently in the rule. The added language is not 
amending the Exchange's current practice; rather the Exchange is 
clearly stating that quoting is not required in every assigned options 
series to make clear the current obligation (i.e., the Market Maker is 
not required to quote every single assigned options series in order to 
meet its quoting obligations). Also, the Exchange proposes to state: 
``Compliance with this requirement is determined by reviewing the 
aggregate of quoting in assigned options series for the Member.'' This 
language is similar to language presently in Supplementary Material .01 
to Rule 804 \27\ and clarifies that the quoting obligations apply to 
all of the Market Maker's assigned options series collectively, which 
is how the Exchange applies the quoting obligation today. As such, the 
proposed language simply conforms the text to Phlx Rule 1081(c)(ii)(D).
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    \27\ The current language provides: ``Compliance with this 
Primary Market Marker quoting requirement and the Competitive Market 
Maker quoting requirements contained in (e)(2)(iii) above will be 
applied to all option classes quoted collectively on a daily 
basis.''

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[[Page 58661]]

Rule 804(e)(5)
    The Exchange proposes to adopt a new Rule 804(e)(5) to provide that 
GEMX Regulation may consider exceptions to the above-referenced 
requirement to quote based on demonstrated legal or regulatory 
requirements or other mitigating circumstances. This language is 
similar to language presently in Supplementary Material .01 to Rule 
804,\28\ but specifies that GEMX Regulation (i.e., the Exchange's 
regulatory department) may consider exceptions to the quoting 
obligation, which is the case today, and aligns the rule text to Phlx 
Rule 1081(c)(iii). The Exchange further proposes to add the following 
rule text to new Rule 804(e)(5): ``For purposes of the Exchange's 
surveillance of Member compliance with this rule, the Exchange will 
determine compliance on a monthly basis. The Exchange's monthly 
compliance evaluation of the quoting requirement does not relieve a 
Member of the obligation to provide two-sided quotes on a daily basis, 
nor will it prohibit the Exchange from taking disciplinary action 
against a Member for failing to meet the quoting obligation each 
trading day.'' The proposed rule text is similar to language currently 
in Supplementary Material .01 to Rule 804,\29\ and is merely rephrased 
to conform to Phlx Rule 1081(c)(iii). As such, the Exchange is not 
amending the manner in which the surveillance functions today, and the 
proposed amendments to Rule 804(e)(5) are not substantive in nature.
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    \28\ The current language provides: ``The Exchange may consider 
other exceptions to this continuous electronic quote obligation 
based on demonstrated legal or regulatory requirements or other 
mitigating circumstances.''
    \29\ The current language provides: ``Overall compliance with 
market maker quoting obligations will be determined on a monthly 
basis. However, the ability of the Exchange to determine compliance 
on a monthly basis does not: (1) relieve market makers from their 
obligation to meet daily quoting requirements in Rule 804; and (2) 
prohibit the Exchange from bringing disciplinary action against a 
market maker for failure to meet its daily quoting requirements set 
forth in Rule 804.''
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Rule 804(e)(6)
    The Exchange proposes to adopt a new Rule 804(e)(6) that provides: 
``If a technical failure or limitation of a System of the Exchange 
prevents a Member from maintaining, or prevents a market maker from 
communicating to the Exchange, timely and accurate quotes, the Member 
shall promptly notify the Exchange and the duration of such failure or 
limitation shall not be included in any of the calculations under this 
subparagraph (e) with respect to the affected quotes.'' This language 
is being relocated from Supplementary Material .01 to Rule 804, and 
modified to specifically refer to the calculations in proposed 
subparagraph (e), capitalize ``System,'' which is a defined term, and 
rephrased to conform to Phlx Rule 1081(c)(iv).
Clean-Up Changes
    The Exchange proposes to delete Supplementary Materials .01 and .02 
to Rule 804, and all related cross-references throughout the Rulebook. 
As explained above, this rule text is being relocated within the 
proposed rule text with some modifications. Finally, the Exchange 
proposes to update all cross-references to Rule 804(e) in its Rules to 
reflect the proposed renumbering and expansion of rules described 
above.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\30\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\31\ 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. The Exchange believes that its proposed rule change provides 
further detail as to the quoting obligations of Market Makers. As 
discussed above, other than one modification to allow the Exchange to 
announce in advance a higher percentage of quoting compliance 
standards, the Exchange is not amending current practice or its current 
quoting obligations. The Exchange believes that it is consistent with 
the Act to have the ability to announce a higher percentage in the 
interest of maintaining a fair and orderly market. As noted above, the 
Exchange would provide appropriate advance announcement for any such 
higher percentage, which would then be available on the Exchange's 
website. Otherwise, the Exchange notes that to the extent that there 
are rule text changes from the current language, these differences are 
all to harmonize its rules with Phlx Rule 1081(c) to promote 
consistency among similar rules of the Exchange and its affiliates, or 
to codify its current practice within the proposed rule text to bring 
transparency to the Exchange's rulebook.
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    \30\ 15 U.S.C. 78f(b).
    \31\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that replacing ``continuous'' 
with ``intra-day'' throughout the rulebook is consistent with the Act 
because it more accurately reflects the manner in which Market Makers 
quote on GEMX. Also in the introductory sentence to Rule 804(e), the 
Exchange is codifying its current practice of excluding intra-day 
additions of assigned options series from a Market Maker's quoting 
obligations to make clear that Market Makers would not be responsible 
for such series on the day it was added. As noted above, for purposes 
of calculating the quoting obligations, the Exchange counts an intra-
day add of a series the following trading day when the options series 
would be available for a full trading day. The Exchange believes that 
codifying this current exception within the rule text is consistent 
with the Act as it will bring transparency to the Exchange's rulebook. 
The Exchange does not count intra-day adds of options series that were 
not available for the entire day of trading because the Market Maker 
would not have the opportunity to trade that particular options series 
for the entire trading day, and therefore could not have anticipated 
the impact such intra-day additions would have on the calculation of 
its quoting obligations. The Exchange also believes that codifying its 
current practice of excluding Quarterly Options Series from the quoting 
requirements of Competitive Market Makers and Preferred CMMs will bring 
clarity to the Exchange's rulebook that quotes in such series will not 
be considered in determining whether a Competitive Market Maker or 
Preferred CMM complied with their respective quoting obligations. 
Similar to the Adjusted Options Series and long-term options series 
that are currently explicitly listed as exceptions in the rule text, it 
is the Exchange's understanding that quoting obligations on these often 
less frequently traded options series impact the risk parameters 
acceptable to the Market Makers, and therefore the quoting obligation 
exceptions (including Quarterly Options Series) are to incentivize 
Market Makers to continue to seek assignments in these options series 
and thereby promote liquidity in options classes listed on the Exchange 
to the benefit of investors and the public interest.
    The Exchange is also proposing to explicitly state that a member 
will be required to meet each market making obligation separately in 
order to make clear that a Competitive Market Maker, Primary Market 
Maker, or Preferred CMM will have quoting obligations which may need to 
be met separately, depending on the role. In addition, the Exchange is 
expressing each of the current quoting obligations as a

[[Page 58662]]

percentage of the cumulative number of seconds rather than as a 
percentage of the time the class is open for trading on the Exchange in 
order to add more transparency as to the standards by which a Market 
Maker's quoting obligations are measured. In the same vein, the 
proposed rule text in Rule 804(e)(4) to describe the exact manner in 
which the Exchange calculates the quoting obligations by specifying the 
numerator and denominator calculations, as well as clarifying that 
quoting is not required in every assigned options series, adds 
transparency to the Exchange's rulebook, and allows members to better 
monitor whether they are in compliance with their quoting requirements.
    Adding ``associated with the same Member'' throughout the proposed 
rule text conforms to Phlx Rule 1081(c)(ii) and adds clarity that the 
quoting obligations are at the firm level, and that all associated 
Market Makers will be counted in arriving at the applicable calculation 
for quoting obligations. Specifically stating that Primary Market 
Makers are required to make two-sided markets in any Quarterly Options 
Series, any Adjusted Options Series, and any long-term options series 
codifies what was implicit in the current rule text which required 
Primary Market Makers to enter continuous quotations in all of the 
series listed on the Exchange in their assigned options classes, as 
further described above. Finally, adding that the Member is considered 
preferenced for that day in all series for that assigned options class 
in which it received the Preferenced Order is similarly codifying the 
Exchange's current practice and will bring more transparency to the 
Rulebook.
    Overall, the Exchange believes that its proposal is consistent with 
the Act because the proposed rule text protects investors and the 
public interest by providing clear language that will be utilized on 
all Nasdaq, Inc.-affiliated options markets for easy comparison by 
common members that are engaged in market making activities on both the 
Exchange and its affiliates. As discussed above, the proposed changes 
will restructure GEMX's current rules on Market Maker quoting 
obligations to conform to rule text used on its affiliate, Phlx. The 
Exchange further believes that the proposed rule changes would remove 
impediments to and perfect the mechanism of a free and open market by 
ensuring that members, regulators and the public can more easily 
navigate and understand the Exchange's rulebook, thereby avoiding 
potential confusion.

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 that is not necessary or appropriate 
in further of the purposes of the Act. The proposal does not impose a 
burden on competition because the Exchange will continue to uniformly 
calculate and apply the quoting obligations for all Market Makers. 
Other than to allow the Exchange to announce in advance a higher 
percentage of quoting compliance standards, the Exchange's proposal 
does not modify the current practice or the current quoting obligations 
on GEMX, as further discussed above.

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 \32\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\33\
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    \32\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \33\ 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 [email protected]. Please include 
File Number SR-GEMX-2018-37 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-2018-37. 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-2018-37 and should be submitted on 
or before December 11, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25233 Filed 11-19-18; 8:45 am]
 BILLING CODE 8011-01-P